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EU and Energy - fluff, facts, fundies and wiphful finking

by Jerome a Paris Thu Mar 9th, 2006 at 10:06:55 AM EST

I've been going through the various EU documents on energy that have come out, trying to make sense of what has been said and what is being proposed. It's a strange mix of good statistics, reality-based thinking, political bromides, freemarketista ideology, and wishful thinking. Some sources, random extracts and analysis below.

Why Europe must act collectively on energy by Javier Solana (in the FT)
EU homepage energy (in English)
EU energy fact sheet 2004 (pdf, 4 pages)
EU Green paper (with links to documents in other languages)
Green Paper (pdf, 20p.)
Green Paper slide presentation (pdf, 14p.)
Green Paper technical annex (pdf, 49p.)

To those that find windfarms ugly, I can only point out first of all that the EU, like countless companies, find that wind turbine convey such a positive image that they are worth peppering on their home page:

More depressingly, EU statistics show that the EU still gets more 4 times more electricity from oil than from wind:

(and it also gets more electricity from biomass than from wind)

And Europe is no longer on target to meet its (modest) obligations under the Kyoto protocol:

But let's get to the meat of the text.

The fluff is exemplified by Solana's opening paragraphs:

Energy security has shot to the top of the European and wider international agenda. It is easy to see why. Europe will be importing a growing amount of its energy needs from abroad. We already rely on external sources for 50 per cent. Most estimates suggest this will rise to 90 per cent for oil and 70 per cent for gas by 2030. Russia’s recent disputes with Ukraine, Georgia and Moldova over the terms of gas supplies have concentrated our minds.

If we are importing an ever greater amount of energy from abroad, we need to discuss this with foreign partners. It also makes sense to do this together, as Europeans. We are already working together on liberalising and integrating energy markets within the European Union. It makes sense to complement this with concerted action on the external side. If you negotiate together, you will have more influence.

That article is Solana's attempt to muscle into EU negotiations with neighbors on energy, so must be taken in that light, but note that basically the only point he makes on domestic policies is that liberalisation is under way and that it is a good thing (presumably to fight import dependence and provide stability).

That theme comes across throughout the Green Paper - WITHOUT EVER BEING ARGUMENTED. It's just a fact:

Europe has not yet developed fully competitive internal energy markets. Only when such markets exist will EU citizens and businesses enjoy all the benefits of security of supply and lower prices. To achieve this aim, interconnections should be developed, effective legislative and regulatory frameworks must be in place and be fully applied in practice, and Community competition rules need to be rigorously enforced. Furthermore, the consolidation of the energy sector should be market driven if Europe is to respond successfully to the many challenges it faces and to invest properly for the future.

(that's the last item in the description of the "current landscape" - thus presented as a fact, like growing import dependency and global warming)

This slide (about the "common goals") exemplfies this:

The 6 main goals in the Green Paper are:

1. Completing the internal market for energy;
2. Diversification;
3. Solidarity;
4. Sustainability;
5. Innovation and technology;
6. Setting an external policy;

The first one is "liberalisation", the second one is seen in the same logic (it focuses on creating domestic competition), and the third one is about stripping national governments of their individual energy policies - especially for those that have comprehensive ones like France.

The good things in the Green Paper

  • there is a real focus on sustainability, including energy efficiency, demand reduction, giving priority to low carbon energy, and promoting R&D; it's sadly not in the headlines, but it takes the biggest chunk of the Green Paper itself, and all of it makes sense, including the acknowledgement that demand reduction and domestic renewable energy will be the best way to ensure security of supply;

  • calls for investment in networks, coordination of networks, build up of spare capacity and storage and planning for catastrophic events all make sense;

  • the goals of external dialogue are also reasonable, including suggestions to help neighboring producers built their export infrastructure towards Europe, and calls to extend carbon trading beyond Europe.

Solana also notes in his article that dependency is a two way street, and thus that cooperation and trust are the most important thing, and he acknowledges that in order to have a common external energy policy, one shoudl agree on its content (a point sorely missing from the Green Paper).

