Select Committee on European Union Fourteenth Report


PART 2: THE GREEN PAPER—TOWARDS A EUROPEAN STRATEGY FOR THE SECURITY OF ENERGY SUPPLY

Background

11. Against the background of the renewed interest in the issue[5], and the need for a redefinition of energy security in the context of competitive markets, we welcome the publication of the Commission's Green Paper on Energy Security and the debate that it has engendered. We have received a considerable body of evidence during our inquiry, both written and oral, and we are grateful to the witnesses for the care and thoroughness with which they have addressed the issues raised by the Green Paper. Their evidence is of high quality and is to be found in pages 1-329.

12. We think that the Green Paper is timely and rightly draws attention to major issues. Both the Commission's Green Paper and the Government's national review carried out by the Performance and Innovation Unit of the Cabinet Office consider security of energy supply together with environmental issues relating to the control and reduction of CO2 emissions (the Kyoto targets). We have not done so. Rather, we have concentrated on security of supply in a national and European context. For this reason, the evidence in support of energy from renewables and subjects such as energy efficiency is not as extensive as the evidence on security of supply. We have considered aspects of energy from renewable sources in our Report Electricity from Renewables.[6]

13. The Green Paper also considers the role of transport in the context of energy supply. We do not. Nor do we reflect on the impact of enlargement. Both are subjects of sufficient importance as to warrant separate examination.

14. The Green Paper highlights Europe's (and the United Kingdom's) increasing dependence on imported oil and gas. We have heard that the European Union may be some 40 per cent dependent on gas imports by 2010 or soon thereafter and that import dependence will rise to 66 per cent or more by 2020.[7] Along with the rest of Europe, we will be dependent on a small number of suppliers, prominent among them Russia and Algeria. The United Kingdom, because of its geographical position will in most cases be "at the end of the line", receiving gas which has been transmitted through the entire European pipeline system.

15. The position in relation to oil is broadly similar. Production in the Organisation for European Co-operation and Development (OECD) (including the North Sea and US) is set to decline. Imports to Europe and the United Kingdom will have to increase. OPEC's share of world markets will rise—to some 54 per cent of world demand by 2020 (as compared with around 40 per cent today) according to IEA projections[8] comparable to the level in the 1970s. The growth of imports sets challenges that need to be addressed and the Green Paper is right to draw attention to them.

Energy in a European context

16. The Green Paper is also right to set these issues in a European context. With the development of the single market, the common environmental challenges facing all Member States and the common external sources for future energy supplies, individual national energy markets can no longer be seen in isolation. We therefore accept the need for an overview at European level, for sharing of experience in and between Member States, and, in some areas, for action at European Union level. This does not in our view mean that an Energy Chapter in the Treaties is called for, and few of our witnesses supported this. However, the majority believed, and we agree, that there is a role for both the Commission and Member States and that, in view of the extent of the common interests, there is some need for comparability and co-ordination of effort.

A role for the European Commission?

17. As regards the role of the Commission, we think that its priorities should be to complete the single market in energy and ensure that it operates flexibly and effectively; to facilitate the development of energy infrastructure and interconnections between Member States; and to work to encourage stable investment conditions in the main supplying countries.[9] The Commission already has considerable scope to act in these areas and we are not persuaded that it needs significant extra powers or that a new Energy Chapter is required[10].

We do not believe 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.

Equivalent standards of emergency preparedness

18. In general, we believe that planning for energy emergencies is best left to individual Member States, because their circumstances are very different—the fuel mix, levels of import dependence, share of nuclear power etc, all vary considerably across Europe. The risks of supply disruption and the appropriate responses also vary accordingly and a "one size fits all" policy would make no sense. Nonetheless, in some cases the Member States face common threats. In a single market it is right that they should maintain a comparable level of preparedness to deal with emergencies, to avoid some States "free-riding" on the emergency response measures set up by others. We indicate below instances where we believe this applies (paragraphs 37-38). In such cases we believe it is appropriate for there to be common European standards of emergency preparedness, to be implemented in the most appropriate way by individual Member States.

