Why the UK needs to back Commission energy plans

Written by Katinka Barysch, 12 January 2007

Why the UK needs to back Commission energy plans
by Katinka Barysch

The reactions to the Commission’s energy package – widely leaked before its official publication date on January 10th – were predictable. Environmental campaigners deplored a lack of ambition while the big eurozone countries recoiled at the Commission’s call to break-up national energy champions.

The package offers little that is fundamentally new: the EU has had targets for energy market liberalisation, renewable energy use, CO2 emissions and so on for years. The Commission wants the member-states to become more ambitious in some areas (for example in saving energy), but in others it is just reinforcing objectives that EU countries have signed up to a long time ago. Energy market liberalisation is a case in point.

It is ten years since the EU decided to create a single European market for energy. EU countries were supposed to liberalise wholesale markets by 2004 and those for consumers by mid-2007. Yet the reality is very different.

In the gas sector, the incumbents still controls more than 80 per cent of the national gas market in Germany and France, as well as Denmark, Italy, Hungary and Poland. In the UK, the country that has gone furthest with gas sector liberalisation, the share is just one-quarter.

Power markets look similarly closed. Electricite de France has three-quarters of the French electricity market; Spain has just two dominant operators; and Germany’s lucrative power market has been carved up between five big companies. In the UK, nine companies compete on relatively even terms.

Cross-border competition remains severely limited. In the gas sector, the big European companies tend to sign long-term bilateral deals with gas producers, most notably Russia’s Gazprom. In the electricity sector there are still very few interconnectors between national grids, and those that do exist are chronically congested. Partly as a result of this, wholesale gas and power prices vary widely between the different EU countries.

Neelie Kroes, the EU’s competition commissioner, has spent the last two years trying to find out why competition has remained so limited. She has launched dawn raids on various European power companies suspected of collusion, and she promises closer scrutiny of future energy mergers. But, as the energy paper rightly points out, competition policy alone cannot create a well-functioning European energy market. National governments and European energy companies need to play ball.

The Commission says that the fact that Europe’s big energy companies still control both production and distribution of energy is a serious impediment to competition. It therefore wants gas and electricity companies to sell their networks and pipelines. Knowing that this is controversial, it suggests an alternative option: a legal and de facto separation that actually works (unlike the current weak legal controls). Since regulation is key to making this second option work (and since a number of national regulators are rather too cosy with their clients), the Commission wants to shift regulatory powers to Brussels.

The comments from Paris and Berlin ranged from “unnecessary complications” to “expropriation”. So what are the chances that EU leaders will adopt the Commission’s package, or parts of it, at their March summit?

Germany, as the EU president in the first half of 2007, is chiefly responsible for brokering a deal. But Germany – with its big and powerful energy companies – is hardly suited to play the role of an ‘honest broker’. Worse still, Germany itself is divided about what to do. The environment ministry wants tough targets for emissions of greenhouse gases. Chancellor Angela Merkel backs this stance, not least because an intra-EU agreement would allow her to shine when the issue comes up at the G8 summit in June. The economics minister, Michael Glos, fears that higher environmental standards could erode German industrial competitiveness. But he will compromise – provided that German power producers can retain their cosy national oligopoly.

In an FT interview on January 12th, Glos said he would not completely rule out the Commission’s suggestions of ‘ownership unbundling’ and centralised regulatory powers – but only after all other options have been exhausted. So he is effectively defending the current system of (weak) legal unbundling and co-operation between national regulators. Germany is also having fierce internal debates about most other aspects of the EU energy agenda, ranging from the ‘right’ stance towards Russia to energy saving targets for cars and buildings. Chances are that Merkel will arrive at the EU spring summit perched precariously on a fragile national compromise.

