Monday, 10 June 2013

Who is winning Energy battles - UK vs EU

I enjoyed speaking to the Parliamentary Group for Energy Studies in May. It gave me a chance to reflect on what I have seen in the past 4 years and how UK policy affects EU thinking on energy issues and vice versa.  I have written an article for their magazine - which I thought I should also put here.

There are three legs to energy policy; energy security, the cost of energy and how costs affect competitiveness, and how energy and climate policy work together.  All three issues are inter-related and conflict; and often when trying to address one issue it can often make another worse.
A one-size-fits-all policy on Energy is unworkable. The public perception of acceptable energy varies from country to country. Just when the UK is investing in new nuclear, Germany is abandoning it.  What's more, we are at a time when private sector investment is under huge pressure.

Longer standing MEPs tell me that 20 years ago the priority was competitiveness, it then swung towards decarbonisation and climate change, but in this 4 year period security has also been a priority. 
In the UK energy security is important, but it is one of many concerns. However many of my  Eastern European colleagues would list it as their biggest however priority.  They remember how  Gazprom switched off the lights in the depths of winter in early 2009. This has driven a strategy to improve energy security infrastructure especially interconnectors and storage.

It is important to stress that this public money is not meant to fund everything, but is intended to plug infrastructure holes where there no private sector or national funding.
Interconnectors will also help the UK to diversify energy for example linking offshore North Sea wind to Norway's hydro storage capacity. Gas interconnectors are important because the UK has less gas storage than others. I have visited the two-way pipeline running out of remote Bacton in Norfolk, but most people didn’t realise how important it was until it temporarily shut down in March. 

As the House of Lords' committee pointed out in May[1], the required investment in European energy infrastructure is in the order of one trillion euros by 2020.  Whilst the proposed investment from the EU budget will increase to €5bn between 2014 and 2020, it is vital to unlock private sector investment.   Investors are challenged by uncertainty since politicians are increasingly concerned about affordability and are less willing to commit to long-term price contracts.  Furthermore, many EU financial sector laws impact negatively on investment; Solvency II will constrain insurance companies investing in long-dated BBB bonds, new Basel III rules for banks will impact on longer-dated lending, any financial transaction tax will reduce investment returns.
MEPs prioritised competitiveness in the recent vote on proposals to "backload" allowances in the EU Emissions Trading System (ETS).  Businesses supporting backloading said it would help them invest in newer generation technologies.  Others said it would raise energy prices, forcing energy users to re-locate overseas.  Everyone agreed that the proposals were a short-term sticking plaster and did not help long-term certainty.

Some argued that it would help the UK if backloading pushed up the continental price of carbon towards the UK's carbon floor price.  But colleagues especially in Germany and Eastern Europe were concerned about the impact on competitiveness. Backloading was eventually rejected by just 19 votes, showing how finely balanced the issue was.
UK MEPs can influence EU energy policy. A year ago, we were concerned about pending EU rules on derivatives trading and their impact on energy hedges and about the proposed EU Regulation on offshore oil and gas.

Through Parliament amendments we have exempted hedges for business risks from the derivatives trading rules, thus neutralising the impact on costs. We have also completely rewritten the offshore oil and gas legislation. In fact I tabled over 300 amendments to the draft legislation to alter the text line by line.  Instead of a heavy-handed, one-size-fits-all Regulation we have a Directive.  The high quality North Sea safety standards will not be dumbed down but will be followed in the rest of Europe.  An estimated £146m of implementation costs have been saved. This required huge assistance from UK DECC and HSE experts, cross-party co-ordination by British MEPs and close work with members from other countries, in particular with the Belgian rapporteur.
Another major problem is that EU laws are often insufficiently impact assessed and thousands of amendments are tabled through the Parliament without detailed analysis.

For example on the Energy Efficiency Directive the Parliament was split between those who thought energy savings policies should enable households and businesses to save on their energy bills and those who pursued a target-driven, headline-grabbing approach. My own view is that EU targets are easily set but rarely met. But even the best impact assessments are not a crystal ball. I was extremely concerned to read recently that the UK's Energy Company Obligation programme may add up to £100 to household bills, especially as the UK was often cited by other European countries as a standard-setter in this area. 
Public concern about energy bills is growing.. If we want public support for decarbonisation policies we must be highly attentive to the impact of policies on prices. MEPs are now more wary of taking first-mover actions on climate policy in Europe if it impacts our global competitiveness and want to push back on EU legislation if it places extra costs on consumers and businesses. Climate policy has to be flexible and there are many technologies which will help us meet our goals. It was therefore alarming to see momentum (from certain corners) behind an outright EU ban on shale gas fracking.  Under the European Treaty countries are entitled to the economic benefits from their resources and we need to uphold this principal.

To conclude, the UK can play a key part in reforming EU policy, but there are vast differences in Member States' energy mixes and domestic energy policies so we cannot accept a top-down, rigid approach from Brussels. Energy security, energy prices and decarbonisation all pull against each other, reconciling them is not easy, but it is important to try to keep them balanced.

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