European energy security

2 February 2006

The European Policy Centre, together with the Clingendael International Energy Programme, held a Policy Dialogue on European energy security. EPC Chief Executive Hans Martens made some opening remarks. Noé van Hulst, Director of Long-Term Office, International Energy Agency, and Coby van der Linde, Director of the Clingendael International Energy Programme, were the keynote speakers in the first session, on New risks and challenges in security of supply, which was chaired by EPC Founding Chairman Stanley Crossick. The panellists were Fraser Cameron, Senior Advisor at the EPC; Walter Schaefer of Shell, representing the International Association of Oil and Gas Producers (OGP); and Andrei Konoplyanik, Deputy Secretary General, Energy Charter Treaty. Nina Commeau-Yannoussis, Head of Unit, Energy Policy and Security Supply, European Commission Directorate-General for Energy and Transport, and Jacques de Jong, Senior Fellow, Clingendael International Energy Programme; were the keynote speakers in the second session, on Policy responses to new risks and challenges. The panellists were Stephan Singer, Head of European Climate and Energy Policy Unit, WWF European Policy Office; Didier Sire, Vice President for Strategy of Gaz de France, representing Eurogas; and Gwyn Dolben, Head of European Affairs, Association of Electricity Producers, UK, Chairman, Energy Policy Working Group, Eurelectric.

Session 1: New risks and challenges in security of supply

Even the most optimistic scenarios from the International Energy Agency’s World Energy Outlook present Europe with tough choices, suggested Noé van Hulst.

A simple extrapolation of current trends depicts the EU as massively dependent on energy imports and higher prices in a world of increased competition for resources. Worse, the increasingly likely worldwide shortfall in investment in energy production and infrastructure will aggravate shortages and expose the EU to even higher prices.

The only escape route from such dire misfortune is for the Union to make an abrupt switch to energy efficiency programmes - but at best this would still leave it requiring two-thirds of its energy from abroad in 2030.

Mr. van Hulst highlighted the many vulnerabilities: under-investment (“more of a challenge than the sexier political issues evident at present”); production increases foreseen only in non-OECD countries; higher demand in Asia; and continued dependence on fossil fuels. Together, these will increase the EU’s dependency on oil to 94% and on gas to 81% of requirements. “The trend is remorselessly upwards, so it will be a question of managing the increase as well as possible, rather than cutting demand back,” he predicted.

The outlook is aggravated by questions over whether the regions that are technically capable of increasing supply, essentially the Middle East and North Africa, will choose to do so, and over the hazards that beset many of the key fossil fuel transit routes - what Mr. van Hulst termed the “dire straits”.

Coby van der Linde offered little consolation in her assessment of how the changing geopolitical context will affect EU energy procurement. In her view, the Union’s tendency towards obsessive introspection threatens to leave it ill-prepared to deal with a world that is being shaped by forces that are more robust than EU policy-makers have acknowledged.

In the face of a major paradigm change which is turning a buyers’ market into a sellers’ market - and an imperfect market, at that - Europe is displaying a mismatch between its regulatory and competition agenda and the realities of the development of international energy markets and their structure.

“When the UK and Germany are each talking of developing their own energy policies, we’re still heading for a confusion of 25 different Member State approaches at a time when what is needed is more consensus,” she argued, urging a re-examination of whether the EU is providing the right economic incentives for investment in the energy infrastructure and diversification that could help mitigate the risks of interruptions to its supply.

Above all, there is a need for a closer link between geopolitics and energy, and a clearer EU appreciation of underlying political and economic trends in the major energy producer and consumer regions. Fossil resources still exist in abundance, but there is limited access to the reserves in a limited group of countries and in an international system which reflects the weakest form of globalisation in energy terms.

“Russia and China are entering the world market on their own terms, with their own definitions,” said Ms. Van der Linde. Glib assumptions of a universal and ineluctable transition towards the western market-driven approach will leave the EU with less than optimal policies on energy supply.

If the world does not correspond to a model of pure globalisation, are EU policies geared to globalisation - notably the Lisbon strategy - still the right approach, or should Europe become more unilateralist? At the very least, said Ms. van der Linde, the EU has to stop acting as if it were a world in itself and recognise that its choices are also influenced by the way the rest of the world is developing. “The EU will pay dearly in the future for taking the wrong decisions now,” she warned.

The need for a single and coherent EU energy policy was identified by speaker after speaker, but there was little expectation of its imminent emergence.

“The concept has been around a long time but not much has been done beyond recognising the problem, or expressing regret over the lack of competence,” said Fraser Cameron, highlighting the “surprising lack of urgency”.

Walter Schaefer echoed the call. “We need to add a sense of urgency to the debate,” he insisted, warning that without a clearer and more stable environment, there would be inadequate incentives for companies to confront the long lead times and high investment required for assuring long-term supply.

Andrei Konoplyanik claimed the Energy Charter Treaty, of which he is Deputy Secretary General, offered the best route towards a single set of rules of the game, not just for the 25 EU Member States, but for the more than 50 countries now linked to the Charter. He suggested that if there had been delays in fully implementing all aspects of the Charter’s aims, some of the blame lay with the EU’s lack of a sense of urgency.

Mr. Cameron noted the unpredictability of events that could influence energy supply to Europe, particularly if imports are to come increasingly from its unstable periphery, where threats to supply reside as much in the lack of rule of law – and consequent discouragement to investment – as in physical shortage of resources. The EU’s attention might be as usefully directed towards promoting stability as towards securing supplies.

