Playing power games – EU fights multi-front battle to secure supply

Date: 14/10/04

WITH oil prices at more than &036;50 (41 euro) per barrel, European energy policy is coming into sharper focus. Taken together, the 25 nations of the EU are net importers of energy. Their dependence on imports will increase in the coming decades. For roughly 15 years from 1984, the energy market was a buyers' market. But in a more unstable world, with energy in shorter and more expensive supply, not just for the EU but for its economic rivals, ensuring security of supply has become a higher priority. So how can the EU ensure its energy needs are met?

Environmentalists argue that there is huge potential for demand-side measures. If the EU could curtail its demand by, for example, greater energy efficiencies, then, they argue, it would reduce its dependence on energy imports.

Others argue for greater diversities of technology. Rather than being over-reliant on oil and at the mercy of OPEC, the cartel of oil-producing nations, the EU should derive more of its energy needs from non-hydrocarbon sources, they argue. Renewable energies such as wind-farms have been criticized in the past as costly and limited in capacity. The more oil prices rise, the more the relative competitive position of renewables improves.

Similarly, rising energy prices might improve the competitive position of some traditional energy sources. For example, Vattenfall, the Swedish state-owned company, has bought up great quantities of lignite stocks in eastern Germany. Lignite, which is basically dirty coal, is decried by environmentalists because it can be very polluting. But Vattenfall is arguing that it should be possible to develop technologies to clean up the emissions from coal or lignite burning power stations.

There is a complex interplay here with the EU's strategy for combating climate change. The Kyoto Protocol now seems likely to come into effect, if Russia ratifies as it promised. The EU was already committed to caps on carbon use and to emissions trading, which is supposed to take off in January. Before that, the talk will intensify about negotiations on climate change measures post-2012. Depending on the line that the EU takes in those negotiations, the pressure to find non-carbon sources of energy could increase.

The joker in the pack is nuclear power, which offers non-carbon energy but with other environmental risks.

The anti-nuclear lobby questions the wisdom of stockpiling radioactive material. A report to the Swedish government last week concluded that "the present dependence on nuclear power is not sustainable in the long term" but observed that "a transition to a sustainable energy system takes time".

The quantities of energy at stake in this debate are huge. Bulgaria will switch from being an exporter of energy to being an importer when it closes its Kozloduy nuclear reactor, which is considered to be unsafe.

Europe will not be alone in its search for energy supplies. World demand for energy is expected to increase over the next 20 years. Measures to curb EU demand and to diversify into different types of energy are unlikely to be an adequate defence against the possibility of greater competition for energy and the EU is likely to get into a power play with the US, China and Japan.

A policy document produced for the European Commission in January asserts that "the probability of events affecting the energy security of supply is likely to increase".

"External trade policy and foreign and security policy will be instrumental in securing an uninterrupted supply of oil and gas by underpinning the political and economic stability in producer countries and maintaining good relations with these countries," it said.

In other words, energy needs and goals should strongly influence the EU's trade and foreign policy towards North Africa, the Persian Gulf, the Caspian Sea region and Russia.

At a time when some EU states are calling for a review of policy towards Russia, the EU is painfully aware that the bulk of its current oil and gas imports are piped through Russia.

The EU's relationship with Turkey, about which the EU is about to make a defining decision, can hardly be divorced from energy issues. Turkey, which borders on both Iran and Iraq, provides an alternative route for hydrocarbon pipelines.

The potential energy flow through Turkey makes all the more important the position of south-east Europe.

Over the course of the next two weeks, the region of south-east Europe is being reconnected with the main electricity transmission network which covers most of the rest of Europe.

Physically, the zone of Greece, Romania, Bulgaria, the Former Yugoslav Republic of Macedonia, Albania, Serbia and Montenegro, have been cut off since 1991 by war in the then Yugoslavia. The regional electricity markets of south-east Europe will be integrated into the EU's internal electricity market once the system is reconnected.

This week, the countries of south-east Europe began negotiating over a treaty to give legal force to an internal energy market in their region.

It is yet another front on which the European Union is trying to secure its energy supplies for the future.

Analytical feature in which the author discusses the long-term prospects of European energy policy.