The intriguing things in the Green Paper

The Green Paper is pretty bullish on nuclear energy, and it even suggests that Europe should set itself a minimum share of low carbon electricity production. That's a pretty smart compromise, as it encourages renewable energies while keeping the door open to nuclear energy;

Both the Green Paper and Solana acknowledge the reality that energy is an eminently political issue, and thus that Member States will want to have their say. This is mostly coherent in Solana's paper (see extract below), but it borders on the schizophrenic in the Green Paper as it has just explained before that that the goals is to have the markets decide what are the best investments, to have private companies compete on a pan-European basis and not on national markets, and to have "coordinated" regulation of the sector in all countries... but Member States are still presumed to influence the choices of what kind of power generation is priviledged or not.

from Solana

Some question whether our member states, given their different outlooks and interests, can agree on a substantive set of messages. More dialogue, they say, sounds good. But what are we going to say? My answer would be that we should stress that most producers and all consumers have a shared interest in maintaining a stable, transparent framework in which the pricing mechanism can function as freely as possible. This means no unilateral measures and no “politicisation” of energy exports to punish foes or reward friends. What we need is an orderly combination of markets, law and consensual negotiations.

The crazy or silly stuff

This points us towards the question of Russia, which is after all the root cause of all this agitation thanks to the Ukrainian shenanigans earlier this year... Barroso and Solana would love to get a strategic dialogue going with Russia, and the Green Paper dangles some apparently tempting carrots in front of the Russian: offer access to other countries to your network, and we'll let you enter our own downstream business, and treat you as an "equal partner".

The fact that Russia doesn't care so much about downstream, and that they certainly won't open their networks (and have every reason not to) doesn't seem to have registered, nor has the fact that, as all the pipelines go to Europe, it doesn't really matter. The parallel attempts to build infrastructure from the Caspian (both for oil and gas) bypassing Russia is also unlikely to be looked upon with kindness by Russia, but do make sense on their own.

This brings us to EU vs national countries issues.

Russia is clearly a topic where the EU is itching to take away responsibility from the Member States. With energy the single most important area of dialogue with Russia, and with France, Germany and Italy being the main conduits of this dialogue, taking over these negotiations would boost the EU versus the most annoying Member States... Which of course means that there is little chance of that happening, but many opportunities to brand these countries as "nationalistic" and "protectionist".

This graph (from the FT) shows how this would work on the vexing issue of gas storage, which I mentioned yesterday:

"Coordinate" these, and you effectively take power away from E.On, GDF (the evil protectionist "national champions") and Snam and give it to the European Commission or its new energy regulator.

Which gets us, as usual, to the underlying assumption that markets will solve everything. As quoted above, it is repeatedly stated throughout these documents that enforcing the liberalisation directives (and, once again, not just the letter of the directive, but also the spirit of the directive, i.e. the full unconstrained liberalisation) are the only way to ensure security of supply and lower prices. This means fighting national ("nationalist") energy policies, and eliminating "dominant" companies in their domestic markets.

The following questions are never discussed:

  • if nuclear is encouraged, how is this going to be (i) financed, (ii) supervised and (iii) who is going to deal with the waste?

    If State involvement in any of these is authorised, how is this made compatible with the denationalisation of the regulatory framework?

  • who gets to define policy viz. Russia (concerning mainly oil and gas)? Those that consume most gas? Those that import most gas as a portion of their consumption? Those that import most Russian gas (in volume or in proportion)? Those that have otherwise intense diplomatic links with Russia?

  • Are long term contracts to ensure stability and security of supply (which the EU has fought tooth and nail in recent years as incompatible with "market liberalisation") now encouraged? Who has the right to negotiate them? The companies? The EU regulator?

  • What's the criteria to know if a market is "competitive"? Price levels? Share of imports? Share of sales made by foreign companies? (And how do you define "foreign"? By the location of headquarters? Nationality of shareholders? Nationality of CEO? Origin of energy production?) Let's have objective criteria...

Fundamentally, the EU has yet to reconcile market "liberalisation" with security of supply and the need to forcefully regulate the sector if you want any results (renewables require subsidies and a supportive legal framework; energy efficiency requires public action on standards definition and enforcement, R&D, monetary incentives; security of supply requires long term commitments and diplomatic/commercial relations whose rigidity is precisely the opposite of how markets work).

The EU could be the appropriate level to regulate the sector, but not for so long as it keeps its pure market ideology. Countries that have been importers of energy for a long time - or those that want to impose environmental preoccupations know that security of supply and the accounting of externalities require consistent policies over the long term, serious enforcement power, a lot of political support - and that these goals have a price that markets on their own are not able to make private players pay.

If the EU gets to be the regulator today, it will, in its current incarnation, go for the most pro-business, lightest enforcement and short-termist version, and that's not going to respond to ANY of the stated goals.

