COMMISSION OF THE EUROPEAN COMMUNITIES
Brussels, 29.11.2000
COM2000 769 final
Green Paper
Towards a European strategy for the security of energy
supply
Presented by the Commission
EXECUTIVE SUMMARY
The European Union is consuming more and more energy and importing more and
more energy products. Community production is insufficient for the Unions energy
requirements. As a result, external dependence for energy is constantly increasing. The dramatic rise in oil prices which could undermine the recovery of the European
economy, caused by the fact that the price of crude oil has tripled since March 1999,
once again reveals the European Unions structural weaknesses regarding energy
the role of oil as the
supply, namely Europes growing dependence on energy,
governing factor in the price of energy and the disappointing results of policies to
control consumption. Without an active energy policy, the European Union will not
be able to free itself from its increasing energy dependence. If no measures are taken, in the next 20 to 30 years 70 of the Unions energy
requirements, as opposed to the current 50, will be covered by imported products. This dependence can be witnessed in all sectors of the economy. For example
transport, the domestic sector and the electricity industry depend largely on oil and
gas and are at the mercy of erratic variations in international prices. Enlargement will
exacerbate these trends. In economic terms, the consequences of this dependence are
heavy. It cost the Union some EUR 240 billion in 1999, or 6 of total imports. In
geopolitical terms, 45 of oil imports come from the Middle East and 40 of natural
gas from Russia. The European Union does not yet have all the means to change the
international market. The European Unions long-term strategy for energy supply security must be geared to
ensuring, for the well-being of its citizens and the proper functioning of the economy,
the uninterrupted physical availability of energy products on the market, at a price
which is affordable for all consumers private and industrial, while respecting
environmental concerns and looking towards sustainable development, as enshrined in
Articles 2 and 6 of the Treaty on European Union. Security of supply does not seek to maximise energy self-sufficiency or to minimise
dependence, but aims to reduce the risks linked to such dependence. Among the
objectives to be pursued are those balancing between and diversifying of the various
sources of supply by product and by geographical region.
. The European Union now has to face new challenges characteristic of a period of
profound transition for the European economy. In the decade to come, investments in energy, both to replace existing resources and
in order to meet increasing energy requirements, will oblige European economies to
arbitrate among energy products which, given the inertia of energy systems, will
condition the next 30 years. The energy options exercised by the European Union are conditioned by the world
context, by the enlargement perhaps 30 Member States with different energy
structures, but above all by the new reference framework for the energy market,
namely the liberalisation of the sector and environmental concerns. 2
Environmental concerns, which are nowadays shared by the majority of the public
and which include damage caused by the energy supply system, whether such damage
is of accidental origin oil slicks, nuclear accidents, methane leaks or connected to
emissions of pollutants, have highlighted the weaknesses of fossil fuels and the
problems of atomic energy. As for the struggle against climate changes, this is a major
challenge. Climate change is a long-term battle for the international community. The
commitments made in the Kyoto Protocol are only a first step. The European Union
has reached its objective in 2000, but greenhouse gas emissions are on the rise in the
Union as in the rest of the world. It is much more arduous to reverse this trend than it
might have seemed three years ago. The return to sustained economic growth on both
sides of the Atlantic and in Asia and the development of our energy consumption
structure, mainly of electricity and for transport, which is a consequence of our
lifestyle, are contributing to the increase in greenhouse gas emissions and of carbon
dioxide in particular. This situation is a major stumbling block to any policy seeking
to safeguard the environment. What is more, the achievement of the internal energy market has given a new
position and role to energy demand. New tensions are appearing and our societies will
have to find valid compromises to ease them. For example, the fall in electricity prices
goes against policies to curtail increasing demand and to combat climate change,
while the competition introduced by the internal market is changing the conditions of
competitiveness for the different sources of energy supply coal, nuclear, natural gas,
oil, renewables. Nowadays the Member States are interdependent both as regards the issue of
combating climate change and for the completion of the internal energy market. Any
energy policy decision taken by one Member State will inevitably have an impact on
the functioning of the market in the other Member States. Energy policy has assumed
a new Community dimension without that fact being reflected in new Community
powers. In this context,
is worthwhile
conceiving a European energy policy from an angle other than that of the internal
market, harmonisation, the environment or taxation. is appropriate to analyse whether
it
it
The European Union must take better charge of its energy destiny. We are obliged to
acknowledge that, despite the various crises besetting the European economy in the
last thirty years, there has not been a real debate on the choice of energy sources and
even less an energy policy regarding security of supply. Now, the twin pressures of
environmental concerns and the new functioning of the European energy market make
this debate inevitable. The oil price crisis prevailing since 1999 makes it urgent. This debate should take into account that current energy demand is covered by 41
oil, 22 gas, 16 coal hard coal, lignite and peat, 15 nuclear and 6 renewables. If nothing is done, the total energy picture in 2030 will continue to be dominated by
fossil fuels 38 oil, 29 gas, 19 solid fuels, 8 renewables and barely 6
nuclear. The Green Paper sketches out
according to which
the bare bones of a long-term energy strategy,
- The Union must rebalance its supply policy by clear action in favour of a
demand policy. The margins for manoeuvre for any increase in Community supply
3
are weak in view of its requirements, while the scope for action to address demand
appears more promising. - With regard to demand, the Green Paper is calling for a real change in consumer
It highlights the value of taxation measures to steer demand towards
behaviour. better-controlled consumption which is more respectful of the environment. Taxation
or parafiscal levies are advocated with a view to penalising the harmful environmental
impact of energies. The transport and construction industries will have to apply an
active energy savings policy and diversification in favour of non-polluting energy. - With regard to supply, priority must be given to the fight against global warming. The development of new and renewable energies including biofuels is the key to
change. Doubling their share in the energy supply quota from 6 to 12 and raising
their part in electricity production from 14 to 22 is an objective to be attained
between now and 2010. If current conditions apply, they will stagnate around 7 in
ten years. Only financial measures aids, tax deductions and financial support would
be able to buttress such an ambitious aim. One way which could be explored is that
profitable energies such as oil, gas and nuclear could finance the development of
renewable energies which, unlike traditional energy sources, have not benefited from
substantial support. The contribution of atomic energy in the medium term must, in its turn, be analysed. Among the issues which will certainly form part of the debate will be the decision by
most Member States to relinquish this sector, the fight against global warming,
security of supply and sustainable development.
Whatever the conclusions of this
reflection, research on waste management technologies and their implementation in
the best possible safety conditions must be actively pursued. As far as oil and gas are concerned, imports of which are increasing, a stronger
mechanism ought to be provided to build up strategic stocks and to foresee new
import routes. Every form of technological progress will help to reinforce the impact of this outline
energy strategy. The Commission proposes to launch a debate during 2001 around the essential
questions which shed light on the energy choices to be made. It is not a question of
proposing a key in the door strategy for security of supply, but to hold a new and
deep and debate on the principal questions which can be identified, notwithstanding
possible additional ones. 4
CONTENTS
INTRODUCTION
PART ONE
BASIC FACTS ABOUT ENERGY IN THE EUROPEAN UNION
I. THE IMPOSSIBILITY OF ENERGY SELF-SUFFICIENCY
A. An energy-intensive economy
1. Industry life after oil
2. Held hostage by oil households, services and the transport sector
3. Energy diversification electricity and heat
B. Community resources are limited
1. Uncertainty about oil and gas production
2. Decline in mine production
3. Potential abundance of renewable energy
C. Gulliver in chains energy supply in the European Union
1. External dependence
2. Trade in energy products Europe constrained by
its geographical location
3. The European Union an actor on world markets
II. LESS THAN PERFECT ENERGY OPTIONS
A. Nuclear energy and solid fuels the undesirables
1. Nuclear energy a source of energy in doubt
2. Coal a glorious past
B. Oil Still the favourite
1. Dependence on oil
2. Geopolitics in oil
3. Effects of oil prices
C. Natural gas and renewable energy sources seductive alternatives
5
1. Natural gas towards new dependence
2. New and renewables sources of energy a political priority
PART TWO
A NEW REFERENCE FRAMEWORK FOR ENERGY
I. THE CHALLENGE OF CLIMATE CHANGE
A. New issues
1. Combating climate change an urgent need
2. A major challenge meeting international commitments
B. Inappropriate answers
1. Fiscal disorder
2. The opaque nature of state aids
3. Ineffective demand management
II. GRADUAL INTEGRATION OF ENERGY MARKETS
A. The internal market in natural gas and electricity
1. Market dynamics
2. Obstacles to be overcome
B. The internal market in oil products
1. Market structure
2. Competition policy
PART THREE
SECURING THE FUTURE OUTLINE OF ENERGY STRATEGY
I. THE WEAKNESSES IN CURRENT ENERGY SUPPLY
A. Hurdles to security of supply
B. Forecasts illustrate the potential instability
1. Presentation
2. Conclusions drawn from the updated scenario
II. TOMORROWS PRIORITIES
6
A. Controlling the growth of demand
1. Horizontal policies
2. Sectoral policies
B. Managing supply dependence
1. Internal supply
2. Maintaining competition
3. Ensure external supplies
GUIDELINES FOR THE DEBATE
ANNEXES
1. 2.
3. - Technical document summary
- Note on the impact of fuel taxation on technology choice
- Coal after the ECSC Treaty expires
7
LIST OF TABLES AND GRAPHS
Europe-30 final energy consumption in m toe
Electricity production by energy source and Member State
Europe-30 energy production by fuel reference case in m toe
World oil production cost
NW ECS oil production forecast. Three scenarios comparison
Origin of uranium imports used in the Union
Europe-30 total energy reference case in m toe
Europe-30 Dependence according to energy product
Gross internal consumption in 1998 Europe-15
Gross internal consumption in 1998 Europe-30
Europe-30 nuclear reference case in m toe
Europe-30 solid fuels reference case in m toe
Europe-15 coal imports from third countries 1999
Production and labour costs in the coal industry
Europe-30 oil reference case in m toe
Europe-15 1999 Origin of crude oil imports
Crude oil OPEC basket of prices 1970-2000 Jan-Oct
Europe-30 natural gas reference case in m toe
Europe-15 natural gas imports from third countries- 1999
Europe-30 renewables reference case in m toe
Europe-30 emissions of energy related CO2 emissions
Revenue of energy and transport taxes as a of total tax revenue and
social security contributions 1997
Duties on lead-free petrol
VAT rates in Member States 2000 products and services as
Excise duty rates in applicant countries beginning of 2000
Gas and oil pipelines in Europe
Share of oil and gas in total energy consumption in
Increase of CO2 emissions related to the 1990 base year of the Kyoto Protocol in
Import dependence in
8
INTRODUCTION
This Green Paper is the response to an observable fact Europes growing future energy
dependence. Its aim is to initiate a debate on the security of energy supply, an issue that is still very much
alive. The recent tripling in the price of crude oil on the international market has served as a
grim reminder of the crucial role of energy in Europes economy. Security of supply does not
seek to maximise our autonomy in energy or to minimise our dependence, but to reduce the
risks connected to the latter. Energy dependence is not in itself an easy problem to solve,
however the concept of security of supply which appears in the Treaty on European Union
Article 100 calls for an exercise of reflection over the diversification of the various sources
of supply in products and by geographical areas. The European Union is extremely dependent on its external supplies. It currently imports
some 50 of its requirements, a figure that will rise to about 70 in 2030, with an even
greater dependence on oil and gas,
the Union some
EUR 240 billion in 1999, or 6 of total imports and 1.2 of GDP. Security of supply in the
energy field must be geared to ensuring, for the good of the general public and the smooth
functioning of the economy, the uninterrupted physical availability on the market of energy
products at prices for all consumers both private and industrial, in the framework of the
objective of sustainable development enshrined in the Amsterdam Treaty. trends persist. It cost
if current
How much importance, then, should the European Union attach to the security of its supplies? This question is all the more pressing with enlargement imminent and relations with our
partners suppliers and transit countries in the process of being redefined. Can we afford to ignore a dependence of more than 40 on oil imported from OPEC
countries? Can we allow erratic increases in the price of oil and gas to disrupt our economies and
those of the non-producer developing countries ?
Is it acceptable for oil and gas transport networks in their present form to be a source of
instability in the supply chain? Investments in energy, both to replace the obsolete infrastructures and to meet the growth in
demand will be necessary in the next ten years in the new energy market context opening up
of the sector to competition and environmental concerns. The opportunity should be seized to
promote a coherent energy policy at the Community level. Faced with these constraints, the European Union still has too few resources and
instruments at its disposal to meet these challenges. The present Green Paper describes
these weaknesses and proposes a reflection about the different instruments which could be
used. However, energy concerns have been a permanent feature since the very beginnings of
European construction. Two of the three treaties establishing the European Communities are
about energy the European Coal and Steel Community ECSC Treaty and the Euratom
Treaty. These two treaties were adopted primarily to ensure regular and equitable supplies of
coal and nuclear energy in the Community. In the Treaty establishing the European Economic
Community, however, the Member States chose not to lay the foundations of a common
energy policy. Subsequent attempts to include a chapter on energy, during the negotiations on
the Maastricht and Amsterdam Treaties, ended in failure. Energy receives no more than a
mention in the preamble to the Amsterdam Treaty. There has thus never been a real Community debate on the main lines of an energy policy. As
a result, the energy problems which have inevitably cropped up since the Treaty of Rome was
9
adopted, more particularly after the first oil crises, have been approached either through the
mechanism of the internal market, or from the angle of harmonisation, environmental policy
or taxation. Security of supply concerns are not, however, alien to the Treaty, as scope for action at the
Community level to remedy supply problems has existed since the Treaty of Rome e.g. Article 103. This is the Article on which the decision on oil stocks was based. However,
since the Maastricht Treaty,1 the implementation of such measures requires decisions to be
taken unanimously rather than by qualified majority as previously Article 100 of the Treaty
on European Union. Today, Member States are interdependent, both because of climate change issues and the
creation of the internal energy market. Any energy policy decision taken by a Member State
will inevitably have repercussions on the functioning of the market in other Member States. Energy policy has assumed a new, Community dimension. In this context, it is legitimate to
question the wisdom of uncoordinated national decisions on energy policy. As Mr Prodi, the
President of the European Commission, said in his address to the European Parliament on
3 October 2000 You cannot on the one hand deplore the lack of effective and united
European action and on the other be content with the weakness of the instruments available to
the Community for carrying out such action. The recent petrol crisis is a perfect illustration. The analysis in this Green Paper sets out to show, as objectively as possible, that the
European Union has very limited scope to influence the energy supply side. It also sets out
to show, without bias, that the major efforts required to promote renewables will in fact have
a limited impact in the face of the growth in demand. Conventional energy sources will
remain indispensable for a long time. Efforts will have to focus on orienting the demand
for energy in a way which respects the EUs Kyoto commitments and is mindful of
security of supply. Apart from declarations of principle, what specific measures can be taken?
This is the issue
on which the Green Paper wishes to initiate a debate, starting in particular with the 12
questions at the end of the Paper which are reproduced below for the readers convenience. Three main points emerge from the Green Paper
-
-
-
The European Union will become increasingly dependent on external energy sources
enlargement will not change the situation based on current forecasts, dependence will reach
70 in 2030. The European Union has very limited scope to influence energy supply conditions it is
essentially on the demand side that the EU can intervene, mainly by promoting energy saving
in buildings and the transport sector.
At present, the European Union is not in a position to respond to the challenge of climate
change and to meet its commitments, notably under the Kyoto Protocol. In these circumstances, the Commission would like the debate on the future strategy to be structured
around the following principal questions
1
The new Article requires unanimity to decide upon the measures appropriate to the economic situation,
in particular if serious difficulties arise in the supply of certain products. 10
1. Can the European Union accept an increase in its dependence on external energy sources without
compromising its security of supply and European competitiveness? For which sources of energy
would it be appropriate, if this were the case, to foresee a framework policy for imports? In this
context, is it appropriate to favour an economic approach energy cost or geopolitical approach risk of
disruption? 2. Does not Europes increasingly integrated internal market, where decisions taken in one country
have an impact on the others, call for a consistent and co-ordinated policy at Community level? What
should such a policy consist of and where should competition rules fit in? 3. Are tax and state aid policies in the energy sector an obstacle to competitiveness in the European
Union or not? Given the failure of attempts to harmonise indirect taxation, should not the whole issue
of energy taxation be re-examined taking account of energy and environmental objectives? 4. In the framework of an ongoing dialogue with producer countries, what should supply and
investment promotion agreements contain? Given the importance of a partnership with Russia in
particular, how can stable quantities, prices and investments be guaranteed?
5. Should more reserves be stockpiled -as already done for oil - and should other energy sources be
included, such as gas or coal? Should the Community take on a greater role in stock management and,
if so, what should the objectives and modalities be? Does the risk of physical disruption to energy
supplies justify more onerous measures for access to resources? 6. How can we ensure the development and better operation of energy transport networks in the
European Union and neighbouring countries that enable the internal market to function properly and
guarantee security of supply? 7. The development of some renewable energy sources calls for major efforts in terms of Research and
Technological Development, investment aid and operational aid. Should co-financing of this aid
include a contribution from sectors which received substantial initial development aid and which are
now highly profitable gas, oil, nuclear? 8. Seeing that nuclear energy is one of the elements in the debate on tackling climate change and
energy autonomy, how can the Community find a solution to the problem of nuclear waste, reinforcing
nuclear safety and developing research into reactors of the future, in particular fusion technology? 9. Which policies should permit the European Union to fulfil its obligations within the Kyoto Protocol? What measures could be taken in order to exploit fully potential energy savings which would help to
reduce both our external dependence and CO2 emissions? 10. Can an ambitious programme to promote biofuels and other substitute fuels, including hydrogen,
geared to 20 of total fuel consumption by 2020, continue to be implemented via national initiatives,
or are co-ordinated decisions required on taxation, distribution and prospects for agricultural
production? 11. Should energy saving in buildings 40 of energy consumption, whether public or private, new or
under renovation, be promoted through incentives such as tax breaks, or are regulatory measures
required along the lines of those adopted for major industrial installations? 12. Energy saving in the transport sector 32 of energy consumption depends on redressing the
growing imbalance between road haulage and rail. Is this imbalance inevitable, or could corrective
action be taken, however unpopular, notably to encourage lower use of cars in urban areas? How can
the aims of opening up the sector to competition, investment in infrastructure to remove bottlenecks
and intermodality be reconciled? 13. How can we develop more collaborative visions and integrate the long-term dimension into
deliberations and actions undertaken by public authorities and other involved parties in order to evolve
a sustainable system of energy supply. How are we to prepare the energy options for the future. 11
PART ONE
BASIC FACTS ABOUT ENERGY IN THE EUROPEAN UNION
The EUs energy choices are restricted by its limited capacity for self-sufficiency and by
available technology. I. THE IMPOSSIBILITY OF ENERGY SELF-SUFFICIENCY
Since the first oil crisis, Europes economy has grown faster than its energy consumption. Yet
despite this achievement, the Unions energy needs are still increasing, and internal resources
are inadequate to meet them. Whether or not the applicant countries are included in the
calculation, the Europe of 15 is using far more energy than it can produce.2
A. An energy-intensive economy
The EUs demand for energy has been growing at a rate of between 1 and 2 a year since
1986. While industrial demand has been relatively stable, as a result of the transition to a
service-oriented economy, the increased demand for electricity, transport and heat from
households and the tertiary sector has more than made up for this decline. The long-term evolution of energy demand in the applicant countries will doubtless track that
of the Union, even though these states are at present well behind in terms of energy
conservation. Once the present crisis period is over, however, the medium term will inevitably
see a rapid surge in energy demand, especially since their economies in the period leading up
to 2010 will be growing much faster than those of the Member States an annual rate of
between 3 and 6, as compared to 2-4 for the EU.