The events of 11 September

19. We launched our inquiry in July 2001, before the terrorist attacks of 11 September and much of the written evidence we received was prepared before then. However, we have considered the attacks and their consequences in some detail in the course of taking evidence[11]. These events have reminded us of the potential vulnerability of key parts of our economic infrastructure and our growing dependence on politically unstable regions of the world.

20. We think the attacks underline the energy security challenges we face rather than fundamentally changing their nature. They reaffirm the importance of paying attention to the main components of energy security—diversity and flexibility of supply, the maintenance of capacity to respond to any disruptions and also the importance of limiting "facility dependence"—of avoiding over-dependence on any single energy facility, which might then become a target for hostile action. The United Kingdom Government and the Commission will need to bear this in mind when considering future interconnections—for instance the new pipelines which will be needed to import gas from Russia via continental Europe, or new terminals for Liquefied Natural Gas (LNG) if this option is chosen (see paragraph 72). The danger comes not so much from attacks by terrorists as from the potential intervention by producer or transit states either to interrupt supply or to manipulate prices for political reasons or because of political or social instability in those countries.

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.

Liberalisation

21. As we have indicated above, we see no fundamental conflict between liberalisation and energy security. Indeed, in our view, liberalisation can help promote security by creating more flexible and diverse markets. However, liberalisation of European energy markets is progressing slowly and we heard much evidence to indicate that some major European states are reluctant to open up their markets effectively. In the case of France, this takes the form of a slow and minimal compliance with the existing electricity and gas directives. In the case of Germany, there is formal market opening but because of the dominance of a small number of large utilities and an inadequate regulatory system, access for outside suppliers is unnecessarily difficult.

22. In our view, this halting approach to liberalisation impedes security of energy supply to Europe as a whole. First, it makes energy transit more difficult. For instance, future United Kingdom gas supplies will have to come increasingly from such places as Russia. United Kingdom companies will need effective and non-discriminatory access to European pipelines, storage facilities etc. At present, that is not assured.[12] Second, the slow progress is allowing incumbent utilities, particularly those from the relatively protected French and German markets, to increase market dominance across Europe in the markets that have already been fully liberalised. This reduces flexibility and diversity and increases the risk of monopoly abuse. A key priority for the United Kingdom Government and the Commission should therefore be to reinvigorate the process of liberalisation.

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.

Supply side policies

Oil markets and producer/consumer dialogue

23. The Green Paper accepts as inevitable the prospect of increasing oil imports. It sees this as a problem—in particular because of the lack of European influence in world markets. It describes Europe as "Gulliver in chains" and argues "as long as the European Union fails to develop means to reduce the influence of the international markets, this situation will remain the Achilles' heel of the European economy". It sees two main solutions to the problem: dialogue between Europe and producer countries with, amongst other objectives, the aim of "the improvement of pricing mechanisms"; and centralised European emergency arrangements to release oil stocks on to the market if oil prices were to rise to "unreasonable levels"[13].

24. On the first point, we certainly accept the importance of maintaining good relations with producer countries to help promote stable investment conditions.[14] The IEA has identified this as one of the key areas in relation to the promotion of energy security. Our growing dependence on imports will require high levels of investment in producing countries—estimated by the IEA at an average of $10 billion to produce one million barrels a day[15]. Achieving this will require a positive climate for investment; dialogue with the main producing countries to help develop trust, build effective legal investment frameworks, and establish trading and transit regimes can help promote the right climate. These should be the objectives of producer/consumer countries' dialogue and the Commission's role in the dialogue should be to promote these objectives.

25. Beyond that, however, we accept the overwhelming majority of the evidence put to us which is sceptical of the Commission's wider ambitions. In particular, we are not persuaded that there is a need for a more significant "European voice" to provide geo-political balance, or that dialogue should be used as a means of managing the oil price.[16] Prices should be set by markets and the aim should be to make these markets operate effectively, not to set up new government-level mechanisms to manage them.

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.

