| Author (Person) | Egenhofer, Christian |
|---|---|
| Series Title | European Voice |
| Series Details | Vol.8, No.6, 14.2.02, p14 |
| Publication Date | 14/02/2002 |
| Content Type | News |
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Date: 14/02/02 Christian Egenhofer of the Centre for European Policy Studies assesses the security of Europe's energy supply and asks whether Brussels can cut dependence on imported power. THE European Commission has reignited the debate on a subject that has faded in prominence, but not in importance, since the oil shortages of the 1970s - the security of Europe's energy supply. The events of 11 September have added new urgency to the Commission's Green Paper on supply security. Although it is still unclear whether the issue will be discussed at the Barcelona European Council in March, the subject is now being dealt with at the highest level. The Commission has expressed particular concerns about the growing instability in the Middle East. It has raised the spectre of dependence on exporting countries run by fundamentalist Islamist governments and has also noted an increasing reliance on natural gas, partly for economic and partly for environmental reasons. This, alongside decreasing domestic oil and gas reserves, will push the EU's dependence on imported energy to an unprecedented 70 between 2020 and 2030. There are also fears about the real or perceived new power of the Organisation of Petroleum Exporting Countries (OPEC) and of volatile markets that saw the price of crude oil peak at close to €28 a barrel in September 2000. The Green Paper put forward several options, including increased use of indigenous fuels such as coal, lignite, biofuels and nuclear energy, intensified economic and political cooperation with supplier countries, and - perhaps surprisingly for many - a focus on demand-side policy. The Green Paper was particularly enthusiastic about the potential of research and development (R&D) and claimed that technological developments will pose the principal threat to OPEC in the future. Whether this strategy could work depends on the acceptance of a number of assumptions. Is import dependency as big a problem as the Commission argues? The European Parliament thinks not. The Chichester report of October 2001 argued that import dependence is neither necessarily a bad thing nor economically inefficient, as long as the portfolio of fuels and import regions is diversified. The second assumption that has been challenged - predictably by industry most of all - is whether price volatility should be a concern to security of supply. Energy economists argue that price volatility is a proof that markets work. Today's energy markets provide for financial products such as derivatives to hedge financial risks. More fundamental, however, is the question of what governments can realistically do to influence world oil prices (which are still the reference point for fuel prices). The very limited medium-term effect on prices of the US release from strategic stocks on 21 September 2000 is a case in point. Finally, we must have a clear notion of what security of supply threats are. Physical supply disruptions are very rare, as we have learned during the past few decades. In 1963 Harold Lubell wrote of the possibilities for disruption of Middle East oil supplies. His nightmare scenario was an Iraqi invasion of Kuwait, a revolution in Iran, a coup in Iraq that brings a 'young Turk' to the helm, a breakdown in relations between oil companies and governments, civil war in Lebanon and the nationalisation of the Arabian American Oil Company. He turned out to be right on every count, but physical supplies continued nevertheless. Due to its emphasis on the long-term dimension of security of supply, such as fuel availability or development of the network, the Green Paper has unfortunately somewhat neglected the short-term risks of continuity and reliability. If one analyses the supply disruptions that have materialised, one quickly concludes that they have been fairly local events and are usually 'home-made'. Recent supply disruptions have usually related to the liberalisation of electricity and gas markets or public opposition to new investment, or consumer protests. The most spectacular recent event was California's power shortages. But such problems are closer than one thinks. Temporary power shortages have also been witnessed in Nordic countries in the winter of 2000 as well as in Spain at the end of last year. Power shortages were also predicted in Ireland for this winter with its remaining excess generation capacity for peaks coming close to zero. Taking the figures of the European electricity transmission companies (ETSO), which estimate the cost of unserved energy to be between €1-100 per kilowatt depending on the length of the interruption, damage quickly runs into billions of euro. This is not negligible. The other recent example is the crisis sparked by fuel price protesters in autumn 2000. The UK came close to a standstill as a result of the blockage of oil refineries. Most conventional energy sources face public opposition. Nuclear power is the most prominent example, but other projects are also opposed: oil and gas exploration, liquefied natural gas terminals, large hydro power plants, open-cast coal mining, electricity from waste incineration and even - in Sweden - gas-fired power plants. Public opposition even extends to renewable energy as well: it is increasingly difficult to build wind farms - certainly in the Netherlands. Perhaps most damaging to electricity supply in the medium run perhaps is the objections to new overhead transmission lines in the more populated areas, where they are often opposed on grounds of health, their visual impact or their damage to flora and fauna. All of these examples show that security of supply is not a matter for governments alone any more, as was argued in a recent CEPS report. The liberalisation of energy markets, notably electricity and gas, has established a new balance of responsibility for security of supply between governments, energy firms and consumers. In the previous monopolistic situation, responsibility for security of supply lay almost entirely with the supply company - with little consideration for costs - but liberalisation has empowered the customer. Customers (especially industrial ones) must choose whether to assume responsibility for security of supply themselves - and pay less - or to allow the supply company to bear the responsibility and pay a risk premium. This new notion of security of supply inextricably links physical availability and price. Large industrial users typically choose to buy gas from a risky but cheap source, accepting the possibility of higher prices for short-term contracts or mitigating the risk by installing dual-firing capacity or back-up from another supplier. Similarly, supply companies for domestic consumers will develop a portfolio of supply sources carrying different degrees of risk. In essence, security of supply comes down to a risk management strategy by market participants. There is ample evidence that the market can be an efficient tool for achieving security of supply through interruptable supplies, short-term markets, storage close to the consumer, the use of liquefied natural gas, and other responses. This is the real space for EU security of supply policy. EU internal market legislation must and can be shaped in such a way that it provides the necessary incentives for market participants to manage their own security of supply. Improvements include removing barriers to entry for energy companies, promoting short-term markets, and decentralised generation (through combined heat and power units, for example). This is not to say that the market can achieve everything. In the short term, liberalisation creates new risks, as witnessed in Nordic markets and Spain or California. Where markets fail (through lack of capacity and networks, for example), the EU and national governments must step in with regulations such as supply obligations and liability rules for failure to supply or tender for new generation capacity. There is also a role for governments to support R&D, promote innovation and foster energy efficiency and conservation. In any case for the long-term, beyond the time period in which liquid energy markets can be expected to operate, governments' role will still remain dominant, a point which has been made convincingly by the Green Paper. Here the real question Europe faces is in the light of an internal energy market, whether the member state can still be the reference framework, and if not, what role the EU itself should play in securing Europe's energy supply in the long term. This question will be on the agenda far beyond the Barcelona European Council. Major feature. Author assesses the security of Europe's energy supply and asks whether Brussels can cut dependence on imported power. |
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