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Select Committee on European Scrutiny First Report
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1.1
Background 1.2
According to the Commission, Community energy policy has in recent
years focussed on two main concerns — the establishment
of an internal market for natural gas and electricity, and the
need to safeguard energy supplies. The second of these was the
subject of a Green Paper[1]
in November 2000, and the main purpose of this document is to
set out in a Communication the Commission's latest thinking, together
with two related legislative proposals (and two others, which
would repeal a number of existing measures).
The current document 1.3
In its Communication, the Commission recalls the steps which have
been taken to establish the internal market, particularly for
natural gas and electricity, including increased competition through
access to networks and improved infrastructure, and the part this
has played in addressing concerns over energy supplies. It also
notes that, despite the measures which have been taken, the Community's
structural weakness resulting from its undue reliance on imports
of oil and natural gas means that it remains vulnerable to external
geopolitical, economic and social factors. It adds that this problem
is particularly acute as regards fossil fuels, which currently
represent four-fifths of energy consumption, and that, if nothing
is done to reverse current trends, imports could account for 70%
or more of total requirements in thirty years time. It is concerned
that this could in turn give rise to various risks, either of
a physical kind (involving disruption of supplies) or of an economic
nature (such as price volatility), and it notes the extent to
which reductions in growth in both the United States and Europe
since 1973 have been preceded by sudden sharp increases in the
price of crude oil. 1.4
The Commission goes on to point out that, although rules for the
maintenance of stocks of crude oil and petroleum products are
laid down by both the International Energy Agency (IEA) and the
Community itself, the mechanisms concerned — which were
introduced in the early 1970s, prior to the development of a single
market — are no longer suited to present circumstances.
In each case, it comments on the lack of a legal framework for
co-ordinating action, in that the IEA requires the unanimous agreement
of 26 participating countries (many of whose priorities may differ
from those of the Community), whilst there is no Community decision-making
power to dispose of oil stocks on the market, with there being
a "lack of solidarity" between Member States. In this
respect, it also notes the more favourable situation as regards
gas, which it attributes to the control over infrastructure and
supply exercised by the hitherto dominant companies partly or
wholly owned by public authorities. However, it points out that,
as a result of restructuring brought about by the internal market,
this situation is likely to change, and that consequently, even
in this sector, security of supply cannot be left entirely to
the industry. It therefore believes that harmonised measures
are needed to guarantee unified and coordinated action, particularly
as regards storage and infrastructure, in order further to establish
the internal market. 1.5
More specifically, the Communication notes that the establishment
of national reserves of crude oil and petroleum products by Member
States is governed by three Community directives, which require
them to maintain a level of stocks equivalent to 90 days' consumption
for each of the three main categories for energy use (though a
derogation allows producer Member States, such as the UK, to hold
only 67½ days' supply). Member States must also be ready
to act when there is a risk of physical disruption, and, in the
event of a crisis, the Commission may, either on request or on
its own initiative, fix a target for a reduction in consumption.
However, the Communication notes that, although consultations
are arranged at Community level for coordination purposes, the
Commission has no powers to order stock disposal, this being a
matter for individual Member States. It also points out that,
in most Community countries, the security stocks are held by the
oil companies, and mixed up with their operational stocks, making
the quantities actually available in the event of a crisis very
uncertain. 1.6
Against this background, the Communication suggests that a more
coordinated approach is required so as to maximise the impact
of the actions taken, and that the need for this has been further
emphasized by the impending enlargement. It notes that its Green
Paper considered various proposals in general terms, such as placing
the oil reserves system on a Community footing; the possibility
of extending this mechanism to natural gas reserves; the need
to institute a permanent dialogue with producer countries; and
a greater integration and diversification of supply networks.
With this in mind, it says that the aim now should be:
— to promote solidarity between Member States and the
Community in the event of an energy crisis by putting in place
predefined measures and mechanisms which will guarantee coordinated
action;
— to manage security of supplies by providing adequate
mechanisms to deal with physical disruption of energy supplies;
— to manage the safety of supplies and infrastructures
by adopting safety measures which will ensure maximum reliability
of supply flows from producer countries;
— to promote market stability by providing for proper
responses where a physical disruption is anticipated. 1.7
The Commission proposes that these objectives would be met by
a number of specific initiatives at Community level.
— Organisation and coordinated use of oil stocks
1.8
It notes that in some Member States stocks are held by ad hoc
bodies, and in others by private operators, and it says that this
fragmentation has adversely affected the proper functioning of
the internal energy market, and lacks transparency. It therefore
proposes that all Member States should set up a public body to
hold such stocks, up to a quantity representing one third of the
new obligations imposed. 1.9
In view of the weaknesses of the present Community arrangements,
and those of the IEA, the Communication also says that the Community
must in future be able to decide upon a common strategy to be
adopted by all Member States to provide an effective response
to the physical or economic disruption of supplies. It therefore
suggests that the Commission, assisted by a committee made up
of Member States' representatives, should be empowered to adopt
the necessary measures as a matter of urgency. 1.10
The Commission also notes that current Community legislation lays
down rules for the use of stocks only in the event of an actual
disruption of supply, and thus cannot be used to react to volatility
in the market due to expectations of a disruption. It
therefore proposes that there should be common rules governing
the response to an economic risk, and that this should in the
first instance be defined in terms of price. Thus, an alert threshold
would be established when the price of crude oil on the spot markets
is such that, if maintained for 12 months, the Community's external
oil bill over the following 12 months, as compared with the average
external bill over the last five years, would be increased by
an amount equivalent to more than half of one percent of the Community's
GDP in the previous year. However, the Communication also stresses
that such a threshold is a necessary, but not sufficient, condition
for action, and that it would merely initiate an examination by
the Commission of all the contributory factors. It also suggests
that the minimum volume of stocks held should be increased from
90 days to 120 days, so that any crisis measures can be "effective
and credible", and that the derogation allowing producer
Member States to hold a lower stock level should be removed.
