Examination of Witnesses (Questions 380
- 391)
THURSDAY 17 JANUARY 2008
Professor Dieter Helm
Q380 Lord Hannay of Chiswick:
No, I completely misunderstood.
Professor Helm: On the contrary, the oil companies
appear to me to be leading the game in terms of thinking about
how the North Sea will develop for carbon sequestration.
Q381 Lord Hannay of Chiswick:
Sorry, I completely misunderstood you. Could I ask you about the
regulatory negotiated framework for, above all, gas but also other
energy issues between the European Union and Russia which has
come to a grinding halt with the non-ratification of the Energy
Charter and in particular its Transit Protocol and the clear indication,
and I imagine you would confirm the thrust of your answers, that
the Russians are not going to buy into ratification particularly
of the Transit Protocol. What can be saved from this shipwreck
is the question I would like to put to you. Is it sensible to,
as it were, recognise that the Energy Charter is never going to
enter into force between Russia and the European Union? If so,
is it sensible to try to find a more modest regulatory framework
within which, above all, the gas relationship will continue to
be operated and which will seek to balance the European interests
not only in Russian gas but also in other people's gas that transits
Russia and the Russian interest in downstream? Can that be fitted
into an agreement in which there is equality, reciprocity and
so on? I think from your extremely useful paper of last September
I know roughly where you will come down but I think it would be
very useful for the Committee to hear your views on that.
Professor Helm: There were two things going
on in the Energy Charter and Transit Protocol discussions. One
view, which was the view in the 1990s in the Yeltsin period when
the oil prices were low, was that Russia, which at that stage
was about the size of Mexico in terms of economic significance
despite its vast size, was basically on its way to a liberal democracy,
and one way of expressing that was that it would arrive in a position
where its laws and structures would look like the EU. It was almost
as if it was a candidate member but was never going to be allowed
to be a member. In the same way that Bulgaria, Romania and eastern
European countries, had to converge on European ways of doing
things, so it was thought the Russians would do that. The Energy
Charter and the Transit Protocol at that stage were deemed to
be essentially the application of what I would call a kind of
bastardised British model of how to run an energy system applied
to Russia and at the core of that idea was they should open up
all their pipelines and electricity systems to third party access
on even terms. The other view about the Energy Charter which has
developed subsequently is the notion it is basically a contract
resolutions or arbitration body which can sort out disputes between
players, and I will come back to that in a moment. The first view
was not only falsified by the sharp rise of oil prices, Russia
was no longer beholden to Europe, it was no longer in a bankrupt
state, but it was utterly absurd for Gazprom to ever accept the
idea that third party access should be allowed to its pipes because
what that does is minimise its monopoly power. It is the absolute
opposite of what you would want to do. For the Europeans to believe
that they could bash the Russians into that position could only
be based on the idea that Russia was so weak and compliant to
European needs because its economy was in such trouble and after
the bankruptcy it would need resources into the future, or the
Europeans believed the thesis that a liberal capitalist democracy
was at the end of the history and we were all going to go there
anyway, which you can understand people believed after the collapse
of the Berlin Wall. I think that was utterly hopeless and an enormous
amount of effort and time was spent on something which clearly
was not going to happen, and it is not going to happen going forward.
If the Russians sign and ratify it, it will only be in a sense
in which it will not be applied. The other idea that there should
be an international body which is responsible for helping parties
to resolve disputes seems to me to be an excellent idea but one
has to be very careful that it does not have a British or necessarily
European label upon it. I will not say it is necessarily a UN
function but it is a kind of WTO-type function and it seems to
me in the framework of negotiation with Russia to join the WTO
this should be part and parcel of that framework. Going down that
route is the sensible thing to do. Going down the former route
is both hopeless and just creates trouble because every time there
is a serious interchange between the EU and Russia, the EU says,
"Ratify the Energy Charter, ratify the Transit Protocol"
and the Russians say, "No, go away" and that does not
help get us anywhere. That is why I think it has been misconceived.
Q382 Lord Hannay of Chiswick:
Can I just be clear, if you will forgive me for saying so, I think
your concept that at this very late stage this could somehow be
incorporated into the WTO accession negotiations is not terribly
realistic.
Professor Helm: That may be right.
Q383 Lord Hannay of Chiswick:
Are you saying that the idea of an EU-Russia regulatory framework
building on the four spaces or a new agreement with Russia is
too narrow for basing what you see as desirable, which is a regulatory
framework that could give both sides a degree of predictability,
rule of law, et cetera?
Professor Helm: If you look at the pillars in
the EU-Russian energy dialogue and the PCA framework what I am
really saying is not that that engagement cannot be taken forward
but in the energy component of that dialogue one needs to have
a harder and more realistic approach to negotiations which start
from a clear understanding of the objectives of both parties.
