No Country is an Energy Island: Securing Investment for the EU's Future - European Union Committee Contents

CHAPTER 1: Introduction

1.  The central focus of this inquiry has been securing the necessary investment for the EU energy infrastructure over the next few years. This is crucial for the EU to overcome what many describe as the energy 'trilemma': how to meet the EU's carbon reduction trajectory whilst maintaining security of energy supply and affordability to domestic and industrial consumers.

2.  This report has taken into account a range of issues, which include: the necessary investment and costs; different energy sources; a potential 2030 policy framework; research and innovation; and issues of interconnection and energy security. We have not considered the detail of specific renewable sources—such as wind and solar—but consider renewables in a more general sense. The aim of this inquiry is to offer our views on the future direction of EU energy policy at a time when the European Commission, Member States and other interested groups are engaged in discussions about the role of energy beyond 2020. We issued our call for evidence in September 2012 and took oral evidence from a range of EU and UK witnesses between October 2012 and February 2013. Our findings are of relevance to policies within the broader EU, with some reference to how this might impact the UK. It must, however, be stressed that we did not concentrate on UK policy. This inquiry has predominantly considered how to resolve the trilemma in a cost efficient way.

3.  Decarbonisation should be delivered largely through the electricity, heat (buildings) and transport sectors which, in 2011, accounted for 27%, 35% and 20% respectively of the UK's greenhouse gas emissions.[1] We have focused on the electricity sector based on the analysis of the UK's Committee on Climate Change, which has found that the costs of decarbonising the power sector are generally lower than for other sectors and has made the point that both heat and transport are likely to become increasingly electrified.[2] For this reason, we have excluded oil from our study. We note that the Commission recently published an Alternative Fuels Strategy relating to decarbonisation of the transport sector.[3]

4.  Historically, the EU has never had an explicit energy policy in the way that it has, for example, in the areas of agriculture and competition. Energy has, nevertheless, been on the European agenda since the formation of the European Coal and Steel Community (ECSC) and European Atomic Energy Community (Euratom) in 1952 and 1957 respectively. Other EU policies, such as internal market, environment and competition, all bear upon energy and so the EU developed a de facto energy policy.

5.  It was not until the Treaty of Lisbon in 2009 that the EU allowed explicitly for an energy policy. Article 194, TFEU[4] (see Box 1), establishes energy as a competence which is shared between the EU and Member States. Whereas Member States have the right to determine which energy sources to employ, the EU has the authority to establish measures necessary to achieve the objectives as outlined in the Article.


TFEU—Article 194
The Treaty of Lisbon established Article 194 of the TFEU, which outlines the competence for energy policy:

"(1) In the context of the establishment and functioning of the internal market and with regard for the need to preserve and improve the environment, Union policy on energy shall aim, in a spirit of solidarity between Member States, to:

(a)  ensure the functioning of the energy market;

(b)  ensure security of energy supply in the Union;

(c)  promote energy efficiency and energy saving and the development of new and renewable forms of energy; and

(d)  promote the interconnection[5] of energy networks."

The EU may adopt measures to achieve those objectives, but:

"Such measures shall not affect a Member State's right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply."[6]

6.  The existing EU policy framework for energy is comprised of numerous Directives and Regulations. The most significant of these are: the EU Emissions Trading System (ETS) (2003); the Security of Supply Directive (2005); the climate and energy package (2008); the third internal energy market package (2009); and the Energy Efficiency Directive (2012) (see Appendix 6). Recently, a number of proposals relating to the EU energy sector have been put forward, including: a trans-European Energy Infrastructure Regulation; the Connecting Europe Facility (CEF); and the ETS backloading[7] proposal (see Appendix 6 and Chapter 4). EU environmental legislation also affects energy policy, such as the Large Combustion Plant Directive (LCPD) and the Industrial Emissions Directive (IED) (see Appendix 6).

7.  Today, the EU finds itself in a dramatically altered economic situation compared to 2008 when the energy and climate change package was adopted (see Appendix 6), and there has also been an unanticipated revolution in the energy market. Most predictions at that time have been proven inaccurate. The deteriorating economic circumstances have made the energy trilemma much more difficult to resolve. It is on that basis that the Commission suggests the EU's future energy policy should be formulated.[8]

8.  There has also been a significant shift in the global situation. As was identified in the International Energy Agency's (IEA) World Energy Outlook 2012, the global energy map is changing.[9] The past decade has seen a rise in global fossil fuel prices, linked partly to economic growth in Asia, which has seen it take an increasingly large share of global fossil fuel consumption. More recently, the US has experienced a shale gas 'revolution', with the prospect of becoming energy self-sufficient and a drop in gas prices that will potentially add 0.5% to US Gross Domestic Product (GDP) by 2017.[10] The cost of some renewable energy (notably solar) has also declined sharply. Overall, there has been a growth in coal generation, and a rise in global carbon emissions, of which the EU is currently responsible for approximately 10%.[11]