Sorry for the 2 comments that have been swallowed by the machine in my editing of the post. Would you guys mind posting them again?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Mar 9th, 2006 at 10:09:32 AM EST
every Energy Marketista should be forced to answer, preferably by sworn deposition:

How will you prevent rapacious peak pricing and another Enron?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 9th, 2006 at 10:09:34 AM EST
As I wrote in ManfromMiddletown's diary, the reason peak prices can be so "obscenely high" is that the power plant needs to make its revenue over a short period of time. Absolute amounts paid are not that big, because volumes are pretty small. Of course, 3000 $/MWh prices instead of the usual 30-50$/MWh may sound insane, but that's what it takes to clear the market, and it works. No, the real money is made when the marginal baseload plant is an expensive one and everybody starts making out like thieves for normal, regular production over long periods - and that's what's happening when all marginal producers are gas-fired and gas gets scarce...

The other issue with peak prices, of course, is that those that push for market mechanisms do not have the confidence to push these mechanisms all the way to the retail user - after all, demand comes from there, and they should be incentivised to change their behavior by prices... Imagine having your kWh jump to 30$ at home...

So peak pricing per se is not an absurd tool, but it is if you don't accept the full logic of it, which the marketistas never do, of course.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Mar 9th, 2006 at 11:06:25 AM EST
[ Parent ]
I think it's a question of scale though. (And also of national security - but that's a different issue.)

When the generating capacity is there, it's nonsensical for peak pricing to be used as an excuse for blackouts, especially since by definition the blackouts will come at a time when they'll be least tolerable to customers. From that point of view peak pricing is an absurd tool - or at least it was in the way that it was used in the US. It's like charging £50 for a bottle of water on a hot day.  

The real point - and it's an obvious one that seems to complete pass the marketistas by - is that markets are a tool, not a panacea. There are situations where they can help with efficiency and situations where they can do a lot of damage.

Markets work well when innovation levels are high, sources are fluid, there are many players in an ecosystem, and there's strategic government intervention to prevent monopolies and limit extremist short-termism, and also to fung long-term innovation.

They don't work when sources have no flexibility, distributors are a monopoly or a cartel, and governments aren't taking a lead to promote innovation or even (blasphemy...) cap prices and profits to non-rapacious levels.

They also don't work when managers are crooks and liars.

So - if infrastructure is managed strategically and intelligently by governments, peak pricing and other horrors stop being necessary. Profits are lower, pay-back times are longer, there will be whining about reduced competitiveness and all the usual complaints, but in the end no one who matters will really suffer. And there's plenty of slack in energy profits for some reductions to have a net positive effect on the economy. But only if governments are willing to set up regulatory frameworks which make this possible.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Mar 9th, 2006 at 12:11:18 PM EST
[ Parent ]
And here I thought you where behind that windmill on the EU web page. Thanks for this piece. I had been hoping it would show up on ET because of the increased talk about an EU energy policy and sure enough here is the analysis!! I'm off for 4 days and won't be online but I'll take this with me for travel reading.
by Alexandra in WMass (alexandra_wmass[a|t]yahoo[d|o|t]fr) on Thu Mar 9th, 2006 at 10:39:26 AM EST

As you are in the business, do you know if there is something similar to the EIA of the US DoE for Europe, in term of quality of data?
by Francois in Paris on Thu Mar 9th, 2006 at 02:44:13 PM EST
Not that I remember right now. The DGEMP @ French Ministry of Industry has some good stuff in French, and most of the regulatory agencies produce interesting reports (RTE, ANDRA, CRE, Cour des Comptes, etc...)

EWEA has decent stuff on wind.

The EU has lots of stuff, starting from here: http://europa.eu.int/pol/ener/index_en.htm

PS - did you ever get the email I sent you (to the email you used to register on the site)?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Mar 9th, 2006 at 02:58:34 PM EST
[ Parent ]
And EU statistics are here

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Mar 9th, 2006 at 03:00:27 PM EST
[ Parent ]

Yeah, just got it. Hadn't checked this account in more than a month. Sorry about that [and I missed the deadline for the Turbotax rebate :( ]

Thanks for the pointers, BTW.
by Francois in Paris on Thu Mar 9th, 2006 at 03:27:52 PM EST
[ Parent ]
Fundamentally, the EU has yet to reconcile market "liberalisation" with security of supply and the need to forcefully regulate the sector if you want any results.
Also known as "trying to fit a square peg in a round hole" or vice and versa ...

No wonder the popularity of EU institutions is somewhere between the sink hole and the drain pipe. Dogmatics idiots.
by Francois in Paris on Thu Mar 9th, 2006 at 02:53:41 PM EST

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