This transition period could provide
these countries with the opportunity of modernising their systems. E u r o p e - 3 0 F i n a l e n e r g y c o n s u m p t io n i n M to e
1 7 5 0
1 5 0 0
1 2 5 0
1 0 0 0
7 5 0
5 0 0
2 5 0
0
1 9 9 0
3 4
D o m e stic ,
t e rtia r y s e c to r
T ra n sp o r t
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
1. Industry life after oil
Investment in modernisation has enabled European industry to reduce its need for energy. A
conscious effort has been made to reduce dependence on oil which now represents only 16
2
3
4
This Green Paper examines the Unions energy needs in a 20-to-30-year time frame. Over this period it
is possible the number of Member States may grow to around 30. Mtoe Million tonnes of oil equivalent
The figures used in the Green Paper are taken from the forecasts in Part 3 I.B below
12
of total industrial energy consumption and diversify into natural gas and electricity. As a
result, the sector saw its energy intensity5 decline by 23 between 1985 and 1998. The stability of consumption between 1985 and 19986 was due to the introduction of
combined heat and power generation and greater technological efficiency, but Europes
transition to a service-oriented economy also played a key role. In the applicant countries,
however, this trend is not yet clearly visible. As they recover from their severe recession, the
industrial sectors of the CEEC countries will probably absorb 2 of annual growth in energy
demand between now and 2020. 2. a
Held hostage by oil households, services and the transport sector
Households, the tertiary sector and technological progress
In absolute terms, the biggest energy users are households and the tertiary sector. To date,
their energy use has tended to grow at a moderate rate,7 as a decrease in energy intensity was
partly offset by a systematic rise in levels of material comfort. The result has been higher per
capita consumption, in particular of electricity. Per capita consumption in the applicant
countries remains lower, despite weaker energy saving efforts. This can be explained by
delays in investment and economic development. Excluding personal
transport, 63 of household needs are supplied by oil and gas. Households are the biggest consumers of natural gas 13 of total gas consumption, supplying
40 of household demand and account for approximately 18 of total oil use 14 of
household demand. b
Transport
Transport certainly represents the great unknown for the future of energy. With a market
entirely dependent upon oil 98 of transport consumption, representing 67 of final oil
demand, this sector has seen consumption rise steeply. Between 1985 and 1998 it rose from
203 Mtoe to 298 Mtoe, while the number of public and private vehicles in use rose from 132
million to 189 million, with a parallel explosion in air traffic. The sectors energy intensity
increased by 10 between 1985 and 1998.8
In the foreseeable future, this sector should
continue to grow at a rate of 2 per annum over the coming decade. Within the European
Union, passenger transport should increase by 19 by 2010, mainly due to a 16 rise in road
use and a 90 increase in air traffic. At the same time, goods transport is expected to grow by
38, driven by road 50 and seaborne 34. The efforts undertaken by the automotive
industry under its agreements with the Commission to reduce CO2 emissions from passenger
cars will make and important contribution to preventing these trends from translating into a
corresponding increase in fuel consumption. However, this progress will not be sufficient to
reduce or even come close to stabilising the transports sectors energy demand.
These growth factors will have an even greater impact
in applicant countries. After
enlargement, the Union will have to provide mobility for an additional 170 million people,
while its territory will be extended by 1.86 million square kilometres. Given the gap in
development with the European Union, there will be a lot of catching up to do. In one
optimistic scenario, applicant countries could see their economies grow at an annual rate of 5-
6 over the next decade - that is, twice as fast as the existing Member States. If that is the
5
6
7
8
Energy intensity measures energy consumption in relation to GDP. 264-262 millions tonnes of oil equivalent toe
From 355 to 384 Mtoe between 1980 and 1998. The most important factor underlying this rise was the increase, especially over the last few years, in
intra-Community road transport between the Iberian peninsula and the rest of the Union, as well as with
the Central and Eastern European Countries
13
case, then transport demand will inevitably grow even faster than the economy. Most of this
growth will have to be supplied by the road transport sector. Growth in demand, combined with gaps in infrastructure and services, especially when it
comes to international transport and the breakdown of traffic between the different transport
sectors, will aggravate existing congestion problems saturated cities,
road networks,
airports. This congestion not only comes at significant economic and environmental cost, it
In this way, external costs of pollution due to
also impacts negatively on quality of life. transport have been estimated at nearly 2 of GDP.
3. a
Energy diversification electricity and heat
Electricity
G W H
E le c t r i c it y p r o d u c t i o n b y e n e r g y s o u r c e a n d M e m b e r S t a t e
b e
d k
d e
g r
e s
f r
i e
i t
l u
n l
a t
p t
f i
s e
a r
H a r d c o a l
L ig n it e
N a t u r a l g a s
P e t r o le u m p r o d u c t s
scale one space 50GWH
In recent years, demand for electricity has grown much more rapidly than for any other type
of energy, and will continue to track GDP growth closely until 2020. In the applicant
countries this demand should grow even faster, with electricity increasing by 3 annually9
between now and 2020. The EUs installed capacity should reach 800-900 GWe10 in around 2020, compared to the
present 600 GWe. Around 300 GWe of capacity will be installed over the next 20 years
simply to replace power stations that have reached the end of their lives, in addition to the
200-300 GWe that will be necessary to meet increased demand. In the absence of any major technological breakthrough, excess demand will have to be
supplied from already available energy sources natural gas, coal, oil, nuclear and renewable
energy. At present, electricity is generated from the following sources nuclear 35, solid
fuel 27, natural gas 16, hydro and other renewables 15 and oil 8. New capacity
9
10
European Energy outlook to 2020 figures based on the seven Central European countries, excluding
Bulgaria, Slovakia and Romania. Gwe Giga watt electric
14
will be predominantly gas-generated, while the number of oil and solid-fuel power stations
will continue to decline. At the moment, it seems unlikely that nuclear energy will see renewed growth. In the long-
term, its contribution is linked to the pursuit of policies to combat climate change,
its
competitive position vis-à-vis other energy sources, public acceptance and a possible solution
to the problem of nuclear waste. Given the present political context decision by certain
Member States to relinquish this sector, it seems likely that the contribution of nuclear
energy will change little from now until 2020. In the medium-term, possible disenchantment
with nuclear could result in greater use of thermal power stations, barring new investments. However, this forecast could be changed with an enhanced contribution of renewable energy
and action on the energy demand side. The present electricity generation capacity of the applicant countries is difficult to assess. Modernisationreplacement of existing generation facilities seems certain to proceed at a rapid
rate, since a large number of these plants are already obsolete. -
In theory, existing thermal power stations whose capacity is currently in surplus will
require extensive modernisation. Some of the solid fuel stations may be replaced by gas-
fired plants. However, were the price of gas on the international markets to rise and remain
high, investments might be held back. In that case, solid-fuel and nuclear would continue
to play a significant role.
Indeed, in the reference scenario,11 higher gas prices could lead to
a 24 reduction in the growth rate for gas use. - The expansion of nuclear generating facilities will depend upon efforts by the states
concerned to ensure that these facilities are safe. Nuclear power is already diminishing as a
proportion of energy use in the applicant countries, and is forecast to decline from the
present 15 to 8.1 by around 2020.12
b
Heating
Heating is the largest single user of final energy, accounting for about one third of total
consumption. The market ranges from household heating including hot water to steam
production for industrial uses. The energy balance for heat production is very different from
that for electricity. Unlike electricity, heat production is predominantly decentralised, whether it takes the form
of individual heating systems, CHP13 or dedicated heat stations with their associated heating
networks. The latter are more common in the applicant countries than in the EU Member
States.
B. Community resources are limited
Despite the considerable progress made in tapping conventional energy reserves in Europe,
their levels remain low and they are expensive to extract. In the future, domestic fossil fuel
resources are likely to decline quite sharply. 11
12
13
See Part 3, I.B. This figure reflects both the growth of demand and planned closuremodernisation of nuclear plants. Combined production of electricity and heat. 15
E u ro p e -3 0 e n e rg y p r o d u c tio n b y f u e l re f e re n c e c a s e in m to e
1 2 5 0
1 0 0 0
7 5 0
5 0 0
2 5 0
R e n e w a b le s
N u c le a r
N a tu ra l ga s
O il
So lid fu e ls
0
1 9 9 0
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
1. a
Uncertainty about oil and gas production
Oil reserves are very unevenly distributed across the world, and the European Union in
particular has very few. In the applicant countries,
the situation is even worse. The
Community has eight years of known reserves at current consumption rates assuming no
change in consumption patterns andor related technologies. Thanks to the North Sea, whose
reserves belong mainly to the United Kingdom, the Union produces some 158.3 Mtoe 1997,
representing scarcely 4.4 of world output. Today, the cost of extracting one barrel of oil in
Europe ranges between USD 7-11, compared to a range of USD 1-3 in the Middle East. W o r l d o i l p r o d u c tio n c o s t
l
e
r
r
a
b
t
s
o
C
1 4
1 2
1 0
8
6
4
2
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
P r o d u c t io n m io b a r r e ls d a y
b
Natural gas reserves are more evenly distributed on the global level, but the European Union
is once again unfortunate, with barely 2 of world reserves, or 20 years consumption at
present rates. 223.2 Mtoe were extracted in 1997, representing 12 of world production.
Most of these reserves are located in the Netherlands 56 and Great Britain 24. 16
c
The rate at which Community resources will be depleted depends not only on the extent of
known reserves, but also on the price of oil and gas on the world market, and on technological
progress. The higher the price of oil, the more companies will invest in prospecting and
production. If present oil and natural gas prices could be sustained around USD 30 in 2000,
then large reserves would be brought into production. Amid such uncertainties, however, one
thing is clear if production continues at its present rate, North Sea oil and gas deposits will be
exhausted within 25 years. Enlargement will do nothing to increase internal supply14. technological innovation, as shown in
Forecasts are usually exceeded notably as a result of
the graph below. If investment were to pick up, this might also help relieve the prevailing pessimistic outlook. New extraction technologies may mean that, in time, the recovery rate could rise from 20-
40 of deposits to 60.
N o rth S e a p ro d u c tio n fo re c a s ts
N W E C S O i l P r o d u c t i o n F o r e c a s t
T h r e e S c e n a r i o s - C o m p a r i s o n
N o r t h S e a P r o d u c t i o n F o r e c a s t
i n 1 9 8 3
L o w
P r o b a b l e
H i g h
1 2 0 0 0
1 0 0 0 0
8 0 0 0
6 0 0 0
4 0 0 0
2 0 0 0
y
a
d
l
b
b
K
0
1 9 6 5
1 9 7 5
1 9 8 5
1 9 9 5
2 0 0 5
2 0 1 5
2 0 2 5
2 0 3 5
2 0 4 5
U n d e r th e H ig h S c e n a r io , th e d a ily p r o d u c tio n is p e a k in g a t 9 .5 M ib b ld a t 2 0 1 0
U n d er th e p r o b a b le s c e n a r io p ro d u c ti o n is k e p t a t 6 -7 M i b b l, b u t fo r m u c h l o n g e r 2 0 2 5
2. a
Decline in mine production
Solid fuels
In absolute terms, the world has substantial reserves of solid fuel - 4-5 times as much as oil, or
some 200 years supply. 80 of Europes fossil fuel reserves are solid fuels including coal,
lignite, peat and oil shale. However, this optimism has to be tempered by the fact the quality
of solid fuels is variable and production costs are high. The Community now produces 1.2 Mtoe of peat a year, 50 Mtoe of lignite and 60 Mtoe of
coal or some 5 of world production. After enlargement, the Unions coal production will
more than double. However, while lignite and peat are profitable businesses, European coal is
highly uncompetitive compared with imported coal. Difficult geological conditions and the rules governing social insurance in the European
Union cause the average cost of producing European coal to be 3-4 times the international
market price US 150 per Tce compared to US 40 per Tce. Given this context, European
coal cannot compete with that of the major coal exporting countries such as the United States,
Australia, South Africa or Columbia. This gap has led producing countries either to cease all
14
In 1999, Norway had 1.77 trillion cubic metres of proven gas reserves which at current production rates
will last 23 years, proven oil reserves at around 11 bn barrels are over half Europes reserves but at
current production rates will last 10 years. However, there are substantial reserves of oil and gas to be
exploited in the Barents Sea. 17
production as in Portugal, Belgium and France in 2005 or to decide to restructure the
industry so as to gradually reduce mining activity Germany and Spain or to make production
competitive with that of imported coal United Kingdom. A few years hence, the highly uncompetitive European coal industry will be providing only a
tiny proportion of the Unions energy needs, even after taking enlargement into account
Poland, Czech Republic, Romania. Although the applicant countries have substantial solid
fuel reserves, they will not be able to stand up to international competition, and will have to
reduce their mining activities in line with EU policy. Difficult decisions will have to be taken regarding the future of the European coal industry on
account of its lack of competitiveness. One path to explore could be that of maintaining
access to certain reserves.
The question of which type of waste can be incinerated will require attention. Community resources in conventional primary energy cannot, at
their current stage of
development, form the basis for European energy self-sufficiency. Only technology-intensive
trend towards increasing energy
renewable resources can help mitigate the present
dependence. Conclusion In 1998, the European Union consumed 1 436 million toe of energy from all
sources taken together, of which 753 million toe were produced within the Community. Demand was covered by 16 coal, 41 oil, 22 gas, 15 nuclear and 6 renewables. The
CEEC countries consumed 285 million toe and produced 164 million toe. Unless
consumption rates show a downward trend in the most rapidly growing sectors -
transport and housing - Europes energy dependence will reach more and more
worrying levels. The EUs physical energy stocks, though now at higher levels than when the
first oil crisis broke, thanks to the implementation of policies for demand management and
development of internal resources,15 are bound to decrease.
In the long term, this depletion
will be aggravated by the exhaustion of North Sea deposits and the scaling down of
nuclear energy, even if to a greater or lesser degree in the case of the latter. Even after
enlargement and including Norway in the equation, the European Unions energy dependence
will rise by 20 percentage points from current levels to reach some 70. C. Gulliver in chains, or energy supply in the European Union
The European Union is an important actor on the international market for energy products
second largest energy consumer in the world, and the largest energy importer16. As such, it
is associated with demand on the world energy market, geo-political developments,
15
16
North Sea oil, revival of nuclear energy programmes and renewable energy development.. by comparison, the US imports 24 of its needs and Japan 80
19
geographical location and the political stability of the countries through which the energy it
imports must transit. 1. External dependence
While world energy consumption has risen since the first oil crisis, the EU also succeeded in
reducing its energy dependence over this period, from 60 in 1973 to 50 in 1999. Policies
focusing on demand management energy conservation, development of internal resources
North Sea oil and diversification revival of nuclear programmes,17 research into renewable
energies, etc. have borne considerable fruit. E u r o p e - 3 0
t o t a l e n e r g y
r e f e r e n c e c a s e
i n m i l l i o n t o e
2 4 0 0
2 2 0 0
2 0 0 0
1 8 0 0
1 6 0 0
1 4 0 0
1 2 0 0
1 0 0 0
8 0 0
6 0 0
4 0 0
2 0 0
0
1 9 9 0
c o n s u m p t io n
n e t i m p o r t s
p r o d u c t io n
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
a
Increasing dependence for all forms of energy
As long-term growth begins to revive, the overall energy dependence of the EU is likely to
rise once again, reaching 70 within 20 to 30 years. In the case of oil, dependence could
reach 90, for gas 70, and for coal 100 dependence is feasible. Enlargement will only serve to reinforce this trend. Natural gas imports to the applicant
countries may rise from 60 to 90 of demand, and oil from 90 to 94. Meanwhile, those
countries which are currently net exporters of coal may have to import 12 of their needs by
2020, under the impact of drastic restructuring in this sector. 17
Installed nuclear generating capacity has supported the policy of reducing external dependence. From
45 GWe in 1980, it has grown to 125 GWe today in the EU. This progress is the result of investment
decisions made in the wake of the oil crises of 1973 and 1979. The aim was to replace oil-generated
electricity with nuclear-generated, so as to reduce the reliance of pro-nuclear countries. The resulting
30-45
savings can be estimated at 200 million toe for the year 2000, which is equivalent to a saving of
billion for the EUs trade balance. 20
E U 3 0 D e p e n d e n c e a c c o r d i n g t o e n e r g y p r o d u c t
1 0 0
9 0
8 0
7 0
6 0
5 0
4 0
3 0
2 0
1 0
0
s o li d f u e ls
1 9 9 0
o i l
2 0 0 0
n a t u r a l g a s
t o t a l
2 0 1 0
2 0 2 0
b
Extent of dependence
Dependence will have different effects, according to the Member State concerned, and the
structure of the international market for the type of energy in question. - The impact of instability in energy supply in Member States will be in direct proportion to
their reliance on external resources.18 The impact will be greater where the supplier nations
are themselves vulnerable to geopolitical instability. - Price levels will also depend on the degree to which the imported commodity is traded
internationally. Thus, 57 of oil consumed is traded internationally, as against only 20 of
natural gas and 15 of coal. - The markets for different energy products are structured very differently from one another,
which also has an effect on prices. For coal, one can talk of a competitive international market, for oil of a market dominated by
a cartel19, and for natural gas markets of a unique situation which might be described as
regional oligopolies forming functional cartels in which prices are effectively determined by
the oil market. The most acute case of Community dependence is oil, where 76 of demand is met from
external sources. In the long term, geographic diversification will not be as easily achieved as
for natural gas, since the worlds remaining oil reserves will increasingly be concentrated in
the Middle East.20 In the short term, there is little prospect of increasing supply in any
significant way, as most oil-exporting countries have no spare production capacity. The sole
exceptions to this rule are Saudi Arabia, Iraq and - to some extent - Russia. 18
19
20
Since domestic prices are in any case related to international prices, the degree of external dependence
will not influence prices to the same extent. Some economists argue that OPEC cannot be described as a cartel, since its function is not to fix
prices, but to eliminate competition between oil-producing countries - a project it has pursued with
varying degrees of success.
Saudi Arabia, Iran, Iraq, UAE, Kuwait and Qatar. 21
At present, the EU is moderately dependent on imported natural gas, which supplies 40 of
consumption. To try and offset the likely increase in this dependence to 70 over the next
20 to 30 years, the Union has several options. There are a number of nearby producer-nations
which have limited resources Russia, Norway and North Africa, especially Algeria and
Libya. It should be noted, moreover,
that despite various difficulties the USSR and
subsequently Russia always fulfilled its supply obligations under its long-term contracts with
the European Union. Further afield, vast amounts of natural gas have been discovered in
regions where both production and transport costs are now at economically viable levels, in
particular, Russia Western Siberia, the Caspian region including Iran, the Near East and
Nigeria. The Union currently imports more than 50 of the coal it uses. Although demand has been
consistently decreasing in absolute terms, relative dependence on external sources will
continue to rise for a number of years, to reach more than 70 in 2020. Some analysts even
believe that
the figure could reach 100, given that Community coal production only
survives thanks to huge public subsidies. The characteristics of the world coal market
geographical and geopolitical spread of supply and absence of price tensions are reassuring
in view of growing external dependence. In this respect one can speak of a stable economical
and physical supply. Europe depends on external supplies of uranium for 95 of its requirements. However, the
European nuclear industry controls the whole fuel cycle. The problem of managing waste
remains. The EURATOM Supply Agency is responsible for ensuring, primarily by
authorising contracts, that there is a wide range of supply sources and for preventing any
excessive dependence. Moreover, Europes nuclear operators also have stocks of fuel
representing a few years of operation for working plants uranium is easy to store and the
costs are low. Adopting a policy of geopolitical diversification has not been able to free the Union from
effective dependence on the Middle East for oil and Russia for natural gas. Indeed, a
number of Member States, and in particular the applicant countries, are entirely dependent on
a single gas pipeline that links them to a single supplier country. 2.