26. Similarly, while we accept the importance of maintaining an adequate level of oil stocks, we do not see a need for any special European oil emergency arrangements. Oil markets are international and matters relating to oil stocks and sharing are best handled within the IEA, with its much wider membership, rather than the EU. The IEA requires member nations to maintain a minimum of 90 days supply in stocks but it does not prescribe how these should be managed in individual countries. Nor do we believe that oil stocks should be used as a way of managing the oil price. Any attempt to do so is more likely to introduce distortions and inefficiencies than reduce oil price volatility.

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

World oil supply

27. Finally, in relation to oil supplies, we considered the more traditional question of whether the world would soon be running out of oil. We heard evidence to this effect from the Oil Depletion Analysis Centre[17], but the great majority of our witnesses discounted any problem of this nature, pointing to new discoveries and advances in technology which were broadly keeping pace with the depletion of the world's oil resources. We did not study this issue in depth and are not able to compare the arguments in detail. But we believe that there is some truth in both propositions. On the one hand, we accept that it is inevitable that the world will become increasingly dependent on OPEC for its oil supplies and that at some stage this century oil production will start declining. However, we go along with the majority view to the extent that we do not believe that this presents an immediate security issue of itself. The key priority, as indicated above, is in our view to establish a stable investment climate and secure trading and transit conditions. Provided this is done, we should receive adequate warning of any shortage of oil through the normal mechanisms of the market—higher prices—giving the incentives to develop alternatives, whether these are unconventional sources of oil or alternatives to oil itself.

Nuclear

28. Nuclear power is currently a key component of energy security and environmental performance—it provides over one third of Europe's electricity and will lower the European Union's CO2 emissions by over 300 mtonnes in 2010 more than would be the case if the nuclear contribution was replaced by the use of fossil fuels. Given the uncertainties over other sources, Europe should aim to retain the nuclear power generation option so that it can continue to make this essential contribution. There is, in practice, no alternative in the short to medium term which would not increase costs or emissions or both, while reducing energy security.

29. Against this background we think that the Green Paper is right to encourage a debate on the issue, though it seems that it has been relatively unsuccessful in this aim[18]—Commission witnesses informed us that few of the respondents to the Green Paper had dealt with the issue in any detail[19]. One of the problems, no doubt, is the sensitivity of nuclear power and the very different positions of individual Member States, which perhaps led the Commission to pull its punches in the Green Paper, which makes no firm recommendation.

30. We recognise that there are major questions over the public acceptability of nuclear power generation and we accept that progress needs to be made if the option is to be expanded. We see three main issues: the perceived safety of nuclear plant; its economic viability; and waste disposal.[20](See paragraphs 73-79, where we consider these issues within a specifically United Kingdom context.) We would urge the Government and the Commission to take a more pro-active approach on these issues and to promote a genuine national and Union-wide debate. In particular, we think that there is a role for the Commission and for those Member States which wish to preserve the option in helping to encourage research and development.

We recommend that the Commission and Member States encourage research and development on issues relating to the public acceptability of nuclear power generation.

31. If positive measures are not taken we think that there is a risk that the nuclear power generation option will be lost by default. In our view this would seriously damage Europe's energy security and lose us a key element of diversity. We therefore expect that the current energy review[21] under way in this country will identify the role nuclear could play in both energy security and the achievement of environmental targets, and in the promotion of diversity of supply, and spell out the measures necessary to enable this to happen.

32. The minimum we would consider necessary is to seek to "maintain the nuclear option", but this immediately raises the question: what exactly does this mean? Some of the broad elements are clear—eg, retaining the necessary expertise; finding a way of financing nuclear power generation in a liberalised market; modernising the system for granting planning permission so that a public good is not vitiated by local objection, etc—but we think that they need to be spelt out in practical terms. The Commission should study this in more detail so that the measures needed are set out clearly.

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.

