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Can Brussels Deliver An Energy Union For Europe?

Originally published on Energy Post.
By Sonja van Renssen

Energy Post takes stock of what the proposals for an Energy Union mean and ponders the key question: can Brussels deliver? The Commission is pushing hard on a far-reaching redesign of the electricity market, which is to be driven by the EU Emission Trading Scheme and increasingly run by EU institutions. In gas Brussels also wants to take a central role. When it comes to climate policy, the Commission has some substantial new proposals on energy efficiency and the transport sector. But all of it will have to be achieved with Brussels’ existing, limited means: the Commission is not looking for new powers.

“This is undoubtedly the most ambitious European project since the formation of the coal and steel community [which created the EU],” said European Commission Vice President for the Energy Union Maroš Šefčovič as he presented the Energy Union for Europe package on 25 February in Brussels. He was joined on the podium in the press room by his colleague Miguel Arias Cañete, EU commissioner for Energy and Climate Action. For once, the room was packed.

The package joins the EU’s 2030 climate and energy package and a European Energy Security Strategy to shape the bloc’s long-term energy and climate future. The Commission’s goal is to transform the EU energy system over the next five years, said Šefčovič. Europe must move away from an economy that is driven by fossil fuels and a centralised supply-side approach to energy.

Šefčovič’s original five pillars are still there. But they have been fleshed out, largely in line with the sneak preview offered by Cañete in Riga earlier this month. It will be Cañete’s job to implement much of what is being proposed over the next few years. After a series of interviews in the run-up to this big day (with Jean-Arnold Vinois, Georg Zachmann and Jean-Michel Glachant), Energy Post asks the now all-important question: has Brussels delivered?

More power to Brussels

“If this is the biggest integration project since the coal and steel union, then how can it succeed without a major shift of power to Brussels?” Because that’s what the coal and steel union entailed.

The question came from a Dutch journalist and it was inevitable. As was the response: “I still believe this is possible within the current Treaties,” said Šefčovič. “We need to complete the internal energy market.” Cañete added for good measure: “The Energy Union is a shared competence. A formal rebalancing of powers is not necessary to achieve our objectives.”

Every person Energy Post interviewed ahead of the formal proposals this week said the same. And yet, this is the biggest question of all: can Brussels deliver an Energy Union for Europe with its current powers? Jean-Michel Glachant, Director of the Florence School of Regulation questioned whether it could even complete the internal market, never mind launching a more ambitious Energy Union that took on board security of supply and decarbonisation.

The last years have seen a fresh fragmentation of European energy policy. Member states have introduced national policies to make up for inaction from Brussels and to pursue national priorities. Take the UK, which has introduced a carbon price floor and a national capacity market. It has also persuaded Brussels to let it introduce public subsidies for a new nuclear plant. All of these actions are breaking up the internal energy market. The previous Commission did not always condone them, but could not prevent them either. What’s different now?

The new Commission is going down the only road it can: more power to ACER (Agency for the Cooperation of Energy Regulators) and ENTSO-E and ENTSO-G, the European-level bodies for Transmission System Operators [TSOs] for electricity and gas respectively. “With measures like a stronger ACER and improved cooperation between TSOs, we can do a lot,” Šefčovič insisted. In its Energy Union document the Commission dares to call for a “significant reinforcement of powers and independence of ACER”. Glachant, Zachmann and Vinois all pointed to this as the best option on the table today.

Market redesign

But the Commission wants to go further. The electricity market as we know it is no longer working. That’s old news. New is that Deputy Director General for Energy Christopher Jones announced last week that the Commission will launch a consultation on its ideas for a market redesign as early as June. Europe needs a new regulatory framework to incorporate 45% renewables into its power mix by 2030, he told a conference on local grids. (This is the electricity market share of the 27% renewables target agreed by European leaders last October.) Legislative proposals will follow in 2016.