Trade in energy products Europe constrained by its geographical location
Europes increasing dependence on external energy resources, and the ever-greater distance at
which those resources are located, are set to increase the burden of both transport costs and
transit requirements. The challenges posed by the transit problem have also been significantly
complicated by the emergence of the New Independent States NIS out of the ruins of the
Soviet Union. a
Trade in energy products
Growth in energy product transportation is a sensitive matter, because of the health and
environmental risks it poses oil slicks,
transport of
radioactive substances and traffic congestion in a number of transit zones, such as the
Bosphorus. leaks from gas and oil pipelines,
Seaborne trade is vulnerable to such concerns. 90 of world trade in oil and coal, and one
quarter of trade in natural gas LNG, is carried by sea. Coal is the only energy product which
has been removed from the International Maritime Organisations OMI list of dangerous
products.
800 million tonnes of oil and gas are transported through European waters every
year, 70 of them off the Atlantic coast or through the North Sea and 30 through the
Mediterranean. 22
The number of maritime accidents is directly linked to the age of the ships involved. Of the 77
oil tankers lost at sea between 1992 and 1999, 60 were more than 20 years old. The wreck of the oil tanker ERIKA in December 1999 revealed a number of serious flaws in
the way oil is currently shipped. The Commission responded by adopting a Communication
on the safety of the seaborne oil trade, and proposed a number of measures for increasing
technical controls. Plans were also made to exclude from European waters single hull oil
tankers, which pose the greatest risk of pollution in case of accident. The ban will be enacted
in two stages 2010 and 2015, according to the tonnage of the vessels concerned. These measures will be followed up by new draft legislation prepared by the Commission to
increase the supervision of ships carrying dangerous or polluting substances and to broaden
the terms of responsibility for the principal parties involved in the seaborne oil trade in
particular, charter companies in case of accidents leading to serious pollution. In this context, the construction of new oil terminals which might create environmental
problems for neighbouring countries needs to be carefully examined. A case in point is
Russias project to build a new oil terminal at Primorsk in the Gulf of Finland, where the
environmental impact on states bordering the Baltic Sea should be addressed. 23
EUR15
6
16
15
22
41
Gross internal consumption in 1998
AU
BE
DK
23
0
23
11
20
1
15
43
22
42
8
0
20
26
46
IR
2
0
FL
22
17
17
10
34
IT
16
0
14
11
59
SW
5
28
FR
7
7
GE
11 2
25
GR
5
0
0
22
22
35
37
36
21
13
41
NL
2
1
13
47
37
LX
2
0
4
23
71
UK
15 1
24
60
16
0
3
PO
14
54
SP
6
16
13
11
67
54
32
15
34
1
45
24
EUR30
0
6
19
14
21
40
Gross internal consumption in 1998
Bulgaria
Czech Republic
2
3
21
15
1
2
8
36
19
50
23
20
Estonia
1
10
0
12
25
Hungary
0
1
14
16
52
29
40
Latvia
3
1
33
0
24
Lithuania
5
2
6
39
35
35
17
Cyprus
0
0
0
0
1
99
Malta
0000
0
100
0
Poland
Romania
5
0
10
19
12 0
18
3
Slovak Republic
Slovenia
1
3
18
26
8 2
18
19
Turkey
15
0
0
12
30
66
38
29
33
19
11
42
43
Solid fuels
Oil and oil products
Natural gas
l
25
Nuclear
Renewables
b
Transit
It is essential for the Union to maintain satisfactory relations with transit countries if it is to
have stable access to the energy products it needs. This is especially true for gas, where the
main risk lies in transit conditions and continuing diversification of transport routes, not
in the status of world reserves. With regard to supplies originating in Russia, the Caspian Sea Basin, North Africa and the
Middle East, two regions deserve special attention, Eastern and Northern Europe on the one
hand and the Mediterranean Basin on the other. - Russia plays an essential role, providing the Union with 42 of its natural gas needs. However, there is also considerable potential for oil and gas production in the countries of the
Caspian Sea basin. As a producer, Russia is the worlds leading natural gas exporter. It would
also like to export more oil, and even electricity, to Europe, establishing new transport routes
to this end. A range of transport routes will also be necessary if the resources of the Caspian
Sea Basin are to be fully exploited. Particular attention should therefore be paid to transit
states such as Turkey, the CEEC countries, Ukraine, the Baltic States and the Caucasian
countries. - North Africa is also an important producer region for Europe Algeria, Libya. In the light of their intention to join the Union, Europe should consider what support it could
give to Turkey, Bulgaria and Romania, to develop transit facilities for Caspian basin gas and
oil,21 in addition to existing plans for transporting Russian supplies.22 The natural gas
interconnection project linking Greece and Turkey opens up the potential for European access
to new sources of natural gas, providing an alternative to seaborne trade. It could also provide
an export route for Middle Eastern production. The northern, central and Mediterranean dimensions of energy policy assume primordial
importance in this context. 3. The European Union an actor on world markets
Because the European Union relies on imported energy, it is dependent on supply and demand
conditions in the international energy markets. This dependence is to some extent re-balanced
by the weight of EU exports to countries which themselves export energy products. a
The Union is a major player in the international markets
The Union accounts for 14 to 15 of world energy consumption, though it is home to only
6 of the worlds population. In particular it represents 19 of world oil consumption, 16
of natural gas, 10 of coal and 35 of uranium. The EU imported 16 of the natural gas traded on the international markets in 1999 450
billion m3, and a quarter of the coal 150 out of 500 Mtce and oil 9.7 out of 40.4 million
barrels a day.
Enlargement will increase the EUs share of these markets yet further, except
for coal. 21
22
The Caspian Sea Basin refers to the oil and gas reserves located in Southern Russia, the Caucasus,
Central Asia and Iran. A transit agreement was signed by the Applicant Countries and most of the Mediterranean states as part
of the Umbrella Agreement under the INOGATE programme. 26
In 1997, the EU spent
imports. Oil alone accounted for 75 of this sum. In 1997, the Unions oil bill was
billion, almost half of which 45 was paid to Middle Eastern suppliers more than
billion. In 1999, this bill reached
added a heavy burden to this bill. 120 billion on energy imports, representing 6 of the total value of all
94
40
rate since January 2000
240 billion. Changes in the
b
The EU has no influence over international prices
In the long term, it is the energy choices made by the developing countries - and in particular
China, India23 and Latin America, whose populations and energy demands will see the
strongest growth - which will have the most decisive and lasting influence on the international
energy markets. According to demographic experts, by 2020 the worlds population will have grown to 8
billion - 2 billion more than in the year 2000. World energy demand according to current
trends, could rise sharply, and the developing nations will account for 90 of that increase. Demand is forecast to rise by some 65 over 20 years, from 9.3 billion Toe in 2000 to 15.4
billion Toe in 2020. This trend may have a substantial impact on international fossil fuel
prices. However, this trend could be reduced by international efforts to promote renewable
energy and energy efficiency, for example in the fight against climate change. To give an example, the number of cars in use world-wide is forecast to double by the year
2020. Most of this growth will come from the developing countries. In the OECD states, there
are already around 6 cars for every 10 citizens, whereas in most of the rest of the world, the
ratio is 2 cars for every 10 persons. Even if the shortfall in supply could be partly made up,
the pressure on oil prices in the relatively short term is likely to be considerable. That is one reason why agreements with developing countries have to take the aspect of
security of energy supply into account.24
trends,
Beyond overall market
instability in energy prices for products traded on the
international markets oil, natural gas, coal and uranium may result from a number of other
disruptive factors deliberate actions by exporting countries such as OPEC, geopolitical
disputes or the effects of exchange rates. Sudden price shifts and the profound crises they can
cause are connected to intense price volatility, recurring conflicts over prices, the ability of
our economies to absorb price changes, and their capacity to bring pressure to bear on both
the market in question and those for substitute energy products. While the EU economies are now better able to deal with price volatility, they are still unable
to control all the relevant geopolitical and speculative factors, and have little power to
determine the future direction of world markets.
- On the geopolitical level, recent problems with the Middle East peace process, the embargo
against Iraq and uncertainty over the situations in Iran and Libya have all influenced the
actions of OPEC, without it being possible to say what exactly their effect has been. - On the financial level, the impact of speculative capital flows generated by the growing
number of transactions in the futures markets can cause sudden price movements and is also
23
24
China and India combined consume some 1.115 billion Toe a year respectively, 844 million toe and
271 million toe. Communication on co-operation as regards energy with Asia COM96308.
27
highly worrying. In such a context, as the Commission has already pointed out, strategic
reserves may be able to play an anti-speculative role.25
Unfortunately, the EU lacks the means of negotiate and exert pressure. The Union suffers
from having no competence and no community cohesion in energy matters. Apart from the powers established by the ECSC and EURATOM treaties, there is no explicit
mandate for a European energy policy. As a result, over the last 40 years, Europe has failed to
develop a consistent common energy policy within both the EU and the International Energy
Agency, as the OPEC countries have today, and as other producer groups may in the future. The lack of a real energy policy reduces the EUs bargaining power. In the face of powerful
oil-exporting companies, European importers without co-ordination on a market where prices
are largely fixed. The development of the single market should help to curb the influence of
exporting countries, as liberalisation and increased trading encourage competition between
exporting companies, particularly where natural gas is concerned. As long as the EU fails to develop means to reduce the influence of the international markets,
this situation will remain the Achilles heel of the European economy and its ability to
influence dialogue at world level will remain limited.
As a result, the Union will be unable to
pull its weight in international political debate. As the current President of the European
Union remarked at the European Council meeting in Biarritz, the recent increase in oil prices
has alerted Member States to the need for a co-ordinated response in times of crisis. c
An inadequate strategy for prevention
Energy security and - insofar as it might be possible - self-sufficiency have always lain at the
heart of the Member States energy policies. This goal was embodied in the ECSC and
EURATOM treaties, and was intended to provide the cornerstone of European harmony as
conceived by the Unions founding fathers. Following the first oil crisis, the Member States and the European Union sought to minimise
their quantitative reliance on external energy sources. The result was a raft of measures
intended to support domestic production that would otherwise be uncompetitive, a deliberate
policy of stockpiling, and programmes to promote energy efficiency and technological
development. However, these measures did not go far enough to reverse the underlying trend. The coal industry
The truth of this statement is particularly obvious if we consider the coal mining industry. Social and regional considerations argued for mitigating the effects of an inevitable decline,
rather than examining how the sector might make a positive contribution to energy security in
the context of a well-ordered and efficient
international market.
Of course, whatever
credibility such a contribution might once have had has since been largely eroded by the rise
in European production costs. Responding to oil crises
World physical supply of oil can be disrupted at any moment by events in producer regions
and transit zones, especially political instability andor war. Emergency reserves and crisis
measures, such as those set up by the International Energy Agency IEA and by Community
25
Communication from the Commission of 11.10.2000, The European Unions oil supply
28
legislation, provide a partial response to this threat. Existing measures should not only be
maintained, but might be strengthened further. The key decisions regarding strategic reserves were taken in 1974 through the Agreement
concerning an International Energy Programme, the act founding the International Energy
Agency IEA. This move came in the wake of the oil embargo imposed on a number of
industrialised nations by OPEC as a consequence of the political climate in late 1973. One of the IEA Member States principal commitments is to maintain reserves of oil andor
petroleum products at a level equivalent to 90 days of net imports, for use in case supply
should be cut. Most Member States actually maintain their strategic reserves at a somewhat
higher level. The Union has issued three Directives which, together with measures taken by the IEA,
govern the organisation of Member States national reserves
- Two directives26 impose an obligation on Member States to maintain stocks equal to 90
days consumption for each of three main categories of petroleum-based energy products. When reserves fall below this level, the Commission must organise consultation with the
Member States.27
- Under another directive28 Member States must be ready to act, i.e. they must establish
contingency plans, together with appropriate bodies and mandates, in particular for releasing
reserves onto the market, limiting consumption, ensuring supply to priority customers and
the
regulating prices. The same Directive stipulates that should a crisis break out,
Commission must organise consultation with the Member States to ensure their actions are
co-ordinated through an Oil Supply Group. The Commission must also ensure that the
different national systems do not give rise to distortions of competition or obstacles to intra-
Community trade. These mechanisms are in no way intended to deal with circumstances such as the present rise
in the price of oil. As a result, Community legislation on strategic reserves can have only a
limited impact on concerns about energy supply. The impact of the United States decision to release 30 million barrels from its crude oil
reserves in September 2000 only serves to illustrate the fact that the mechanisms which exist
at the international level to deal with crises are severely limited - especially since such crises
often have more to do with market economics than with physical disruption of supply. No one
denies the importance of co-ordination between those countries which are net consumers of
oil. However, the experience of negotiations within the IEA demonstrates that effective co-
ordination and co-operation are extremely difficult to achieve in practice. During the Gulf
War, as again today, it has been left to the US Strategic Petroleum Reserve SPR29 to
spearhead pro-active intervention in the oil markets. 26
27
28
29
Directive 68414EEC, amended by Directive 9893EC. It should be noted that presently several Member States have more than 90 days of stocks. This excess
can therefore be released without triggering Community consultation.
Directive 73238EEC. The United States established the Strategic Petroleum Reserve in 1975, after joining the IEA, and two
years after the first oil crisis. American law lays down that there should be a strategic reserve equal to 1
billion barrels of oil, for use in case of war or other serious conflict leading to the physical disruption of
supply. Presently, there are 571 million barrels in the SPR, representing an investment of USD 20
billion at todays prices. The SPR is located in the Gulf of Mexico Louisiana and Texas, a region
29
The Communitys own mechanisms are quite inadequate in view of tensions on the
market for energy products. For instance, there is no centralised decision-making
mechanism through which oil could be released onto the market. If oil prices were to
rise to unreasonable levels, the EU would find it had little power to act. In order to
reduce the risk of a crisis as a result of their dependence on external energy, a number
of Member States have set up independent inventories or strategic reserves for certain
energy products.
Thus the Netherlands has implemented a policy of responsible use of
small-scale natural gas reserves, so as to leave open the possibility of drawing more
heavily on the Groningen reserve estimated at 1 100 bn m3 as and when necessary.30
In its recent Communication on the EUs oil supplies, the Commission declared that it
intended to look into how it might be possible to increase the quantities held in
strategic petroleum reserves by reorganising them on a Community basis. Conclusion Given the external risk factors present whether related to volumes, prices,
investment levels, geopolitical factors, etc., the best guarantee of security of energy supply is
clearly to maintain a diversity of energy sources and supplies. Present forecasts suggest that it
will be impossible to arrest the Unions growing quantitative dependence. Enlargement will
only serve to reduce diversity of external supplies. At the same time, the strong fall in the
price of oil products at the beginning of the 1980s and the lacklustre efforts to promote
the Union dependence has remained at
energy savings and renewable energy have meant that
high level. Between 1975 and 1985, the improvement in energy efficiency was 24, whereas
it was 10 between 1985 and 1999. This underlines the importance of acting on the demand
side and assuring a secure energy supply at the Community level. II
LESS THAN PERFECT ENERGY OPTIONS
As 2010 approaches, numerous Member States, as well as the applicant countries. will have to
make choices regarding energy investment, primarily in the electricity sector. Current
channels determine the choice of
technological
breakthrough that changes the energy landscape. These changes might centre on decentralised
fuel cells. These options are
production of electricity through mini gas turbines or
fundamental because over the next 30 to 50 years they will dictate the structure of energy
consumption. They therefore have to be carefully thought through. investment, unless there is a major
At the end of the 1970s, coal and nuclear energy were thought to be the only alternative to oil. The countries participating in the G7 Summit in Tokyo May 1979 undertook to encourage
energy saving and the production of coal and nuclear energy. Similarly, the Council resolution
of 1980 set the objective of covering 70 to 75 of primary energy needs for the production
of electricity by means of solid fuels and nuclear energy. With hindsight this outlook is now
somewhat dated. The 20th century began with the might of coal, progressed through the
predominance of oil and ended with the breakthrough of natural gas. which has more than 500 salt caves, thus providing ideal storage conditions. The reserve was drawn on
in 1991 during the Gulf War, and again a second time a few weeks ago, when 30 million barrels were
released barely equivalent to two days demand. 30
This policy is combined with measures to encourage the exploration of North Sea resources.
30
A. Nuclear energy and solid fuels the undesirables
Nuclear energy and solid fuels are the undesirables among energy products although their
contribution within the global energy balance, which is restricted almost exclusively to the
generation of electricity, is enormous. These two sources of energy account for 35 and 26
respectively of the electricity produced. 1. Nuclear energy a source of energy in doubt
E u r o p e - 3 0 n u c l e a r r e f e r e n c e c a s e
i n m t o e
3 0 0
2 5 0
2 0 0
1 5 0
1 0 0
5 0
0
1 9 9 0
p r o d u c t i o n
c o n s u m p t i o n
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
The hopes generated in the second half of the 20th century by the use of nuclear fission for
civil purposes must be seen against the investment in this sector and its achievements in
energy and technology terms. Regardless of their natural resources in energy products, all the
Member States that had the means embarked on major civil nuclear programmes. Tainted by
the original sin of dual usage civil and military in the fuel cycle, the development of nuclear
fuel centres around the Euratom Treaty, the 1968 Treaty of Non-proliferation entered into
force in 1970 and the rules of the IAEA. a
Achievements of the Euratom Treaty
The aim of the Euratom Treaty, which was signed in 1957, was to provide the European
Community with an alternative source of indigenous energy supply in order to bring a halt to
the growing dependence on oil from the Middle East. The Treaty was meant to enable Europe
to develop its know-how and obtain the means of exploiting nuclear energy for civilian
purposes. Pooling resources know-how, infrastructure, financing and control was meant to
translate into faster progress at lower cost. The Euratom Treaty presents a certain originality compared with the EEC Treaty, being
organised around specific industrial objectives and using instruments that sometimes departed
from the Treaty of Rome. Even though problems appeared very early in the implementation of the Euratom Treaty, in
particular the chapter on supply, these should not hide its achievements. - The dynamism created by the Euratom Treaty in research and technological development is
clear for all to see. The Single European Act adopted this precedent of providing a framework
31
research for
for nuclear
the Communitys research and technological
development programme. Within the framework of Euratom, the integration of all European
fusion activities played a key role in giving European research its position of excellence in
this domain.31
the whole of
- From the beginning of the Treaty major investment was needed to build and maintain new
nuclear power stations. The Treaty assigned the Commission the task of examining the
investment plans scheduled in the Member States, by virtue of which it has so far passed
judgement on 238 investment projects for which it has checked both the merits and
compatibility with the Euratom Treaty. These investments exceed
400 billion, of which the Community budget contributed
2.9 billion. This has contributed to the Communitys industrial development, which today
has mastery of the entire nuclear fuel cycle, with the exception of waste management. Nuclear power stations installed on the territory of the Community cover 35 of its electricity
needs. By extending the life of nuclear reactors beyond the initial expectations, thanks
primarily to better knowledge of the performance of materials, the nuclear energy sector has
become competitive and is a source of considerable income for operators. The latter no longer
need public aid or Euratom loans32. These loans are currently being used by applicant
countries to help modernise their installations. - Health and radiation protection standards established at Community level are enshrined in
the legislation of each Member State. Over and above the actual activities of the nuclear
industry, these standards also concern the use of radioactive materials in medicine, research
and industry. the
- Euratom safeguards give the Community undeniable credibility in terms of
non-proliferation of nuclear materials. The Euratom Supply Agencys target of diversifying
supply also means that the Community does not overly depend on a single geographic region
for its uranium requirements see graph above, part 1, I.B.2.b. Implementation of the main provisions of the Euratom Treaty, therefore, difficult though it
was, has been a success overall. In the current circumstances a renewal of interest in the
Euratom Treaty and the alternative it offers in the production of electricity have kept it very
much to the fore.
