Select Committee on European Union Fourteenth Report


FOURTEENTH REPORT


12 FEBRUARY 2002

By the Select Committee appointed to consider European Union documents and other matters relating to the European Union.

ORDERED TO REPORT

ENERGY SUPPLY: HOW SECURE ARE WE?

5619/01 COM(2000) 769 final:  Green Paper presented by the Commission—Towards a European strategy for the security of energy supply

EXECUTIVE SUMMARY

Part 1—The Nature of Energy Security

1. We examine the nature of energy security (paragraphs 1-3).

2. We are convinced that liberalisation of energy markets will help promote energy security. But markets on their own cannot cope with the geo-political problems. The key criterion for energy security should be risk management rather than self-sufficiency. Energy security needs to be redefined for liberalised energy markets. We recommend that the focus should be on risk management and the main tools should be diversity, flexibility and availability of backup, not central planning or self-sufficiency (paragraphs 4-10).

Part 2—The Green Paper

3. We welcome the Green Paper and its timeliness. Our inquiry has concentrated on security of energy supply. We have not covered all aspects of the Green Paper such as transport, environmental issues, or demand side policies.

We do not think that the Commission needs significant new powers or that there should be an energy Chapter in the Treaties. We recommend that the Commission's priorities be to complete a liberalised single market in energy, facilitate energy interconnections between Member States and to encourage stable investment conditions in producer countries (paragraphs 11-17).

4. The Commission's role should be to promote equivalent standards of emergency preparedness (paragraph 18).

11 September 2001—Terrorism

5. The events of 11 September remind us of the vulnerability of key parts of our economic infrastructure and our growing dependence on unstable regions of the world. We recommend that the Government and the Commission regard the threat of terrorist attack as further underlining the need to avoid over-dependence on any single energy facility or geographical source (paragraphs 19-20).

6. We see no fundamental conflict between liberalised energy markets and energy security. We recommend that the United Kingdom Government and the Commission reinvigorate the process of liberalisation. In particular, effective access to electricity wires and gas pipelines and storage is essential (paragraphs 21-22).

Supply side policies

Oil markets and producer/consumer dialogue

7. The Green Paper sees growing European dependence on imported oil as Europe's "Achilles heel".

8. We recommend that the Government and the Commission support and promote government-to-government dialogue with oil-producing countries but that such dialogue should aim at improving understanding between producer and consumer countries, not at managing oil prices (paragraphs 23-25).

9. We recommend that oil stocks be used within the International Energy Agency (IEA) arrangements to maintain supply during an emergency, not to stabilise prices (paragraph 26).

World oil supply.

10. We hear conflicting evidence about how long oil stocks are estimated to last. We side with the majority view that depletion does not present an immediate risk (paragraph 27).

Nuclear

11. Nuclear power is currently a key component of energy security and environmental performance—it provides over one third of Europe's electricity and will reduce the European Union's CO2 emissions by over 300 mtonnes in 2010. We see three main issues: the perceived safety of nuclear plant; the problem of nuclear waste disposal; and the economic viability of nuclear power generation. We recommend that the Commission and Member States encourage research and development on issues relating to the public acceptability of nuclear power generation (paragraphs 28-30).

12. If positive measures are not taken, there is a risk that the nuclear power generation option will be lost by default. We recommend that the European Union should aim at least to retain its present proportion of nuclear power generation and should examine what is necessary to achieve this (paragraphs 31-32).

Gas

13. Europe is becoming increasingly dependent on external sources for the supply of gas and this is now becoming true for the United Kingdom too (paragraphs 33-34).

14. We are concerned about the dependence of many Member States on one or two major gas trunklines. We are also concerned about the varying levels of planning for storage. We recommend that the Commission undertake a study of the options designed to ensure a comparable level of energy security in all Member States (paragraphs 35-36).

We recommend that European Union Member States be required to have comparable standards of emergency preparedness in relation to gas emergencies, to ensure that gas flows are not interrupted (paragraphs 37-38).

15. It has been argued that long-term contracts are essential in the gas industry in order to fund expensive infrastructure and thus to add to security of supply. We do not agree with this proposition, though we recognise the need for significant capital investment. A freely operating European market would provide the liquidity necessary to offset perceptions of demand risk. We recommend that faster progress be made towards full market liberalisation, rather than rely on very large long-term contracts, to help create the conditions for the substantial investments needed in producing countries. The Commission must continue to encourage gas interconnections and inter-operability between Member States so that a larger, effective market is created (paragraphs 39-40).

Coal

16. Coal is described by the Green Paper as an "undesirable" fuel. All energy sources have disadvantages as well as advantages and coal is not alone in this. Coal remains the world's largest single source of electricity, now and for the foreseeable future. It is a key element of energy diversity and flexibility. We recommend that Europe avoid handicapping coal unnecessarily in view of its contribution to energy security. The focus of European support for coal in future should be the development of clean coal technologies, not support for unprofitable coalmines (paragraphs 41-42).

