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Visit our website for all the latest news and analysis on Policy & Regulation Policy & Regulation from Brussels and beyond Contents Competition law Commission approves state aid for Hinkley nuclear plant E3 Foreign affairs EU and US divided over energy chapter in trade deal E3 European elections Industry concerned over Cañete’s calls for single gas buyer E4 Investment & finance Price caps, subsidies blamed for tariff deficits – EC E5 Data page EU gas demand expected to drop by 9% in 2014 E6 Editor, EU Policy and Regulation Andreas Walstad [email protected] Correspondent, EU Policy and Regulation Annemarie Botzki [email protected] Chief Sub-editor Rhys Timson Sub-editors Doug Kitson, Rob Loveday Layout & Design Joseph Williams www.interfaxenergy.com Energy union suffers setback after Bratušek rejection European elections Bratušek’s parliamentary hearing The European Commission’s vision of an energy union seems to have suffered a setback this week after it became clear that MEPs have rejected Alenka Bratušek as candidate for the job of overseeing its creation. President-elect Jean-Claude Juncker nominated the former Slovenian Prime Minster as the commission’s vice president for energy union in September. However, it became clear after a meeting in the European Parliament’s energy and environment committees on Wednesday afternoon that Bratušek does not have the necessary backing from MEPs and she will not stand as a candidate at the plenary vote on 22 October. Meanwhile Miguel Arias Cañete, commissionerdesignate for climate action and energy, received the necessary support from MEPs and is expected to be sworn in as commissioner after the plenary vote on 22 October. Following the rejection of Bratušek, Frans Timmermans – the most senior vice president in Juncker’s team – is tipped to oversee energy and climate in his portfolio, however at the time of writing this has not been confirmed. During this week’s public hearing in the European Parliament, Bratušek was openly criticised by MEPs for lacking clarity when trying to address their questions about energy and climate policy. “I was rather surprised by a weak performance. I had expected better,” Krišjanis Karinš (Latvia, EPP) told journalist after the hearing. This view was backed by several MEPs, including Matthias Groote (Germany, S&D) who told journalists Bratušek’s performance was “the low of all hearings” and said her apparent lack of preparation was “a provocation”. During the Q&A session, it quickly became clear that MEPs were dissatisfied with what they considered as pre-fabricated and blunt statements, dodging their pressing questions. “I think I speak on behalf of many when I say we have difficulties in seeing beyond the standard answers,” said Esther de Lange (Netherlands, EPP). Bratušek – speaking in Slovenian – repeatedly said Europe needs more and better infrastructure, ■ MEPs were frustrated by Bratušek’s lack of clarity and repetitive answers during Q&A session in parliament. ■ No-show at press conference after hearing caused concern. ■ Common purchaser of gas proposal not addressed during hearing. ■ Energy union remains vague concept, according to MEPs. Source: Interfax that the EU’s dependence on imports is too high and that renewables will play a key role in the future. Asked by MEPs whether she would advocate a more ambitious renewables and climate targets f or 2030 than those tabled by the commission earlier this year, Bratušek said: “I truly believe that renewables are the future of Europe... however, it is also true that things cannot be changed overnight.” Bratušek said several times that the commission could do little without backing from member states. Most EU legislation needs approval from both the parliament and European Council to pass into law. “We need to set ambitious yet realistic targets. The commission cannot act alone – we need the parliament on one hand, and on the other hand we need to reach an agreement with member states,” said Bratušek. “I am prepared to advocate higher targets... but there is no point setting ambitious targets if we don’t reach them,” she added. October summit nears Heads of the 28 EU member states will meet in Brussels on 23-24 October to try to reach an agreement on the proposed 2030 energy and climate targets. The EU is calling for 40% cuts in carbon dioxide emissions below 1990 levels, ...continued on page E2 Energy Policy Weekly | 9 October 2014 | E1 ENERGY POLICY WEEKLY European elections ...continued from page E1 energy savings of 30% and a 27% share of renewables in energy consumption. An EU agreement in October could set the tone for negotiations on global CO2 cuts at the UN climate change summit in Paris next year. However, several Eastern European nations are sceptical about ambitious climate goals. Lower-income countries are lobbying for a burden-sharing agreement between member states. They also want financial compensation to finance