— Minimum measures for the security of gas supplies
1.11
The Commission says that, although conditions for stocking gas
are different from those for oil and petroleum products, the mechanism
for fixing gas prices is index-linked to that for oil, and that
the problems arising in terms of security of supply, and the solutions
to be applied, are therefore similar for the two energy sources.
More specifically, it suggests:
— that most Member States do not have a very coherent
approach to guaranteeing security of gas supplies in the internal
market, and that, before any other action is taken, they must
define a general policy and standards for security of supply,
involving a clear definition of the roles and responsibilities
of the various market players: it adds that Member States should
in this connection pay the greatest possible attention to ensuring
continuity of supplies in difficult circumstances, especially
to consumers who have no alternative energy source, and to establishing
a balance between the various sources of gas supplies;
— that they should take the measures needed to ensure
that vital consumers not in a position to replace gas with another
fuel are, in the event of disruption of the biggest single source
of gas, assured of supply for a period of sixty days under average
weather conditions;
— that Member States should take the steps needed to
ensure the establishment or maintenance of a minimum level of
gas stocks;
— that, in order to ensure the proper functioning of
the internal gas market, mechanisms should be put in place to
allow the coordinated implementation of measures at Community
level: this should involve the Commission issuing recommendations
to urge Member States to provide assistance to others whose supplies
are disrupted, and, if necessary, it would be able to require
Member States to take specific actions: however, these arrangements
would not, at this stage, lay down minimum quantities of gas stocks
which Member States should hold. 1.12
In addition to these measures, the Commission says that long-term
supply contracts have played a fundamental role in the development
of the European gas market, and that an appropriate proportion
of gas supplies from countries outside the Community should be
based on such arrangements. However, it believes that Member
States should also ensure greater liquidity and the development
of transparent prices, and that a minimum proportion of new gas
supplies will have to be based on short-term "spot"
contract (or on long-term contracts whose price is geared to the
spot markets). It adds that this approach is possible only on
the basis of cooperation rather than confrontation with the producer
countries, and that the Community must encourage the necessary
dialogue.
The Government's view 1.13
In his Explanatory Memorandum of 17 October 2002, the Parliamentary
Under-Secretary of State for Science and Innovation at the Department
of Trade and Industry (Lord Sainsbury of Turville) says that the
UK is opposed to the Commission's proposals, because:
— existing IEA and Community arrangements for holding
stocks already provide sufficient cover for oil supply disruptions,
and the IEA has a track record of acting sensibly and effectively
in an emergency;
— oil is an internationally marketed commodity which
is freely traded worldwide, and emergency plans need to cover
key world players, such as the United States and Japan, which
only the IEA is in a position to do;
— whilst the existence of stocks helps to reassure the
market, this would not be true if the Community were thought to
be using them to try and influence prices;
— the proposals on gas are premature, in that it would
make sense to move to a detailed discussion of security of supply
only when there is a firm and irrevocable commitment to full liberalisation
of Community electricity and gas markets, with the biggest single
contribution to security of gas supply being made by the market
disciplines which will result from liberalisation;
— the proposals received no support from Member States
when the Commission previously floated them during discussions
on the Green Paper on energy security, and the Commission has
since then produced no new justification for them;
— the proposals have not been adequately costed by the
Commission, and would impose considerable burdens on Government,
business and the consumer;
— in terms of subsidiarity, individual countries, acting
as members of the IEA, are best placed to respond to an international
oil emergency. 1.14
The Minister says that the UK also has reservations about the
suggestion that the proposal should be based on Article 95 of
the EC Treaty, believing that Article 100 (which provided the
legal base for the existing oil stocking Directives) may be more
appropriate
Supplementary Explanatory Memorandum of 30 October 2002
1.15
In his Explanatory Memorandum, the Minister said that a Regulatory
Impact Assessment would be supplied as soon as possible. This
has now been provided under cover of a Supplementary Explanatory
Memorandum of 30 October 2002 from the Minister for Energy and
Construction (Mr Brian Wilson). This notes that, although the
risks of failures in energy supply identified by the Commission
are clear, it has not produced any analysis on oil to show why
the increased stocking requirement and more interventionist role
it envisages for itself would improve the ability to cope with
disruption. The Assessment also reiterates the point that, although
the UK is more sympathetic to the proposal on gas, it believes
that a higher priority should be given to completing the liberalisation
of the Community energy market, which it says is the best guarantee
of continued supplies. 1.16
In terms of the respective costs and benefits, the Assessment
says that the main impact will be on the oil and gas companies,
though there might be additional opportunities for others to own
or hold the additional stocks, and for construction companies
and others involved in providing additional storage. The Assessment
estimates that the proposal would cost the UK some £1-1.3
billion in additional stocks of crude oil and oil products which
would need to be bought, and that, on top of this, the infrastructure
costs of providing additional storage for between 6 and 7 billion
tonnes of oil would be approximately £1 billion. It adds
that, in addition to these start up costs, there would subsequently
be annual maintenance costs of around £500 million. The
Assessment does not, however, attempt to estimate the cost of
any new obligation to hold gas stocks, merely describing these
"as likely to be substantial".
Conclusion 1.17
It is apparent that these are potentially highly significant
proposals, not only in terms of the likely costs, but more particularly
in relation to the fundamental difference between the Government
and the Commission over the extent to which action of this kind
should be taken by the Community as opposed to individual Member
States. We note also the Government's reservations over the legal
base proposed. We are therefore recommending the document for
debate in European Standing Committee C.
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| © Parliamentary copyright 2003 | Prepared 8 January 2003 |