The expertise acquired will be invaluable, particularly in the process of
enlargement. b
Nuclear energy in limbo
The potential health and environmental hazards from nuclear fission mean that public opinion
is to some degree opposed to it. The Three Mile Island accident in the United States gave rise
to the Swedish referendum on nuclear energy. The arrival of pressure groups and ecological parties onto the political stage of the Member
States and the Chernobyl accident 26 April 1986, undeniably the most serious accident in
31
32
The JET Joint European Taurus, a European company in the sense of the Euratom Treaty, has been an
essential element in the scientific and technical advances in European fusion.
Its results have helped the
Union to look forward, with its international partners USA, Japan, Russia, to the possibility of a
research project such as the ITER International Thermonuclear Experimental Reactor. The system of setting ceilings in the amount set for the civil responsibility of operators in the case of a
major accident could amount to a state aid. 32
the history of atomic energy, marked a turning point in the development of Europes nuclear
industry. Five out of the eight Member States with nuclear power have now adopted or
announced a moratorium.33 France, the United Kingdom and Finland have not taken a
decision to stop nuclear energy, but, except possibly Finland, there are no new reactors likely
to be built in the next few years. Italy renounced nuclear energy following a referendum in
1987, Germany has announced its decision to shut down its last reactors in 2021 and Belgium
will do the same in 2025. Applicant countries, some of which have undertaken to shut down their nuclear reactors that
are not particularly safe,34 take a mixed view of the alternatives to nuclear energy because of
the impact on their economies. While Turkey has put off building a nuclear power station
indefinitely, Poland would like to keep its options open. It is also possible that some applicant
countries might consider the possibility of new power stations. Consequently, the problem of
the safety of nuclear
installations in applicant countries and the decommissioning of
non-upgradable facilities becomes a priority and will be closely monitored before their
accession to the European Union. The Cologne European Council 3-4 June 1999 underlines that it is important that nuclear
safety standards are high in Central and Eastern Europe, which will require a major
investment effort. These standards must be set against the standards in force in each of the
Member States that have nuclear energy. The Commission is now carrying out the necessary
tasks following the demand at the European Council of Helsinki to examine the means of
treating the question of nuclear safety in the framework of enlargement. The Commission has
joined the Member States safety authorities in this process in order to prepare a negotiating
position. The future of nuclear energy is uncertain, particularly in Europe. It depends on several
factors, including a solution to the problems of managing and stocking nuclear waste, the
economic viability of the new generation of power stations, the safety of reactors in Eastern
Europe, in particular applicant countries, and the fight against nuclear proliferation in the CIS. Policies to combat global warming should also play a fundamental role. Concerns about global warming have changed the perception of energy supply constraints. The question is particularly pertinent for nuclear energy which avoids 312 Mt of emissions of
CO2 per year in the European Union 7 of all the greenhouse gases emitted in the Union,
the equivalent of the CO2 emissions produced by some 75 million cars.35
c
Nuclear waste
From the time that nuclear energy started being used it was thought that the period of
operating power stations had to be accompanied by a policy on storing, warehousing and
treating waste. In most countries in the world this issue focuses on highly radioactive waste,
which accounts for 5 of the total volume of nuclear waste and 95 of radioactivity. 33
34
35
Sweden1980, Spain-1984, Netherlands-1994, Germany-1998, Belgium-1999. Lithuania Ignalina 1 and 2 Bulgaria Kozloduy 1 to 4 Slovakia Bohunice VI
For example, the Swedish Governments decision to shut down the nuclear facility in Barsebäck on
301199, after 23 years, creates a production shortfall of 4 billion kWh per year, which has to be made
up by electricity imports from coal-fired Danish and German power stations. This leads to an indirect
increase in Swedens CO2 emissions of around 4 million tonnes per year, i.e.
about 8 of total
emissions in Sweden. 33
Definitive storage is feasible and construction and operating techniques are mature enough to
be applied. The most advanced countries in this area appear to be the United States, Sweden
and Finland. Nonetheless, the practical problems of long term storage remain to be solved. Estimates of storage costs vary from one country to another, but they form a small part of the
total cost of kWh production. On the other hand, the degree of concentration in a scenario
high on nuclear energy usage the area needed for storing all waste is around 300 km² would
help to circumvent
the problem in terms of dispersion, unlike other sources of power
generation. Current research, such as partition-transmutation, sets out to reduce the presence of long-lived
elements. Research focussing on waste management has to be continued, but they do not
appear to offer an alternative in the short to medium term. Establishing an integrated programme for waste management needs answers to the publics
questions over safety, from the transport of nuclear materials through to storage itself, along
with the question of reversibility, to allow future generations to use new, more effective waste
treatment techniques as a function of scientific progress should they feel the need. A
consensus can only be achieved on this issue by providing the public, and especially its
representatives, with clear and accurate information and with credible input on the part of the
safety authorities in each Member State. These are the ones who can assure the public that
any decisions taken are in the interest of present and future generations. Nuclear cannot develop without a consensus that gives it a long enough period of stability,
bearing in mind the economic and technological constraints of the industry. This will only be
the case when the waste issue finds a satisfactory solution with maximum transparency. Research in this area should be oriented towards waste management. The European Union must retain its leading position in the field of civil nuclear
technology, in order to retain the necessary expertise and develop more efficient fission
reactors and enable fusion to become a reality.
34
2. Coal a glorious past
E u r o p e - 3 0
s o l i d f u e l s
r e f e r e n c e c a s e
i n m t o e
5 0 0
4 0 0
3 0 0
2 0 0
1 0 0
0
1 9 9 0
a
Background
c o n s u m p t i o n
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
Because of their impact on Europes economies production of electricity and coal and steel,
coal26 and steel were regarded as the cornerstones of Europe and the basis for European
harmony. When the Treaty was signed in Paris in 1951 the reconstruction of Europe required
considerable quantities of energy products. Demand far outstripped supply and the fear of
shortage dominated policy in this sector. The High Authority of the ECSC thus encouraged
greater production through the creation of new mines and the conclusion of long-term supply
contracts. Since the 1960s, however, the coal-mining industry has gone into rapid decline due to
competition from coal from outside the Community and the advent of other fuels to produce
electricity and heat. Following successive phases of restructuring of the coal
industry,
therefore, coal production in the European Union of 15 Member States dropped from around
600 million tonnes in the early 1960s to less than 86 million tonnes in 2000. Competition
from other energy products,
the slackening of the oil constraint as from 1986 and
environmental concerns have all highlighted the weaknesses of solid fuels. b
Constraints
Coal has built-in constraints that put it in a weak position in respect of oil and gas, its direct
competitors. Being a solid and heavy ore, it is bulky and requires large storage areas. With a
lower calorific value than oil and gas it does not have the ease of use of a liquid or gaseous
fuel. It also generates pollution at every stage of the production and utilisation cycle.36 On the
credit side it must be stressed that the transport of coal by sea 90 of coal traded on the
world market is transported by sea does not entail the same environmental hazards as the
transport of oil and gas. 26
27
The term coal refers to solid fuel in general. For reference, a distinction is made between four families
of coal by decreasing order of calorific value anthracite, pit coal, lignite and peat. Coal, anthracite and
lignite briquettes come under the ECSC Treaty whereas lignite and peat are regulated by the
EEC Treaty. All handling from extraction to final use generates dust. Storage in the open air can cause pollution
through rainwater run-off. Coal combustion leaves ash and causes the emission of gases that are
damaging to the quality of air, water and soil CO2, NOx and SO2. 35
The physical disadvantages of coal have considerably reduced its markets for expansion. However, where in the power generation sector coal is not a dominant source of energy, as in
Denmark, Germany, Greece, Ireland and the United Kingdom more than 45 of electricity is
generated on the basis of coal in these countries, it is often used as a back-up fuel. In 1996,
for example, the shortage of hydroelectricity in northern Europe and repairs to French nuclear
facilities created an additional demand for coal. Fluctuations in hydroelectricity have a
considerable impact on coal consumption, the most susceptible countries to these fluctuations
being Austria, Sweden, Portugal, Finland, Italy, France and Spain. c
Trump cards
Pursuing the coal option in Europe is primarily for regional and social reasons. The cost of
imported coal, the diversity of outside suppliers37 and the relative stability of prices compared
with oil and gas are factors which offset the considerable constraints on coal. EU R15 - Imp orts of steam co al comin g fro m third coun tries
1999
12
5
6
9
13
18
Afrique du Sud
Colom bie
37
Pologne
Aus tralie
Indonés ie
Rus s ie
Autres
Being sold on a competitive international market, the price of imported coal shows unequalled
stability compared with other imported energy products. By way of example, steam coal
prices varied by USD 16 between USD 54 and 38tce over a period of ten years 1986-96. 37
In terms of the geographical diversification of coal supply in the European Union, the traditional
exporters of coal Europe, United States, Russia and Ukraine have been joined by Canada, South
Africa and Australia.
More recently new exporters have emerged, such as Indonesia, Colombia and
Venezuela. 36
The average price over those ten years was USD 47. During that same period the price of
heavy fuel expressed in tonnes coal equivalent varied even more, and more frequently, the
price ranging from USD 41.11 to 100.67. The effects of such a difference in price on the balance of payments should not be
underestimated, especially for countries without their own domestic energy products. The
Danish coal option over the past twenty years certainly has to be listed among the economic
advantages of coal. The flexibility of coal contracts and the development of a spot market have allowed the price
of coal to adjust constantly to the market situation. The lack of any economic and political
risk and the opening-up of the market in terms of supply-side players explain the relatively
minor, upward and downward price fluctuations of coal compared with oil and even natural
gas. Keeping the prices of oil and gas at a high level and having greater recourse to imported
coal in Europe could put considerable pressure on prices. d
The future
The lack of competitiveness of European coal-mining, both now and in the future, has led
several Member States to abandon coal. This throws up undeniable political problems in other
countries, in particular Germany. The coal compromise concluded in 1997, for example,
between the Federal Government, the Länder and the undertakings concerned provides for a
reduction in state aid from DM 9.1 billion in 2000 to 5.5 billion in 2005, production being
reduced to 21 million metric tonnes and employment to no more than 36 000 miners. The fact that closure decisions taken or still to be taken by several Member States are
unavoidable must also be applied by the same token to applicant countries, particularly
Poland. Being an industry with high labour intensity, it contributed to the full employment economy
of post-war coal regions. The policy of sustainable social and regional restructuring pursued
by the European Union within the framework established by the ECSC Treaty will have to be
adapted to applicant countries producing solid fuels when they join the European Union. 37
P ro d u ctio n an d lab o u r co sts
in th e co al in d u stry
The primary objective of the ECSC Treaty signed in Paris in 1951 was to establish a common
market in coal and steel and to contribute to economic expansion, growth of employment and
a rising standard of living in the Member States. In this context the Community institutions
had the task of promoting the most rational operating policy, modernising production and
improving quality. The future of coal in Europe today lies in global terms of security of supply since coal has no
prospect of competitiveness either in the European Union or in any of the applicant countries. In the circumstances, we ought to be asking ourselves whether it might not in fact be
necessary to maintain a production base which could give access to reserves in the event of a
serious crisis while at the same time applying the most advanced technologies. The European
Union should look at whether this concept might form part of the framework provided for by
the Directive on the liberalisation of the electricity market under security of supply. It is also in this context that the control of State aid to production after expiry of the ECSC
Treaty in 2002 needs to be looked at. One possible solution would be to define a system of
control of national aid to the coal industry which meets the need for security of supply by
maintaining minimum access to reserves and ties in with social and regional perspectives. Although in the short to medium term there are no major problems regarding security of
supply in solid fuels, coals future depends largely on the development of techniques which
make it easier to use like gasification and lessen its environmental impact in terms of
pollutant emissions through clean combustion technologies and CO2 sequestration. The production of coal on the basis of economic criteria has no prospect either in the
European Union or in the applicant countries. Its future can only be maintained within the
framework of the European Unions security of supply. The upcoming expiry of the ECSC
Treaty will not help to provide a simple answer to this matter
38
Conclusion Under the pressure of ecological concerns, solid fuels and nuclear energy have fallen
from grace and seem set to play less of a role in the production of electricity. However, given
the present facilities and technologies, reducing these two sources of energy at the same
time could give rise to economic tensions and threaten supply without an active policy of
demand management.
B. Oil still the favourite
E u r o p e - 3 0 o il
r e f e r e n c e c a s e in m t o e
9 0 0
8 0 0
7 0 0
6 0 0
5 0 0
4 0 0
3 0 0
2 0 0
1 0 0
0
1 9 9 0
c o n su m p t io n
n e t im p o r ts
p ro d u c tio n
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
The advantages of oil in terms of calorific value and ease of use readily explain its rapid
breakthrough in the Western economies in the immediate post-war period. Its properties gave
rise to road transport 99 dependent on oil. With greater or lesser speed it replaced coal for
heating and then for the production of electricity. Although oil is being phased out of our economies to a certain extent, as a result of the oil
in the Member States, primarily in
crises, it remains an essential economic component
transport. Transport currently accounts for more than half of oil consumption. While the oil
market is a high-tension market, whether this be due to producer-consumer dialogue, prices
on the international market, quantities available, its impact on the environment or accidents at
sea with wide media exposure, it has to be said that it continues to enjoy the favour of public
opinion. The prospects of the oil market depend on the development of alternative sources of energy
and on improvements in energy efficiency for transport. An analysis of current trends would
indicate that consumption in Europe will increase appreciably, with a much higher growth
rate in applicant countries because of their need to catch up in the passenger and goods
39
transport sectors. The exhaustion of internal resources will also heighten dependence on
outside oil. The development of supply on the international oil market will be a determining
factor in this respect. 1. Dependence on oil
More than 70 of the worlds oil reserves are located in the member countries of OPEC. In
2020 OPEC will cover 50 of the Unions needs with production of the order of 55 million
barrels a day, as against 32 million barrels a day in the year 2000. This willingness on the part
of OPEC is reflected by production costs which will remain extremely advantageous even in a
scenario of low prices. The average cost of OPEC production is currently around USD 2 a
barrel. Significant profit margins will provide an incentive that OPEC will find hard to resist. Europe-15
1999- Origin of crude oil imports
Autres
8
Mexique
2
Ex-URSS
18
Iran
9
Libye
10
OPEP
51
Norvège
21
Arabie Saoudite
13
Irak
7
Nigéria
4
Algérie
4
Vénézuela
2
Koweit
2
The volume of non-OPEC production, at an average cost at present of USD 5 a barrel, but
with a marginal cost of more than USD 10, will be closely linked to price movements, since
reserves will continue to be plentiful. Some oil production areas in Russia and the Caspian
Sea basin are extremely important for the European Union in this respect. It is thought that a
crude oil price of about USD 20 should make it possible to guarantee the investment in
production in non-OPEC regions, which will be needed because of rising demand over the
next twenty years. 40
2. Geopolitics in oil
Recent events on the oil market illustrate that, while OPEC is sometimes described as a weak,
heterogeneous cartel, centralising forces are prevailing at the moment, even if Saudi Arabia,
Venezuela, Iran and Kuwait appear to have had most influence on decisions taken over the
last two years. The interests and constraints of the states which make up OPEC are multiple
and complex, and to a large extent divergent. Some member countries are in favour of maximising prices in the short term as they have low
reserves, a large capacity for absorbing oil revenue and a high degree of production capacity
utilisation Algeria, Venezuela and Iran. Others, such as Saudi Arabia and other Persian Gulf
producers, prefer to vary prices over the longer term, since they have abundant reserves, so as
to prevent the emergence of alternative energy sources and at the same time maintain oils
position on the world energy scene in the medium and long-term, together with their market
share. Geopolitical factors have also played a part in these developments.
The differences of
opinion in OPEC, which were already apparent at the time of the Gulf War, internal tension
regarding the oil embargo on Iraq, uncertainty surrounding developments concerning Iran and
Libya plus the common position of Arab countries on the Israeli-Palestinian conflict are all
factors that affect the smooth functioning of the oil market. Iraqs role in the years ahead is also a major unknown. In 1999 Iraq managed to increase
production to 2.8 million barrels a day and achieve just over USD 5.2 billion in oil exports
authorised by the United Nations Security Council Resolutions under the Food for Oil
programme. If the sanctions were lifted and assistance obtained from foreign investors,
production could soon rise to 3 to 4 million barrels a day. There is no reason to fear a physical shortfall in the foreseeable future, nor is it possible to
anticipate OPECs behaviour as a cartel and the political concerns which may occasionally
affect its attitude. However, several factors stand out which are likely to have a decisive effect
on price levels, namely, the economic growth rates of importing countries, the progress made
in curbing demand,
the addition of new reserves and the tightening of environmental
protection standards.
In the long term, given the concentration of reserves in OPEC countries,
it will be
technological developments that pose the principal threat to OPEC, namely, new production
techniques in difficult areas, using non-conventional oil, and the development of new fuel
substitutes and the technologies associated, chiefly in the transport sector. The role of the countries of the former Soviet Union may also prove to be particularly
they were still the worlds leading oil
in 1989,
important for the European Union as,
producers, with production of more than 11 million barrels a day. Production in this region
could double over the next twenty years from 7.8 million barrels a day in 2000 to 14 million
in 2020. The known reserves in the Caspian Sea basin 25 billion barrels are roughly the
same as in the North Sea and the USA. Potential reserves could exceed 200 billion barrels,
i.e. 25 of known reserves in the Middle East.
41
3. Effects of oil prices
Crude oil- OPEC basket prices
1970-2000 Jan-Oct
l
e
r
r
a
B
3 6
3 3
3 0
2 7
2 4
2 1
1 8
1 5
1 2
9
6
3
0
7 0
72
74
76
7 8
8 0
82
84
8 6
8 8
9 0
92
94
96
9 8
20 00
J A N-
O CT
N om ina l pric e
C onsta nt pric e 1973
While industrialised countries were at breaking point following the two oil crises 1973 and
1979, this is no longer the case today threefold rise in the price of oil in a year. Energy
diversification, the almost general exclusion of oil products from the production of electricity
and structural changes in Europes economy, which has changed from being an industrial
society to a services society, have lessened the impact of erratic fluctuations in the price of
oil. Thought should be given to methods of payment, in particular the possibility of billing the
Unions energy purchases in Euros, thereby reducing the impact of exchange rate fluctuations. Also, the high level of taxation on oil products in Western Europe considerably reduces the
impact of price increases on inflation. For all non-producing developing countries, the cost
is still higher and this can prevent them from breaking out of the vicious circle of
poverty. More particularly, the increase in oil prices affects those populations already on the threshold
of poverty and threatens them with even greater levels of economic and social exclusion. The
Commission will seek to facilitate exchanges of experience on appropriate practices designed
to alleviate the effects of oil price increases on those most in need and to reduce the risks of
social exclusion in line with the Lisbon conclusions. 42
Unless specific measures are taken to disengage the oil sector, especially in transport, oil
dependence could reach 90 by 2020. Intensive efforts are needed to replace oil with other
alternative sources of energy and to curb consumption, in the road transport sector where oil
consumption has risen from 18 in 1973 to 50 in 2000.