Basically the energy pillar in those negotiations has been anchored
in the Energy Charter and third party access. I wish it was not
true from a European perspective, but all I am saying is it is
utterly hopeless to imagine that political and diplomatic capital
should be used and expanded on the idea that we will persuade
the Russians to admit third party access to their gas network.
This will not happen, it is not in their interests, and we are
wasting a great deal of time and effort to no net benefit.
Chairman: Thank you very much indeed.
That, to some extent, links to the next question from Lord Truscott.
Q384 Lord Truscott:
Thank you, my Lord Chairman. Professor Helm, what is your view
of the Commission's Third Energy Package and the alleged discrimination
that Russia might face? Would you also comment on the EU's other
efforts to avoid dependency and enhance accessibility to supply
and the European idea of boosting renewables, enhancing efficiency
and some Member States going down the nuclear road, like the UK?
We were talking about dependency earlier but the percentage of
gas supplied by Russia to the EU will go down in percentage terms
over the coming years although not in absolute terms.
Professor Helm: There are two bundles of EU
policy relevant to the energy sector. There is the bundle from
last year, a group of directives, initiatives, around the idea
of unbundling competitive markets, and then there is the package
for 23 January this year which is the environmental side. I will
start with the unbundling. I cannot get myself terribly exercised
that forcible ownership unbundling in the energy market we now
have in Europe is going to do much per se to increase competition.
It probably will do a bit but if you want competition you have
to have some competitors. If you are on a football pitch and you
have got two Frenchmen and a German, or two Germans and a Frenchman,
as we have in the UK, plus a Spaniard, you have not got enough
to make a really competitive market stick. The big mistake in
the internal market in Europe was to allow these mergers and acquisitions
which created this market power which means that you are not going
to have this idealised market, which was the objective in the
first place. It is an interesting question of whether you want
to get to that market, but if you did want to do it, you should
not have allowed these mergers but we are where we are now. However,
where unbundling is extremely helpful is that unbundling detaches
grids and if the grids can then co-operate to think on a European
level to help construct the European grid this is an excellent
thing to happen. I turn out to be in favour of unbundling not
primarily for the competition argument but because I think it
will help to get this European grid built. The greatest asset
in trying to increase competition is interconnection. Competition
comes through wires and pipes, that is why incumbents do not fully
connect and that is why it has to be imposed upon them. It had
to be imposed before the Second World War in the UK, after the
Second World War in France, by central government, and in Japan
and by Germany through forced collusion. You do not get natural
grids developing out of the interests of the players. For that
reason I am in favour of the unbundling provided it goes with
a package on the grid side. You need a physical market before
you can have the actual competition. On the issue of the environment
and security of supply measures, it is true that the market will
not produce optimal diversity and the market will not produce
security of supply through individual decisions. That is contrary
to British energy policy for the last 15-20 years in repeated
White Papers and statements and it is a matter of fact which even
this government now accepts by having to earmark particular technologies.
There would be no wind power in the UK but for government policy,
the market would never build a windmill, or hardly any windmills.
The question is how far should the intervention be and of what
sort. In this context it is fashionable for people to argue that
environmental measures, like renewables and energy efficiency,
are the best way of increasing security of supply. Unfortunately,
the best way of increasing security of supply is coal and coal
is the growing fuel around the world and it has many sources,
it is extremely cheap and is fantastically damaging to the environment.
People who argue that pursuing environmental policy and security
of supply are necessarily linked, that is not true. If you look
at the particular technologies, energy efficiency does reduce
demand and in the short-term a lower level of demand might lead
to a higher level of security in the short run, but not in the
long run. On renewables, most of the renewables policies very
unfortunately reduce security of supply, particularly when the
renewables penetration goes to high levels. At the extreme you
could have a system in which if the wind was blowing nothing else
would be needed and, therefore, nothing else would earn any money
but if the wind does not blow everything else is needed and it
has to earn enormous returns to provide that facility. Hopefully
in ten or 15 years' time it will have some batteries and then
wind will be base load and this issue will be transformed, but
not in the short run.
Q385 Lord Boyce:
I wonder if you would say something about the anti-monopoly powers.
I rather get the impression from what you have been saying that
Gazprom would like to have a dominant position in the European
gas market. Do you think the European Union existing anti-monopoly
powers could prevent that? That is the theory, but in practice
do you think the European Union will want to exercise those powers
because individual states may not want them to be exercised because
it will upset their bilateral relationships?
Professor Helm: I think the European Union should
insist that any company that operates within its boundaries should
abide by European law and by the rules of the European Community
laid down for its markets. I think Gazprom should be treated like
any other state driven company that wished to invest in the European
Union and because its motives are not purely the maximisation
of profits, they are political and wider ranging, there should
be a greater burden of proof applied than if a normal commercial
quoted company with transparent accounts wished to acquire assets.