modernisation and innovation in the energy and industrial sector, according to a letter signed by ministers of six nations – Poland, Czech Republic, Hungary, Slovakia, Bulgaria and Romania – on 30 September. The letter also called for protective measures for energy-intensive industries to prevent carbon leakage. Bratušek reiterated the need for EU nations to ‘speak with one voice’ when negotiating with third parties such as Russia. However, she did not address the proposal for a common purchaser of gas on behalf of member states. To this end, MEPs voiced concerns that the energy union remained a vague concept. “There is still no substance in this [energy union] idea,” said Martin Edouard (France, S&D). MEPs also addressed concerns that Bratušek’s workload could prove too challenging. According to the job description, the vice president for energy union will steer and coordinate the work of the commissioners for climate action and energy, transport and space, the internal market, entrepreneurship and SMEs, environment, maritime affairs and fisheries, regional policy, agriculture and rural development as well as research, science and innovation. Bratušek did not attend a scheduled press briefing after the public hearing. Andreas Walstad [email protected] TSOs urge council to prioritise Iberian interconnectors Investment & finance The heads of the 28 member states in the European Council must show the political will to help foster investment in cross-border infrastructure in electricity and gas when they meet on 23-24 October, representatives from Spanish and Portuguese TSOs said in Brussels this week. LNG imports and electricity from renewables in Spain and Portugal could help Europe overcome a potential supply crisis from Russia this winter. However, export potential remains limited because of a lack of cross-border interconnectors, delegates heard at an event hosted by Iberian TSOs REN and REE. “The Iberian Peninsula will not be able to contribute [in case of Russian supply disruptions] this winter due to low interconnection capacity with the rest of Europe. That is unfortunate,” said Rui Marmota, system and management planner at Portuguese TSO REN. A third gas interconnection point between Portugal and Spain has been given Project of Common Interest status by the European Commission. The project is an extension of the existing pipeline connecting to Zamora in Spain. However, the problem was not in financing the project, but in convincing the national www.interfaxenergy.com regulator that it was necessary to carry on with the project despite a lack of commercial interest from the market players because of the current market conditions, Marmota told Interfax at the sidelines of the event. “We are trying to convince national regulators that we are not building white elephants here. This is about the fulfilment of security of supply criteria and creating the conditions for the proper functioning of the the Iberian region gas market. We know from experience that the interconnectors will be used,” Marmota told Interfax. Delegates also heard member states should commit to a binding interconnection target of 15% of total power production capacity by 2030 to foster the penetration of renewables and enhance security of supply. The EU heads of state are meeting in Brussels on 23-34 October to try to reach an agreement on energy and climate targets for 2030. “A provision for energy infrastructure was absent in the 2020 targets. It would be unacceptable if that happens again,” Domingos Fezas Vital, Portugal’s ambassador to the EU, told the event. He added that the non-binding 10% infrastructure target had not been met by 2012. “It is important to have binding targets for interconnectors,” added Alfonso Dastis Quecedo, Spain’s EU ambassador. Financing for interconnectors in electricity and gas could come from the Connecting Europe Facility, the European Investment Bank and private funds, he added. A second electricity interconnector between Spain and France is expected to become operational later this year. Despite this, João Faria Conceição, executive director at REN, said the Iberian peninsula remained an energy island. “We are not satisfied with the integration of Iberia and the rest of Europe,” he told the event. Speaking at an event in Brussels this week, outgoing Energy Commissioner Günther Oettinger said French incumbent energy companies including EDF should increasingly open up the domestic energy market to foreign competition. “[Interconnectors between] Spain and France are not a question of investment. It is French policy. The French government must open up its own market – it is more or less a closed shop,” he said. Meanwhile Graeme Steele, head of UK TSO National Grid’s Brussels office, played down the immediate prospects for the proposed electricity interconnector between the UK and Iberia. “I think this one is a little bit further into the future, certainly beyond 2020,” he said. Andreas Walstad [email protected] Energy