The current absence of any real oil
substitute biofuels, natural gas, principally in the transport sector, would make any
prolonged oil crisis critical. Europes economy must learn to live with oil prices above USD 20. C. Natural gas and renewable energy sources seductive alternatives
1. Natural gas towards new dependence
E u ro p e - 3 0 n a tu r a l g a s re fe re n c e c a se in m to e
8 0 0
7 0 0
6 0 0
5 0 0
4 0 0
3 0 0
2 0 0
1 0 0
0
1 9 9 0
c o n su m p tio n
n e t im p o rts
p ro d u c tio n
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
a
Expansion of natural gas
Natural gas, which was discovered at the beginning of the 1950s, took decades to earn its
spurs in the energy sector. Once considered to be a second-rate energy product by-product of
the exploitation of oil, it has now become a multi-faceted source of energy. Easy to use, with
its own distribution network,
it has since gained a footing in all sectors of energy
consumption, be it power 24 of the gas consumed, including combined heat and power,
the production of heat or, more recently, transport. Some 70 of natural gas is currently
consumed in the industrial sector 26 and residential sector 30, but the sector for
expansion is in the generation of electricity where it accounts for 15 of production. Some countries are seeing a rapid rise in the percentage of natural gas used to produce
electricity. This will have to increase quickly to provide part replacement of coal in the
production of electricity. By the end of the decade, thermal power stations operating on
natural gas should account for about two-thirds of the increase in demand investment in
trends,
mixed power stations and combined cycle gas turbines. Extrapolating market
43
expectations in 2020-2030 are that almost half of electricity will be produced by natural gas
40, i.e. 45 of the natural gas consumed. b
International gas market
While natural gas now seems to be a product for energy diversification that is essential to
providing a healthy energy consumption balance, its rapid growth on some markets, such as
electricity, households and the production of heat, could give rise to a fresh structural
weakness in the European Union. By 2010 demand could increase by 85 millions toe to
410 million toe. Among the applicant countries from Eastern Europe the demand for gas
could increase by 40 to 80 million toe in 2010. The natural gas market has little in common with the oil market apart from being indexed on
the price of oil. Its frequent geological proximity has placed it right away in the hands of oil
companies, which explains the index-linking. The economic reason for this index-linking is
due to the competition that gas will provide for oil.38 While this index-linking was presented
at the time that natural gas was making a breakthrough on the markets as a means of gradually
introducing this product, this mechanism now no longer has any economic justification and
should ultimately be replaced by a price based on supply and demand for gas. This cannot
happen until a genuinely integrated internal gas market is established which is not restricted to
the liberalisation of national markets. While there is no danger in the medium term of cartels forming on the international natural
gas market among such widely differing producer countries, it has to be observed that the
natural gas market is rigid. The combination of price indexing, supplies under long-term take
or pay contracts and imports into Europe primarily through gas pipelines makes the gas
market into an regional market characterised by reduced competition between exporters, of
which the principal ones are Russia, Norway and Algeria, and tomorrow no doubt Iran and
Turkmenistan. With regard to the major reserves located in Russia one-third of world
reserves, a certain increase in dependence on that country appears inevitable. It should be
noted in this connection that the continuity of supplies from the former Soviet Union, and
then Russia, over the last 25 years is testimony to an exemplary stability.
A long term
strategy in the framework of a partnership with Russia would be an important step to the
benefit of supply security. 38
Index-linking is based on a netback calculation mechanism from the price of oil products competing
on the same markets, which gas companies call the market volume approach, as passed on to the
import price at the frontier. 44
EUR15 - Natural gas imp orts from th ird coun tries
1999
5
25
Ex- URSS
Algér ie
41
Norvège
Autres
29
Major changes on the international gas market have to be expected in the future. Some experts
are predicting rises in the price of natural gas of close to 20 by 2010. Under the joint effect
of an emerging spot market in the European Union through the completion of the internal
market and demand-side pressure compounded in particular by concern for global warming,
changes can be expected to pricing rules i.e. end to index-inking of gas prices on oil prices,
either in the standard manner of a competitive market reflecting production costs or through
the formation of a gas cartel.
This rate of dependence should
increase under the effect of enlargement and pressure of consumption to over 60. 45
While gas supplies diversity may seem relatively limited both within and outside the
Community when considering the number of producing countries, it is worth noting that, in
1996, it took no less than 33 individual gas companies to produce around 94 of total West
European production from a very large number of fields. The three largest of these alone
produce between 10 and 15. Moreover, imports of gas from other geographical areas,
including LNG imports, are likely to increase in future. This illustrates the potential for
supply-side competition within as well as outside the EU. The construction of new import routes by pipeline or LNG currently being studied Iran,
Qatar39 will help to increase the geographical diversification of gas supply and to maintain a
buyers market. That said, the high cost will not go unmarked on the price paid by the
consumer or on the increased risk in respect of transit countries. In the long run, the supply of gas in Europe risks creating a new situation of dependence, all
the more so given the less intensive consumption of carbon. Greater consumption of gas could
be followed by an upward trend in prices and undermine the European Unions security of
supply. As long as the European Unions external supply of gas depends on 41 of imports
from Russia and almost 30 from Algeria, geographical diversification of our supplies would
appear desirable, particularly in LNG. By comparison, Europes oil and coal supply is more
diversified.
The development of a long term energy partnership with key suppliers such as
Russia is therefore essential. 39
Qatar has three times as many known reserves as Algeria and Norway. 46
2. New and renewable sources of energy a political priority
E u r o p e - 3 0
r e n e w a b l e s r e f e r e n c e c a s e
i n m t o e
2 0 0
1 7 5
1 5 0
1 2 5
1 0 0
7 5
5 0
2 5
0
1 9 9 0
p r o d u c t io n
c o n s u m p t io n
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
Renewable sources of energy have considerable potential40 for increasing security of supply
in Europe. Developing their use, however, will depend on extremely substantial political and
economic efforts. These efforts will only succeed if they are accompanied by a real policy of
demand geared to rationalising and stabilising energy consumption. In the medium term,
renewables are the only source of energy in which the European Union has a certain amount
of room for manoeuvre aimed at increasing supply in the current circumstances. We cannot
afford to neglect this form of energy. a
A potential to be exploited
Renewable energy sources renewables currently account for almost 6 of Europes supply,
including 2 just for hydroelectricity. The target of doubling the share of renewables in the
production of electricity, which has been regularly set since 1985, has not been achieved.41
The Member States have to consider this target as one of theirs and set their national targets in
tandem with the Unions. This is still not the case in all Member States and progress needs to
be made along these lines. including hydroelectric power. This small global
Between 1985 and 1998 the increase in energy production from renewables was significant in
relative terms 30, but still fairly insignificant in absolute terms from 65 to 85 million toe
foothold masks shares that vary
-
appreciably from one country to another. There are four countries that use renewables to a
significant extent, Portugal 15.7, Finland 21.8, Austria 23.3 and Sweden 28.5
drawing on their forestry and water potential. Renewable energys share of global consumption is closely linked to consumption trends and
energy-saving. The progress made in the renewables sector is offset by the increase in
consumption. It has stagnated at around 6 of global consumption despite consistent annual
growth in the sector of 3 and spectacular growth of more than 2000 in the wind energy
sector in ten years. It has to be said that supply-side efforts will only succeed if they are
accompanied by policies to rationalise the demand for energy. 40
41
See Part I B.
OJ C 241, 25.09.1986. 47
In the years ahead, renewables share in energy consumption will have to increase in absolute
terms. Their proportion in relative terms in the energy balance will depend largely on being
connected to the electricity network and being competitive in decentralised production. The Commission has set the target of doubling the share of renewables in global energy
consumption from 6 in 1997 to 12 in 2010. This increase should provide a new incentive
for SMEs and will also have beneficial effects on employment and will make for European
technologies that can be exported to developing countries. Member States therefore have to adopt national objectives that are aligned with the proposal
for a directive on electricity generated from renewable sources. b
Differing levels of growth potential
The target of doubling the share of renewables forms part of a strategy of security of supply
and sustainable development. It needs a major effort, however. The investment needed to
achieve this target has been estimated by the Commission at
165 billion between 1997 and
2010. A particularly big effort will have to be made in the electricity sector to achieve the
target set out in the proposal for a directive on electricity produced from renewable sources of
24 of green electricity in 2010 as compared with 12 now. This target will be all the more difficult to achieve in that for hydroelectricity, which
accounts for one-third of renewable energy sources at the present time, the possibilities of
expansion are practically nil, the development of new useable sites meeting with strong local
resistance. Small-scale hydropower is the only sector with any prospect. Consequently, the
other forms of renewables biomass, wind energy, solar power, geothermal will have to
provide almost all the growth needed. What really needs to be achieved is a four-fold increase
in proportionate share rather than a doubling. Biomass, for its part, could significantly reinforce sustainable security of supply. Biomass is
a widespread and versatile resource that can be used just as easily for heating as for
electricity. Bio-energy sources of supply include agricultural and forest residues and waste
streams from new energy crops. The enormous potential of forest and agricultural residues
has so far not been exploited. Despite their high production costs, it is important to ensure the continuing and growing
presence of biofuels and other alternative fuels in the fuel market. Biofuels can be divided
primarily into biodiesels 70 to 80 coming from organic oils and sunflower, etc. and
alcohols coming from beetroot, wheat, sorghum, etc. Numerous production options are
available, preference being given to high-yield crops with low intermediate input and no
effect on biodiversity. Biodiesel could be used without any major technical problems to
replace normal diesel. As for alcohols, these can be mixed with conventional petrol up to a
level of around 15 without any technical modifications having to be made to the vehicle
fleet. In terms of environmental impact, biofuels are very attractive, emitting between 40 and 80
less in the way of greenhouse gases than other fossil fuels. They also give off less particulate
and carbon monoxide and hydroxide. Biofuels will also help to create jobs in rural areas and
thus preserve the rural fabric by providing agriculture with new outlets. In this respect, care
needs to be taken to ensure that bio-fuels for not lead to a continuation of highly intensified
In the longer term, the possibilities for other renewable
forms of agricultural production.
sources of fuels, such as hydrogen, need to be exploited. 48
The proportionate share of biofuels in the European Union is still small, amounting to 0.15,
of the total consumption of mineral oils as fuel in 1998. The principal obstacle to their use is
the price differential with fossil fuel which currently varies from 1.5 biodiesel to 4 for
products before tax. As part of the target of doubling the share of renewable energy sources
by 2010, the Commission put the contribution of bioenergy in its 1997 White Paper42 on
renewable sources of energy at 7 of total consumption by 2010. It was stressed, however,
that an increase of this kind in the role played by biofuels could only really be achieved if the
following conditions were met
- Member States should make a firm commitment to achieving the ambitious and
realistic objective of the White Paper for 2010, namely, 7 of biofuels and a target of
20 for 2020 for all fuel substitutes
- The gap between the prices of biofuels and competing products should be reduced by
measures which, initially, could be of a fiscal nature
- Oil companies should undertake to organise large-scale distribution by way of
voluntary agreements rather than Community regulations. - Research in this sector should be intensified, with a view, notably, to explore new
solutions linked to the utilisation of alternative energy sources, such as hydrogen which,
together with methanol, is the fuel used in fuel cells and which can be produced from
several sources of primary energy, including renewable sources. Efforts should also focus on electricity power from wind energy,
hydropower projects under 10 MW, which have so far not been taken into account. including small-scale
To date renewable sources have been promoted in a number of programmes of varying
importance at national and Community level. As indispensable as it is, this approach is not
enough and may be backed up by a package of support for research and aid for the
investment, operating and use of these energy sources in accordance with Articles 87 and 88
of the Treaty on European Union. In proposing the directive on renewable sources of energy,
the Commission has set out the framework within which electricity produced from certain
renewable sources of energy, in particular wind energy, could in time become competitive
with conventional sources. This approach will be backed within the limits authorised in the
prevailing Community regulatory context by a new proposal on energy-saving in buildings,
which will make for far more decentralised promotion of other sources of energy solar,
biomass since resources in this area have to be seen at local level. c
Obstacles to the development of renewables
Regardless of the type of renewable source of energy, it has to be borne in mind that there are
first the type of all obstacles of a structural nature to its development. The economic and
social system is based on centralised development around conventional sources of energy
coal, oil, natural gas and nuclear and above all around the generation of electricity. However the most important problem is financial. We have to be aware that some renewables
need significant initial investment, as was the case for that matter with other energy sources,
such as coal, oil and nuclear energy. One possible way of financing renewables could be to
subject the most profitable sources of energy - nuclear, oil and gas - to a contribution
42
Document COM97 599 of 26 November 1997
49
towards the development of renewable energy sources. An example of this might be a
parafiscal tax to finance a regional or national fund for the necessary start-up investment. Also, before they can achieve a profitability threshold, several renewable sources may need
aid for relatively long periods.
This type of aid has already been put in place in some Member
States, either through fixed prices for renewable energy sources, or through the obligation to
purchase green certificates, or else through invitations to tender for a certain capacity. Finally, and this is a problem to be solved under the umbrella of subsidiarity, national,
regional and local regulations need to be adapted for land planning and use so as to give clear
priority to the installation of generation plants for electricity from renewable energy sources. It is somewhat paradoxical that, when nuclear first began to be developed, the public was not
able to oppose the installation of a nuclear reactor but
the
development of installations for renewables. It also has to be stressed that administrative and
environmental obstacles are now much bigger than when conventional sources of energy were
being developed and these are reflected by additional investment costs. it can now obstruct
that
Several trends are emerging in different areas. Whereas renewables were associated in the
past with a decentralised form of energy of limited production, wind parks, some offshore, are
now being developed. This helps to integrate renewables into centralised production and
consumption on a large scale. Short of a technological breakthrough the position of renewable energy sources on the market
could be improved by high oil prices or through inclusion of the price of emission
certificates in the investment cost of conventional sources of energy. However, the renewable energy market in the European Union cannot be expected to develop
regularly without a voluntarist policy in the medium term on the part of the public authorities. This policy could fall within a raft of decisions stretching from drastic fiscal measures in
favour of renewable energy sources or the obligation on the part of electricity producers and
distributors to purchase a minimum percentage of electricity produced from renewable
sources of energy through to aid to research or to financing mechanisms interest subsidies,
guarantee funds, parafiscal tax on other sources of energy. Certain renewables should benefit
from aid in the framework of Community competition rules, in order to help them to reach
comparable markets to those for conventional fuels. For renewable sources of energy to take off wind energy, in particular financial or fiscal
incentives are needed.
The target of 20 substitute fuels by 2020 will probably remain a
dead letter, without favourable fiscal measures, regulations for their distribution by oil
companies and voluntary agreements with industry. It is unfortunate that at Community level
there is no harmonisation on taxation in favour of biofuels, particularly as the Commission
put forward a proposal to that effect in 1992 and, on the contrary, efforts made along these
lines within certain programmes have been called into question for legal reasons. Conclusion No one sector can meet
the energy requirements of the present or an enlarged
European Union. Relations between the various energy sources are changing radically
diverging specialisation between oil and coal and complementarity between coal and nuclear
energy, for example. Gas is in competition with all energy products on all markets. The pressure on global demand for natural gas, the export capacities of producer countries
Algeria, Russia, Norway, Netherlands as well as new producers such as countries in the
Middle East, the gradual exhaustion of hydrocarbon reserves, the relative upward trend in
the difficulties encountered in implementing nuclear programmes, and the
prices,
environmental challenge of using coal are all factors that influence the European Unions
conditions of supply. 50
Current energy demand is covered by 41 oil, 22 gas, 16 coal hard coal, lignite and
If nothing is done, the total energy picture in 2030
peat, 15 nuclear and 6 renewables.
will continue to be dominated by fossil fuels 38 oil, 29 gas, 19 solid fuels, and 8
renewables and barely 6 nuclear. The European Union lacks the necessary powers to act on supply conditions to ensure the best
possible management of security of supply. Although room for manoeuvre is limited, two
avenues can be explored. First of all, if only because it is an attractive market, the European Union can negotiate a
strategic partnership with its supplier countries in order to improve security of supply. It has
begun to do this with the Russian Federation by offering it aid to improve its transport
networks and develop new technologies within a political framework that could stabilise
supply and guarantee investment. Secondly, the European Union must focus particular attention on generating financial aid for
renewable sources of energy which, in the very long term, are the most promising in terms of
diversification of supplies. Nonetheless, the European Union will only reduce its external energy dependence through a
determined policy of demand management. This policy of demand management is all the more necessary in that it is the only way of
meeting the challenge of climate change. 51
PART TWO A NEW REFERENCE FRAMEWORK FOR ENERGY
the future of Europes energy supply, especially options
Any consideration of
for
diversification, has to include two new factors that have recently emerged. The first is climate
change. Whatever the scale of this phenomenon, it is a fact and it poses a threat to harmonious
world development. It has to be said that, even though the European Union has subscribed to
the Kyoto commitments, it has not yet given itself effective means of combating the effects of
imate change. A proactive policy in favour of sustainable development Article 6 of the EU
Treaty would simultaneously reinforce security of supply and action to tackle climate
change. The second factor is the establishment of a progressively integrated energy market. It is in the
light of this that measures have to be adopted to offset the challenge of climate change at
European level. By establishing this energy market, national options or company strategies
will have an effect that goes beyond the national level.
I. THE CHALLENGE OF CLIMATE CHANGE
Today, security of supply on Europes energy market must take account of the imperative to
combat climate change and pursue sustainable development Articles 2 and 6 of the Treaty. The European Union will not be able to meet the commitments given at Kyoto unless
significant measures are taken to reduce demand. The measures will have to be in tune with
the concern to reduce dependence on imported energy supplies. Taxation, state aid and demand policy are ill-suited to providing answers to these questions.
A. New issues
In recent years the statistical and scientific evidence has shown that the climate is being
disrupted by the build-up of greenhouse gases as a result of our pattern of development. 1. Combating climate change an urgent need
According to the Intergovernmental Panel on Climate Change, since 1990 global warming has
been speeding up. The earth has warmed up by an average of 0.3 to 0.6C. As a result, the
oceans have risen by between 10 and 25 cm. In the space of half a century the ice cap has
become an average of 40 thinner.
The successive temperature records provide firm evidence
that global warming has intensified over the last 25 years. The causes anthropogenic emissions
Global warming is the result of intensification of a natural phenomenon essential to the
survival of the planet the greenhouse effect. Greenhouse gases retain some of the heat from
the sun as it is reflected back off the earth, thereby keeping the average ground temperature at
15C, instead of the -18C which would prevail without them.
52
Since the first industrial revolution, however, the concentration of greenhouse gases43 in the
atmosphere has increased substantially while the natural capacity to absorb them has been
declining. The concentration of CO2 - the gas primarily responsible for the greenhouse effect -
has risen by 30 since 1750.44
Some 94 of man-made CO2 emissions in Europe are attributable to the energy sector as a
whole. Fossil fuels are the prime culprits. In absolute terms, oil consumption on its own accounts for
50 of CO2 emissions in the European Union, natural gas for 22 and coal for 28. In terms
of consumer sectors, electricity generation and steam raising are responsible for 37 of CO2
emissions, transport for 28, households for 14, industry for 16 and the services sector
for 5. Some 90 of the projected growth in CO2 emissions will be from the transport sector. By way of illustration, every year an average car pumps out four times its own mass in
CO2. In other sectors the figures are probably lower than in 1990. The dependence of the transport sector on fossil energy - and the fact that roads bear the most
responsibility for the growth in mobility demand - results in emissions of greenhouse gases
which are a by-product of burning fossil fuels. During the last decade, these gases, and in
particular CO2, were recognised as a serious threat for future generations. They produce a
warming of the atmosphere which translates into an increasingly serious climate change. Even
if the impact of the EU, with 14 of the world CO2 emissions, remains limited, the EU has to
set an example in this field by implementing a strong policy aimed at significantly reducing
the production of these gases. Assuming its global responsibility, the EU committed itself in
Kyoto to reducing between now and 2008-2012,
its greenhouse gas emissions by 8
compared to 1990. The energy consumption of transport represented in 1998 28 of the CO2 emissions, the
principal greenhouse gas. According to the last estimates, if nothing is undertaken to reverse
the growth trend, CO2 emissions due to transport would increase by approximately 50
between 1990 and 2010 reaching 1113 million tonnes of emissions, compared with 739
million in 1990.