The idea is that the EU Emission Trading Scheme (ETS), not renewables subsidies, drives energy investments in future, Jones explained. The Commission will push back on the renationalisation of energy policy through capacity mechanisms, propose new incentives for smart grids and introduce rewards for flexibility, he added. The electricity market redesign will include a retail market reform. And yes, it will also put forward new ideas for what ACER and the ENTSOs could take on. Further ETS reform proposals will also come out by June, Cañete announced on 25 February.

More regional cooperation is also part of putting the EU internal market back on track for the Commission. Concretely, it will develop guidance on regional cooperation “as a step towards full EU-wide market integration” – building on existing arrangements such as the Pentalateral Energy Forum and the Baltic Energy Market Interconnection Plan (BEMIP), it says in its Energy Union paper. This goes against Zachmann’s warnings that the regional approach could result in incompatible markets and miss out on the benefits of bringing more disparate nations together.

What it all still boils down to first and foremost however, is completing the internal energy market. “Competition, internal market and trade rules,” said Cañete, “are all the tools at our disposal.” This was Glachant’s assessment too – the only difference is that he seriously questioned whether these are enough to get the job done. Certainly, the Commission seems determined to use these tools to their full potential. Šefčovič described the free flow of electricity as a “5th freedom”. Fully implementing the third market liberalisation package will become a condition to access EU funds for energy investments. “We will use competition rules to phase out below-cost regulated prices,” Cañete said. The Commission also plans to produce biennial reports on energy prices, analysing the role of taxes, levies and subsidies.

Kingmaker for gas

For Vinois, part of completing the internal market for electricity was also making sure it is just as resilient to potential security of supply disruptions as the gas market is. Here, the Commission is proposing to do pretty much exactly as he recommended: an update to the 2005 electricity security of supply regulation and stress tests, just like for gas, as well as giving more power to ENTSO-E. But if the internal gas market has worked better since the Ukraine-Russia gas crisis in 2009 – and a consultation on updating the 2010 gas security of supply regulation is already underway – this hasn’t stopped the Commission from seeking to swell it beyond its internal market glove to help assure European security of gas supply in other ways too.

The LNG strategy for Europe was already announced by Cañete in Riga. What caused more of a stir on 25 February was the Commission’s call to be involved in nations’ negotiation of intergovernmental energy agreements (IGAs) with third countries such as Russia in future, before they are signed. The Commission will propose a revision of the law on intergovernmental agreements in 2016 to this effect. “We are going to make the proposal that the European Commission should be part of the negotiating team on IGAs,” said Šefčovič. Three years ago, the Commission proposed something very similar and this was immediately blocked by Member States. What’s different now?

South Stream happened, for one. This was a clear example of the Commission finding out too late that EU law had been breached, said both Šefčovič and Cañete. The purpose of earlier Commission involvement is to check in advance that a project is compatible with EU law – and that it really does improve European security of supply. The political context has also changed, added Šefčovič: “I see much stronger momentum to increase transparency.” Whatever Šefčovič may say, the green light from Member States is far from assured on this: Hungary’s Prime Minister Viktor Orban has already said no.

On top of its IGA initiative, the Commission will look to improve the transparency of commercial gas supply contracts. Prices, volumes and delivery points are exactly the kind of information that would be useful, said Šefčovič in response to a question. “It would be good to have advice from the Commission on what is being negotiated with other partners,” he suggested. The results of DG Competition’s investigation into Gazprom for anti-competitive behaviour will be announced in a “matter of weeks” the Vice President added.

For all the talk about transparency, it seems that this has not dissuaded the Commission from investigating the option of joint gas buying. In its Energy Union paper, the Commission says it will “assess options” for this, while stipulating that it would be only be possible under strict conditions, such as during a crisis and when Member States are dependent on a single supplier, and would need to comply with EU and WTO competition laws.

Climate change and decarbonisation

If the Energy Union is about the internal market and security of supply, it is also most definitely about climate change and decarbonisation. How far can the Commission’s powers take it here? Certainly energy efficiency is given the usual glowing review in the Energy Union vision. But aside from saying it must be “fundamentally rethought”, there is something of substance here: as part of its electricity market re-design, the Commission says it will “ensure that energy efficiency and demand side response can compete on equal terms with generation capacity”. E3G Associate Director Ingrid Holmes calls it a “radical and very welcome shift”.