Policy Weekly | 9 October 2014 | E2 ENERGY POLICY WEEKLY Commission approves state aid for Hinkley nuclear plant Competition law The European Commission said on Wednesday that the UK’s plans to subsidise the construction and operation of the nuclear power plant at Hinkley Point are in line with EU state aid rules. Opponents of the project said they will legally challenge the EU’s decision. The UK plans to establish a price support mechanism – a ‘contract for difference’ – to ensure the plant’s operator will receive stable revenues for 35 years. The UK government and EDF group previously agreed on a ‘strike price’ of £89.50/MWh ($42.15/MMBtu). “For me it is important Hinkley C is a special case – that it is not a blueprint for [other new] reactors,” Europrean Commissioner for Energy Günther Oettinger said following the announcement. Joaquín Almunia, the commission’s vice president for competition, said the case will not mark a precedent and state aid will be assessed on a case-by-case basis in the future. According to the commission, the UK will need about 60 GW of new electricity generation capacity to come online between 2021 and 2030 as a result of the closure of existing nuclear and coal power plants. The commission said the project could not be financed by markets alone, and therefore the public support would address a genuine market failure – a necessary precondition for state aid. Eliza Petritsi, a partner at law firm Holman Fenwick Willan, said the case was a highly controversial subject from the beginning. “The commission initially expressed serious doubt about the case, but state aid decisions are always very political cases and the commission has a wide margin to assess if state aid is compatible with EU law,” Petritsi told Interfax. Austria has already said it would challenge the commission’s decision at the European Court of Justice, stating that only alternative forms of energy should receive subsidies, not nuclear energy. Opposition against the project has also formed within the UK. “In waving through the massively problematic Hinkley C deal, the commission is giving a cynical boost to nuclear power,” MEP Molly Scott Cato (UK, Green) told Interfax. “This deal, and the precedent it creates, is a massive setback for renewable energy. Greens will fully support in any way possible any legal challenges that may now present themselves,” Cato added. The commission presented new guidelines on state aid in April that said feed-in tariffs – a fixed price for electricity generated by renewables – should be phased out. It also said capacity mechanisms – designed to enhance the profitability of gas-fired power generation – will be allowed under certain conditions. However, nuclear energy projects were excluded from the guidelines and the Hinkley decision represents the first time state aid has been assessed under EU treaties. French utility EDF will build the £34 billion project in southwest England. The start of operations is scheduled for 2023, while the plant has an operational lifetime of 60 years. The two reactors will produce 3.3 GW of electricity – accounting for 7% of the UK’s electricity generation. “There are of course always construction risks and that includes a political risk – if there should be a political shift [in the UK after the general election in May 2015] this could also affect the project,” Almunia said. Annemarie Botzki [email protected] EU and US divided over energy chapter in trade deal Foreign affairs The United States and the EU are split on whether or not to include a chapter on energy in the Transatlantic Trade and Investment Partnership (TTIP), it transpired last week at the end of the seventh round of negotiations. The ongoing dispute between Ukraine and Russia has prompted EU officials to lobby hard for an energy chapter to be included in the TTIP to facilitate LNG imports from the US. However, the US remains undecided if an additional chapter on energy is needed. “We haven’t agreed on the necessity of a separate energy chapter or whether energy might be covered under other chapters, such as ‘services and goods’,” Dan Mullaney, the chief US negotiator, told journalists following the latest round of negotiations. “We are discussing export liberalisation www.interfaxenergy.com – and are aware of [the EU’s] requests. Gas exports would already be easier under the broad trade agreement,” he added. A leaked document from the EU Directorate General for Competition said the EU wants gas export licences from the US to be “automatically” approved once the TTIP is implemented. “Exports of energy goods... shall be deemed automatically to comply with any conditions and tests foreseen in [EU and US] legislation for the granting of export licences,” the paper reads. “We [the EU] have been quite clear that we see the need for having an energy chapter. Then, there wouldn’t be any problem in addressing all energy-related issues in this part of the trade deal,” Wojtek Talko, the spokesman