But even if her hands were not tied, she would struggle to persuade pre-election France that energy market opening is a good idea. The merger between Gaz de France and Suez is still one of Paris’ pet projects. Unlike other big European gas companies, Gaz de France owns few production assets. Stripping out the French gas pipe network would make Gaz de France unattractive to Suez. EdF is one of Europe’s more efficient power producers, and with its strong home base it would do well in a more liberalised European market. However, EdF also provides pensions and welfare to several hundred thousand workers. It is highly unlikely that either of the big parties would risk a blow to national prestige and / or a showdown with the trade unions just ahead of presidential and parliamentary elections.

This leaves the UK as the only big country that could push hard for the Commission’s package – provided the British government can overcome its traditional dislike for the Commission. The UK is in a strong position since it has already done its homework on opening local power and gas markets, and since most Brits want tougher action climate change. Yet, London will face an uphill struggle to persuade the Germans and the French that open and flexible markets, rather than national champions, are the best guarantee for secure energy supplies.

Katinka Barysch is chief economist at the Centre for European Reform.

Comments

Added on 14 Jan 2007 at 15:40 by anonymous

100% agree with the author, but lets be honest that to expect Britain to have a bargaining position in intergovernmental Europe without being in Eurozone is not an easy task indeed.

Britain' s supporters are in Central Europe, but Scandinavians are vavering. Benelux supports Continental powers and Southern Europe is ''faraway'' from energy problematique.

Two level games continue in Europe ever since 1957. Günter Verheugen has his opinions about the future composition of European Commission and two speed EU talks are particularly vocal lately.

Common energy policy to become truly operational and effective may take as long as it took for CFSP to be what it is today...half functioning.

External shock (e.g. fall of the greenback) is more probable for real change within EU than peacemeal reforms.

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Climate Change: Western business can help China and India

Written by Katinka Barysch, 17 November 2006

Climate change:
Western business can help China and India
by Katinka Barysch

We Europeans are proud pioneers in combating climate change. But what we do at home is almost irrelevant unless we persuade and help China and India to limit emissions.

European countries are doing more than most to reduce emissions at home, according to report presented to the UN’s climate change conference in Nairobi this week: 15 of the world’s ‘greenest’ countries are in Europe. And the EU wants to go further. The European Commission has just published a plan to extend the EU’s pioneering emissions rights trading (ETS) scheme to cover more sectors and pollutants.

European climate policies matter – as examples for the rest of the world and as a testing ground for new technologies and policies. But to stop global warming we need a global approach.

In the US – the single biggest source of greenhouse gas emissions – the consensus is slowly shifting in favour of tougher policies. While the Bush administration has ruled out ratifying the Kyoto Protocol, a large number of State governments have adopted emission reduction targets or joined regional ‘cap and trade’ schemes.

Whether the US supports a post-Kyoto regime will critically depend on whether China and India come on board. China is already the second biggest emitter of greenhouse gases, mainly because it relies on coal – the dirtiest of fuels – for two-thirds of its power generation. Coal in China is cheap and plentiful. The country still has reserves to last it about 200 years, and the price of producing energy with coal is a fraction of any alternatives. India is a similar story: it relies on coal for more than half of its energy needs and is the fourth biggest source of CO2 emissions in the world. The International Energy Agency assumes that 70 per cent of additional coal demand until 2030 will come from India and China.

The Kyoto protocol almost pales into insignificance in comparison. In 2004, the Christian Science Monitor reported that China was on course to build 562 additional coal-fired power plants by 2012, more than half of the world’s total. Together with planned new plants in India (213) and the US (70 or so), these will emit 2.7 billion additional tons of carbon dioxide. Compare that with the (maximum) 480 million tons that Kyoto countries have promised to cut from their CO2 emissions by 2012.

Coal is not the only problem. China is already the second biggest oil consumer in the world, after the US. It used up 5.5 million barrels of oil a day in 2005, and India an additional 2 million. Both countries’ needs will continue to grow fast as people get wealthier and more mobile. More than three million new passenger cars were registered in China last year. But still only 11 out of 1,000 people have their own vehicle. In a developed country like the UK, more than half of all people have a car.

