Special energy report

Date: 20/09/01

European Commission Director-General for Energy

• Question: The EU is surrounded by major sources of energy that are preparing to compete in its liberalised markets. How reasonable are the Commission's preoccupations with 'security of supply'? Answer: As it enlarges, the EU is building up the biggest liberalised energy market in the world. It is also the nearest market to many of the surrounding energy resources, be they in the North Sea, the Russian Federation, the Middle East or North Africa. But the EU still depends heavily on OPEC for its oil supply.

Direct access is needed to new resource areas such as the Caspian Basin, through integrated oil pipelines. This will improve our security of supply, granting access to private companies that are not controlled by cartels.

The problem is even more crucial where gas is concerned. The Union is currently dependent on a handful of suppliers, with many important reserves still not linked by pipeline to the EU. The development of gas pipelines from the Caspian, Iran and the Balkans is crucial to the EU's diversification of supply - as are new links to North African gas resources.

• Question: Do these concerns justify the ten-year extension of coal subsidies proposed by the Commission, in spite of EU commitments under Kyoto? Answer: Given the marginal share of the energy market currently accounted for by renewables, coal is still important to ensure a balanced mix and to avoid an over-dependence on oil and gas, most of whose longer-term reserves lie outside the EU. The complete demise of EU coal production in the short term would have repercussions on our long-term energy security.

Furthermore, under the proposal, member states will be able gradually to transfer aid from coal towards renewable energy sources. The increasing use of clean-coal technologies will also improve energy efficiency and substantially reduce pollution levels, while cleaner technologies developed in the EU can be transferred elsewhere, contributing to a significant reduction in greenhouse emissions globally.

• Question: Given their unpopularity and high capital costs, can nuclear plants make a significant contribution to a secure energy supply? Answer: Nuclear energy has always been mistrusted, and the Chernobyl accident strengthened those fears. However, climate change is forcing us to revise some of our preconceptions.

Accounting for planned closures, nuclear energy will account for savings of around 300 million tonnes in CO2 emissions between now and 2010 - equivalent to halving the number of the vehicles on Union roads. The Commission's green paper on energy included a reminder of this evidence as a way of taking the heat out of the debate. Nuclear energy is unavoidable.

Investments in power stations are very high, but the long-term cost comparison will have to make allowances for variable fuel costs. Uranium accounts for 6&percent; of the cost of each kilowatt-hour it produces, while natural gas accounts for 60&percent;. Gas is subject to greater price variations than uranium, as well as supply limitations. Such considerations explain Finland's decision to build two new nuclear reactors.

• Question: Is politicians' protectionism the only reason that energy liberalisation is progressing so slowly? Answer: Liberalisation is not progressing slowly. Over 60&percent; of EU electricity and gas demand is now open to Europe-wide competition, and a clear majority of member states have committed themselves to full market opening in the next few years. This does not mean that the adoption of the Commission's proposals for full market opening is not urgent or vital; it is.

But our ultimate goal is a real internal market offering a level playing field to all Community energy suppliers, not just a juxtaposition of 15 national markets. We need clear rules on cross-border trade as well as new infrastructure to link national networks.

To follow up on its proposals to promote cross-border trade in electricity, the Commission will soon launch an initiative aimed at ensuring the continued provision of adequate infrastructure capacity to support the internal market and security of supply.

• Question: Will liberalisation necessarily deliver lower prices for consumers? Answer: In practice, the efficiency gains brought by the introduction of competition have so far led in many cases to significant price reductions, particularly in the electricity sector. However, no-one can guarantee that prices will always fall.

Future energy prices depend on many factors including the price of primary energy sources for electricity production. The key, therefore, is that consumers will have competitive energy prices; it is they who will benefit from cost savings which result from competition.

And with the choice of suppliers comes improved standards of service - we've seen this in the telecoms sector, and we are seeing it in liberalised electricity markets.

• Question: What more could be done to limit future acquisition sprees by state-owned energy companies with protected home markets? Answer: A balance needs to be found between the need for the free movement of capital and equitable conditions for market access. The European Court of Justice will soon adopt a ruling that will clarify this debate.

We are aware that this situation results in serious difficulties and tensions, when firms in largely closed markets opt for an active Europe-wide expansion strategy.

The only appropriate way to address this is by the rapid adoption of our proposals for full market opening by the Council and the Parliament. In the meantime the EU executive will continue to be strict in its application of competition and state aid rules.

• Question: Does the California crisis offer reasons for caution over liberalisation? Answer: The Californian crisis gives us a taste of the problems that Europe could face if we do not pay enough attention to security of supply. California placed enormous obstacles and disincentives to the construction of new generation and transmission capacity in a rapidly growing market. These structural errors are not being replicated in Europe. However, this is no reason for complacency. If market opening is correctly undertaken, it enhances security of supply.
• Question: The Commission has decided to allow government aid to compensate utilities for costs inherited with privatisation. How can you ensure this is fair to competitors and market entrants? Answer: The Commission has adopted guidelines setting out the conditions that need to be met for any stranded costs compensation scheme to be acceptable. These rules ensure that support is limited to what is necessary to compensate for stranded investment and therefore avoid distortions of the market.

Recipients of stranded costs may not receive any competitive advantage against private rivals and market entrants. Such support may only be granted if it is absolutely necessary to ensure that the companies in question are themselves not disadvantaged by old investments that are no longer viable. In other words, it

can only bring disadvantaged companies up to the level playing field of their competitors - not above it.

• Question: What are the main challenges facing EU energy policy as the Union enlarges? Answer: I would answer in two words: closure and safety. Enlargement will not bring major changes to our energy mix; the main challenge is nuclear safety. When I was deputy director-general for DG External Relations, I negotiated the closure of three nuclear power stations in applicant countries that could not be upgraded to EU safety levels.

I believed and continue to believe that nuclear safety is one of most important energy issues in the enlargement process. We have to make sure that applicant countries fulfil their commitments in this area and that their nuclear safety standards correspond to those in place in our own countries.