Gas

33. A major starting point for the Green Paper is that Europe will become increasingly dependent on external sources such as Russia and Algeria to meet its growing gas demand. As many witnesses have told us[22], this is also true of the United Kingdom. The precise timing and scale of these imports is uncertain but we are likely to become a significant importer of gas before 2010 and our imports are likely to grow rapidly as demand grows and domestic production declines. So the relatively relaxed position we have taken over the past decade may have to be reconsidered—indeed, we have heard evidence that the position over our gas supplies is already tighter than many realise. The United Kingdom has to import to meet peak winter demand.[23] (See also paragraph 66)

34. As we have pointed out above, imports are not of themselves a security problem and in practice, Russia and Algeria have been reliable suppliers[24]. But that does not mean that one can be complacent about the prospective rise in imports. It raises a number of security issues, including that of price—if Europe is dependent on a small number of sources for a large share of its energy supply it may be unable to resist price increases arising from outside. We are already seeing price increases that stem from the need to import gas from the Continent to cover a shortfall in supplies from indigenous North Sea sources[25]. Imports are likely in practice to reduce the diversity and flexibility of our supply sources and routes, and increase "facility dependence". The United Kingdom has in the past, for instance, relied heavily on flexible production from nearby North Sea fields to meet peak winter demand and we have not built large facilities for gas storage.[26] For long distance supplies such flexibility is unlikely to be available, so we may need to construct more storage, or obtain secure and non-discriminatory access to storage in Europe (see paragraph 65). For the latter course we would need a much more fully developed competitive market than at present exists or is likely under the present single market directives.

35. As the previous paragraphs indicate, we will in future be increasingly dependent on the European gas market and will have the same sources of gas, and the same transit routes, as our European partners.[27] We are not persuaded that a European emergency scheme (e.g. minimum gas stock levels across the Union) is appropriate—countries' circumstances differ greatly, as do the most effective means of providing security.[28] For instance, existing levels of gas storage, of interruptible contracts (under which gas supply can be stopped in an emergency) of dual-firing (where an alternative fuel is available as back-up) and of gas penetration in the domestic and power generation sectors all vary significantly across Europe. Since a gas emergency system has to be adapted to these and other special characteristics of the relevant gas market, there is no case for a single system covering Europe as a whole though the IEA is currently concluding a review of the possibility of constructing a system that would strengthen existing national emergency planning.

36. Nonetheless, in view of the future common sources and transit routes, there may be a case for some co-ordination of national approaches within a common framework, to ensure equivalent levels of security across Europe and continuity of transit in an emergency. For instance, the United Kingdom might wish to continue to import gas through an interconnector with Europe in an emergency affecting all European countries and should not find that supply has been siphoned off to meet the emergency requirements of another Member State.

We recommend that the Commission undertake a study of the options designed to ensure a comparable level of energy security in all Member States.

37. We have not examined the issue in sufficient detail to make specific proposals for such a system, but for illustrative purposes we outline here the sort of requirement which might be considered. In the interests of diversity, one could return to the rule of thumb evolved at the time of the development of the (then) Soviet gas pipelines—that no European Union Member State should be more than 30 per cent dependent on imports from any single source[29]. It should then have back-up and other flexibility to withstand an interruption of, say, one or two years from that source (i.e. enough time to develop alternatives if necessary). If these sound demanding targets it may be worth pointing out that the major European gas-consuming countries met these criteria in the mid-1990s when the IEA conducted its last major Gas Security study.[30]

38. Since gas, unlike oil, is a regional issue, we see a role for Europe and the Commission in setting out such criteria for the European gas market. This should not, however, be used to undermine the process of liberalisation, which we see as the priority. Indeed, we believe that it would be easier to accelerate the process of liberalisation if the Commission could demonstrate that gas security would not be impaired.

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.

39. In particular, although we heard conflicting views on the issue, we see no need for long-term supply contracts to receive any special protection in the interests of energy security and believe that they have sometimes had the effect, if not the purpose, of inhibiting competition. While such contracts (i.e. those lasting decades or more) can certainly form part of a gas supply portfolio in a competitive market, they should not be the dominant form of supply—this undermines diversity and flexibility and acts as a barrier to market entry. However, Gas Release Programmes—which respect the sanctity of existing contracts but which provide gas supplies for new market participants— have an important role. Programmes that release gas from existing long-term incumbent contracts on to new entrants such as those recently undertaken in Spain can provide the first steps to creating effective gas liquidity in the market[31].