for EU trade, told Interfax. “LNG export licences are not the main issue, because the US grants these licences to all trade partners once there is a deal.” According to Ken Culotta, partner in the Houston office of law firm King & Spalding, the split in views is not surprising. “Given the administration’s environmentalist base, [the US] can’t be seen to be aiding hydrocarbons exports as a matter of policy,” he said. US gas producers are largely in favour of LNG exports as they could help raise the currently low price of gas in the US. However, others in the industry are sceptical as cheap energy is a major competitive advantage. The European Commission negotiates the provisions in TTIP on behalf of the 28 EU member states. The European Parliament will then vote on whether the deal should be accepted. However, no breakthrough has been made and no firm deadline has been set for a conclusion to negotiations. Annemarie Botzki [email protected] Energy Policy Weekly | 9 October 2014 | E3 ENERGY POLICY WEEKLY Industry concerned over Cañete’s calls for single gas buyer European elections Miguel Arias Cañete, commissionerdesignate for Climate Action and Energy, defined his energy and climate priorities in a hearing of the European Parliament on 1 October. These include the possibility of further fracking regulation, a platform for joint purchasing of gas, and the advanced introduction of the proposed market stability reserve (MSR) for the European Emission Trading System (ETS). While the establishment of an ‘energy union’ has been named as a top priority of the new European Commission, it is not yet clear if the concept will include establishing a single purchaser of gas on behalf of all member states, as suggested Donald Tusk, Polish prime minister and incoming president of the European Council. Cañete made it clear he supports the idea of ‘joint negotiating’ if it would be in line with WTO trade rules. “We must negotiate with one voice when buying fuels. I will try my best to convince people to work in a collaborative way to have more negotiating power when the EU is negotiating [gas] prices,” Cañete told parliament this week. “I would be happy to support a platform of joint purchasing, within the WTO rules – the EU could support its buyers’ positions internationally,” he added. Speaking at a Eurelectric event in Brussels this week, outgoing Energy Commissioner Günther Oettinger said he was not in favour of a single gas buyer. “This is one point where I don’t agree with Tusk. It should be a market-based system.” Johannes Teyssen, chief executive of E.On, backed Oettinger’s view. “A true energy union should not be an alliance against somebody out there,” Teyssen told the event. The oil and gas industry has also expressed concerns about the idea, which it says could undermine fundamental principles of free trade as well as liquidity in energy markets (see Gas union is not a solution to EU supply concerns – industry, 3 July 2014). “We have concerns about [the joint purchasing body], because we are afraid it will distort competition and hinder www.interfaxenergy.com the functioning of the internal energy market. It also risks adding complexity,” Alessandro Torello, spokesperson for the International Association of Oil & Gas Producers, told Interfax. Cañete said legally binding fracking regulation could potentially be introduced in 2015. “I will consider further legislation of fracking, after studying the results of the first European projects; we will establish new rules if needed,” he told parliament. “The commission has taken the approach to [only] make recommendations now, and research groups have been set up to establish best practice and find out about the social and economic impacts of fracking,” he added. The EU gave free rein to member states aiming to explore shale gas by presenting non-binding guidelines in January this year. The commission will review the implementation of the recommendation by 22 July 2015 and will consider making the recommendations legally binding. “We don’t see the need for any additional regulation on shale gas – there are already 17 pieces of EU legislation in place, not counting the national laws,” Torello said. The future of the ETS Cañete told parliament he supports an earlier introduction of the MSR mechanism. “I am very much committed to developing the ETS. If I can find enough support in [the parliament] I will try to convince and support the council to advance the establishment of the MSR,” Cañete said. “The backloading [of allowances] should be a onetime measure. When allowances are reintroduced in the market, this could send a bad price signal,” he added. Cañete also said the EU will have to link its carbon markets internationally with China, the United States, Switzerland and other global carbon markets in the future. According to Andrei Marcu, head of the Carbon Market Forum at the Centre for European Policy Studies, linking carbon markets is in some cases a necessity as