Once again, road transport is the principal cause as it alone accounts for 84
of CO2 emissions ascribable to transport. Air transport represents 13. It is well known that
the combustion engine is lagging behind in terms of energy efficiency, in particular because
only a part of the fuel used serves to drive the vehicle45. Reducing oil dependence - and improving energy efficiency in transport - constitutes an
environmental necessity and a technological challenge. In this context, the Community wishes
to put emphasis on a series of measures with a view, notably, to reducing emissions of CO2
from private and business cars and their fuel consumption.
b. The consequences a succession of natural disasters
Although scientists agree on the cause of this speeding-up of global warming, the scale of the
phenomenon and the severity of the consequences are still being debated. 43
44
45
Six greenhouse gases are generated by human activity carbon dioxide CO2 which is the biggest
contributor 80, nitrous oxide N20, methane CH4, hydrofluorocarbons HFCs, perfluorocarbons
PFC and sulphur hexafluoride SF6. Intergovernment Panel on Climate Change, 1995. A study by the French transport Ministry shows that the energy efficiency of a private car in km per
kilo of oil equivalent is half that of the underground train.
The efficiency of a thermal car motor is in
the order of 17 Pour la Science, Jan 1998. 53
Raging fires, torrential rain, long heatwaves and thinning of the ice cap are all cited as
consequences of the build-up of greenhouse gases. According to the Intergovernmental Panel
on Climate Change, although these phenomena are not particularly surprising in themselves,
the growing numbers and frequency of such events are giving cause for concern. The worst is yet to come but remains unknown. The Panel estimates that if nothing is done the
average temperature on earth could rise by a further 1 to 3.5C by 2100. This would raise sea
levels by between 15 and 95 cm. Coastal areas, but also entire islands and archipelagos, could
be wiped off the map as the ice melts and oceans swell. The consequences could be
catastrophic since they combine with other aggravating factors linked to economic activities
as a whole and land use. Droughts and floods alike are expected to be more severe and more
frequent, shaking the foundations of agriculture.
2. A major challenge meeting international commitments
To stabilise the CO2 concentration at the current level, emissions would have to be cut by 50
to 70 immediately. Simply to soften the expected impact, action would have to be taken
immediately. For example, to keep the temperature increase by 2050 down to around 1.5C
and to contain the rise in sea levels to 2 cm every ten years, estimates suggest that the
industrialised countries would have to cut their emissions by at least 35 between 1990 and
2010.46 If it is impossible to stop the phenomenon, it must be slowed down. The longer
we wait, the more drastic the measures taken will have to be. Although transport accounts for only 28 of total CO2 emissions, it will be the main reason
for the European Union failing to meet the commitments given at Kyoto unless radical
changes are made rapidly. In particular, 90 of the expected increase in CO2 between 1990 and 2010 will be attributable
to the transport sector. Road transport is particularly to blame, since it generates 85 of CO2
emissions from the transport sector. The fact that an average lorry generates six times more
CO2 per tonnekm than a train puts into perspective the full significance of Community action
to rebalance the modal split. This is why it is time to be blunt about the position of road transport for goods haulage and
the position of private cars in cities. The Commissions forthcoming White Paper on the future development of the common
transport policy will stress the urgent need for specific measures in this field.
a. The Kyoto commitments a historic turning point
The campaign against climate change led to agreement on a package of objectives at the Earth
Summit held in Rio in 1992 under the auspices of the United Nations. The resultant
Convention was followed by a Protocol signed in Kyoto in 1997 containing more detailed
commitments which, once ratified, will be more binding on the industrialised countries. The European Union has given an initial commitment to stabilise its CO2 emissions at 1990
levels in 2000 and then to reduce its overall greenhouse gas emissions over the period from
2008 to 2012 by 8 compared with 1990 levels, equivalent to a 346 million tonne reduction
in CO2. Under a burden-sharing agreement concluded within the European Union, Germany is
46
Environment at the turn of the century, European Environment Agency, 1999. 54
committed to a 21 cut and the United Kingdom to 12.5, while France and Finland must
stabilise their emissions.
b. A difficult commitment to fulfil
E u ro p e - 3 0 e n e rg y r e la te d C O 2 e m is s io n s
1 9 9 0 1 0 0
1 4 0
1 3 0
1 2 0
1 1 0
1 0 0
9 0
1 9 9 0
n u c le a r p h a se - o u t
re f e re n c e
h igh p ric e s
2 0 0 0
2 0 1 0
2 0 2 0
2 0 3 0
At the meeting held in The Hague in November 2000, the discussions on how to apply the
provisions in the Kyoto Protocol on reducing greenhouse gases was postponed until Spring
2000. Before the agreement can enter into force, it must be ratified by 2002 by at least
55 countries accounting for 55 of total emissions from the industrialised countries. The
European Union is doing all it can to ensure that the Kyoto Protocol enters into force in 2002. Since 1990 greenhouse gas emissions have continued to rise relentlessly in most industrialised
countries. Europe has succeeded in stabilising its CO2 emissions in 2000 at the 1990 level. However, this has been due largely to cyclical factors such as the economic slowdown in the
wake of the 1991 Gulf crisis, combined with industrial restructuring in the United Kingdom
and the new German Länder. According to the European Environment Agencys projections,47
total emissions of
greenhouse gases by the Union of 15 Member States are expected to increase by at least 5.2
between 1990 and 2010, if no action is taken. The applicant countries in turn have appreciable
room for manoeuvre compared with 1990 as a result of the economic recession which
followed the collapse of the iron curtain. Total emissions by the applicant countries are set to decline by 11 but must be expected to
catch up rapidly as a result of strong economic growth in the future around 4 per year on
average. During the transition period emission permits might be exchanged between the
Member States and the applicant countries. Europe contributes only 14 to total annual world-wide CO2 emissions, far behind Asia
25 and North America 29. The Kyoto Protocol can only be a first step towards
47
Environment at the turn of the century, European Environment Agency, 1999. 55
reducing greenhouse gas emissions. Greater long term objectives are necessary and will
contribute towards the future energy policy framework and sustainable development in the
European Union. It is therefore up to the European Union to devise the whole gamut of
technologies for the saving of energy and renewable energy as well as more generally a
sustainable model of energy use and production. An ambitious policy to tackle climate change should not endanger economic development. Such a policy should serve to promote innovation and structural changes and lead to more
efficient production systems and improved European competitivity. The decisive moves on climate change will be made above all outside Europe. It is therefore
up to the European Union to devise appropriate technical solutions48 and to invent a new
exportable development model which allows for the application of flexible mechanisms, such
as a clean development model. The priority objectives of the political measures must be to reduce consumption and to
increase the share taken by less carbon-intensive energy products, particularly in road
transport and buildings. In this context developing countries should be encouraged to their
energy policies to less carbon-intensive energy products, especially new and renewable forms
of energy. The Union could back up the domestic efforts of non-EU countries, with priority
for countries experiencing rapid economic growth Latin America in particular, by a policy
of investment in clean, advanced technologies. Action to tackle climate change reinforces
security of energy supply. Conclusion Compliance with the Kyoto commitments and control of greenhouse gas emissions in
general are essentially a matter of energy and transport policy. Without drastic measures in
both these sectors, climate change can only be effectively countered if the European Union
makes a firm commitment, as this Green Paper recommends, to undertake concrete measures
notably fiscal and regulatory geared to energy-saving and the promotion of renewable
energy sources in buildings, for example. These measures are all the more necessary in that
the new energy market in Europe is rather demand-driven. B. Inappropriate answers
The challenge of climate change has not been backed by a reform of taxation and State aid for
energy products to meet the new trends. Nor has it been translated into ambitious plans for
demand, particularly energy-saving.
1. Fiscal disorder
Energy products make up most of the tax revenue in the Member States. Although these
products are heavily taxed the tax itself various from product to product and from Member
State to Member State. Despite major disparities between the Member States, taxation, particularly in terms of
excise duty, can be an effective tool in energy policy. The aims of this kind of policy, like
the internalisation of costs linked to degradation of the environment or application of the
polluter pays principle, can be effectively attained by tax incentives. Given the rigidity of
48
Technological hopes exist but are difficult and costly to implement, such as underground burial of CO2,
the development of new energy-generating technologies producing no carbon dioxide, or production of
carbon sinks by means of reforestation or development of marine plankton, etc. 56
demand compared with prices, the level of taxation has to be high enough for a coherent price
signal to be given over long periods and for the fiscal measure to be accompanied by simple
methods of implementation, possibly progressive, accessible to all parties concerned and
inexpensive at administrative level. A more harmonised Community framework of taxation on energy products is needed to
prevent distortion of competition.
a. Fiscal disparities
- General trends
Since 1980, tax revenue from duty on energy and transport has increased slightly from 5.7
to 6.5 of the total tax revenue and social security contributions between 1980 and 1997. This trend is in line with the green tax reforms introducing new taxes reducing the levies
applicable to employment. There are major disparities between the Member States. The causes of the different levels of
taxation are very complex. They point to tax approaches accentuating either a main objective
of generating budget revenue, economic policies to develop sectoral competitive advantages
or even environmental, social and regional considerations. There is nonetheless one constant most of the revenue drawn from energy taxation is from
mineral oils. Accordingly, tax accounts on average for 69 of the price of diesel and 75 of
the price of petrol. Revenue from energy and transport taxes as a percentage of total tax revenue and social
security contributions 1997
Energy
Transport
Total taxes for
energy production
Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
RU
EU 15
1,9
4,3
1.0
1.1
0.6
0.5
3.9
1.1
0.3
3.3
1.5
2.5
2.2
0.7
1.6
1.3
3.5
4.5
4.4
8.1
5.3
4.3
4.9
7.2
7.2
4.4
3.7
7.2
4.8
5.2
6.3
5.2
57
5,4
8,8
5.4
9.2
5.9
4.8
8.8
8.3
7.5
7.7
5.2
9.7
7.0
5.9
7.9
6.5
- The principles of taxation on energy products the source of fiscal disparities
The end price of energy products comprises three types of tax VAT value added duty
proportional to the selling price of the product, excise duties specific duties proportional to
the physical quantity of the product and dedicated taxes and duties. Excise duty on mineral oils and VAT are covered by a Community system of taxation. However, there is no Community framework for other energy products or other taxes. - Excise duty
The approach taken to determine excise duty rates differs from one Member State to another. the
Their nature also varies considerably. Some Member States Denmark, Finland,
Netherlands and Sweden have CO2 taxes, others do not. Some impose taxes on nuclear
energy Sweden or to support national industries coal in Spain. As regards excise duty on mineral oils, the Member States decided unanimously in 1992 to
introduce a minimum Community rate as a function of the use of each mineral oil fuel,
industrial and commercial use, heating. In practice excise duty often exceeds the minimum
rates, which have not been adjusted since 1992. Rates differ enormously from one Member
State to another. 58
Duties on lead-free petrol
l
0
0
0
1
o
r
u
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800
700
600
500
400
300
200
100
0
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e
d
n
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g
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u
o
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m
e
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e
n
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l
a
g
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o
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e
r
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i
i
m
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m
e
s
c
c
A
i
Also, several special arrangements allow Member States to waive or reduce excise duty on oil
products. Several exemptions or reductions are expressly provided for by Community
legislation. A good example is the total exemption from excise duty on fuel used for
commercial air services and commercial navigation in Community waters.
Community legislation also allows Member States to ask the European Commission for
exemptions or reductions other than those expressly provided for by Community legislation. - VAT
In terms of VAT the 6th Directive provides that all energy products except natural gas should
be subject to a standard minimum rate of 15. Only gas and electricity can qualify for a
reduced rate. Reduced rates on other products, which existed in 1991 can nonetheless be
maintained in the form of transitional measures. The real situation is therefore very complex,
as is borne out by VAT on electricity, which varies between 5 in Denmark and 25 in
Sweden. 59
VAT rates in the Member States - 2000
products and services as
Country
VAT - standard
rate
Passenger
transport
Natural gas Electricity
10
6
exempt
8
5.5
16 - 7
8
20
21
25
25
20
21
25
25
19.6
19.6
16
8
16
8
exempt
12,5
12,5
10
3 - 0
6
5
16-7
12
0
10
6
10
6
17.5
17.5
17
16
25
5
5
16
25
5
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
20
21
25
25
19.6
16
18
21
20
15
Netherlands
17.5
Portugal
Spain
Sweden
UK
17
16
25
17.5
- Other tax revenue
For other taxes and duties on energy the Member States have developed numerous tools,
which differ in area of application, methods of calculation and rates, to the detriment of the
unity of the internal market. The level of taxation applied to energy products differs appreciably from one Member State to
245 per
another, oil products being a point in question. Excise duty on diesel varies from
1000 litres in Portugal to
777 per 1000 litres in the United Kingdom, the Community
245. It can therefore be said that the total tax burden for fuel amounts to 50
minimum being
to 60 in countries with lower taxes Greece, Luxembourg, Portugal and Spain while it is as
high as 75 in the United Kingdom. As regards the applicant countries, all have introduced excise duty on petrol leaded and
unleaded and on diesel. Rates in these countries are generally lower than in the Member
States. Duty on other motor fuels LPG and kerosene and heavy and light fuels has been
introduced in a few of these countries. Applicant countries have to increase the rates or
60
introduce excise duty on accession, even though that may cause a certain amount of economic
and social tension.
Apart from Lithuania, which applies an value added tax on electricity, Central and Eastern
European countries have not introduced taxes on natural gas, electricity or coal. Excise duty rates in applicant countries
beginning of 2000
Leaded petrol
Unleaded petrol
Diesel
Light petroleum Heavy petroleum
EUR 1000 l
EUR 1000 l
EUR 1000 l
EUR 1000 l
EURton
Bulgaria
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Romania
Slovakia
Slovenia incl.CO2 tax
Minimum EU rate
206
294
192
0
224
0
288
232
0
384
337
188
294
192
343
190
208
266
225
223
324
287
47
221
127
296
178
111
196
116
173
330
245
6.3
221
14
296
18
0
24
0
0
11.3
0
0
0
3.2
4.7
24.1
0
0
25.8 66.2
15.5 63.6
18
13
2. Incompatibility of taxation with the needs of society
- The tax hierarchy
The principle of fiscal neutrality avoids distortion in the choice of factors of production and in
consumer choice. The latter point is of particular relevance to the energy sector. Taxes on energy products in the Member States often follow the same hierarchy between
products. Coal and natural gas are the least taxed and oil the most heavily taxed. Taxes are
spent on renewable sources and coal benefits from State aid in the coal-producing countries. Coal is relatively lightly taxed, except in the northern EU States. The tax rates vary from zero
in ten Member States to as much as 60 for industrial uses49 in Finland. Although it is
49
The figures available are not very detailed. 61
perfectly logical to relieve coal of any tax burden while it is receiving substantial state aid, the
result is to promote imported coal to the detriment of alternative but more heavily taxed
energy sources such as natural gas and oil. Natural gas is generally more heavily taxed than coal, but apart from in Denmark, Austria,
Italy and Sweden, the rates are still low. They range from 5 VAT in the United Kingdom
to around 50 for domestic users in Italy and Denmark. For industrial uses and for electricity
generation the range is from zero to 15.50
Renewable energy sources currently benefit from tax exemptions or reductions, but not
equally across the Member States.
The lack of harmonisation in the European Union sends an
inconsistent message conflicting with the security of supply objectives. Some renewable
energy sources should be given favourable tax treatment. Some energy production from
renewable sources is already exempt from all taxes, such as solar heat and power for domestic
use. Another segment, including wind power, hydroelectricity, electricity from biomass and
biofuels, is sold on the market and can be taxed. In the case of biofuels, for example, excise
duties are applied to a selling price which is already three times higher than the cost of
European fuels, inevitably dooming biofuels to marginalisation on the market. However, the
current Community legislation allows no exemption for biofuels, apart from in pilot projects. It should nonetheless be noted that measures have already been taken to promote renewable
energy sources. Measures in favour of fuel substitutes, for example, have been adopted to help
natural gas and LPG to gain a foothold. In the longer term, the proposal for a directive on
energy products will allow tax exemptions for hydrogen and biofuels. - Effect of fiscal disparities
An example will illustrate the inconsistency in the transport and energy taxes. On the same
600 km route between a capital city and a regional centre, airlines compete against high-speed
trains, with all the congestion problems which this can cause, particularly on the routes out of
the capital. Aviation spirit used by the aeroplane is exempt of all taxes, whereas the railway
travellers, through their ticket, have to pay VAT on electricity and, in some cases, duties. - Fiscal disparities lead to paradoxes in the choice of energy sources51. For electricity generation, taxes and excise duties seem to have a neutral effect on consumer
choice. In the Netherlands, for example, coal is heavily taxed, which favours production from
other sources and electricity imports from Germany, produced from solid fuels. Similarly, the
green ticket in the United Kingdom boosted exports of electricity from nuclear power stations
in France. Some studies show that the taxes currently applied in the Member States do not always act as
an incentive for consumers because they are too low. In the case of heat generation for industrial uses, once again the tax burden is neutral as
regards the choice of fuel, except in Greece, where it tips the balance in favour of solid fuels. For domestic heating, natural gas holds such a disproportionate competitive advantage that
consumer choice is not steered by taxation, except in Spain and Ireland.
50
51
The figures the Commission has are not very clear. See tax study in Annex 2
62
As regards private cars, diesel vehicles offer tax advantages in Belgium, France, Germany,
the Netherlands and Sweden52. Given the rigidity of demand in both the short and medium
term, excise duties on fuels are not yet at a sufficient level relative to prices to steer consumer
choice. Although they have only a marginal effect on decisions, other forms of taxation such
as vehicle registration tax and road tax should be taken into account. - Lack of harmonisation in energy taxation can lead to distortion of competition between
Member States
The very different rates of excise duty in the Member States on fuel, especially diesel for
utility vehicles, are a classic example. Frontier trade in these products is greatly affected by
the different rates of tax. Similarly, increases in fuel prices, even when made in a general
context of energy tax stability, have resulted in disorganised reactions among the Member
States, often based on reductions in energy and transport taxes designed to support the road
transport sector in particular. Sometimes losing sight of the need for restructuring in this
sector,
tax initiatives taken by the Member states merely exacerbate the distortion of
competition that already exists in the Community. As for oil, as stressed at the ECOFIN Council in Versailles September 2000, attempts to
offset rises in oil prices by lowering taxation should be discouraged. Given the massive proportion of tax in the price paid by consumers, a fairly widespread idea,
and one taken up by OPEC, is to offset the price rises for oil products by lowering taxes. Capitulating on this front would amount to transferring tax revenue to the member countries
of OPEC and encouraging them to keep their rates artificially high since the effect of crude
increases on consumer prices would be offset by tax reductions. The current rise in fuel prices should also be seen in relative terms. During the last twenty
years prices including taxes have been at higher levels at constant rates. In France, for
example, the price paid by motorists at the pump averaged FF 6.6 in 2000, as against FF 5.9
in 1990 and FF 7.3 in 1985. In terms of cost per kilometre, this rise is further offset by
technical developments. A car in 2000 uses half as much petrol as twenty years ago. Piecemeal tax cuts are not fully compatible with European law, as mentioned above,
Community law allows Member States to apply for exemptions from or reductions in excise
duties other than those expressly permitted. The number of such applications has multiplied. Several Member States have recently announced reductions in excise duty on diesel fuel for
road haulage. The Commission has proposed to the Council
the number of these
exemptions be reduced and limited over time. that
- The lack of harmonisation in energy taxation can also lead to excess tax competition. A
Member State wishing to introduce a tax on an energy product could be prevented from doing
so if this product is not taxed in a comparable way in a neighbouring country, for fear of
delocalising some of its economic activities. Member States thus lose some of their decision-
making independence on tax matters. Generally, the lack of Community energy taxation structures affects the unity of the internal
market and the liberalisation of gas and electricity markets could even come under threat. It
also reduces Member States scope for carrying out the necessary tax reforms.