Transparency of accounts should be demanded. I have no idea where
the money goes in Gazprom. I have never seen any accounts which
lead me to understand that. Given the strategy that Gazprom is
pursuing, given it has upstream market power, the Commission should
ask serious questions to have a look at a competition inquiry
into its activities across the market and apply the full force
of competition law. Will it do so? No, probably not. Does it have
the powers to do these kinds of competition investigations? I
am not sure. Part and parcel of a more realistic policy towards
Gazprom is to say, "We understand you are trying to maximise
your position, we understand your strategy to extract the maximum
returns for your resources, why shouldn't you, but you have to
understand that within the EU we want to protect our position
too and we are interested in a competitive market, not a political
market, and just as we should be concerned about sovereign wealth
funds we should be extremely concerned about particular acquisitions
which have this broader market power rationale behind them".
I would argue for a much sharper application of competition policy
and the rules of the European Union within its boundaries.
Q386 Lord Anderson of Swansea:
You argue for quite a substantial new agenda for the Commission.
Have you been brought in by the Commission as an adviser at all?
I notice from your CV that most of your work has been with the
British Government, but are you an adviser to the Commission?
Professor Helm: I have no formal post or role
in respect of the European Commission but I spend a great deal
of time talking to people there and a lot of time in Brussels.
Q387 Lord Crickhowell:
I suppose your central recommendation about how the Europeans
should deal with the situation is that they should get together
and act as a European whole, and you have given some pretty compelling
reasons as to why the Germans seem to be unlikely to go down this
road, the French with their nuclear dominance are not likely to
go down the road and the British for political and other reasons
are reluctant to go down this road. In preliminary conversation
before this meeting with Lord Hannay he said, "Yes, but Europe
under threat sometimes is prepared to come together and act as
Europe". How far do you think it is likely that we can get
together and act on a European basis? It is a central recommendation
but it may be the most difficult one to achieve.
Professor Helm: My first observation is that
nothing substantive seems to happen in the EU unless the Germans,
the French and the British agree. That may be too strong a statement
and monetary union might be the exception to that, but it seems
to me when it comes to the energy debate the question is how are
those three countries going to co-operate. So far the British
have been banging on against the French and the Germans on the
competition agenda and the unbundling. The British energy position
could not be more in your face vis-a"-vis French energy policy
and German energy policy. On a regular basis British officials
attack European companies for being bundled and argue they should
be broken up and their governments tacitly or explicitly do not
want that to happen. The question comes, if fundamentally we disagree
with the position that these two other countries wish to take
in terms of the structure of their own energy markets, how can
we expect them to co-operate with us to protect us, those who
now have had to join the European club. The great difference between
British energy policy and everybody else for the last 40/50 years
has been, "We've got plenty of energy and they haven't".
Germany in the end had to manufacture synthetic fuels in the Second
World War. France built its nuclear programme because it does
not have natural resources. Suddenly we too do not because we
have pursued this strategy of depleting the North Sea as fast
as possible and it turns out historically at the lowest possible
prices too. Suddenly we are terribly exposed. My own view is it
will take another few winters before the British Government discovers
that actually the exposure to a volatile spot market without much
storage and without the long-term contracts that our European
partners have is a big disadvantage. It is already true that British
prices on the electricity market are moving above the European
average and in the coming decade I expect them to be at the top
of the European market but very much more volatile in that context.
My view is you need quite a lot of pain for people to understand
they need to change their political policies and there is a long
lag that leads with it. Given that, the understanding between
France and Germany, between Merkel who is somewhat more distant
than Schroeder was to the relationship, and with Sarkozy who clearly
has views about how France will join this club, that gives some
grounds for hope that a Franco-German common view on energy policy
will gradually emerge. I think it will take time. My real fear
is that the UK is on the cusp of a difficult decade in which any
nuclear power will not be there because that is 2020 and beyond,
the AGRs are in a pretty weakened state and could fail, as they
do on a regular basis, we have a dramatic increase in our need
to import gas and we have no long-term contracts and that is a
terribly exposed position. All of my work on energy policy has
led me to the conclusion that energy policy changes after a crisis
and not before. My view is at the moment we have the makings of
a crisis but the bad news is that it is not anything like big
enough yet to force the British to come to an understanding that
they will have to agree with the French and the Germans a common
energy position. In the meantime, why should the Germans share
the benefits they have got of their storage and the long-term
take or pay contracts and their relationships with us who told
them this is the worst way to organise their market and they should
break them up immediately to our benefit. This is an extraordinary
position to get to.
Q388 Lord Anderson of Swansea:
Can you see any conceivable German interest in a European grid?