Improving the EU’s ETS is important. But our priority must be to persuade and help China and India to limit greenhouse gas emissions.

The Chinese and Indian authorities say they take climate change seriously. But they insist that economic growth has priority and only rich countries can afford to combat climate change. China and India account for only 10 per cent of the fossil fuel CO2 accumulated in 1850-2004. The EU, the US and Russia together account for 70 per cent. Getting Beijing and Delhi to sign up to a tough post-Kyoto regime will be as difficult as it will be essential. In the meantime, are there other things we in Europe can do?

At a workshop on India, China and climate change – which the CER ran together with the German-British Forum on November 14th – we explored how the private sector could help China and India to become greener.

The transfer of Western technology is helping to make these countries more energy efficient. But change is slow: 15 years ago, Chinese power plants typically operated at a level of efficiency that was 35-50 per cent of that of German plants. Since then that share has crept up to 50-60 per cent. A step change is needed.

Many people put their hopes into clean coal technologies. These capture the CO2 produced by coal burning and bury it under ground. So far there are only a few pilot plants in places such as Norway and the UK. But even if the West managed to make the technology commercially viable, it would remain too expensive for China to roll it out on a grand scale.

Western governments and the EU give China some money to encourage the adoption of clean technologies. But it is not enough to make a difference. Perhaps market mechanisms are more promising. Business is certainly interested. There are now 80 environmental companies listed in London’s AIM (alternative investment market) alone. Mainstream companies from Goldman Sachs to Virgin have earmarked billions of dollars for green investment schemes. There are now more than 100 funds that solely invest in clean energy and other environmental technologies.

Under Kyoto’s ‘clean development mechanism’, rich-world polluters can keep within their target by investing in environmental projects in those developing countries that have no targets themselves. In theory, therefore, Western businesses have an incentive to invest in energy savings technologies, clean coal plants and renewables in China. In practice, however, the clean development mechanism is clunky and complicated. Its effectiveness also suffers from Kyoto’s limited lifespan. Most green investments, such as new power station or windfarms, have long lifespans. So investors have to make an assumption about long-term trends in carbon prices. At the moment, they don’t even know whether there will be a carbon market after Kyoto runs out in 2012.

China itself is not exactly making it easy for Western companies. Widespread disregard for intellectual property rights makes investors reluctant to transfer the cutting edge technologies that are often needed in environmental projects. Moreover, regulatory frameworks are uncertain or badly enforced. Take renewables as an example. Both India and China have ambitious targets but since burning coal is cheaper than building dams or erecting wind turbines, regulation is needed to encourage investment. In 2004, the Chinese authorities announced that 30 Giga-watts should come from wind power by 2020 (a modest target: experts assume that China’s potential for wind-powered energy is at least ten times that). However, when the government finally released the relevant regulation in 2006, potential investors withdrew in frustration: local content requirements of 70 per cent and an overly competitive market framework would make it almost impossible for western companies to turn a profit. The big winners would be incumbent Chinese energy giants.

Western investment can help China and India to limit their greenhouse gas emissions. But these countries also need to help themselves by building an attractive regulatory and business environment for green investments.

Comments

Added on 11 Jan 2007 at 19:31 by anonymous

Despite the disastrous current American administration that country had quite capable and extraordinary presidential talent, that served America quite well in the past. Some of these leaders would have been able to see deeper in future, understand the dilemmas we already face in climate policies and take apt measures. Instead? America shamefully leads on the polluters list, along with the EU, Russia, China and India.
The reasons all remain unconvinced in cutting down on their gas emission are both understandable and shameful, when we all see where their blindness and stubborness leads.
Why not take the lead, the EU that is, in bringing together these polluting nations to re-address the climate changes issue in view of new and cleaner energy alternatives. Rather than asking China and India alone to cut down on their cheap coal emissions, why not sit them down all together and try to bring them to their senses. Why not convene the meeting in a European Alps resort in the middle of winter, when there would be lots of sunshine and tanning opportunities rather than snow and skiing chances..

