Select Committee on European Union Thirty-Seventh Report


Letter from Lord Truscott, Parliamentary Under Secretary of State for Energy, Department of Trade and Industry to the Chairman

  I have pleasure in enclosing the Government's response to the Committee's report on the Green Paper. The delay in response means that some of the points raised in the Committee's report have been addressed by the recent publication of the European Commission's recent Strategic Energy Review of 10 January and, alongside this, the Commission's Communication on Climate Change. Departmental officials will be putting together Explanatory Memoranda in respect of the SER itself and its various component parts.

  On EU/Russia, the process of agreeing the EU's negotiating mandate for the post-PCA agreement continues. With regard to the PPC meeting that took place in Moscow on 8 December, I am afraid that the formal report of this meeting was circulated to Member States under a "restricted" cover and I am not therefore able to send it to the Committee.

29 January 2007

Government Response

  The Government welcomes the thorough, wide ranging and detailed work undertaken by the Committee in its examination of the important topic of the European Commission's Green Paper. As the report notes, this Green Paper is an important legacy of the UK's EU Presidency when a key conclusion of the Hampton Court Summit in October 2005 was the need to develop a strong common EU policy where appropriate against a background of concerns over security of supply, energy prices and the environmental costs associated with some uses of energy.

  2.  The UK had already sent its interim response to the Commission on the Green Paper in June, shortly before the European Committee produced its report. To reflect the UK's own Energy Review, completed in July, the Government sent a further supplementary response to the Commission at the beginning of October. The Committee's report was very helpful in informing this supplementary response.

  3.  In broad terms, the Government is in agreement with many of the views expressed in the Committee's report. In particular, we agree on the importance of the role of the market, on the need to uphold Member State subsidiarity especially in the area of energy mix, on the need to avoid political or central intervention except on clear, adequately justified grounds and when such intervention has the agreement of Member States. We agree with the Committee also on the need for further clarification on the part of the Commission in respect of a number of its proposals. The Commission's recent Strategic Energy Review (SER) of 10 January 2007 goes some way to doing this.


  Recommendation 1: the Commission should more clearly articulate where it believes that a more coordinated approach is required on an item-by-item basis, detailing the benefits arising from implementation of its recommendations and why such benefits could not be achieved at individual Member State level.

  At a general level, the Government believes that under all the three themes of the Green Paper—security of supply, EU competitiveness and sustainable development—there is both benefit in a more coordinated approach and a limit to what the UK or other Member States can achieve on their own. That is why the Prime Minister set this agenda at Hampton Court in 2005, during the UK Presidency of the EU, for a new European approach to address the three challenges of security of supply, maintaining European competitiveness and climate change.

  The UK's energy policy is inextricably tied up with our fellow EU Member States, with whom we now share dependency on foreign gas sources. Developments in continental Europe and the EU's neighbours have a direct effect on UK domestic policy and energy prices. By speaking to major supplier and transit countries with one voice, the EU can achieve more to improve security of supply than can individual Member State governments. Acting together more coherently increases the EU's influence internationally in persuading third countries to move towards more sustainable and market-based policies. The Energy Community Treaty, in which the states of south-east Europe have signed up to EU electricity and gas legislation and part of the EU's competition and environmental legislation, is one example of this.

  The Government considers that the EU not only needs a sustainable energy policy on its own account but also as a way of driving the international response on climate change, demonstrated by its adoption earlier of the Kyoto protocol and establishment of the EU Emissions Trading Scheme. Again, more can be achieved by the EU collectively than at individual Member State level. And an effectively implemented single energy market is vital for the economic competitiveness of the UK as a net gas importer—and the EU as whole.

  As noted above, the Commission's Strategic Energy Review (SER) of 10 January has already put more flesh on the bones of its Green Paper proposals and in doing so addresses at least in part a number of the Committee's points.

  The design and implementation of new policy needs to recognise that markets (rather than the State) are best placed to deliver objectives efficiently and effectively. The degree of EC/government intervention needs to be carefully managed. Political intervention by the Commission or Member States should be cautious, infrequent and long-lasting. Policy needs to be sensitive to national and regional differences and avoid setting specific targets.

  The Government very much agrees on the primacy of the market, as stressed in our initial response to the Green Paper, which underlined the importance of fully implementing existing internal market legislation but also highlighted areas where further legislation was needed to improve the functioning of EU energy markets. We agree that we need to be wary over market intervention, though there may be a role for providing incentives in certain areas to bring new technologies and forms of energy on to the market, such as renewable energy, in order to accelerate their commercial deployment. The role of the Commission and Member States should be to put in place the regulatory framework necessary to enable markets to work effectively and efficiently.

  We very much agree that European policy must be sensitive to national and regional differences, notably to enable individual Member States to choose their own energy mix in a way that is compatible with meeting their emission reduction goals.

  The definition and clarity of the main policy objectives, including the understanding and interpretation at a Member State level, needs to be reviewed and revisited, to enable consistent decision making across Europe.

