Bursting the Bubble

The Political Economy of the Energy Union

13 February 2017 | by
European Energy

In 2014 Juncker presented his vision on the European Energy policy, whereas we need to pool our resources, combine our infrastructures and unite our negotiation power with third countries. He established 4 pillars for an Energy Union: creating an Energy Union by pooling resources and connecting networks; diversifying energy sources; helping Member States becoming less dependent on energy imports; and significant enhancement of energy efficiency.

As is known, the emergence of the European Coal and Steel Community can be seen as the first attempts to establish a European energy policy. This was further enhanced by the Treaties of Rome, which established the Euratom.

But it was the Lisbon Treaty that shifted further attention on energy issues; a paper ‘An Energy Policy for Europe’ drew the attention to the combination of climate change (post-Kyoto), import dependency (geopolitics) and high energy prices. The new European energy policy was ambitious, competitive and long-term. This laid the foundation for the 20-20-20 targets focusing on energy efficiency targets, the percentage of renewable and emission reductions.

The completion of the internal energy market is also an aim of the Third Package. This package for gas and electricity markets supported a competitive and integrated energy market allowing European consumers to choose between different suppliers, and all suppliers having access to the market. The European Agency for the Cooperation of Energy Regulators was also established. The target for completion was set on 2014 but has not been reached yet.

In 2014, the Commission published a new paper updating the 20-20-20 targets.

And Juncker has made it his mission to create an Energy Union together with the vice-presidents Sefcovic, Canete and Timmermans.

Political Economy of Energy
The political economy of European energy aids three pillars of the European political economy: it enhances competitiveness, further establishes sustainability and wants to construct security of supply, away from the turmoil of Russian or the Middle East.

First, competitiveness: the relationship between EU vis-à-vis its trading partners has changed. So, there is the American shale gas revolution and the worldwide growth of energy demand. EU electricity prices are 40% higher than its American counter parts. As a result, the EU is expected to see its share in the global export of energy-intensive goods fall around 10, whereas the USA and emerging countries are expected to win market share.

The price of oil has seen a rise again, but also an increase in demand from OPEC countries. High oil prices will increase energy prices and can contribute to lower investment, employment and growth because it has to be imported. Another factor is the divergent tax regime in the EU: European taxes and levies on electricity spanned a range between 5 and 56%.

Second, the transition towards a sustainable society needs to find its place within the EU energy market. The EU aims to increase its share of renewables which will challenge the grid. The instable character of renewables will make it difficult to balance supply and demand.

Third, there is the issue of security of supply. Renewables make the system less stable and more weather dependent.

There also is a geopolitical factor: the Russian invasion of the Crimea and the unrest it caused in Eastern Europe, has turned to the dependency on Russian gas.

The Sixpack…
The EC sees 6 objectives, which need to be achieved to establish the Energy Union fully:

• More investments in infrastructure including smart grids. In gas, these investments should focus on ending the isolation of the Baltics and diversifying suppliers for countries in Eastern Europe. In electricity, investments should focus on linking the grids of the Iberian Peninsula and other shores of the EU
• The implementation of a set of simple, harmonized rules across the EU should be set
• Government intervention should only happen when secure energy flows cannot be guaranteed by the market
• A stronger emphasis on regional cooperation to bring faster results and to better address local needs
• Consumers should become more active players in the energy market
• And finally, retail and wholesale markets should be better linked so that lower wholesale prices lead to lower consumer prices

… in relation with EU climate policy
The global deal agreed in Paris at the end of 2015 was a milestone in international efforts to address climate change.

The EU played a central role in the negotiations that delivered a legal text to align action across 196 countries. The climate change commitments of countries – known as Intended Nationally Determined Contributions (INDCs) – will provide a new baseline for assessing global ‘business as usual’ for the energy sector, and will shape the context for future investment in clean technology.

The Paris Agreement vindicates the EU’s approach. Implementing the 2030 energy and climate framework as agreed by the European Council is a priority in following up to the Paris Agreement.

The Commission has already initiated this process by putting forward a proposal to revise the Emissions Trading System (ETS), covering 45% of the EU’s greenhouse gas emissions. The Commission will present during the next 12 months the key remaining legislative proposals to implement the agreed 2030 regulatory framework domestically in a fair and cost-efficient manner, providing maximum flexibility for Member States and striking the right balance between national and EU level action. As the next step, the Commission is working on the preparation of proposals for an Effort-Sharing Decision on land use, land use change and forestry.

The Paris Agreement gives a strong impetus for global clean energy investment. To deliver its emissions cuts cost-effectively and to take advantage of these new opportunities, the EU’s Energy Union agenda should also implement:

• Reforms to its energy markets through the new market design proposals
• Reforms to financial markets – including through the Capital Markets Union proposals, to address carbon bubble risks and avoid stranded assets.
• Reforms to its energy governance system to give investors confidence to put their money into clean investment and out of high carbon investment.
• Reforms to its infrastructure policies – to ensure everything we build is in line with the Energy Union and climate change objectives and to phase out fossil fuel subsidies.
• Reforms to its Energy Diplomacy and Security Strategies to ensure Europe’s energy diplomacy is aligned with its climate diplomacy. This renewed diplomatic effort should focus on: maximising the impact of EU climate financing on delivering INDCs; driving up ambition for the next 5-year review; driving climate mainstreaming in international financial institutions and the G20; and achieving clean energy cost reductions through development of global supply chains, open trade and coordinated research and innovation.

What do you think?