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Launch of CER report 'How to make EU emissions trading a success'

09 June 2008

Speakers included: Adair Turner, chair of the committee on climate change, Anthony White, Climate Change Capital, Mark Lewis, Deutsche Bank, Nick Mabey, E3G, Damien Meadows, DG environment, European Commission & Simon Tilford.

Location info

London

Seminar on 'The EU, energy security and Russia'

19 May 2008

With Alexandr Vondra, Czech Republic’s deputy prime minister for European affairs.

Location info

London

Just another gas crisis?

Written by Katinka Barysch, 07 January 2009

by Katinka Barysch

Russia has cut off the gas flowing to and through Ukraine – again. Like in January 2006, Moscow and Kyiv are blaming each other, while a convoluted mix of political intrigues, shady middlemen and broken contracts makes it almost impossible for outsiders to ascertain which side is at fault. But the current interruption in gas supplies to Europe is different in many ways from that three years ago.

First, the interruption is more severe but some EU countries appear to be better prepared. In January 2006, when Gazprom first turned off the tap over a pricing dispute with Kyiv, the volumes affected were much smaller. On January 7th 2009, Russian gas supplies through Ukraine (which account for over 80 per cent of all Russian gas sales to Europe) stopped altogether. The bigger EU countries, such as Germany, Italy and France, have plenty of gas in storage and they can use more Norwegian or Algerian or domestic gas instead. However, some of the newer member-states are not so lucky. Bulgaria, Slovakia, Hungary and Poland, with little storage or access to alternative suppliers will have to ration gas. A spike in energy prices is the last thing Europe’s struggling industries need at the moment. Calls for European ‘energy solidarity’ will suddenly acquire a new meaning.

Second, the political dynamics are very different. In 2006, when memories of the orange revolution were still rather fresh, many Europeans were quick to blame Russia for using energy to punish pro-western Ukraine. Now Ukraine’s squabbling, self-serving leaders attract little sympathy. The fact that Ukraine does not have a functioning government mattered less as long as its economy was doing well. But now it has become one of the main obstacles to resolving the crisis.

Russia has considerably beefed up its PR efforts, having warned of potential supply cuts weeks ago (and blaming the Ukrainians in advance). But the fact that some smart people speculate whether Russia has deliberately caused the gas crisis to destabilise Ukrainian politics or to push up global energy prices shows just how little credibility the country has, especially after the Georgia war. Both Moscow and Kyiv had reassured the Europeans numerous times that gas transit to the EU would not be affected. Now half of Europe is living of its own gas storage or switching to fuel oil. Gazprom’s mantra that it, really is, a reliable supplier sounds hollow. But so does Ukraine’s claim to be the innocent victim of neo-imperialist policies.

Third, the stakes for both Ukraine and Russia are a lot higher. In 2006, Ukraine’s economy grew by more than 7 per cent despite higher gas prices, as exports of steel and chemicals boomed. At the end of 2008, Ukraine’s economy was in meltdown, with industrial production down 30 per cent year on year in November. The Ukrainian currency has plummeted 40 per cent against the dollar since September. So paying for imports – including energy – would be a lot harder even if gas prices stayed the same. The IMF, which has pledged $16 billion to shore up the Ukrainian economy, will demand that the government phase out energy subsidies to keep the budget deficit under control. That means that more of any gas price increase will have to be passed on to households. With inflation already running at 20 per cent and presidential elections coming up next year, Ukraine simply cannot afford a rise to $450 per 1,000 cubic metres, as requested by Gazprom after the negotiations broke down.

