The man who wants absolute power

Energy is an oddity in the field of European policymaking. For some years now, and not only in the UK, national resistance to Brussels has been growing. Politicians win votes by standing up to the steamroller of Europe rather than by advocating closer ties and more integration. The rejection of the proposed European constitution in such unlikely places as France was only a stark symbol of much wider tendencies.

Yet the European Commission can plausibly argue — as in its energy green paper of March this year — that Europe needs a strategy for sustainable, competitive and secure energy. Tony Blair has talked plainly and without serious criticism of the need for a common European approach to energy. So how can the European energy policy debate be moving in the opposite direction to the dominant political trend?

The simple answer is a set of intensified and visceral fears about energy security of supply in a period of conflict in the Middle East, high and volatile fossil fuel prices and rising imports, especially of the increasingly dominant fuel — natural gas.

These fears expose the old but fundamental tension in the European project between fortress Europe and the Europe of free trade and economic efficiency. In the course of this battle for the meaning of Europe in energy terms, the potential loser is the sustainability objective and more particularly climate change objectives, especially as the showpiece of European climate change policy, the European Emission Trading Scheme (ETS), is in some disarray.

The tension in the fortress versus free trade issue in energy shows most distinctly in the relationship the Commission describes between the security of supply and competitiveness objectives. The way to ensure security of supply within the EU is evidently to complete the liberalisation of the internal gas and electricity markets. One of the commission’s subheadings says it plainly: ‘An internal energy market that guarantees security of supply’.

This is a plausible argument because a genuinely competitive Europe-wide market would offer consumers depth and liquidity, and genuinely competitive behaviours would tend to push prices down closer to costs. In other words, as the classical economists in the early nineteenth century and their many followers have eloquently argued, expansion of trade across national borders makes all parties potentially better off.

But in relating to countries outside the EU a quite different agenda is suggested and the fortress becomes visible. Europe’s import dependency in energy, now 50%, may well soon rise to 70% and imports of gas will tend to come from a limited range of countries. It therefore seems self-evident to the Commission that Europe must act to curb this dependency. In other words, trade outside the EU is dangerous and should be limited.

It is of course true that trade, in energy as well as other commodities, carries risks, and that energy is a peculiarly vital need for Europe, as elsewhere. And if very few countries supply a vital commodity there needs to be realistic risk assessment, and risk reduction measures put in place, rather than a bland assumption that everything will turn out well.

But the Commission does not put the countervailing arguments: that trade adds to diversity and will tend to reduce prices (whoever wanted to import more expensive energy?); or that exporters are generally speaking more dependent on selling to Europe than Europe is on buying from them. In other words, there is a natural economic community of interest between exporters and importers, not an inherent conflict.

Nor does the Commision consider the point, convincingly made by Jonathan Stern in the April issue of Parliamentary Brief, that there is no serious historical evidence that domestic (in this context European) energy sources or infrastructure are any more secure than foreign sources.

The tension between the fortress and free trade visions shows most clearly in the ambivalence about what competitiveness (itself an ambiguous word) really means. When the Commission talks of European industrial competitiveness it does not mean a high degree of competition — rather it means the ability of European firms to compete in world markets, and this may of course mean a preference for large, oligopolistic firms.

But what does competitiveness mean in the energy industry itself? It is not clear. There is an unambiguous and welcome commitment to the notion of full consumer choice as a result of the integration of gas and electricity markets, but how intense the competition is meant to be in those markets is much less clear.

The Commission says that the ‘consolidation of the energy sector should be market driven’. What this seems to mean is that as European energy firms consolidate into larger and more powerful forms, the market rather than national governments needs to be in the lead. At one level, this is recognition that the wave of energy takeovers is not going away and that oligopolistic structures are rapidly emerging across Europe.

But just because the market leads the way into new and more concentrated structures, this does not mean there will automatically be more competition. While oligopolistic structures can provide workable competition, firms within them carry substantial market power, which can be misused.

Counteracting such potential misuse needs strong economic regulation, and the Commission proposes the notion of a European energy regulator. But this will almost certainly be a step too far for national governments inherently suspicious of the expansion of Brussels: a European energy regulator with real teeth is a distant prospect at best.

Where does this leave sustainability and climate change? The Commission here does spell out a wide range of existing and potential Europe-wide measures. The centrepiece is the ETS, designed initially to be the major means of getting member states to their share of Kyoto targets. Unfortunately, the early experience of the scheme has been mixed at best and it is clear that a significant number of member states have set early carbon emission caps that were (charitably) undemanding of their industry, with a consequent collapse of the carbon price.

And the German government’s endorsement of a level of emission reduction for German industry to 2012 that looks frankly derisory does not help. While it is important that the ETS survives and flourishes, its capacity to deliver large carbon emission reductions looks much less promising than early hopes suggested.

This limited role for the ETS inevitably throws attention to other ways that the Commission will try to encourage stronger and Europe-wide action in support of sustainability. It proposes an action plan on energy efficiency, further measures to promote renewables, incentives for carbon capture and storage development and a strategic energy technology plan. It also, quietly and very briefly, points out the advantages of nuclear power for lower emissions — but is politically sensitive enough not to give nuclear its own programme.

Most of these ideas are worthy and there may be further action towards common European action on them. But a major problem here is that effective action in renewables and energy efficiency needs initiative not at supra-national levels but at deep sub-national levels — regions, local authorities, local communities and even households. These are member state, regional and local matters and there is not much the Commission can do here — subsidiarity can and should rule.

Overall, it is unmistakeable that the real driver for this new and more assertive Commission stance on Community-wide energy policy is the security issue. Of the six proposals put forward, the last — developing a common external energy policy — is where the novelty lies and where the political action will be located.

The problems here are twofold. First, in relation to the wider European project, these proposals strengthen the ‘fortress’ tendency (so powerfully represented historically by agriculture). Second, in relation to the energy agenda, conflicts between achieving security and sustainability objectives are overwhelmingly likely to be resolved in favour of security.

In the medium to long term the climate change issue is the dominant energy-related problem for Europe, but recent developments in Commission and much other thinking on European energy make a realistic tackling of the climate change agenda less rather than more likely.

Gordon MacKerron is Director of the Sussex Energy Group SPRU, University of Sussex.