There is plenty more in the Energy Union package on exactly what the Commission intends to do on efficiency, notably a review of all existing legislation, a link to the circular economy with a waste-to-energy paper due in 2016, and a heating and cooling strategy this year still. But it still fell short for some stakeholders. “Why does the Energy Union Framework not take more action on buildings?” asked Adrian Joyce, Secretary General of EuroACE, an industry alliance for more efficient buildings. The only concrete initiative presented for buildings is a “Smart Financing for Smart Buildings” initiative.

The biggest chunk of text in the efficiency section of the package however, is devoted to transport, with the Commission promising a “comprehensive road transport package” with measures to improve the efficiency of vehicles, road use, modal choice, alternative fuels and their infrastructure, and public procurement of clean vehicles. Biofuels are back with an action plan for second and third generation biofuels foreseen for 2017. In a nutshell, the Commission foresees a “gradual transformation of the entire transport system” i.e. an Energiewende for transport. The Commission plans a stakeholder conference on decarbonising transport for 18 June, Cañete announced at the press conference.

Yet even here, not all were happy. “We welcome the Commission’s good intentions on cleaner cars and the electrification of transport, including rail,” said Jos Dings, Director at green transport NGO T&E. “But shying away from an earlier commitment to introduce CO2 standards for trucks and buses is an entirely unwelcome concession to special interests.” Fuels Europe meanwhile, representing the EU refining industry, lambasted the Commission for failing to show how the Energy Union will deliver competitive energy and dismissing the role of oil products in transport.

Negative and positive reactions

There were plenty of negative reactions overall, also from green groups. “Inspiring preamble, short on concrete vision,” said Birdlife. Some criticised what they saw as too great an emphasis on finding new gas supply routes (and sometimes, reviving nuclear power) rather than going all out for energy efficiency and renewables. The Greens in the European Parliament called it a “missed opportunity for promoting real energy transition in Europe”. “Why is so much energy put in replacing the gas dependency of the EU to one country by the dependency to another, when reducing the overall dependency is possible as of today?” asked Thomas Nowak, Secretary General of the European Heat Pump Association.

Others were more positive. “The EU has created a compelling vision for an economy driven by clean energy supported by a forward-looking climate policy,” said Stephanie Pfeifer, Chief Executive of the Institutional Investor Group on Climate Change (IIGCC). The proposal is a “clear signal to investors that Europe is open for business on zero-carbon energy”, agreed the European Wind Energy Association. Unexpectedly, Food & Water Europe, which has campaigned for a shale gas ban in Europe, welcomed the Commission’s apparent backing away from shale gas. “One year ago, its Communication on shale gas projected that 10% of EU energy demand in 2035 could come from shale gas,” said Director of EU Affairs Geert Decock. “Now, shale gas is just ‘an option’ with a number of important caveats about environmental impacts and public acceptance.”

For business leaders in the Prince of Wales Corporate Leaders Group on Climate Change, the bottom line was clear: the success of the Energy Union hangs on how effectively its plans are implemented.

And herein exactly, lies the rub. Will the Energy Union deliver? There are expensive investments to make, yes, never mind public opposition to infrastructure projects and indeed privacy concerns to overcome if we look indeed to a Googlisation of our energy system. But the biggest challenge of all is overcoming national interests. Vinois, Zachmann and Glachant all said it: the Energy Union depends on Member States and governance is the core issue.

Already, countries have expressed different preferences, with the UK calling for a light touch approach from Brussels and Germany wanting full coordination, on the 2030 climate and energy goals. Green groups’ biggest criticism of the package, apart from a too much of a focus on gas, is that it fails to propose a strong governance system for renewables and energy efficiency. Is this because the Commission knows that its competition and internal market powers just don’t stretch that far?

Šefčovič will deliver Europe’s first State of the Energy Union address later this year. That will be interesting. But much more so will be to hear what EU energy ministers and national heads of state and government make of an Energy Union for Europe. Next EU summit: 19-20 March.

Reprinted with permission.

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