41st REPORT: THE COMMISSION'S GREEN PAPER,
"A EUROPEAN STRATEGY FOR SUSTAINABLE, COMPETITIVE AND SECURE
ENERGY"
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.
GOVERNMENT COMMENTS
ON THE
CONCLUSIONS AND
RECOMMENDATIONS OF
THE COMMITTEE'S
REPORT (CHAPTER
8)
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.
CHAPTER 3: A COMMON
APPROACH TO
EUROPEAN ENERGY
POLICY?
— 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.
CHAPTER 4: SUSTAINABILITY
— 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.
CHAPTER 5: COMPETITIVENESS
— 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.
CHAPTER 6: SECURITY
OF SUPPLY
— 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
CHAPTER 7: PRIORITY
AREAS FOR
ACTION
— 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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