Dare and Care

The last energy crisis?

Briefing Note For Workshop VIII
This Briefing Note has been prepared for Workshop VIII of the 2009 European Business Summit. The workshop will run between 15.45 and 17.00 on Thursday 26th March 2009. This Briefing Note has been prepared by European Voice.

This session will be moderated by Joshua Chaffin of Financial Times.

Introduction

Energy crises can be defined as shortage crises, and can be linked to either a hike in prices making energy unaffordable, or a physical shortage of energy, linked to insufficient production or insufficient distribution capacity.

Energy crises of a global scale have mostly been linked to a sudden rise in oil prices, as oil and related fossil fuels still constitute the backbone of our economies. In July 2008, crude oil reached a record price of $146 a barrel, before the financial meltdown caused prices to go down again. This unprecedented rise in energy prices has been a symptom of a foreseeable crisis in energy supply.

Indeed, as the peak in world oil production looms, worldwide energy demand has never been so high. Moreover, the global economy is set to grow four-fold between now and 2050, and this trend will mean an even higher energy demand, putting unsustainable pressures on natural resources and the environment. The need for alternatives sources of energy and new consumption patterns has therefore become urgent.

Main issues at the European Level

The latest dispute between Russia and Ukraine over gas prices has reminded us once again that Europe is particularly vulnerable to energy crises because of its dependence on a few external sources of energy. This dependence has been steadily worsening over the years and ensuring energy security has come to the forefront of EU policies in recent years.

One major milestone was the release of the European Commission Green Paper on security of energy supply in 2000, which started the debate on devising a common response to the energy challenge. The strategy that came out of this consultation put the achievement of a unified internal market for energy at its core, while pursuing both greater energy efficiency and a diversification of energy sources, with a new emphasis on renewables that recognised the link between energy and climate change. A number of measures (directive on cogeneration in 2004, new norms for appliances in 2006, European action plan for Energy efficiency 2007-2012 in 2006, initiatives in the transport sector, etc.) followed, but fell short of the objectives that the EU had set itself and did not solve the EU’s external dependence.

On security of supply, the 2006-2007 Ukraine-Russia conflict over gas prompted the European Commission to give a new dimension to its energy policy with the presentation of an ambitious climate and energy package in January 2007, which included a Strategic Energy Review focusing on both external and internal aspects of EU energy policy. The more recent gas supply interruptions revived the discussions over the necessity to complete the Nabucco pipeline project.

Beyond the issue of security of supply, the link between energy and climate was stressed by the fact that the package clearly dealt with both issues at the same time. On the climate side, it set objectives for production of energy from renewable sources (+20% by 2020) use of biofuels (10% in transport by 2020) and reducing greenhouse gas emissions (-20% by 2020). A means to achieve these objectives clearly included a new energy policy combining better energy efficiency and more sustainable generation and consumption patterns.

This approach was rapidly endorsed by member states which agreed to a two-year action plan to establish a common energy policy in March 2007. This approach linking completion of the internal market, diversification of supply and promotion of domestic environmentally friendlier sources of energy was confirmed.

Other actions by the Commission included of a third energy liberalisation package aiming at the completion of internal markets of electricity and gas, adopted in July 2008, and a Strategic Energy Technology plan (SET-plan) to support Energy research (2007).

The package was adopted by the Council of the EU and the European Parliament in December 2008. Although this adoption was welcomed by most stakeholders, it also led to criticism from environmental groups and green politicians, who considered that the Commission’s initial proposals had been watered down. Indeed, the potential impact of the package on energy prices and, as a consequence, on the competitiveness of EU industries, was a major point of contention.
Agreement on the energy liberalisation package was hard to reach, as some member states, led by France and Germany, resisted the idea of further unbundling of production. A particular cause for concern for member states was that unbundling might weaken European companies, making them vulnerable to take-overs from third-country companies – in particular, Russia’s Gazprom. As retaining control over such a strategic sector as energy has been one of the main reasons for the slow pace of unification of European energy markets, the European Commission proposed to introduce a specific protection clause limiting foreign investment from countries which would not apply the same unbundling rules. This clause was watered down by the very same countries who opposed full unbundling.

Challenges in the short and long run

In November 2008, the Commission presented its Second Strategic European Energy Review, which included a new EU security and Solidarity Action Plan. This plan calls on Member states to:

– invest in infrastructure;
– make better use of indigenous energy resources – both fossil and renewable;
– improve crisis management mechanisms and oil and gas stocks, with a clear emphasis on intra-EU solidarity.

The Review also calls for a new approach in foreign and neighbourhood policies, to put a new emphasis on energy interdependence, and includes a review of the 2007-2012 energy efficiency action plan.

If this plan is a show of resolve, it also reveals that much remains to be done if the EU is to match its ambitious 2020 objectives. The challenges are numerous: technical, financial, political and technological.

On the technical side, European energy markets are still fragmented, and interconnections between national distribution grids are not yet sufficient, leaving some member states isolated and vulnerable.

On the political side, solidarity among member states has not become a natural reflex yet, and national interests will have to be overcome if Europe wants to achieve a real unified energy market. Financial resources dedicated to the Trans-European Networks have proven insufficient, so far, to trigger the necessary investments in infrastructure. New instruments are needed.

On the financial side, action on energy efficiency also needs to be strengthened, and investments in this field need to be stepped up. This is why the European Commission is preparing a new Sustainable Energy Financing Initiative with the European Investment bank and other international financial institutions. But will Member States follow?

Concerning security of supply, in the short run, the main challenge for Europe will be to secure a constant supply of raw materials, so as to keep the economy running, and at the same time to reduce drastically its dependence on foreign energy sources. The challenge is not new, and it will take a lot of political will to really achieve a result. Engaging with Mediterranean partners has been on the agenda since 1995, but in recent years, dependence towards Russia has tended to increase rather than decrease, despite full awareness of the problems over-reliance on one single partner could bring.

At the same time, Europe will also have to develop and implement energy-saving technologies that will allow it to move to a new low-carbon, high-efficiency economy. Statistics show that Europe is lagging behind on investment in innovation, falling short of the 3% of GDP objective set by the Lisbon Strategy. Will the new instruments help to trigger new dynamics?

In the long run, the major threat will be scarcity of resources if worldwide demand is not brought to a more sustainable pace. Climate change may also seriously affect energy security by disrupting access to resources and making current living conditions unsustainable.

Possible questions

– Is the EU on the right track? Or is it too little too late?
– Is the internal energy market really the solution?
– Will member states play a collective game?
– In the light of the limited achievements of a decade of Euro-Mediterranean partnership, what will make a difference this time and allow Europe to strengthen its energy ties with its Southern neighbours?
– The recent gas dispute between Ukraine and Russia has sparked renewed interest for the Nabucco project, even though this project has encountered several difficulties, and is still at a very early stage. Can Nabucco really deliver?
– What impact will global recession have on EU efforts?

Further reading

– European Commission 2nd strategic energy review (http://ec.europa.eu/energy/strategies/2008/2008_11_ser2_en.htm)
– European Voice : special report on Energy & Climate change (http://www.europeanvoice.com/folder/energyquarterlyclimatechange/93.aspx)
– Didier Houssin, Director, Office of Oil Markets and Emergency Preparedness, IEA “Security of Energy Supplies in a Global Market”, speech at the 2007 Prague Energy Summit (http://www.iea.org/textbase/speech/2007/Houssin_Prague.pdf)

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