Russia is also in a very different position. Its external surplus and reserves are dwindling. Gazprom, like most Russian companies, is seriously short of cash. Ukraine buys more than 40 billion cubic metres of gas from Russia a year, which makes it one of Gazprom’s bigger customers. So the price of these sales does matter for Russia. However, the costs of a sustained interruption of gas flows would be immeasurably higher. Not only because Gazprom could face an avalanche of law suits from European companies if supply contracts were breached, but also because Gazprom could lose its standing in its biggest and most lucrative market. That is already happening.

The final, and perhaps most important, difference between the 2006 and today is that Europe is more likely to draw the right conclusions. After the 2006 cut-off, the Europeans panicked – and then the EU proceeded to lecture Russia on how to run its energy sector and export business while individual EU countries rushed to sign long-term bilateral agreements with Gazprom to secure their own supplies. This did not work. Today, the Europeans will (hopefully) focus on what they can do together to increase their energy security: build a functioning internal gas market, invest more in gas storage and focus on alternative sources of gas, for example from the Caspian via Nabucco and in the form of LNG from Northern Africa and the Middle East. They also need to reinforce their efforts to achieve their 20 per cent energy savings target and explore alternative sources of power, namely renewables and nuclear. If the gas standoff reminds the Europeans of the importance of such measures, Russia and Ukraine will have done the EU a favour.

Download the CER’s book ‘Pipelines, politics and power: The future of EU-Russia energy relations’ for free http://www.cer.org.uk/pdf/rp_851.pdf

Katinka Barysch is deputy director of the Centre for European Reform.

Comments

Added on 11 Jan 2009 at 13:46 by Michel

Dear Katinka,

Thanks for this thorough assessment!
Who do you think is benefiting from the opaque deal with Rosukrenergo besides Mr. Firtash and Mr. Fursin?
Was this set up from Ukrainian side or from Russian side or from both?
Thanks in advance.

Michel Kleistra

Added on 16 Jan 2009 at 17:24 by anonymous

Thank you for interesting article! I have some friends in Central Europe so I am pretty concerned about this topic. As far I know, some countries are able to use some temporary solutions, like gas swaps and storage in Germany, but still, thousands are freezing in their homes. we are really lucky here to have some own resources....
Best wishes and warm winter!
Julie, Toronto

Added on 24 Feb 2009 at 21:24 by Федоренко

A new price on Russian gas for Ukraine is about $230 for thousand cubic meters. Nobody will say more precisely today. A word «about» is a new know-how of the Ukrainian government, that hides the unwillingness of Julia Volodimirivna to acknowledge that she handed us to Russia.

During the first four months we will pay $360 for gas. And that is exactly twice as high, than paid until now. And Timoshenko’s «about» means a kind of an average annual price. Such a convinient gap : nobody knows its size, so no one will notice, someone will grab a piece of pie from there.
http://ua-ru-news.blogspot.com/2009/01/new-price-on-russian-gas.html</A>

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After the gas conflict

Written by Katinka Barysch, 23 January 2009

by Katinka Barysch

On January 20th, Russian gas started flowing again through Ukraine, after a two-week shut-down that had left people in South East Europe freezing and factories idle. The relief across Europe was palpable but the confusion about what happened is still there.

First, both Russia and Ukraine said that the dispute was about money that Naftogaz, the Ukrainian gas company, owed to Russia’s monopoly Gazprom for last year’s deliveries. Then it was about the price the Ukrainians should pay in 2009 for the Russian (or Turkmen) gas that it uses domestically. Then Ukraine tore up a contract about gas transport to Europe and threw transit fees into the negotiations too. If this was not complicated enough, the dispute then centred on ‘technical’ gas that is needed to keep up volumes in Ukraine’s pipelines. When a handful of European gas companies offered to buy this technical gas in order to get things moving again, the Russians said that this wasn’t really the problem. At one point, Russia claimed that it was sending gas to Ukraine but Ukraine refused to accept it. Ukraine said the gas was coming down the wrong pipe and could only be delivered to Europe if it shut off supplies to Ukrainian factories and households. A group of observers cobbled together by the EU to find out whether gas was actually flowing from Russia to Ukraine never got down to work. The role of RosUkrEnergo, the lucrative trading company at the heart of the Russian-Ukrainian gas deliveries was, as always, unclear. Add the frosty political climate between an angry and increasingly desperate Russia and a divided and even more desperate Ukraine, and the situation is almost impossible for outsiders to understand.