Similarly, it is
incompatible with certain policies with which it interacts, including with security of supply. 52 see tax study in Annex 2
63
Community regulations have numerous advantages over laws adopted in a national context,
particularly in terms of the functioning of the internal market and harmonisation of
competition within the EU. The Community is the optimum level at which to set the main
guidelines for energy, transport and environmental tax policy. The Community is also the right framework in that problems of actually implementing certain
aspects of energy or environmental protection policy are linked to state aid rules. Upward harmonisation of tax rates between Member States is therefore unavoidable. This is the essence of the Commissions proposal in its draft directive on the taxation of
energy products53, which has been before the Council of Ministers since 1997. Although it
does not introduce a new tax, the draft aims to make it possible to restructure national taxation
systems and achieve objectives in environment, transport and energy while complying with
the single market. However adoption is being blocked in the Council, in particular by Spain. It is essential that discussions be restarted to allow this directive to be adopted soon. A foreseeable adjustment would be a stabilisation mechanism for VAT revenue that could be
used in the event of significant fluctuations in oil prices. In this context, the Commission will
continue to explore the advantages of such a mechanism, taking into account the objective of
harmonising energy taxes upwards54. A first analysis shows that VAT revenue is little
affected by increases in the price of oil because of reductions in VAT revenue on other
consumption. Conclusions The fiscal disorder prevailing in the energy sector often runs counter to the objectives
of transport and environmental policy. The unanimity rule stands in the way of any real
harmonisation of taxation levels. Until such time as the European Union can obtain real
harmonisation of national taxes on energy, there are unlikely to be any Community
taxes introduced in the short term, such as the taxes on pollutant emissions or carbon
dioxide. All attempts along these lines so far have failed.
2. The opaque nature of state aids
State aid is a powerful lever for keeping the internal market working smoothly. Up until now,
however, the Commission has followed a case-by-case approach, particularly on aid for
electricity generated from renewable sources and on transitional arrangements stranded
costs provided for in the electricity Directive. At the present time no precise inventory of all the forms of aid that the Member States grant
to the different energy products exists at Community level. The Commission has already
embarked on this task in an attempt to determine whether certain sources of energy are not put
at an advantage through the aid in disregard of the objectives of energy policy or the fight
against climate change. This was indeed the case once. Today the situation is somewhat
confused, particularly in respect of distortion of competition. An inventory of state aid to
energy should indicate the merits of certain forms of aid for the future. Some sectors should
no longer benefit from aid e.g. oil, gas, and nuclear power. On the other hand, they should
collaborate to help renewable sources of energy to take off. A revision of the framework for state aids is underway with a view to helping new and
renewable sources of energy gain a foothold. Decisions are also awaited on stranded cost to
53
54
COM9730 final, OJ C 139, 6.5.1997. Commission communication of 11.10.2000 Oil supply in the European Union COM2000631 final. 64
clarify the question of transitional arrangements. This is also a key point for setting a
framework for the restructuring underway in applicant countries. The Commission will soon finalise the new framework for state aid pour the protection of the
environment. This framework includes specific provisions to facilitate the development of
renewable sources. The state aids should therefore be examined with regard to transport policy, energy policy,
security of energy supply and the need to promote renewable energy. The Commission will make a systematic inventory of state aid to see whether it ties in with
the political priorities of the EU. 3. Ineffective demand management
Energy saving took off to some extent after the oil crises, but over the last ten years it has
dropped off appreciably, improving by only 10 in ten years against 25 in the 1980s. Measures in favour of demand management have been mainly at national level, with disparate
results across the Member States. Some have opted for incentives while others have gone for
more binding measures. The challenge of climate change and preparation of The Hague
Conference have also prompted some Member States to announce more ambitious
programmes, although these have not been reflected by lower consumption in line with the
problems to be solved. The Member States have shown little inclination for developing wide-
ranging measures at Community level with binding objectives. Community action to date has been limited.
Europe has failed to continue the implementation
of the considerable efforts to improve energy efficiency which were agreed after the first oil
crises. In 1993 the European Union adopted the SAVE Directive. Under this Directive
Member States are required to develop and implement energy savings in the residential,
tertiary and industrial sectors55. In comparison to the draft proposal of the Commission that gave clear guidance on measures
to be adopted at national level, Member States insisted in the decision process on maximum
flexibility in being able to choose which measures are most appropriate to their national
circumstances. This has considerably reduced the impact of the Directive.
Moreover, eight
Member States have either failed to implement parts of the Directive or failed to report
results. As a consequence, infringement procedures were initiated in October 2000. The SAVE and ALTENER Directives were adopted in the early 1990s. These are policy-
oriented programmes which focus on non-technological measures to better exploit
the
economic potential of existing innovative practices in the energy market and energy aspects
within the transport sector. The annual budgets for 2001 and 2002 are envisaged to be
14.0
17.3 million for ALTENER.
These are very
and
modest amounts which do not amount to a real Community policy. 11.0 million for SAVE and
17.5 and
Experience with SAVE and ALTENER has shown that limited results have been obtained
with the exception of selective measures
55
Energy certification of buildings billing of heating and cooling costs according to consumption third-
party financing in the public sector thermal insulation of new buildings regular inspection of boilers
and energy audits of energy-intensive industries
65
A comprehensive strategy for improved energy efficiency for domestic appliances e.g. the technical
refrigerators, washing machines, and ovens. The preparation of
requirements for labels and standards has been done with studies supported by the SAVE
programme. Actions include the labelling Directive for appliances and the minimum
efficiency standards Directives
the
implementation of the Directives has been crucial for their success and was done by
SAVE projects such as the Cool Labels Study dealing with refrigerators. Refrigeration
appliances offered for sale today consume about 27 less energy than equivalent
appliances sold in 1992, much as a result of labelling and standards. refrigerators and boilers. Monitoring of
for
The ALTENER project AFB-NET V in Finland in the field of biomass. Biomass has a very
large potential in the renewables sector. This network has triggered extensive European
the research and development sector and energy
level co-operation among industry,
authorities. The project evaluates among other issues international biomass trade and
provides price comparisons. The experience demonstrates that labelling directives on appliances and efficiency standards
on refrigerators and boilers have proved to be very effective where properly implemented. Latest estimates56 calculate out of the huge technical potential for improved energy efficiency
estimated at 40 of current energy consumption considerable economic potential for cost-
effective improvements in energy efficiency of at least 18 of current energy consumption. This potential is equivalent to over 160 Mtoe, roughly the final energy demand of Austria,
Belgium, Denmark, Finland, Greece and the Netherlands combined. The non-realisation of
that potential is a result of market barriers which prevent the satisfactory diffusion of energy-
efficient technology and the efficient use of energy. In some sectors there are extreme
potentials the Study on European Green Light for example has shown that between 30 and
50 of electricity used for lighting could be saved by investing in the most efficient lighting
systems. Similar levels of efficiency can be achieved through more efficient energy saving
stand-by mechanisms in computers, office equipment and household TVs, video recorders
etc. The Action Plan on Improved Energy Efficiency in the European Community which was
adopted by the Commission in April 2000 proposes an indicative target for improvement of
energy intensity by an additional one percentage point per year above the estimated forecast. This can realise two-thirds of the available cost-effective saving potential by the year 2010,
equivalent to over 100 Mtoe, avoiding CO2 emissions of almost 200 Mtyear. These need to
be developed in an energy efficiency scenario
Meeting the Community-wide target of doubling the use of co-generation to 18 of EU
electricity production by 2010 is expected to lead to additional avoided CO2 emissions of
over 65 Mt CO2year by 2010. The potential for co-generation is, however, much greater and
with the right framework in the liberalised market it has been estimated that CHP could triple
by 2010 leading to an additional reduction of CO2 of around 65 Mt per year. Particularly promising developments that could contribute to the de-coupling of energy
demand from economic growth is the development of initiatives on Integrated Resource
Planning SAVE study and energy services
56
MURE model. 66
More recent work in the framework of the European Climate Change Programme57 has
confirmed these economic potential.
The interim report on Energy Consumption Working
Group has identified that, on the consumption side,
it estimated that replacing existing
equipment or when adding equipment to the stock with minimum LCC models could save
around 350 TWh of electricity in the domestic, tertiary and industrial sectors. With the exception of a number of measures taken under the SAVE and ALTENER
Directives, the European Union has regrettably failed to make more of the lessons learnt
from its support for and promotion of new technologies, in particular through its
research programmes, concerning both the dissemination of results and the introduction
of new standards to improve energy efficiency in buildings, transport, industry, etc. In future, all new available technologies clean cars, fuel sales, insulation, solar energy, etc. should benefit from Community support. This will be geared more to the demand for support
from potential users town, municipality, region than support for the supply of technology
which has existed for some time. In other words, it would be better to change tack in favour of
viability of demand which, by extension, would gradually create markets of sufficient size. These economies of scale would make these technologies cheaper. Certification and
standardisation efforts should be supported in parallel. If big conurbations encouraged the use
of hybrid electric cars, for example, and limited access to cars that pollute, this type of support
would be more effective than aid to industry.
Large-scale experiments provide proof-of-
concept showcases. Conclusion The Commission is therefore considering a clear legislative framework for the
priorities of future policies on energy efficiency and renewable energy sources demand-side
management. In its outline of energy strategy see Part Three of this Green Paper, therefore,
the Commission places the emphasis on concrete measures to reduce growth in demand. II. GRADUAL INTEGRATION OF ENERGY MARKETS
Although it has no competence in the field of energy, the Community has nevertheless been
able to adopt a number of measures resulting in the completion of the internal market, notably
in gas and electricity, with an initial effect of substantially reducing prices.58
A. The internal market in natural gas and electricity
1. Market dynamics
a
Falling prices
Just as in the case of telecommunications or financial services, the objective of creating the
internal market in energy is to make the economy more competitive. At the start of the 1990s
European industry was paying an average of 40 more for its electricity than its US rivals. The
impact on prices has already been a success many Member States have gone beyond the
requirements laid down in the Directives on electricity and natural gas59 with the result that
two-thirds of the market in electricity and 80 of the market in natural gas has been opened up. 57
58
59
COM200088 final
To date the milestones on the way to opening up the electricity and natural gas markets to competition
have been five Directives covering price transparency 1990, the transit of electricity and gas through
grids 1990 and 1991, the internal market in electricity 1996 and the internal market in natural gas
1998. Directives 9692EC and 9830EC. 67
Prices to industrial consumers have fallen by 15 on average and by up to 45 in certain
Member States, such as Germany60. b
A harmonised legal framework
Unlike the USA, Europe has a uniform legal framework for opening up the markets. This is
governed by a single directive which imposes minimum obligations on all Member States. By
contrast, in the USA there is no federal law laying down such rules, but the market is being
opened up state by state. This European framework provides for a degree of interconnection and, hence, of network
security far beyond the level existing in the USA. This helps to avoid the risk of power cuts
since the network operators can call on neighbouring operators via a co-ordination body. c
A public service tailored to the new market structures
In the case of electricity and natural gas, a number of public service aspects must be taken
into account, such as security of supply, quality of service and universal service. On this last point, Member States impose minimum conditions on network managers in the
form of public service obligations. The transmission and distribution companies have to
guarantee a network connection on reasonable terms to all citizens. Under no circumstances
could completion of the internal market override the need to guarantee a service tailored to
60
Given the profound changes in the energy markets in the European Union both due to
liberalisation of energy markets and due to environmental regulation, the costs of generation
of electricity have changed. As can be seen in Table x the cost of electricity generation is the
lowest for combined cycle gas turbines followed closely by energy generated from imported
coal. Given the current subsidies to wind energy in many Member States, their generation
costs are already fairly competitive. The generation costs of nuclear power are, however,
about 40 higher than the cheapest alternative, gas. The figures do not include the negative
environmental impact of energy generation. Production costs of electricity of different technologies
Production costs
centskWh
Generation cost
compared to gas
Coal imported
Coal domestic, with subsidies
Gas CCGT
Nuclear
Wind with subsidies
3,29
4,20
3,18
4,51
4,46
3
32
0
42
40
Source Annex 3 Notes CCGT Combined Cycle Gas Turbines. The production costs of different
Member States have been weighted by the amount of electricity produced. The costs are based on a
utilisation rate of 7000 hours per year
68
underprivileged citizens jobseekers,
remote households, disabled persons, etc.. This
universal right to be connected to the electricity grid and to be supplied at a reasonable price
must be preserved. The Directives contain a number of rules to make sure that the Member
States keep in place the means needed to achieve this. Experience has shown that the gradual completion of the internal market has brought no
deterioration in public service standards on the contrary, quality of service has improved. d
Restructuring of the market
The traditional monopoly holders in the natural gas and electricity sectors have planned ahead
for the opening-up of the markets. In response to the competition they have carried out far-
reaching restructuring. As in other sectors of the economy, this is an unavoidable consequence
of the internal market. Since 1998, mergers and acquisitions have gained pace, particularly in the electricity sector. In
the case of electricity, concentration appears natural for production and transmission activities,
which are bound by network operation constraints and which, therefore, can capitalise on
economies of scale.61 What is more, these two subsectors account for a large share of the costs
for example,
together they represent 75 of electricity generation costs in the United
Kingdom. Separation of transmission from production has emerged as a key factor in creating
the conditions for true competition and liberalisation. In the nuclear equipment-making and
nuclear
underway BNFL-Westinghouse-ABB,
Framatome-Siemens with a view to creating strong industrial clusters in Europe which will be
competitive on international markets. concentrations
sector,
also
fuel
are
It is hard to say at this juncture where this trend towards greater concentration will end. It
should allow diversification of the risks in the case of investment in new technologies and
new sectors and, hence, contribute to security of supply for the Union and maintain economic
growth.
2. a
Obstacles to be overcome
Sluggish intra-Community trade
The completion of the internal market is obstructed by the low level of intra-Community trade
in electricity, accounting as yet for only 8 of total electricity production. This level of trade
is much lower than in other sectors that have gained much from the internal market, such as
telecommunications, financial services and industrial products. The juxtaposition of fifteen
fairly liberalised national markets has not yet led to a fully integrated internal market, as the
European Council
the competition between
producers in the Community has pushed national prices down which, paradoxically, has
limited trade. Beyond progressive establishment of tariff policies and charging for the use of
grids, underdevelopment of the transmission infrastructure poses a security of supply problem. in Lisbon and Feira wished. Nevertheless,
b
Insufficient networking
Networking is of primordial importance to smooth operation of the internal energy market. The transmission system and route configuration play a central role in flexibility of supply
volume of trade and consumer choice. In the past the principal objective of interconnections was not to expand trade but to seek
greater security of supply to soften the impact of one-off incidents. The main bottlenecks are
61
Electricity Market Reform, IEA Handbook, 1999. 69
in Southern Europe, as can be seen from the total or partial isolation of the Iberian peninsula
and Greece. A lack of network infrastructure and the maintenance of the quality of supplies network
stability can slow the integration of national markets and thus limit security of supply. Stimulation of intra-Community trading in electricity depends on optimum use of the existing
interconnections between the Member States. These must continue to be the focus of study
from the angle of competition rules. It is not a financial
The construction of new infrastructures should also be encouraged. problem since the undertakings are prepared to invest in new networks in response to the
demand on the market. Generally, it is more of a political problem. Often, plans to construct
new interconnection capacity run up against constraints calling for a balance to be struck
between the public interest, whether Community or national, and local reservations about new
infrastructure. Construction of new transmission lines often raises local opposition at strategic
points, for example, around the Pyrenees or Alps, making it difficult to go ahead with the
scheme. To overcome these problems, efforts must first be made to upgrade the capacity available on
existing lines.
To smooth the way for construction of new infrastructure, consideration could
be given to a European interconnection plan identifying schemes of European interest
which would provide a means of finding ways to clear these hurdles, after consultation with
the elected representatives at national and regional level. The situation with natural gas is different, since over 50 of the natural gas consumed in the
Union already crosses at least one frontier before reaching the end-user. Over the last few
years a number of new gas pipelines have been brought into service to integrate the network,
both within the Union and with outside suppliers. However, in the short to medium term, after completion of the internal market in natural gas,
more intensive use of the network could create bottlenecks for example, in the Benelux
countries or between France and Spain as well as
interconnection and network
interoperability problems. These were previously masked by the existence of monopolies
which settled such issues
arrangements. Consequently,
identification of required new interconnections, allocation of the limited
existing capacity and setting of appropriate tariffs for funding new infrastructure will be the
objectives to be pursued in collaboration with the industry and the national regulators. themselves under
administrative
amongst
Security of supply must also be improved by stepping-up interconnection capacities with and
between the applicant countries. In the longer term, continuing liberalisation on a continental
scale - taking account of fair conditions - will also help to increase interconnections between
non-EU countries Russia, Ukraine, the Caspian Sea and the southern Mediterranean. The complex way in which the networks work, operate and link up calls for public support in
this area. Operation of the internal market must not be hampered by physical constraints. The Union has
an important role to play in giving the networks a Community dimension so that they meet the
needs of the internal market and of all the Member States and applicant countries.
A European mechanism for collaboration between interested parties with a view to defining a
European plan for the major missing interconnection infrastructure could resolve these
problems. c
New security of supply concerns
70
Steps must be taken to avoid seeking an immediate return on investments on an open market
to the detriment of investments in branches which are capital-intensive coal, nuclear energy,
etc. or do not necessarily yield a return in the short term renewable sources. With this in mind, the directive on the internal market in electricity offers the Member States
the option of giving priority to indigenous sources, i.e. renewable energy sources or waste for
producing heat or for combined heat and power production. It also allows the possibility of
giving priority to indigenous primary energy sources to supply not more than 15 of the
energy required to generate the electricity consumed at national level. In the case of new
the Member States must keep potential control over the choice of fuels. investments,
Similarly, Member States may suspend third-party access to the networks whenever necessary,
particularly to safeguard security of supply. There is a risk that the choice of primary energy sources for electricity generation could
jeopardise security of supply by over-concentration on a single source. Although there is no
imbalance in this area at the moment, in years to come such problems could arise as natural gas
gains ground. The liberalisation of the gas sector will open up new supply opportunities for the
applicant countries who obtain most of their supplies from Russia. The Member States and the
Community must keep a close watch. The Directive authorises the Member States to take the
necessary measures to achieve this. Where a primary energy source is too important or
the Directive
develops so rapidly that
authorises the Member State to fix the nature of the primary resources for any new capacity.