  The publication of the SER alongside its Communication on climate change reflects the Commission's wish to ensure consistency between a range of policy objectives, including competitiveness, jobs and growth as well as energy and climate change. Publication of these two documents together underlines that energy policy and climate change are mutually linked.


    —  We recommend that the Commission seek to develop a business case which clearly articulates where it believes that a more centralised approach is required, on an item-by-item basis.

  The Commission has already started this process by providing supporting documents to the different strands of work proposed in the SER. The proposals that will flow from the SER should also be accompanied by a Regulatory Impact Assessment.

    —  It is not clear whether all three objectives can be delivered in practice, particularly in a global context. The inherent tensions need to be specifically acknowledged and managed.

  While we agree that it can be difficult to manage the tensions between the three objectives—of energy security, competitiveness and sustainability—we see them as inextricably linked.

  As the Commission notes in the SER, an effectively functioning competitive market will cut costs, stimulate energy efficiency and investment, is vital for the effective application of economic instruments such as the ETS, and will promote security of supply. To do nothing about climate change would be inconsistent with our energy goals. Conversely, commitments to reduce emissions should be positive for energy security, in the form of greater diversity through increasing the share of renewables and other forms of low carbon energy sources and increased energy efficiency.

  The SER acknowledges that climate change and energy are inextricably connected, given that a large proportion of C02 emissions come from the energy sector. It recognises the global context to tackling climate change by proposing that the EU sets objectives for the reduction of greenhouse gases by developed countries as part of international negotiations, as well as agrees to a unilateral EU commitment to reduce emissions.

    —  More work is needed to properly define unambiguous outcomes for each objective, and fully explore and understand the key drivers of success, including a basis for measuring progress over time.

  The Government agrees on the need for unambiguous outcomes for each objective. The Commission's supporting documents that underpin each of the areas set out in the SER go some way towards this.


    —  The Commission should consider whether responses from other Member States reflect a similar lack of engagement [towards energy efficiency].

  The Committee's report pre-dates the Commission's Energy Efficiency Action Plan which issued in October 2006. The UK and other Member States have welcomed the Plan as ambitious and realistic with a welcome focus on priority areas such as energy performance standards for appliances & other energy using produces, updating the labelling framework, vehicle emissions standards and energy savings from buildings. We strongly support rapid implementation of the Action Plan, particularly on these priorities, which were endorsed by the Council on 23 November last year.

    —  The EU ETS is an area whether the Commission has a key role to play, responding to the early experience and promoting its merits on a global basis.

  In the SER, the Commission underlines the key role that the ETS will play in reducing Europe's emissions. We see the ETS as the best long-term mechanism for securing least-cost emissions reductions across the EU, and will work with EU colleagues to strengthen the scheme. The Government agrees that the ETS has the potential to become the hub for a global carbon market, and will work with the Commission and other Member States to that end.

    —  Developing an energy policy sufficiently flexible to allow the inclusion of key, low carbon technologies, as and when they reach a commercial scale, is critical to delivering sustainability.

  We very much agree. The Commission's European Strategic Energy Technology Plan, to issue later this year, will aim to be a major step towards this.


    —  The UK and/or Commission do not appear to have effective high-level contingency plans to deal with issues which arise in the interim as a result of partial liberalisation in Europe.

  The final report of the Commission's energy sectoral inquiry proposes a number of remedies to address the malfunctioning of EU energy markets, including taking action under EU competition law against individual companies, and the Strategic Energy Review proposes new legislation on, for example, more effective unbundling, increase in harmonisation of regulators' powers and transparency. It will, however, be some time before these measures take practical effect and we recognise that we must seek improvements in market functioning in the meantime. This is why the regional market initiatives currently underway in the EU are so important. These will enable practical progress to be made towards greater market integration and improved cross-border flows through voluntary action agreed by the market players.

    —  Breaking the price-linkage between gas and oil is likely to result in gas prices finding their own, lower level through competition, which would help to offset the incremental costs associated with internalising the price of carbon.

  The Government's policy objective is indeed to move to full "gas-to-gas competition". This would mean that the price of gas would be more reflective of conditions in the gas market, which would in turn provide the signals needed to drive investment where it is needed. It would not necessarily mean that gas prices are lower at all times and in all circumstances.


    —  Energy security of supply should not focus on gas alone but be interpreted in a much broader context.

  We agree. The Green Paper and subsequent SER both focus on the importance of energy efficiency, renewable energy, promotion of energy technologies, increasing electricity interconnection and—for those Member States that choose it—the role of nuclear as well as gas.

    —  LNG is not a single solution for security of supply and may even work against the UK if gas prices elsewhere are higher.

  We agree that LNG is not a single solution for security of supply but it can play an important role in diversifying the EU's imported gas supplies


    —  An open and competitive market place through completion of the liberalisation process is imperative.

  The Government very much agrees on the importance of effective liberalisation including new legislation where necessary. The reports and inquiries into the workings of the internal market carried out by DG TREN and DG COMP reflect the Commission's commitment to making the single market work effectively. A fully implemented single market will aid security of supply, lead to more efficient use of energy, improve the competitiveness of EU businesses and enable effective application of economic instruments such as the ETS. The recent SER puts forward a number of useful proposals to strengthen the development of the internal energy market including ways to increase the effectiveness of unbundling, improve the regulatory framework and enhance transparency. Moreover, the Commission is taking action under competition law against individual companies.

