Outside Forces Shape European Energy

Source: By DAVID BUCHAN, New York Times • Posted: Friday, October 9, 2015

Wind turbines and high-voltage electricity pylons near Brokdorf, Germany. Credit Krisztian Bocsi/Bloomberg News 

The European Union is struggling to create what it calls its “energy union.”

This is largely a refinement of existing policies aimed at improving energy security, accelerating the shift to a low-carbon economy and, on a political level, showing that the 28 European Union member states can pull off a new integration project at a time when they are deeply divided on monetary and immigration policy. Much of it, therefore, is inward-looking.

Yet Europe’s energy project is also being shaped by outside forces, notably the conflict in Ukraine and the potential threat it poses to the supply of Russian gas to Europe.

This was the threat that last year led Donald Tusk, then Polish prime minister and now president of the European Council (composed of European Union heads of government), to call for European Union states to circle their wagons against potential Russian energy blackmail.

But if President Vladimir V. Putin of Russia is seen as the wicked witch in this drama, then President Obama, with his new Clean Power Plan to reduce carbon emissions, could be seen as the fairy godmother to Europe’s energy union.

A rendering of the planned Hinkley Point nuclear  power station in England, which has granted Electricité de France a high fixed power price for 35 years to build a new reactor. CreditHayesDavidson, via EDF Energy 

However controversial the Obama plan is domestically, it underpins United States climate pledges for the United Nations climate conference in December in Paris. This leaves the European Union feeling less vulnerable with its go-it-alone climate policy of recent years.

Back in 2009, Mr. Obama earned no European thanks for sidestepping the European Union attempt to get the Copenhagen climate summit to approve a binding international protocol to limit emissions. (Because of Senate opposition to the United States signing any international climate treaty, Mr. Obama had no other option.)

Since then, Europeans have been spooked by the United States shale revolution, which brought American natural gas prices far below the level of European prices.

The Obama administration claims that the Clean Power Plan will ultimately lower electricity costs in the United States. But this will be mainly through energy efficiency rather than the Environmental Protection Agency’s new carbon caps on American power plants.

The United States is bolstering Europe’s energy union in other ways. Much touted though probably overestimated is the contribution of United States shipments of liquefied natural gas to Europe’s diversification of its gas sources away from Russia.

Certainly East European members of the European Union with ports able to import American liquefied natural gas — the Baltic states and Poland — have lobbied for the United States to relax controls on gas exports, and their appeals have resonated with Congress.

It is possible that some United States liquefied natural gas will reach Europe, but its more likely destination is Asia, where it will be able to command even higher prices than in Europe.

A successful conclusion, if there ever is one, to the European Union and United States negotiations for a Transatlantic Trade and Investment Partnership could facilitate liquefied natural gas exports to Europe.

So far, however, American negotiators have been reluctant to include energy in the trade talks. The European Union fears greater exposure to United States energy-intensive goods, but it would like to include energy raw materials in the negotiations so that Europe can get American liquefied natural gas directly.

Ultimately, the United States may have more to offer Europe’s energy union by sharing its low-carbon management experience than its raw materials.

A key challenge for Europe is to complete the geographical linking of its 28 national markets through cross-border infrastructure and trading arrangements. Another, more difficult challenge is to integrate wind and solar power into the electricity market. Capacity of the renewables sector grows steadily year by year because of subsidies, but output fluctuates daily because of weather.

One solution emphasized in the European Union’s energy union plan is to match this variable supply with flexible demand, which some European Union members like Britain are beginning to experiment with.

No one in Europe has more experience with what is called demand response — paying companies and individuals to turn off or reduce power at times of peak demand or weak supply — than the PJM Interconnection, a regional organization that runs the grid for its utility member companies in 13 mid-Atlantic and Midwestern states.

PJM is attracting European attention for its demand curtailment program, which proved more reliable than supply measures in keeping the grid stable during the 2014-15 winter in North America.

Another significant difference between Europe and the United States is the latter’s tolerance of different nuclear policies in different states.

The only nuclear plants being built in the United States are in Georgia and South Carolina, which under the decentralized United States electricity system have opted for regulation rather than competition in the design of their electricity markets. These states have the right to set electricity tariffs at whatever rate would enable a nuclear constructor to recover its investment, and to protect the regulated utility in question from out-of-state competition.

By contrast, there is supposed to be a uniform competitive energy market template across the whole European Union.

The existence of competition — actual or even potential — makes building a nuclear reactor that may take 10 years to plan and build before it earns a penny a very uncertain business in Europe, while any special national tariff for cost recovery requires state aid approval from the European Commission.

Britain has granted Electricité de France a high fixed power price for 35 years to build a new reactor at Hinkley Point, and got approval from Brussels. But Austria, a strongly anti-nuclear state, and several utilities from Germany, which is exiting nuclear power, have challenged the commission’s approval of British state aid in the European Court of Justice.

Austria is partly reacting to lobbying by a group of pro-nuclear states — France, Britain and several east European countries — to use the energy union plan to rehabilitate nuclear power and to get the European Union’s Euratom nuclear agency to resume financial aid.

Some years ago, Euratom and other European Union agencies ceased lending to the nuclear sector, in contrast to the United States government, which offers loan guarantees to utilities wanting to build new reactors.

What the European Commission and the Obama administration do share is a similar political problem of governance, of getting European Union and American states to follow their respective energy union and clean power plans.

In theory, it should be easier for President Obama, who presides over a single country, but in practice Americans remain far more divided over climate measures than Europeans and have a greater tradition of litigating their differences.

In Europe, the consensus for climate action holds, more or less, but no longer for some of the means to achieve it. Britain and some East European states have succeeded in getting national renewable energy targets removed after 2020, leaving only overall and probably unenforceable European Union-wide targets for renewables and energy efficiency.

Britain and its East European allies want the energy union to be “light touch and non-legislative,” while Germany and the commission want to ensure there will be some penalty on countries backsliding on clean energy programs. Wrangling over the governance provisions of the energy union will continue this fall.

In Paris this December, the European Union and the United States will both need to strike a balance — pledge enough emission reductions to spur other countries into action, but not more than they can actually deliver.

David Buchan is a research fellow at the Oxford Institute for Energy Studies and co-author, with Malcolm Keay, of “Europe’s Long Energy Journey: Towards an Energy Union?,” to be published this autumn.