Session 2: Policy responses to new risks and challenges

A new mood of cooperation in the EU was detectable, according to Nina Commeau-Yannoussis even if, as she admitted, it was the first time there had been general readiness among the Member States to work together on energy.

She set out the main elements of the Commission’s forthcoming energy Green Paper - a direct follow-up to the recent EU Presidency and Summit initiatives to take a firmer grasp on the challenges.

The new paper will cover six areas for joint action. Top of the list is fuller integration of energy into EU international relations, with a greater degree of coordination among Member States. This is needed to enable the Union to speak with a single voice and build effective dialogue with producer regions such as Russia and the Gulf, major users such as the US and China, and transit countries.

The paper will urge development of the link between energy and the EU’s economic and single market goals, developing the theme that energy can be an important motor of growth and jobs if the single market functions correctly. It will also insist on the need for diversity, with a focus not only on exploiting the potential of renewable and other alternative energy sources, but also on diversification of suppliers and routes for classical energy provision.

Energy efficiency will also feature prominently in the Green Paper. The EU is already the most energy-efficient economy in the world, claimed Ms. Commeau-Yannoussis, but it can do better, both in improving its own performance and in promoting efficiency in other parts of the world.

Closely linked to efficiency, a section on innovation will encourage maximising the EU’s position to take advantage of the potentially huge market for clean technology, pointing to the evident assets it possesses in terms of its high environmental standards and experience of emissions trading.

The final element in the Green Paper, which is scheduled for adoption by the Commission within weeks and for discussion at the EU’s Spring Summit, will be an evocation of energy implications of the Union’s underlying value of solidarity. This is an area where Member States are largely interdependent and share a need for supply, and policy should reflect this.

Jacques de Jong pointed to what he regarded as a major deficiency in the EU’s approach to energy policy. Frameworks had been created for issues related to the energy market and to the environment - but on the key issue of security of supply, little had been done to date and nothing comprehensive. The resulting imbalance in policy left the EU without any guarantees in its system, and exposed to a long-term supply risk.

Mr. de Jong provided an overview of work being conducted within the Clingendael International Energy Programme that might fill this gap, by generating a framework for establishing an energy supply security standard. Such a standard could be helpful to politicians and Member States in assessing how security of energy supply at EU level is developing.

The essence of the approach is the determination of the degree of overall EU security of supply by measuring that of each Member State against a set of quantifiable criteria based on pre-agreed attributes.

The Clingendael work has focused on three inputs - energy balances (predominantly the relationship between national demand and supply, and the reliability of sources of supply); crisis capability (the ability to withstand sudden supply interruptions, and the adequacy of crisis management policies and capacity for flexibility in switching energy sources); and multilateral action (the degree of participation in actions to stabilise world markets, and the readiness and ability to deploy foreign policy instruments - diplomatic or military - in support of stability).

Out of these factors, a combined standard could be created that would allow measurement of each Member State’s situation, and consequently the situation of the EU as a whole, feeding into a broader political process. Clingendael will start test runs, feeding data into its model, in March.

The political dimension is only one of the risks to security of supply, emphasised Gwyn Dolben. He drew attention to other aspects, including operational security, investment in networks and power stations, access to resources and physical security, and said “a consistent policy must take account of all of them”. The stability on which investment depends must include regulatory stability too, in respect of environment regulation as much as market rules, and this is not always the case.

“Even if you get approval for a windpower installation, you can’t necessarily get approval for the power transmission lines to link it to the grid,” said Mr. Dolben, adding a list of what he saw as inconsistencies even within the EU’s own policies (conflicts between the water framework directive and hydrogeneration; restrictions squeezing coal out of the energy mix; urging low-carbon production while banning nuclear power; and Member States wanting cheap prices for industry but constantly raising energy taxes).

Didier Sire also advocated an approach that takes account of both industrial and political imperatives - and that means, in his view, recognising that for Europe to assure security of supply, it also needs to provide security of demand.

The EU should examine how it can remain an attractive market for producers, and what the right model is for market organisation in Europe, he said, underlining that the EU will need some strong energy companies which are able to compete effectively on an international market so as to obtain supplies, and which are powerful enough to be able to hold credible discussions with powerful gas producers.

Stephan Singer reminded the audience that “the future ain’t what it used to be”, and that many supposedly authoritative predictions and assumptions about energy supply had proved to be profoundly mistaken. In what was clearly an uncharted world of higher oil prices and new technological opportunities, it was time for a more radical review of received wisdom.

Conservation, energy efficiency and renewables offer huge potential - but in the critical period of the next 20 years, they will not be able to contribute enough to ease the risks of energy supply shortages. And in the face of the need to cut global emissions by 50% “if we take climate change seriously”, a switch to gas will not furnish the solution either.

For Mr. Singer, huge changes in the energy sector are required - and most of all, with a resurgence of coal, making use of clean-burn technology. “If we do it properly, coal is here to stay,” he predicted. “It’s more democratically distributed than oil and gas - and there is still at least 100 years of supply there.”

Ms. van der Linde concluded the meeting with a plea for the EU to take a more comprehensive view, arguing that it should balance its external security supply policies with its own internal debate. “It is time to stop separating them and to take them all together,” she insisted.