However, such measures will have to be co-ordinated with the Commission and checked at
Community level to ensure that they are appropriate. it endangers overall security of electricity supply,
The directive on the single market in natural gas authorises Member States to impose on natural
gas undertakings, in the general economic interest, public service obligations which may relate
to security, including security of supply. Also, in the event of a sudden crisis in the energy
the Member States may take the necessary
market posing a threat
temporary safeguard measures. However, such measures are reserved for exceptional individual
cases.
to system integrity,
Another factor which must be kept under control is any unleashing of consumption as a result
of the falling prices of certain energy sources. Some experts estimate that the internal market
could push up consumption around 20. Security of supply must be clearly recognised, on a par with environmental protection, as an
essential public service objective. Amongst the services which States must guarantee, the
right to connection to the network, the rules on repair times and the requirements on network
deployment are all public service obligations which contribute to security of supply. The
obligations to generate a minimum quantity of electricity from renewable resources in turn
can improve security of supply and make it possible to maintain alternative resources. Energy-saving standards and measures must also be defined. The national regulator has an
essential part to play in this. He alone has the necessary impartiality and detachment to apply
measures in this area, while respecting the configuration of the market. Conclusions The integration of energy markets contributes to security of supply, provided that
these markets are truly integrated. The opening-up of the EUs energy markets provided for in
the existing directives is not enough to create a single energy market in Europe. A new form
of government intervention is called for. In line with the mandate given by the European Council in Lisbon, steps must be taken to
speed up completion of the internal energy market. In order to provide a framework for a
fully open market, there is a need for greater separation between electricity generators
and transport network managers, non-discriminatory network access by new generators
71
and distributors, minimal charges for cross-border trade, clearer public service
obligations and widespread establishment of an independent national regulator. Based on experience, two new components are needed. All the national regulators should sit
on an advisory body to assist the Commission with the smooth operation of the internal
market. Finally, it is necessary to draw up a plan of major interconnection infrastructure of European
interest.
Comparing pump prices of oil products before taxes and duties in different Member States
reveals substantial differences. For example, the price of Euro Super 95 at the end of May
346 in
2000 was
France, a difference of 31. These differences, worrying as they are, existed before the
current price surge and therefore have no causal relationship with it. 4521 000 litres in the Netherlands, but
344 in the United Kingdom
In recent surveys on the application of the Community merger control regulation,
the
Commission decided that that were no reasons to believe that the crude or refined oil market
was not competing. These markets are transparent and prices are publicly displayed on spot
markets. It is, however, correct that, downstream, market imperfections exist. For example, the final
price before taxes varies widely from one Member State to another. This does not necessarily
indicates that markets are inadequately
indicate an infraction of competition rules but
integrated. These differences can be explained by the different cost factors and market
structures in Member States. For example, the prices are very low in the Netherlands where
the market is controlled by a small number of actors. They are even lower in Britain and
France where motorists benefit from the competition produced by non-specialist distribution
supermarkets. This diagnosis raises the question as to whether competition law is being infringed, notably
by the formation of possible cartels price fixing. The national authorities in a number of
Member States have begun to investigate this. In Italy the competition authorities have
imposed sanctions on oil companies. In Sweden, matters are at the proposal stage. 2. Competition policy
It is important to assure that the fuel distribution market remains open to new operators,
notably independent ones. This is a way to guarantee that markets remain competitive. For
this reason an inquiry is underway into the barriers which independent operators face
whether resulting from private or public decisions. The results will allow the Commission
to evaluate the conditions for competition in the internal market and to define possible actions
in the area of competition rules. This Community action reinforces steps taken by national competition authorities. Some of
them have already launched enquiries into infringements of competition law in some cases
suspicions have been confirmed. It would be worth making a systematic comparison of prices of oil products in the Member
States so as to reveal the disparities that exist. 74
The Commission will also continue to be vigilant in applying the merger control rules in this
sector, as in the cases of BPAmoco and TotalFinaElf.
Any price agreement or abuse of a
dominant position should be severely punished. Conclusion Climate change and the growing integration of the European energy market
incidentally better integrated than that of the United States are an opportunity for the
European Union to consider taking measures to improve demand management. Effectively,
the only way of influencing supply is to make serious efforts with renewable sources. Let us
be realistic promoting such forms of energy cannot be the only response to the complex
problems raised by security of supply.
75
PART 3
SECURING THE FUTURE OUTLINE OF ENERGY STRATEGY
The objective of greater security of energy supply to ensure that in 30 years time the Union
will not depend on external supplies for 70 of its energy is very difficult to achieve because
of the general context of instability limiting the room for manoeuvre, in particular in the
supply of energy products. This is why, in order to engender public debate, the priorities
outlined in this Green Paper are basically focused on action that is both specific and internally
coherent to limit demand. I
THE WEAKNESSES IN CURRENT ENERGY SUPPLY
The EUs security of supply must face various challenges created by the current situation of
energy supply and if nothing is done they will be confirmed in the future. A. Hurdles to security of supply
The hazards for energy supply are various physical, economic, social or environmental. 1. Physical risks
Permanent physical disruption can occur when an energy source is exhausted or
production is stopped. It is not excluded that Europe will eventually run out of Community
gas and oil resources at reasonable cost. It is likely that Europe will have to abandon coal
production, as some countries have already done. Nor is it excluded that nuclear energy will
be given up following a major accident at a power station. The consequences of such a
situation in terms of transfer of demand to other products oil, natural gas, nuclear power,
coal, and renewables, the functioning of the market, energy dependence and environmental
objectives must be examined. There are also temporary disruptions, the consequences of which can be disastrous both for
consumers and for the economy in general. These can result from a strike, a geopolitical crisis
or a natural disaster. This Green Paper is only concerned with temporary disruptions insofar
as they are a sign of structural supply difficulties on a Community scale. For example, the
difficulties France experienced as a result of
the damage caused by the storm in
December 1999 showed to what extent the electricity networks were still essentially organised
on a national basis. 2. Economic risks
Economic disruptions are caused by erratic fluctuations in the price of energy products on
the European and world markets. The internal market allows us - thanks to competition - to
optimise resources and reduce costs, but the European market is still linked to prices on the
world market. Oil and gas account for over 60 of fuel consumption in the residential and
tertiary sectors. Transport accounts for half the outlets for petrol. The rise in fuel prices,
mainly oil and gas, creates monetary and trade imbalances which are harmful to the EUs
economic health. In this context, geopolitical considerations - such as OPEC, the recent
difficulties in the Middle East, the embargo on Iraq and uncertainties regarding developments
in Libya and Iran - are a major factor, though it is not possible to define exactly what
influence they have had. The tripling of the price of crude oil in 1999 and its effect on the price of natural gas would
have a significant impact on the energy bill and the Member States economies, were prices to
remain at that level. The increase in the price of crude led to a net transfer from the European
Union of nearly an extra EUR 22,7 billion between January and May 2000.
The spectacular
76
rise in oil prices since 1999, combined with the fall of the Euro has already increased the
Unions inflation rate by one percentage point. Economic growth seems to be feeling the
effects but growth in GDP remains around 3. The current situation is leading to a drop in
growth rate 0.3 in 2000 and 0.5 in 2001. Loss of confidence among market operators and
consumers would aggravate the situation. 3. Social risks
The instability of energy supplies, whether linked to erratic fluctuations in prices, relations
with producer countries or a chance event, may cause serious social disruption. Today, petrol
is vital for the functioning of the economy, like bread. Any disruption of supply is likely to
lead to social demands, if not social conflict. The situation is similar to that created by a bread
shortage two hundred years ago. Current events show us that increases in fuel prices can also
incite corporatist behaviour. The strike in autumn 2000 by those particularly affected by the
rise in oil prices, notably truck drivers, is an example of this. We must not forget that the first
two oil crises helped put an end to full employment. 4. Environmental risks
there are what might be termed environmental disruptions damage to the
Lastly,
environment caused by the energy chain, whether accidentally oil slicks, nuclear accidents,
methane leaks or as a result of polluting emissions urban pollution and greenhouse gas
emissions. All policies now include an environmental dimension, but
special attention
should be given to global warming. Under the Kyoto Protocol the European Union has set
itself the target of reducing its annual greenhouse gas emissions by 8 between now and
2008-2010 compared with the 1990 level. After that, yet more will have to be done. However,
action to reduce greenhouse gas emissions cannot be limited to the framework of the Kyoto
Protocol. Given the environmental consequences of the growth prospects in certain sectors
such as transport, a long-term policy needs to be implemented going well beyond 2010.
B. Forecasts illustrate potential instability
In order to quantify the main challenges ahead concerning energy security, the work that was
carried out in Energy Outlook 202062 has been extended by updating the baseline scenario and
by extending the analysis to 2030. Furthermore, the analysis covers 30 countries, i.e. the EU
countries, the candidate countries as well as Norway and Switzerland. 1. a
Presentation
Assumptions for a dynamic extrapolation of current trends
This updated forecast reflects the continuation of existing trends and policies for the next 30
years. It presumes that all current policies and those in the process of being implemented at 31
December 1999 will continue in the future. Thus, for example, no additional policies to
reduce greenhouse gases are included in the forecast. GDP is expected to increase by 90
between 1998 and 2030. Major factors for economic and energy growth include the
following
continuation of technological progress improving energy efficiency
62 European Union Energy Outlook 2020, Energy in Europe Special Issue, November 1999 European
Commission. 77
continuation of opening up of EU energy markets to competition which is assumed to be
fully implemented by 2010
restructuring of the EU economy towards activities with a high added value to the
detriment of energy intensive production
restructuring of the electricity and heat generating sector through technologies involving
the efficient use of natural gas
continuation of policies promoting the use of renewable energy including the granting of
subsidies on equipment and preferential tariffs supporting demand
the voluntary agreements concluded in 1998 and 1999 with European, Japanese and
Korean car industries ACEA, KAMA, JAMA under which for 2008 ACEA or 2009
KAMA, JAMA CO2 per km emitted by new automotive vehicles will be reduced to
140 grammes
With regard to nuclear energy, it is assumed that Member States without nuclear power
will not change their policy. Taking account of the disengagement or statements of
phasing out nuclear power Belgium, Germany, the Netherlands, Spain, Sweden and the
United Kingdom, it is assumed in the forecast that after the nuclear power plants will
come to the end of their technical and economic life, they will be replaced by other
technologies. The Netherlands is assumed to phase out nuclear power in 2010. In this
modelling, nuclear production will have ceased in Germany after 2025, while in Belgium
nuclear declines rapidly after 2020 to reach only a tiny fraction of its present level in
2030. Finland and France are assumed to carry on using nuclear power. Power plants are
assumed to decommissioned after 40 years of operation, except in Sweden, where the rate
is assumed to be faster. Oil and gas prices are assumed to rise moderately. Oil is assumed to have a trend value in
bbl in 2030. Gas prices are assumed to follow oil prices.
Coal
1999 prices of about 27
prices on an abundant world market are assumed to increase only slightly they remain below
an equivalent of 10
bbl. b
Results
European Union
In the European Union, gross energy demand is projected to be 11 higher in 2030 than in
1998. Energy demand is projected to rise much slower than GDP which is expected to
increase by 90 between 1998 and 2030. There is therefore a marked de-coupling of energy
demand growth from economic growth. Moreover, there is considerable structural change in energy consumption. The fastest growing
fuel is natural gas 45 between 1998 and 2030. Oil remains the most important fuel
despite projected modest growth up to 2030 its share in 2030 is still expected to be 38,
while it was 42 in 1998. The use of solid fuels is projected to decline up to 2010 but if no
strong climate change policies are undertaken, the use of coal is projected to increase again. This would imply that solid fuel consumption would be about a third higher in 2030 than in
1998. The contribution of nuclear power is projected to peak around 2010. However, with nuclear
plants reaching the end of their life, in 2020 nuclear output is somewhat lower than in 1998 -
4 by 2020. The output is projected to decrease by about 50 between 2020 and 2030. Renewables grow resiliently in relative terms, by 45 between 1998 and 2030. However,
the share of renewables is projected rather small 6.7 in 2010 and 7.7 in 2030 despite the
78
assumption that current support schemes in the Member States will be continued. Clearly, the
12 renewables target for the EU requires additional policy measures. Although there is a significant de-coupling of energy consumption from economic growth,
energy demand is projected to increase further. Similarly, energy imports are likely to
continue growing. Given that energy production in the Community is expected to peak around
2010 the share of imports in energy demand will rise considerably. In fact, energy import
dependency is projected to increase significantly, from under 50 in 1998 to 71 in 2030.
Moreover, rising energy consumption leads to higher CO2 emissions. Between 1990 and 2010
the base year of the Kyoto protocol and the middle of its target period 2008-2012, CO2
emissions in the Community are projected to grow by 5. This is much lower than the
growth of energy demand due to higher shares of natural gas, nuclear and renewables by
2010. Fuel switching from coal to natural gas is expected to continue after 2010 helping to contain
CO2 emission. However, with present policies towards nuclear and the current level of
support for renewables, as well as without additional climate policies, the share of zero carbon
fuels would decline after 2010. As a result CO2 emission growth would continue with
emissions exceeding the 1990 level by 12 in 2020 and 22 in 2030. Europe-30
Extending the analysis to cover 30 European countries leads to results that are more or less
similar to those for the current EU. There are two reasons for this. Firstly, the current EU
accounts for almost 80 of the energy consumption of Europe-30. Secondly the group of
candidate countries and direct neighbours are projected to become more similar to the energy
structure of the EU over the next decades. Nevertheless, as Norway which is a major oil and
gas exporter is included in Europe-30 in this analysis import dependency for Europe-30
would be lower. In Europe-30, energy consumption is expected to rise by 25 between 1998 and 2030
reflecting both strong economic growth and considerable energy intensity improvements. The
strongest growing fuels are natural gas, renewables, solid fuels and oil while the nuclear
contribution is expected to decline as a result of closing unsafe nuclear plants in candidate
countries as well as present governmental attitudes towards nuclear in certain Member States. The share of renewables in the Europe-30 would increase from 6.8 in 1998 to reach 8.1
by 2030. Import dependency of Europe-30 is expected to rise from 36 in 1998 to reach 60 in 2030. This is due to continuously growing energy consumption and a decline in North Sea oil and
gas production as well as lower production of solid fuels and nuclear. CO2 emissions in Europe-30 are projected to grow by 7 between 1990 the Kyoto base-
year and 2010. In 2030, CO2 emissions are forecast to exceed the 1990 level by 31 . 2. Conclusions drawn from the updated scenario
Both EU 15 and the wider Europe of 30 countries rely heavily on oil and gas for energy. Overall, oil and gas imports are projected to increase significantly.
Also real prices are
projected to increase. 79
Table Share of oil and gas in total energy consumption in 1998, 2010, 2020 and 2030
1998
2010
2020
2030
EU
64
66
66
67
Europe-30
61
63
65
66
Renewables penetration is projected to remain low and to fall short of the 12 target. Clearly,
additional policy efforts are required to attain this target. Furthermore, without additional
policies, CO2 emissions are projected to exceed their 1990 level by 2010 and continue to
increase thereafter at an increasing rate. Table Projected increase of CO2 emissions in 2010, 2020 and 2030 related to 1990 base
year of the Kyoto Protocol
2010
2020
2030
EU
5
12
22
Europe-30
7
18
31
Import dependence is projected to increase steadily in both the EU and in Europe-30. By
2030, import dependency is expected to reach over 70 in the current EU and 60 in Europe
30. Compared with the present levels of about 50 for the EU and 36 for Europe-30,
Europe is becoming increasingly reliant on imports for its energy supplies. Table Projected import dependence of EU, and Europe-30 in 1998, 2010, 2020 and 2030
1998
2010
2020
2030
EU
49
54
62
71
Europe-30
36
42
51
60
80
Because of the strong de-coupling of energy use from economic growth, the ratio of energy
import quantities to GDP declines. While net energy imports in absolute numbers are
projected to increase by 81 from 648 Mtoe in 1995 to 1175 Mtoe in 2030, compared against
the development of total economic output GDP, net import intensity is projected to decrease
by 11 between 1995 and 2030. However, with the assumed increase in energy import prices by 86 for oil, by 81 for gas
and by 5 for coal between 1995 and 2030, the cost of energy imports is projected to rise
faster than GDP. Thus, it is projected in the forecast that the share of energy imports of GDP
will grow from 1,2 in 1995 to 1,7 in 2030. These trends raise questions concerning alternative developments
To what extent would an accelerated nuclear phase-out than foreseen in the forecast
further increase CO2 emissions and import dependency? What effects on CO2 and import dependency could be expected, if current support to
renewables were either reduced or discontinued or substantially improved, including a
substantial increase in RTD expenditure on renewables? To what extent would substantially higher import prices for oil and gas resulting e.g. from a disturbance in world energy supplies give rise to lower demand for these fuels? Would this lead to lower import dependency and lower CO2 emissions considering that
higher oil and gas prices could favour more carbon intensive fuels such as coal? What are the implications of reaching the first commitment period 2008-2012 target of
the Kyoto Protocol 8 of 1990 for six greenhouse gases and the subsequent more
demanding second and third period targets? In particular, what would this imply for
further improvements of energy intensity and the role zero carbon fuels, such as
renewables and nuclear? Finally, what would this imply for the security of energy supply
in the European Union? By the end of the period, nuclear generation capacity in the EU will have been reduced
substantially as a result of the policy decisions taken by Member States. What are the
possible implications for economic, environmental and energy policies? The forecasts confirm that there are the following challenges
-
-
energy import dependence is around 70 in 2030
renewable energy does not reach its target of 12 share of primary energy
- Kyoto objectives are not met
-
the absence of nuclear would make it even more difficult to tackle climate change in the
long term. 81
The analysis also shows that there are energy policy options which favour zero-carbon fuels
that simultaneously reduce energy dependency and CO2 emissions. Further efforts to
decrease energy intensity would also contribute towards lowering price risks from world
markets through lower import dependency as well as towards reducing CO2 emissions. Areas for improving energy intensity, i.e.
tackling energy demand without compromising
economic growth, include the building and the transport sectors. II
TOMORROWS PRIORITIES
The traditional approach to the security of supply problem is to concentrate on increasing
supply, both internal and external. From this viewpoint, the EU should extend and develop its
range of domestic energy sources and endeavour to secure external supplies. However, future prospects and developments observed on the energy markets limit
the
possibilities for action in this respect. A lack of political consensus on a Community energy
policy limits the possibilities to intervene. Only a policy geared to controlling demand can lay
the foundations for a sound energy supply security policy.
A. Controlling the growth of demand
The situation in Europe today is such that we must develop a new strategy on the demand
side. If the EU cannot reverse current energy consumption trends - energy and transport use,
especially in urban areas - it will have to resign itself to massive dependence on imports for its
energy supplies and will have trouble meeting its commitments under the Kyoto protocol. In
these circumstances, it must turn its attention to the most effective instruments for controlling
demand taxation and legislation and other market instruments. 1. Horizontal policies
Security of supply can only be improved if there is widespread individual awareness that
uncontrolled energy consumption is harmful. This needs to be supported by a horizontal
policy which ensures that energy prices reflect real costs and encourages energy saving. a
Completion of the internal market
To strengthen the internal market in gas and electricity we need more competition between
national energy operators and the introduction of new regulatory powers and reasonable
transit costs. To this end the Commission will be presenting a proposal at the Stockholm
European Council. The proposal is an integral part of a European policy for securing energy
supply. Greater opening up of the market, on both the supply and demand sides, encourages
operators to widen their energy options. In this way, enhanced gas-to-gas competition on an
integrated European market could be conducive to uncoupling the price of gas from that of
oil. b
Energy taxes
In an increasingly open market, taxation is still the most flexible and effective instrument for
encouraging operators to change their behaviour. In the last few years,
the European
Commission has proposed measures to which the Council has not yet responded. In the light
of new constraints affecting security of supply, the Commissions taxation proposals of 1992
and 1997 could be usefully supplemented by a new proposal designed to steer energy
82
consumption towards more environmentally friendly technologies, which will help to bolster
security of supply. The Commission will consider whether it is opportune to couple upward harmonisation of tax
rates on fuel structural component with a Community mechanism for stabilising VAT
revenue in the event of significant fluctuations in oil prices components dependent on
circumstances. In this case, the impact which such measures will have on SMEs should be
investigated.