40. We do however recognise the need for very significant capital investment to meet the gas demands of Europe. We have heard evidence that market conditions in the United Kingdom, or perhaps in Europe in general, may not be adequate to justify these huge investments. We think there may be a need for the Government and the Commission to listen carefully to such representations. As well as doing what they can to encourage stable investment regimes in producing countries, they should also act to free up European markets and remove any unnecessary barriers, for instance ensuring the inter-operability of different European systems and facilitating the construction of interconnections between states. In this respect, we applaud the initiatives of the European Commission in promoting a European Gas Standards Industry Board (GSIB).[32] A big, freely operating European market would provide the liquidity necessary to offset perceptions of "demand risk"—i.e. that a facility could find itself stranded because there was no demand for its output. A Europe-wide fully liberalised market would also have the effect of breaking the link between gas and oil which is an integral feature of long-term contracts; gas-to-gas competition would in turn lead to lower prices for Europe's consumers.[33].

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.

Coal

41. Coal (with nuclear) is described by the Green Paper as an "undesirable" fuel, and we heard a range of evidence about this source, some very positive,[34] some effectively treating it as a relic of the past.[35] In fact, all energy sources have disadvantages as well as advantages, and coal is not alone in this. Certainly coal combustion can have a significant environmental impact. But this can be mitigated and coal offers major security benefits. World coal markets are well supplied and operate freely. Coal is relatively easy to stock in large quantities. It is the world's largest single source of electricity now and for the foreseeable future. It is not subject to the same problems of concentration and vulnerable supply routes as oil and gas. In short, it is a key element of energy diversity and flexibility.

42. In our view it would undermine energy diversity and security if the disadvantages of coal were to blind us to its advantages. Environmental policy should not be used to squeeze out coal but to enable it to find its proper place in the energy balance. However, we see no need on energy security grounds to support uneconomic European coal production (though there may be a case on social grounds for mitigating its decline). As a number of witnesses suggested to us, European policy following the end of the European Coal and Steel Community (ECSC) arrangements should be aimed less at supporting uneconomic coal production and more at developing cleaner technologies for using coal, particularly through co-operative European ventures.[36]

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 coal mines.

Renewables

43. The Green Paper is also right to stress the importance of renewable sources of energy. We considered this subject at length in our Report Electricity from Renewables.[37] Europe needs active programmes of support for renewables to ensure that they develop more quickly. They can contribute to energy security, by adding to the diversity of supply, by providing local energy sources that provide protection against wider system failure, and by reducing reliance on fossil fuels and the supply risks they entail. There are also, of course, significant environmental benefits, not yet fully reflected in energy pricing. So the case for encouraging the development of renewables is very strong.[38]

44. But, as with energy efficiency, it is important not to let a justifiable enthusiasm for the option lead to an unrealistic expectation that it will solve all Europe's energy problems. As many of our witnesses made clear—including the Commission itself[39]—the Commission's target of doubling the share of renewables to 12 per cent of energy consumption by 2010 is ambitious.[40] Even the United Kingdom's own significantly more modest target of supplying 10 per cent of the United Kingdom's electricity (rather than energy) is regarded as highly ambitious. Both the United Kingdom and the European Union have a consistent track record of letting their aspirations run ahead of reality and failing to meet their own targets. As the Green Paper itself admits, the European Union has "regularly" set itself the target of doubling the share of renewables since 1985 without achieving any significant increase.