markets are ‘not deep enough’. “This will be a complex process that could be done under an international framework to be reached at the Paris climate summit next year,” Marcu told Interfax. Cañete’s priorities Energy policy under Spanish Commissioner-designate for Climate and Energy Miguel Arias Cañete will include: ■ Considering further fracking regulation in 2015 ■ Supporting a platform of joint purchasing of gas ■ Backing the advanced introduction of the proposed market stability reserve for the European Emission Trading System ■ Monitoring South Stream: “South stream cannot go on, unless it follows all European legislation” Source: Cañete hearing in the European Parliament Alyssa Gilbert, emission trading expert at Ecofys, said an earlier introduction of the MSR is likely to increase confidence in a higher carbon price, and in the EU ETS in general. “The earlier introduction should slightly increase prices in the EU ETS. Gradually more member states are showing political support for the earlier introduction of the MSR, but it will be a close-run thing to agreeing early introduction and is quite dependent on the agreement struck with the countries that are against the MSR altogether,” Gilbert told Interfax. While Cañete outlined his energy priorities and also stressed the importance of the EU’s climate policy and the agreement on 2030 targets, environmental groups said the EU will not remain a climate leader under Cañete’s leadership. “Cañete stands very much for ‘business as usual’ and continuing the weak line on decarbonisation set out by the previous commission,” Geert Decock, director of EU affairs at Food & Water Europe, told Interfax. “He pays lip-service to the severity of the climate crisis, while failing to adopt an ambitious stance on renewables, energy efficiency and phasing out fossil fuels.” Annemarie Botzki [email protected] Energy Policy Weekly | 9 October 2014 | E4 ENERGY POLICY WEEKLY Price caps, subsidies blamed for tariff deficits – EC Investment & finance Tariff deficits Regulated retail prices and national subsidies for renewables are a major contributing factor to tariff deficits in the electricity sector in several EU member states, a report published by the European Commission has concluded. Spain, Portugal and Greece have the highest tariff deficits, followed by France, Bulgaria and Malta, according to the report, which was published in early October. Tariff deficits are shortfalls of revenues in the electricity system, which arise when the tariffs for the regulated retail electricity price are set below the costs borne by the energy companies – including generation. In Spain, the shortfall is as high as €30 billion ($38 billion) (see No quick fix in sight for Spain’s €30 billion tariff deficit, 23 January 2014). The report concluded regulated retail prices and national support schemes for renewables were major contributing factors to the deficits. The cost of support to renewable energy in Spain rose from €1.2 billion in 2005 to €8.4 billion in 2012, the report said. This has led to suspension of the support to almost all new renewable energy installations in Spain since early 2012. “Support systems, e.g., to renewable electricity, need to be designed carefully to avoid both overcompensation and exploding costs, and should be compatible with a proper functioning of the electricity News in brief The European Commission has adopted a proposal to implement existing obligations in the 2009 amendment of the Fuel Quality Directive. The directive obliges suppliers to reduce the greenhouse gas intensity of fuel supplied for road vehicles by 6% by 2020. Different fuel types will be assigned a default value based on emissions produced over its entire lifecycle. Suppliers will have to use these values when reporting the carbon intensity of their fuel supply to member states. www.interfaxenergy.com ■ The total accumulated tariff deficit in the electricity sector is estimated at €30 billion in Spain, €3.7 billion in Portugal and €700 million in Greece. Tariff deficits occur when retail prices cannot cover the cost borne by the energy companies. This is typically because retail prices are regulated (capped) and cannot cover the rising cost of producing electricity from renewables among other factors. ■ In most EU countries, national subsidies for renewables are paid for by end-users. In 2010, total support from 17 member states amounted to €25 billion, 73% of which came from Germany, Spain and Italy. ■ The tariff deficits have led to retroactive cuts in feed-in tariffs in several countries, including Spain and Greece. In Spain, other measures to reduce the deficit include a tax on electricity production and nuclear waste, a levy on hydro generation, and a carbon tax on fossil fuels used for electricity generation. ■ In Portugal, the regulated tariffs for households are gradually being abolished – a process which began in January 2013, with a transition period of three years until the end of 2015. The