Rumours and conspiracy theories proliferated. PR efforts were ramped up. Insults flew. Various ‘insiders’ offered diametrically opposed accounts of what was happening. The overall impression was that neither the Russians nor the Ukrainians wanted the EU to understand what the stand-off was about. If the parties involved prefer confusion and obscurity, any attempt at mediation – as launched by the EU, numerous European governments and the gas companies in the EU – is bound to fail.

In theory, the conflict has now been resolved. Prime Ministers Putin and Tymoshenko signed a deal on January 19th that is said to be very similar to an understanding they had already reached back in October (details of supply contracts are not usually published, not even those between Gazprom and EU energy companies). According to press reports, the new agreement runs for ten years, and therefore eliminates the haggling that has become an annual ritual since the early 1990s. As from next year, Ukraine will no longer receive subsidised gas from Russia but pay a price that is linked to the one of fuel oil, like all companies in the EU do. In turn, Gazprom will no longer get a discount on the transit fees it will pay Ukraine for shipping more than 120 billion cubic metres gas westwards every year. Under such a deal, there would be no place for shady middlemen – although RosUkrEnergo is reportedly moving into Ukraine’s domestic gas trade.

Does this mean that a repeat of the gas war is unlikely or even impossible? It is hard to say. The EU should not speculate but recount those things it knows for sure: first, both Russia and Ukraine considered it more important to fight for their narrow interests in this energy dispute than to defend their reputations as reliable supplier and transit state, respectively. This is deeply worrying. Second, Russia will not break up Gazprom. Ukraine has rejected the idea of running its pipeline system as a three-way consortium with Russian and European involvement. Monopolies have a tendency to become opaque and greedy unless properly regulated and monitored. Neither Russia nor Ukraine seem keen on doing this. An unpublished contract may or may not be enough to ensure the reliability of Gazprom and Naftogaz (and any intermediary that may yet follow RosUkrEnergo). Third, Russian gas accounts for a quarter of total EU consumption, and 80 per cent of this comes through Ukraine. For some EU countries the dependency is 100 per cent. Even if the supplier was Norway and the transit country Switzerland, this would be an uncomfortable position to be in.

To increase their energy security in the face of such uncertainty, the Europeans do not need to do anything they are not doing – or planning to do – already. The EU has already agreed targets for using more renewables and saving energy (although the latter is non-binding). A new liberalisation directive – if properly enforced – should help to build a more integrated EU energy market. The objective of constructing more interconnections between national gas markets has been there for years. A new initiative to link South East European gas markets (called NETS: new European transmission system) looks a little more concrete, and could get a boost since South East Europe was the region worst affected by the cut-off. On January 26th and 27th, the Hungarians are hosting a ‘Nabucco summit’ for consortium members and potential suppliers for this planned pipeline through Turkey and the Balkans. The project could do with a political push, as well as fresh ideas for financing it. As for its potential supplies, the EU is stepping up efforts to get a big contract with Azerbaijan. And two of the Nabucco consortium members, Austria’s OMV and Germany’s RWE, announced in December that they are dusting off plans to build a trans-Caspian pipeline to get Turkmen gas into Nabucco.

At their spring summit in March, EU leaders will discuss the Commission’s ‘strategic energy review’ (published in November, 2008). It contains useful ideas, for example a proposal to pool EU resources for securing contracts with outside suppliers such as Azerbaijan and Turkmenistan. EU leaders now need to focus on what they can do through concrete steps and investments to increase the EU’s energy security, not speculate about whether Russia and Ukraine may stick to their latest deal.

Katinka Barysch is deputy director of the Centre for European Reform.