9.  The debate about resolving the energy trilemma is also pertinent given developments in UK energy policy. The UK Government stated that the UK electricity sector will require around £110 billion of investment over the next decade to improve its infrastructure. In response, they have published an Energy Bill aimed at attracting investment in low carbon electricity. The main elements of the Bill are contracts for difference—which will stimulate investment in low carbon technologies by lowering risks to investors—and the capacity market—which will secure energy supply by giving capacity providers financial incentives to provide reliable capacity (see Chapter 6). These elements will be supported by a carbon floor price—from 1 April 2013 a minimum price has been applied to the cost of emitting carbon dioxide—and an Emissions Performance Standard (EPS), aimed at preventing the construction of new polluting coal plants. In Autumn 2012, the UK Government also published their Gas Generation Strategy, which considered the barriers faced by potential investors in gas.[12]

10.  The increased prominence of the energy debate at the EU level is reflected in recent Communications from the Commission. It is in large part because of these Communications that we deemed it necessary to conduct this inquiry. In October 2011, the Commission published an Energy Roadmap to 2050.[13] It explored the challenges posed by decarbonisation in the context of ensuring security of energy supply and competitiveness. The Renewable Energy Roadmap assessed both the share and progress of renewables in the energy mix, and initiated the debate about setting a target for the level of total EU energy consumption to be derived from renewable energy sources by 2030, as well as measures to promote renewable sources in the electricity, biofuels and heating and cooling sectors.[14] The Commission's Roadmap for moving to a competitive low-carbon economy in 2050 gives long-term consideration to cost-efficient ways to make the European economy more climate-friendly and less energy-consuming.[15] This Communication sets an EU target of reducing greenhouse gas emissions by 80% by 2050 over 1990 levels, with renewable energy sources and efficiency seen as playing a pivotal role. The Internal Energy Market Review paper, meanwhile, assessed the current state of play of the internal energy market, which is supposedly to be completed by 2014 (see Appendix 6).[16] Looking to the future of the ETS, the Commission published an options paper on its future reform in 2012.[17] The Commission further issued a Green Paper on 27 March 2013, which identified a number of mid-term options up to 2030 on both energy and climate issues (see Chapter 4).[18]

11.  The upcoming international climate change negotiations, including the UNFCCC[19] Conferences in Warsaw and Paris in 2013 and 2015 respectively, added impetus to this inquiry.

12.  The members of the Agriculture, Fisheries, Environment and Energy Sub-Committee who carried out the inquiry are listed in Appendix 1, which shows their declared interests. We are grateful for the written and oral evidence that was submitted to the inquiry; the witnesses who provided it are shown in Appendix 2. We are also grateful to Professor Michael Grubb, Senior Research Associate, 4CMR Land Economy, Cambridge University, who acted as specialist adviser to the inquiry.

13.  The call for evidence is shown in Appendix 3. The evidence received is published online.

14.  We make this report to the House for debate.

1   Meeting the Carbon Budgets-2012 Progress Report to Parliament, Committee on Climate Change, June 2012  Back

2   The Fourth Carbon Budget, Committee on Climate Change, December 2010 Back

3   COM(2013) 17 Back

4   Treaty on the Functioning of the European Union Back

5   For the purposes of this report, interconnection is the physical connection of two or more energy systems that allows for the sale or exchange of electricity between different Member States Back

6   Treaty on the Functioning of the European Union Back

7   Backloading refers to a proposed amendment to the ETS. The amendment would postpone the auctioning of 900 million allowances from 2013-2015 to later in Phase III of the ETS, which ends in 2020. The backloading does not affect the overall volume of allowances to be auctioned in Phase III, only the distribution of auction volumes over the eight-year period (the 'auction time profile') Back

8   COM(2011) 885 Back

9   World Energy Outlook, International Energy Agency, November 2012 Back

10   Gas Works, The Economist, 14 July 2012 Back

11   Q 128 Back

12   Gas Generation Strategy, Department of Energy and Climate Change, December 2012 Back

13   COM(2011) 885 Back

14   COM(2006) 848 Back

15   COM(2011) 112 Back

16   COM(2012) 663 Back

17   COM(2012) 652 Back

18   COM(2013) 169 Back

19   United Nations Framework Convention on Climate Change Back

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