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 Union's 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 Union's structural weaknesses regarding energy supply, namely Europe's growing dependence on energy, the role of oil as the 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 Union's 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 Union's 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.

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, it is appropriate to analyse whether it is worthwhile conceiving a European energy policy from an angle other than that of the internal market, harmonisation, the environment or taxation.

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 the bare bones of a long-term energy strategy, according to which:

- 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 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 behaviour. It highlights the value of taxation measures to steer demand towards 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.

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

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. TOMORROW'S PRIORITIES

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. - Technical document (summary)

2. - Note on the impact of fuel taxation on technology choice

3. - Coal after the ECSC Treaty expires

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 %

INTRODUCTION

This Green Paper is the response to an observable fact: Europe's 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 Europe's 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, if current trends persist. It cost 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.

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 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).

[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".

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 EU's 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 reader's 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. 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 Europe's 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.

PART ONE: BASIC FACTS ABOUT ENERGY IN THE EUROPEAN UNION

The EU's 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, Europe's economy has grown faster than its energy consumption. Yet despite this achievement, the Union's 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]

[2] This Green Paper examines the Union's 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.

A. An energy-intensive economy

The EU's 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.

[3] [4]

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[3] Mtoe = Million tonnes of oil equivalent

[4] The figures used in the Green Paper are taken from the forecasts in Part 3 I.B below

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% of total industrial energy consumption) and diversify into natural gas and electricity. As a result, the sector saw its energy intensity [5] decline by 23% between 1985 and 1998.

[5] Energy intensity measures energy consumption in relation to GDP.

The stability of consumption between 1985 and 1998 [6] was due to the introduction of combined heat and power generation and greater technological efficiency, but Europe's 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.

[6] 264-262 millions tonnes of oil equivalent (toe)

2. Held hostage by oil: households, services and the transport sector

a) 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.

[7] From 355 to 384 Mtoe between 1980 and 1998.

Excluding personal transport, 63% of household needs are supplied by oil and gas. Households are the biggest consumers of natural gas (1/3 of total gas consumption, supplying 40% of household demand) and account for approximately 18% of total oil use (1/4 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 sector's 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 transport's sector's energy demand.

[8] 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

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 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 also impacts negatively on quality of life. In this way, external costs of pollution due to transport have been estimated at nearly 2% of GDP.

3. Energy diversification: electricity and heat

a) Electricity

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(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% annually [9] between now and 2020.

[9] European Energy outlook to 2020: figures based on the seven Central European countries, excluding Bulgaria, Slovakia and Romania.

The EU's installed capacity should reach 800-900 GWe [10] 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.

[10] Gwe : Giga watt electric

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 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. Modernisation/replacement 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.

[11] See Part 3, I.B.

- 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]

[12] This figure reflects both the growth of demand and planned closure/modernisation of nuclear plants.

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, CHP [13] or dedicated heat stations with their associated heating networks. The latter are more common in the applicant countries than in the EU Member States.

[13] Combined production of electricity and heat.

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.

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1. Uncertainty about oil and gas production

a) 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 and/or 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.

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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%).

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 supply [14]. Forecasts are usually exceeded notably as a result of technological innovation, as shown in the graph below.

[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 Europe's 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.

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%.

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2. Decline in mine production

a) 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 Europe's 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 Union's 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 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 Union's 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. To this end, it might be possible to envisage maintaining minimal capacity of coal production in realistic economic conditions, which would ensure the maintenance of the equipment and thus guarantee the continuity of good operation, while at the same time allowing European technology to keep its leading position in clean-coal mining and consumption.

b) Uranium

The world has two and half million tonnes of known uranium reserves (uranium being the only part of the nuclear fuel cycle in which the Union is not self-sufficient) at a market price lower than US$ 80 a kilo, representing 40 years' demand at present rates of consumption (the current market price is around US$ 20 a kilo). Further known resources come to about 850 000 tonnes (corresponding to 15 years' demand) at the same price and are mainly located in Australia, Kazakhstan, Uzbekistan and Canada.

The European Union, for its part, is home to barely 2% of the world's natural uranium reserves (i.e. 52 000 tonnes) at a price lower than US$ 80 a kilo but production will shut down around 2005 in France and Portugal. Europe's uranium mines have closed principally because the deposits have been exhausted and it is expensive to extract relative to the world price, and because world physical stocks of nuclear fuel are very high.

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Origin of uranium imports used in the Union

More uranium could be made available, but only at a higher price. There are in fact non-conventional reserves which would be sufficient in the long term. But this would have little impact on the cost of electricity per kilowatt/hour, since it would concern only a very small part of total production.

The recyclable nature of the used fuel accounts for the promising outlook for reserves. Nuclear fuel differs from other primary energy sources in that fission products can be recycled, proportionately reducing import requirements. Once separated from their waste products (amounting to around 4%), both recovered uranium and plutonium can be used again to generate more electricity. Material obtained from the decommissioning of nuclear weapons can also be recycled as nuclear fuel.

3. Potential abundance of renewable energy

Renewable energy sources, such as firewood and hydro-electricity, have a modest role in the European economies. They represent more significant share in the applicant countries, and in some isolated regions, such as islands, are the only source of energy. Nevertheless, they have the potential to play a much larger role in both the economy and the energy balance.

Renewable energy technology, especially at the cutting edge, is still in its infancy. However, public support for research has led to significant progress over the last few years. Wind energy is now widely recognised as a viable option. Photovoltaic energy, meanwhile, though promising, is still far from economically competitive.