regulated tariff for industrial electricity users was abolished in 2010. ■ The overall amounts of subsidies to fossil fuel-based electricity generation in the EU are thought to be lower than subsidies for renewable energy. However, two studies for the European Commission due in the autumn of 2014 aim to give a more complete picture of the existing support to electricity and heat production in the EU. Source: European Commission, Interfax market,” the report concluded. Retail price regulation is also a main contributor to the deficits because price caps have prevented electricity producers and operators from being able to cover their costs. The economic recession exacerbated the problem by lowering energy demand while making it difficult for countries to raise retail prices, the report said. “Regulated retail prices, for example through integrated tariffs or price caps, limit the possibility [for] the electricity companies to cover their full production costs. The result is the emergence of losses, and hence a risk to accumulate a deficit in these firms,” the report added. Second package The Second Energy Package, adopted in 2003, foresaw the abolishment of end-user price regulation for non-household customers by July 2004 and for all customers by July 2007. The Third Energy Package, adopted in 2009, authorises price regulation for vulnerable customers. Eighteen member states had regulated electricity prices for households in 2012, while five member states (France, Cyprus, Romania, Estonia and Malta) had regulated electricity end-user prices for industry, the report said. The burden of the tariff deficit was initially borne by the energy utilities. In Spain, Portugal, France and some other EU countries, these companies have now been compensated by their national governments for the losses accrued. In Bulgaria however, tariff deficits are not recognised by the authorities as a public liability. This has affected the financial performance of the national incumbent state-owned electricity supplier NEK as well as foreign-owned energy distributions companies. The country’s annual deficit has been estimated by the World Bank st between BGN 0.8-1.2 billion ($518-777 million) in 2013 and is expected to increase further in the coming years if no measures are taken. In the UK, Labour opposition leader Ed Miliband pledged in September last year to freeze energy tariffs if elected prime minister at the next general election in May 2015. Andreas Walstad [email protected] Energy Policy Weekly | 9 October 2014 | E5 ENERGY POLICY WEEKLY EU gas demand expected to drop by 9% in 2014 According to the latest forecast from Eurogas, European gas demand is expected to drop by 9% in 2014 compared with 2013 as a result of mild weather, the low price of coal and carbon, and the growing share of electricity produced from renewables. Year-on-year change in European gas demand 0% -2% -4% -6% -8% -10% 2011 2012 2013 2014* *Estimated 460 bcm €30 per ton Estimated gas demand for EU 28 and Switzerland’s annual consumption in 2013 The first half of 2014 saw a decrease of 18% in demand, compared with the same period in 2013, the report said. Highest price for EU carbon allowances, reached in 2008 417 bcm 18% €6 per ton Estimated gas demand for EU 28 and Switzerland’s annual consumption in 2014 Year-on-year decrease in European gas demand in H1 2014 according to Eurogas Current price for EU carbon allowances For 2014 as a whole, the annual gas consumption of the EU 28 plus Switzerland is expected to amount to about 417 billion cubic metres, down from 460 bcm in 2013, the report said. Europe's economic recovery 2.0% change in EU GDP 2.0% change in eurozone GDP 1.5% 1.5% 1.0% 1.0% 0.5% 0.5% 0.0% 0.0% 2013 2014* 2015* -0.5% 2013 2014* 2015* *Forecasts Growing share of renewable energy Renewables 14.1% Renewables 8.3% Share of final energy consumption in 2004 by source Sources: Eurogas, European Commission www.interfaxenergy.com “The forecast for the second half of the year is based on expectations taking into account normal temperatures,” Marion Le Roy, economic manager at Eurogas, told Interfax. Share of final energy consumption in 2012 by source “The dramatic decline in gas consumption in the first half of the year is mainly the result of the very mild weather, although other factors such as the slow economic recovery, low price of coal coupled with a weak carbon price and growing share of electricity generation from renewables played their part,” the report said. Warm temperatures in the first half of 2014 reduced the demand for heat in the commercial and residential sectors – which experienced the biggest decrease, according to Eurogas. The weather, combined with the slow recovery from recession, have also resulted in a lower demand for electricity than in 2013, which affected gas demand for power generation. Annemarie Botzki Brussels correspondent Energy Policy Weekly | 9 October 2014 | E6
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