Renewables

17. The Green Paper is right to stress the importance of renewable sources of energy. But this should not lead to an unrealistic expectation that it will solve all Europe's energy problems. Current targets are ambitious. In the United Kingdom in particular, planning permission is a major obstacle. There are also difficulties over the integration of renewables into electricity systems. At present, therefore, it would, in our view, be risky and premature to assume that renewables on their own will be able to provide the answer to the environmental and security challenges facing the energy sector, or indeed that they should be the primary recourse. We recommend that the United Kingdom Government and the European Union encourage investment in renewable energy sources but recognise that they cannot rely on renewable energy sources excessively as a major contribution to the environmental security challenges in the energy sector (paragraphs 43-47).

Electricity

18. As with gas, Europe could improve its electricity security by facilitating trade and interconnection in electricity. Electricity is difficult to store, but can be generated by using different sources of fuel. Whilst it is not a primary source of energy, we recommend that European Union Member States and the Commission should keep the electricity regulatory system under review to ensure that it promotes security of supply (paragraphs 48-49).

Demand side policies

Energy efficiency

19. Energy efficiency is an important objective of energy policy but the historical record is not encouraging. There is no simple relationship between energy efficiency and energy security as the Green Paper implies. Greater energy efficiency in effect lowers the cost of energy services which may lead to a higher level of consumption of these services. Nor do lower imports, necessarily, equate to higher security. Energy efficiency does not necessarily improve diversity, flexibility or the availability of backup. We recommend that the United Kingdom Government and the European Union should continue to promote energy efficiency but without assuming that it will lead to greater security of supply (paragraphs 50-55).

Other subjects covered by the Green Paper

Research and Development (R&D)

20. We recommend that the European Union's R&D be designed to support energy policy objectives, including the development of energy efficiency, renewables, and carbon sequestration (paragraphs 56-57).

Climate Change and environment

21. Climate Change was not the focus of our inquiry, but clearly Europe must meet its environmental objectives as well as its energy security objectives. We recommend that the Commission and Member States should treat both energy security and environmental objectives as important without allowing either to dominate (paragraph 58).

Taxing energy

22. We think that the external environmental costs arising from energy use ought to be reflected in energy prices. This would remove many of the barriers to the development of energy efficiency and renewables and reduce the need for distorting subsidies and regulations across the energy sector. These externalities are broadly similar across Europe, and, in the interests of the single market and a level playing field for competition, we therefore see a case for a common approach to European energy taxation, or at least for a more consistent approach between Member States. We recognise, however, that in practice matters are more difficult and there was little enthusiasm among our witnesses for harmonised energy taxes. We recommend that the Government should encourage other Member States to move in the direction of taxation that reflects the environmental impact of energy use. But this should be an agreement between Member States acting collectively on this specific policy issue; we do not accept the case for Community legislation to achieve this objective (paragraphs 59-61).

Part Three—The Committee's views on major issues raised by the Green Paper that relate specifically to the United Kingdom

What happens if the European energy market fails to liberalise fully?

23. We note a possible conflict of interest between Member States that have liberalised fully and those that have not. We sought, and have received, supplementary evidence to define what the United Kingdom's strategy ought to be in the event that Europe fails to liberalise fully. We identify a need for secure access to storage. We recommend that there should be a mandatory storage capacity obligation on companies supplying gas to United Kingdom customers (paragraphs 62-65).

Short/medium term threat to United Kingdom gas supplies

24. We received evidence that has alarmed us. We recommend that as a matter of urgency, the Government examine whether gas stocks are as tight as suggested by some of the evidence and report its findings to Parliament (paragraph 66).

25. Whatever happens in Europe, the United Kingdom's future security of gas supply will depend on the flexibility and resilience of the pan-European gas network. We recommend that the Government use its influence to bring about the establishment of inter-governmental agreements to ensure that there are common infrastructure standards (paragraph 67).

Free market and long-term contracts

26. It has been suggested that gas suppliers might be reluctant to deliver to free markets without long-term contracts and that such contracts are necessary to underwrite the expenditure on infrastructure. Ofgem has introduced measures to provide incentives to National Transmission System (NTS) Operators (paragraphs 68-71).

Terminals

27. It is important for security of supply that new terminals are not sited next to existing ones. We recommend, therefore, that the Government look closely to determine what means it has to ensure that new terminals are so sited as to increase the diversity and flexibility of the infrastructure (paragraph 72).

Nuclear power generation

28. We are of the opinion that the Government cannot leave matters as they stand now. A solution has to be found quickly to problems such as the disposal of nuclear waste, planning permission and public concern about safety of nuclear installations and materials handling. We recommend that the Government should maintain the United Kingdom's present ability to produce no less than 20 per cent of United Kingdom electricity demand from nuclear power generation, and proceed as a matter of urgency to agree a method of dealing with nuclear waste, and an appropriate planning policy for new nuclear power stations on existing sites (paragraphs 73-79).


 
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