Professor Helm: Yes. Germany is geographically
surrounded by links with other players and, of course, as France
expands its nuclear position and Germany does not that is important
to it, but there are also big links between Germany and the Netherlands,
Denmark, all round its frame. The question is not whether it has
an interest in a European grid as opposed to more bilateral links
that suit its own purposes. No incumbent oligopolistic firm will
ever want the system optimal outcome; they will want to control
the linkages. What Europe is in a network sense is a series of
bilateral links between major dominant players, that is why we
have such an inferior grid. It is very, very important on the
grid position to realise it is not just about security of supply,
it is very important too for the competitiveness of the European
economy because interconnection creates a portfolio effect which
means the amount of power stations you need to secure supply at
any point is much less, that is why we built national grids and
broke up the local ones. The Americans are going through the same
problem. This is a competitive battle to see who can get the greatest
efficiency out of their electricity systems in addition to the
security of supply problem.
Q389 Lord Hannay of Chiswick:
I just wanted to ask you on what you said about Nabucco and about
the European grid. Does this lead you to the conclusion that a
European policy ought to be prepared to pay a premium in public
funds to get those two sorts of ideas going and not just leave
them to the market? After all, the whole of energy policy around
the world has been filled with interventions by governments to
in a way distort the power of the market in particular circumstances
where their security might be strengthened by it. Are you suggesting
that the EU as such should, for example, put some EU budget money
behind constructing a grid that is less bilateral and national
than the individual companies might do?
Professor Helm: The first thing to say is there
are no free markets in energy in a perfect textbook sense. Governments
are always involved in energy, they are always intervening, the
question is what is the balance, which bits should they go for
and which bits should they not. No pipeline like Nabucco can be
anything other than political and no company can possibly want
to invest in such things without a political framework around
it. The first thing the European Union should do is decide which
bits of infrastructure matter and put the weight of the European
political framework behind it, and that includes the big players
talking with one voice about them—that the Europeans could
be minded to say to Turkey and other countries affected by the
Nabucco framework, "We want this as a priority European project
and we are going to put political support behind it". The
second thing is the cost of pipelines is mostly about the cost
of capital. Private risk would make these things extremely capital
expensive and government guarantees would reduce those costs of
capital considerably. The difference between Russia and Europe
is in Russia if they want to do something they may not have the
technical skills to do it but an authoritarian capital state can
make sure infrastructure is built. What we have got to do is find
how a liberal democracy can ensure that vital infrastructure,
roads, rail as well as energy infrastructure, gets built and I
would much rather we spent the money on that than paying for the
Common Agricultural Policy.
Q390 Lord Selkirk of Douglas:
May I ask a general question about Kyoto. What are the possibilities
for the European Union working with Russia on post-Kyoto negotiations
on climate change? Perhaps in general you can comment on the prospects
for co-operation between Russia and the European Union in the
present political climate?
Professor Helm: On climate change, as I tried
to say in the note, I cannot see what interest the Russian elite
have got in halting climate change. This is a terribly depressing
thought, but if you were to say that the Russian elite political
system is essentially managing its carbon assets, the faster global
warming the better for the northern sea routes and the expectation
of new resources in Siberia. Of course there will be offsetting
effects but I cannot see that the Russians have much interest
in an international agreement. However, if someone wants to pay
them to do it, as is the negotiation over hot gas and buying gas
into the EU-ETS et cetera, I am sure that they will accept the
cheque. That is a rather cynical view but we have to be realistic.
We are not going to persuade Putin and his Kremlin colleagues
that it is in Russia's interest to have a sharp reduction in carbon
emissions and carbon taxes and things that go with that.
Q391 Lord Selkirk of Douglas:
Is your general message to us that there should be a greater degree
of realism injected into our foreign policy?
Professor Helm: Absolutely. If I could summarise
the most important point I want to make, it is that we should
understand and take as given what Russian objectives are and what
Russian interests are and we should spend less effort trying to
persuade them to change their objectives and more effort in thinking
about what to do as they pursue those objectives to strengthen
our own position. There are an enormous number of things we can
do both on security of supply and on climate change to improve
our position, but of the main things that need to be done these
things are not easily done at a nation state level, they are European,
and this involves the British understanding that having nearly
run out of our own natural resources we are now in the same position
as the French and the Germans and we have to actively co-operate
to produce an outcome between the big powers in Europe at the
EU level and this will be a rather challenging problem for British
political culture but as an economist, and as someone looking
at the energy sector, if we do not do that then we are going to
have a serious energy problem and in the UK this will be reflected
in high and volatile prices and a lot less security.
Chairman: Professor Helm, we have kept
you for longer than we originally talked about but we are extremely
grateful. I think we have had an extraordinary morning. You might
be surprised, you might find some of us queuing up to listen to
your lectures in future because this has really been extremely
helpful for us in challenging some of our ideas and also giving
us a framework to look at this question which is obviously a central
part of the report which we will be preparing. We are extremely
grateful. We will be sending you the transcript and we very much
look forward to your comments and including them in our report.
Thank you very much indeed.
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