Resource levels for renewable energy are a problem only for energy forms which are not driven by the elements, such as biomass (including biofuel), wood and various kinds of biodegradable waste. Yet in theory, as their categorisation as 'renewable' indicates, there are not really any supply problems. Household waste is constantly growing and provides a significant energy opportunity, as do by-products from the timber and agri-foodstuffs industries. However, their use is not without environmental impact and can only develop thanks to advanced technology due to technological difficulties which still need to be overcome. 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 renewable resources can help mitigate the present trend towards increasing energy 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 - Europe's energy dependence will reach more and more worrying levels. The EU's 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 Union's energy dependence will rise by 20 percentage points from current levels to reach some 70%.

[15] North Sea oil, revival of nuclear energy programmes and renewable energy development..

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 importer [16]). As such, it is associated with demand on the world energy market, geo-political developments, geographical location and the political stability of the countries through which the energy it imports must transit.

[16] by comparison, the US imports 24% of its needs and Japan 80%

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.

[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 savings can be estimated at 200 million toe for the year 2000, which is equivalent to a saving of EUR30-45 billion for the EU's trade balance.

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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.

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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.

[18] Since domestic prices are in any case related to international prices, the degree of external dependence will not influence prices to the same extent.

- 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 cartel [19], 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.

[19] 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.

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 world's 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.

[20] Saudi Arabia, Iran, Iraq, UAE, Kuwait and Qatar.

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, Europe's 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

Europe's 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, leaks from gas and oil pipelines, transport of radioactive substances and traffic congestion in a number of transit zones, such as the Bosphorus.

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 Organisation's (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.

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 Russia's 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.

Gross internal consumption (in %) - 1998

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Gross internal consumption (in %) - 1998

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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 world's 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.

[21] The Caspian Sea Basin refers to the oil and gas reserves located in Southern Russia, the Caucasus, Central Asia and Iran.

[22] 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.

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 world's 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 EU's share of these markets yet further, except for coal.

In 1997, the EU spent EUR120 billion on energy imports, representing 6% of the total value of all imports. Oil alone accounted for 75% of this sum. In 1997, the Union's oil bill was EUR94 billion, almost half of which (45%) was paid to Middle Eastern suppliers (more than EUR40 billion). In 1999, this bill reached EUR240 billion. Changes in the EUR/$ rate since January 2000 added a heavy burden to this bill.

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, India [23] 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.

[23] China and India combined consume some 1.115 billion Toe a year (respectively, 844 million toe and 271 million toe).

According to demographic experts, by 2020 the world's 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]

[24] Communication on co-operation as regards energy with Asia (COM/96/308).

Beyond overall market trends, 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 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]

[25] Communication from the Commission of 11.10.2000, The European Union's oil supply

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 EU's 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 Union's 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 and/or war. Emergency reserves and crisis measures, such as those set up by the International Energy Agency (IEA) and by Community 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 and/or 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 directives [26] 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]

[26] Directive 68/414/EEC, amended by Directive 98/93/EC.

[27] 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.

- Under another directive [28] 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 regulating prices. The same Directive stipulates that should a crisis break out, the 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.

[28] Directive 73/238/EEC.

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 (SPR) [29] to spearhead pro-active intervention in the oil markets.

[29] 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 today's prices. The SPR is located in the Gulf of Mexico (Louisiana and Texas), a region 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.

The Community's 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 EU's 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.

[30] This policy is combined with measures to encourage the exploration of North Sea resources.

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 Union's 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 1980's and the lacklustre efforts to promote energy savings and renewable energy have meant that the Union dependence has remained at 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 investment, unless there is a major technological breakthrough that changes the energy landscape. These changes might centre on decentralised production of electricity through mini gas turbines or fuel cells. These options are 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.

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.

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

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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 for nuclear research for the whole of the Community's 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]

[31] 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).

- 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 EUR400 billion, of which the Community budget contributed EUR2.9 billion. This has contributed to the Community's 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 loans [32]. These loans are currently being used by applicant countries to help modernise their installations.

[32] 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.

- 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.

- Euratom safeguards give the Community undeniable credibility in terms of the non-proliferation of nuclear materials. The Euratom Supply Agency's 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 the history of atomic energy, marked a turning point in the development of Europe's 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.

[33] Sweden-1980, Spain-1984, Netherlands-1994, Germany-1998, Belgium-1999.

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.

[34] Lithuania: Ignalina 1 and 2; Bulgaria: Kozloduy 1 to 4; Slovakia: Bohunice VI

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]

[35] For example, the Swedish Government's decision to shut down the nuclear facility in Barsebäck on 30/11/99, 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 Sweden's CO2 emissions of around 4 million tonnes per year, i.e. about 8% of total emissions in Sweden.

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.

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 km ) 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 public's 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.

2. Coal: a glorious past

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a) Background

Because of their impact on Europe's economies (production of electricity and coal and steel), coal [36] 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.

[36] 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.

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. [37] 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.

[37] 7 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).

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 suppliers [38] and the relative stability of prices compared with oil and gas are factors which offset the considerable constraints on coal.

[38] 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.

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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 38/tce) over a period of ten years (1986-96). 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.

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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, coal's 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 Union's security of supply. The upcoming expiry of the ECSC Treaty will not help to provide a simple answer to this matter

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

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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 crises, it remains an essential economic component in the Member States, primarily in 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 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 world's oil reserves are located in the member countries of OPEC. In 2020 OPEC will cover 50% of the Union's 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.

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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.

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 oil's 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.

Iraq's 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 OPEC's 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 important for the European Union as, in 1989, they were still the world's leading oil 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.

3. Effects of oil prices

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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 Europe's 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 Union's 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.

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.

Europe's 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

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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 p