    —  The Commission's role in the area of interconnection should include completing the unbundling process through the separation of supply and generation assets from transmission and distribution assets.

  The Commission has proposed two options to address unbundling: a full Independent System Operator (where the vertically integrated company remains owner of the network assets and receives a regulated return on them, but is not responsible for their operation, maintenance or development) or ownership unbundling (where network companies are wholly separate from the supply and generation companies). The UK believes that full ownership unbundling is the only certain way to ensure non-discriminatory access to networks and to provide the necessary incentives for network investment and will be pressing the Commission to that end. The Commission is also proposing to re-examine the provisions on unbundling of distribution activities, which currently exempt smaller distributors from most unbundling requirements.

    —  We do not support the creation of a single European energy regulator.

  The Government agrees with this point. While not favouring a single European regulator, we do think that powers of energy regulators across the EU should be harmonised at the highest level, and that national regulators should cooperate closely within ERGEG (European Regulators Group) and have the powers to promote the development of the internal energy market and, in particular, greater integration of national markets. A common approach on regulatory issues affecting cross border trade is a major priority.

    —  We do not believe the case has been proven for the development of a European Energy Supply Observatory or for a revision of Community legislation on gas stocks.

  The Commission's rationale for the observatory is that in an integrated market there is a greater need for transparency relating to external dependency. In our original response to the Green Paper, whilst we support efforts to bring transparency on supply and demand data, the UK would not support the creation of a new body. The Commission proposes to establish the observatory as an office within DG TREN, aiming to set out later this year its specific responsibilities and a legal base for how it will be financed. We will consider the proposal carefully when we have more detail.

  Our current view is that new legislation on comprehensive transparency requirements is needed so that companies in Europe all operate on a level playing field and have access to the same information, so ending the advantage afforded to vertically integrated companies. We think the Energy Observatory will provide a useful function in collecting and making available comprehensive data and monitoring the demand/supply balance so that investment needs are identified in time for the market to respond. We see the observatory and new legislation as complementary and both needed.

  The UK is considering the issue of strategic gas storage in the context of our forthcoming Energy White Paper and notes the Committee's views on this. We welcome the Commission's recognition of the high costs that the establishment of strategic stocks would involve and the need to balance this against the benefits gained and will press the Commission for a full cost-benefit analysis to carried out before it brings forward its promised proposal on strategic stocks.

    —  We do not believe that a European-wide energy mix benchmark is appropriate but that markets are best placed to determine specific technologies and related proportions within the energy mix.

  The Government agrees. Member States should have the flexibility to deliver their own energy mix commensurate with their levels of emission reductions and to set policies appropriate to national circumstances. Providing the necessary incentives are in place to bring on new technologies and greater use of energy generated from low carbon sources, the market should deliver the most effective solutions.

    —  While action to reduce energy demand and increase the proportion of renewables in the energy mix are important, setting targets is not appropriate.

  The Government agrees with the Commission on the importance of increasing the use of renewables and other low carbon energy technologies in power generation and transport for meeting our climate change objectives, but does not believe that mandatory targets offer the most cost-effective way of doing this. The UK is firmly of the view that Member States must have the flexibility to deliver their own energy mix at levels commensurate with their overall emission reductions goals in the most cost effective way—by setting policies appropriate to national circumstances. Though indicative targets can be helpful, the UK does not favour prescriptive targets.

    —  The Commission should consider ways to enhance the EU ETS including broadening the scope of the scheme, increasing its terms, reviewing the targets for carbon reduction and considering the basis on which allowances are allocated.

  As noted above, the UK sees the ETS as the best long-term mechanism for securing least-cost emissions reductions across the EU and will work with the Commission to strengthen the scheme for future phases post-2012. In particular, we see the need for greater clarity on when and how caps/limits on emissions will be decided in the future. And we agree with the Committee and a number of other Member States on the need to review the way that allowances are allocated as well as to broaden the scope of the scheme—for example to include aviation. As the largest regional carbon trading scheme in the world, the ETS has the potential to become the hub for a global carbon market but it needs strengthening before it can do this.

Letter from the Chairman to Lord Truscott

  Thank you for your letter of 29 January 2007. Sub-Committee B considered your letter at its meeting on 19 February 2007.

  We were grateful to you for your full response to the recommendations of our report, The Commission's Green Paper, "A European Strategy for Sustainable, Competitive and Secure Energy", published in July of last year. We will consider your response carefully and look forward to addressing the issue further, possibly through a debate in the House. In the meantime, we will continue to scrutinise the Commission's follow up proposals, and share your hope that they do add the necessary clarity to the Green Paper's objectives.

  On the EU-Russia Cooperation Agreement, we fully understand your reasons for withholding the restricted report of the PPC meeting; but would of course be grateful for an update from you should any developments in negotiations be made.

26 February 2007

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