45. A number of major issues have to be resolved before a real take-off is likely. In the United Kingdom, one particular problem, to which we have previously drawn attention, is that of securing planning permission for renewables projects. In every round of the United Kingdom's support via the Non-Fossil Fuel Obligation, the number of projects approved has been consistently many times higher than the number actually implemented, partly because of the difficulty of securing financing and making the other contractual arrangements to enable the projects to get off the ground, but also because of the difficulty of obtaining planning permission for the proposals. Paradoxically, despite the environmental advantages of renewable projects, they are refused planning permission much more frequently than fossil fuel plant. By their nature they are unlikely individually to be of national importance, so the proposed new arrangements for major projects are unlikely to be of help. We are glad that the Government has recognised and is addressing the problem[41] but until it and other obstacles facing renewables are dealt with, we share the view of many of our witnesses that the renewables targets are ambitious and very unlikely to be met.

46. Furthermore, many questions remain over the integration of renewables into electricity systems. Many renewable sources are intermittent and unpredictable. Some are local but many are remote from the existing electricity grid. Many are small scale, making it difficult to integrate them into a system based on the central despatch of large scale power sources. In short, just as renewables do not fit very easily into our present environmental planning system, so they also do not fit easily into electricity production systems. We have no doubt that the problems can and ought to be dealt with but it is not clear precisely how, and at what cost, this will be done.

47. 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 should certainly regard them as a valuable component of diversity, but that does not gainsay the need for other sources.[42]

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 and security challenges in the energy sector.

Electricity

48. As with gas, in our view, Europe could improve its electricity security by facilitating trade and interconnection in electricity, including with the accession states. Liberalisation could thus promote energy security. However, we accept that there are particular risks with electricity because of the difficulty of electricity storage, and shortages, even very short-lived, are unacceptable.

49. Electricity also raises issues of complexity both in the operation of the system itself and in its relation to other markets. This complexity can be an advantage—for instance, the electricity system could permit the "virtual storage" of gas in the form of coal.[43] This is an example of the sort of flexibility which we believe a liberalised market can promote and any security system (such as the framework for gas suggested above) should allow. But the complexity of the electricity system can also add to the complexity of regulation. For instance, there are complicated interactions between regulated and unregulated markets, as the collapse of Enron has reminded us.[44] Care is therefore needed to ensure that regulatory systems for electricity take account of the need to maintain energy security. The position should be kept under constant review by Member States and the Commission. As with gas, they should also work with the appropriate authorities to ensure inter-operability and interconnections between electricity systems. Provided this is done, as with gas, we believe that accelerated liberalisation is the most effective guarantee of electricity security.

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.

Demand side policies

Energy efficiency

50. Energy efficiency is an important objective of energy policy. It has environmental, social and economic benefits and the Green Paper is right to stress the importance of paying attention to the demand for energy, which has hitherto been relatively neglected in energy policy discussions.[45] The Green Paper states "the Union must rebalance its supply policy by clear action in favour of a demand policy. The margins for manoeuvre for any increase in supply are weak, while the scope for action to address demand appears more promising" and, of course, the Commission has greater powers to affect demand.[46]

51. However, we would caution against relying on the demand side to provide all the answers, for two main reasons. The first is that while governments since 1973, or even earlier, have declared a commitment to promoting energy efficiency, there seems to have been comparatively little effect in practice.[47] Actually reducing energy demand (as opposed to limiting the increase in demand) would be an extremely ambitious objective. Neither historical experience nor the relatively modest proposals in the Green Paper persuade us that there is likely to be a step change in this area in the foreseeable future.

52. Second, we recognise the existence of complex interactions in this area, (one reason for the relatively disappointing results of energy efficiency policies hitherto). In particular, there is no simple relationship between energy efficiency and energy security. The Green Paper implies there is. It sees a straightforward link of cause and effect—greater energy efficiency leads to lower demand, which leads to a lower level of imports, which leads to greater security.

53. None of the links in this chain is clear-cut. Greater energy efficiency in effect lowers the cost of energy services, which may lead to a higher level of consumption of these services (for instance, warmer houses, higher levels of production); if it does lead to lower energy consumption in particular areas than would otherwise be the case, the corollary might be lower prices, and hence higher demand in other areas. The interactions are extremely complex and one cannot assume that a particular efficiency gain in one area will lead to a comparable reduction in energy demand across the economy. Even if it does, the resultant decrease in demand will not necessarily mean lower imports. On the whole European energy sources are more expensive than imports so, without special protection, they may be first to feel a decline in demand.

54. Finally, lower imports do not necessarily mean higher security, as discussed above. Energy efficiency does not necessarily improve diversity, flexibility or the availability of back-up, identified above as the key elements of security.[48] Indeed, energy efficiency may actually be pulling in a different direction.[49] Security is usually aided by the existence of back-up, that is of redundancy in the sense of excess capacity in the form of stocks, spare supply capacity or easily interrupted demand. Such back-up could be regarded in normal times as inefficient, just as the existence of large stocks is incompatible with the efficiencies of just-in-time manufacturing.

55. None of this is, of course, an argument against paying attention to energy efficiency, only against the over simple assumption that energy efficiency, along with its many other advantages, automatically improves energy security.

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.

Other subjects covered by the Green Paper

Research and Development (R&D)

56. We did not inquire in detail into European energy R&D but a number of witnesses stressed the importance of this issue in relation to longer-term energy security[50]. In our view, the Commission should ensure that its R&D programmes support the public policy objectives discussed above—in liberalised markets, there is no need to duplicate or subsidise private research. Specific priorities should include non-fossil sources, including energy efficiency, renewables, the areas of nuclear research identified above and the mechanisms for storing energy. Co-operative working between particular Member States rather than European projects as such may be an appropriate vehicle in some cases. We note that the Green Paper includes recommendations for research into forms of transportation. We did not examine this area of the Green Paper and cannot, therefore, comment on the Commission's proposals in this report.

57. Europe is likely to be dependent on fossil fuels for the foreseeable future and may not be able to rely on a move to a wholly non-fossil energy to meet the challenge of climate change. As well as the clean coal technology suggested above, the European Union's R&D should also seek to develop methods of carbon sequestration.[51]

We recommend that the European Union's R&D programmes be designed to support energy policy objectives, including the development of energy efficiency, renewables, and carbon sequestration.

Climate change and the environment

58. Climate change was not the focus of our inquiry but clearly Europe must aim to meet its energy security objectives as well as its environmental objectives. As we have indicated above, we are not persuaded at this stage that a single European energy policy, to integrate energy and environmental issues, is needed, and many witnesses agreed that this was probably too ambitious at this stage. Nonetheless, the Commission and national governments must aim to achieve balance in their policies in relation to energy security and the environment and not let one objective override the other.

We recommend that the Commission and Member States should treat both energy security and environmental objectives as important without allowing either to dominate.

Taxing energy

59. This issue of achieving a balance between energy security and environmental objectives arises in particularly acute form in relation to energy taxation. We think that in theory, the position is straightforward—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 external costs are broadly similar across Europe. In the interests of the single market and a level playing field for competition, we see a case for ensuring the application of the "polluter pays" principle across all Member States, or at least for a more consistent approach between countries.

60. We recognise that in practice matters are more difficult. There are significant social and economic problems in raising energy taxes and huge variations in the tax systems of the different Member States, so that the impact of an energy tax would itself be very variable. Nonetheless, we believe that the principle of internalising environmental costs is important enough to be worth pursuing. United Kingdom industry already faces a form of carbon tax in the Climate Change Levy and we should welcome, rather than fear, a levelling up of environmental taxes elsewhere. The issue has a clear European dimension. Unless action is taken on a Europe-wide basis, there is a risk that many Member States will be unwilling to tax the environmental effects of energy use appropriately. They may fear that others will not follow their lead and that their industry will therefore face a competitive disadvantage. Moving forward together would have positive environmental and energy policy benefits across, and ways of doing so deserve fuller consideration.

61. However, the overwhelming majority of witnesses expressed varying degrees of hostility to any form of energy taxation[52] and recent research by the University of Surrey[53] shows that in the United Kingdom big business would rather have tradable permits than taxation. Small and medium size enterprises (SMEs) do not support energy taxation at all and naturally prefer incentives and measures such as improved equipment standards to encourage energy efficiency.

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 Members States acting collectively on this specific policy issue; we do not accept the case for Community legislation to achieve this objective.


5   Evidence from Professor Paul Stevens Q 61 Back

6   12th Report, Session 1998-99 (HL Papers 78 & 79) and 1st Report Session 1999-2000 (HL Paper 18) Back

7   Memorandum by BP, page 49 Back

8   World Energy Outlook-2001 Insights (Chapter 2-Reference Scenario) OECD/IEA Paris 2001 Back

9   Q 609 Back

10   For the Commission's position see the evidence from the Commissioner, Mme Loyola de Palacio-Q 610 Back

11   Evidence from Professor Paul Stevens and from Mr John Mitchell-pages 19-38 Back

12   Evidence from Centrica Q 625 Back

13   Evidence from Mr Sampaio Nunes Q 278 Back

14   But see Professor Nigel Lucas's evidence Q 598 Back

15   Evidence from the IEA Q 384 Back

16   Evidence from Mr Sampaio Nunes Q 280 and Evidence from Commissioner De Palacio Q 611 Back

17   See pages 39-48 Back

18   Evidence from Professor Nigel Lucas Q 600 Back

19   Evidence from Mr Sampaio Nunes Q 271 Back

20   Managing Radioactive Waste: the Government's Consultation Report by the House of Lords Select Committee on Science and Technology, 1st Report, Session 2001-02, (HL Paper 36) Back

21   By the Performance and Innovation Unit of the Cabinet Office Back

22   Notably Mr Brian Wilson MP, the Minister for Energy Q 919 Back

23   See Addendum to the Supplementary evidence from the Lattice Group-page 195 Back

24   But see Lord Haslam's Supplementary evidence page 235 Back

25   Q 678 Back

26   Paragraph 3 (a) of Supplementary evidence from the Lattice Group-page193 Back

27   Memorandum by Centrica-page 185 Back

28   Q 705 Back

29   Evidence from Mr Chichester, MEP-Q 314; but see also BP's Memorandum, paragraph 8, Page 73 and Centrica's Memorandum-page 176 Back

30   The IEA Natural Gas Survey-OECD/IEA Paris 1995 Back

31   Evidence from Professor Peter Davies, BP-Q 244 Back

32   Ibid-Q 246 Back

33   Evidence from Mr Jonathan Stern-Q 181 and evidence from Centrica-Dr Colin Lyle-Q 631 Back

34   See the evidence from the Coal Authority-pages 149-158 and evidence from PowerGen-Q 692 Back

35   Q 526 Back

36   The Lord Haslam's Supplementary evidence-page 235 and evidence from Mr Brian Wilson MP, Minister for Energy-Q 949 & 950 Back

37   12th Report, Session 1998-99 (HL Papers 78-1 & 2) Back

38   Evidence from Mrs Anna Walker, DTI-Q 22-27 Back

39   Evidence from Mr Sampaio Nunes-Q 287 Back

40   Evidence from Professor Nigel Lucas-Q 595 and evidence from Commissioner de Palacio-Q 612 Back

41   Planning Green Paper:Planning: Delivering a Fundamental Change-http://www.planning.dtlr.gov.uk/consult/greenpap/pdf/greenpap/pdf Back

42   But see Mr Stephen Tindale's evidence on behalf of Greenpeace-Q 586 Back

43   Q 508 Back

44   Supplementary evidence from Dr Dieter Helm-page 18 Back

45   Q 700 Back

46   Evidence from EuroACE-pages 237-242 Back

47   Evidence from CBI-Q 728 Back

48   Evidence from Professor Nigel Lucas-Q 595 Back

49   and vice-versa-see EuroACE's Memorandum, Sections B and D- pages 238-239 Back

50   Evidence from Professor Nigel Lucas-Q 601 Back

51   But see Greenpeace's evidence through Mr Stephen Tindale-Q 580-583 and see the Lord Ezra's evidence-Q 503 Back

52   But see BNFL's evidence-Q 789-790 Back

53   UK Gas Report Issue 20-28 January 2002, page 5 Back


 
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