Finally, Brussels’ battle plan for the European energy market

Finally, Brussels’ battle plan for the European energy market

By Hughes Belin

The European Commission has set out its vision on how to develop the European energy networks needed for a low carbon and more import-dependent future. Brussels’ infrastructure battle plan, adopted on 17 November, is to focus on a limited number of priorities with high added value in terms of achieving European energy and climate change goals, to identify specific but flexible projects that enable the EU to adapt to a changing economic and technological environment and to create tools that can support this policy. Legislative proposals will follow soon. The stakes are high. Success or failure of the new infrastructure policy will be crucial to Europe’s entire strategy on energy efficiency, renewable energy, the Single Market, and security of supply.

This time Günther Oettinger presented a rather impressive new infrastructure package

Energy Commissioner Günther Oettinger had a real baptism of fire on 17 November. After a less-than-impressive performance on 10 November when he presented the new EU Energy Strategy, he did it right this time, with a rather impressive new infrastructure package. This is no coincidence: his department had been working on the package for a year. It is a real battle plan that sets out to solve complex ownership issues and makes it possible to carry out a real European energy policy. In this it is much more concrete than the energy strategy and has generated a much more positive response among stakeholders in Brussels, although questions remain whether it can deliver the goods – on time.

Up until now, European infrastructure policy consisted of lists of “priority projects” that were supported by a low level of funding from a very modest trans-European networks budget. Priorities were often ill-defined, however. There was a lack of long-term vision, a lack of flexibility in the designation of projects and, above all, delays in approval processes that hung like a millstone around the necks of the financial plans and discouraged investors.

In the last five years, of the 32 electricity projects and 10 gas projects of European interest (the highest priority), nine were completed and twelve are underway. That may seem not such a bad result, but it is

It is clear that the role of Brussels in energy infrastructure has been insignificant so far

clear that the role of Brussels in energy infrastructure has been insignificant so far, especially if you consider that the networks are the physical key to all crucial European energy policies: in energy efficiency, low carbon energy, market integration and liberalization and security of supply. These objectives are all dependent on the development of the networks.

Legal basis

So far the Member States have called the shots; now the added value of Europe is coming into play. A crucial step in this process has been the Lisbon Treaty, which added the interconnection of networks to the objectives of EU energy policy. This means the EU has a legal basis now to pursue these projects.

The infrastructure package makes it clear that huge investments are required: €600 billion until 2020 for transport, distribution and storage of electricity and gas (including smart meters). In addition, €500 billion of investment is needed in new generation capacity, but that’s a different story. So much money is needed, in fact, that the Council of European Energy Regulators (CEER) has warned that the costs ‘will have a significant impact on customers’ energy bills. It means that value for money needs to be built into the process, which can be delivered through regulatory oversight.’

Costs may be considerable, but the list of current energy challenges that stand to benefit from the new infrastructure policy is long: integration of offshore wind power form the North sea and hydro-energy from the Alps, an electricity backbone bringing together the whole European network, new routes for gas

So much money is needed that the Council of European Energy Regulators has warned that the costs will have a significant impact on customers' energy bills

imports, a more liquid gas market, integration of the Baltic States into the EU energy system, new East-West interconnections, a CO2 transport network connecting up the CO2 capture plants to storage sites, and deployment of technologies for smart grids. And there are other potential benefits as well if the necessary investments are made: 775,000 jobs and €19 billion of profits for the European economy.

Absurd situation

The infrastructure package distinguishes four short-term priority areas (electricity, gas, oil and smart grids) and two long-term priority areas (“electricity highways” and CO2-infrastructure).

With regard to electricity, the package proposes to realize four “electricity corridors”. These build on the development priorities defined in the ten-year plan of ENTSO-E, the European association of electricity transmission system operators. The corridors are intended:

• to connect the offshore wind power of the North sea and the hydro-storage sites in Scandinavia and the Alps with the main consumption centres in the heart of Europe
• to connect the production of renewable energy in the South of Europe with the North
• to achieve better East-West and North-South connections
• to complete the Baltic Energy Market Integration Plan (BEMIP)

The Lisbon Treaty added the interconnection of networks to the objectives of EU energy policy

The renewable energy industry strongly backs the plan. ‘If governments do not get behind the proposal for a European grid, we will face an absurd situation in which renewable energy capacity is being built, but no adequate grid exists to deliver the 34% of renewable electricity needed by 2020 to reach the EU’s binding renewable energy targets,’ says Christian Kjaer, Chief Executive Officer of the European Wind Energy Association (EWEA).

In fact, some NGO’s believe the electricity proposals of the infrastructure plan do not go far enough. ‘In trying to please all, Commissioner Oettinger has helped only a few’, says Mark Johnston, Senior Policy Adviser at WWF. ‘Future energy needs point clearly to electricity and its efficient use as a priority over other options, yet today’s energy project shopping list fails to make this key distinction.’ Johnston adds that ‘prolonging support for classical fossil infrastructure will divert resources from smarter power network investments. Energy ministers meeting next month must prioritise the electricity system if overall objectives are to be met.’

When it comes to gas, the Commission wants each region to have at least three different supply sources by 2020. To achieve this goal, three projects are given priority:

• the southern corridor which will allow gas from the Caspian, central Asia and the Middle East to be routed to Europe
• the BEMIP again, as the gas interconnections in the Baltic Region are even lagging behind the electricity interconnections
• and the North-South connections in central Europe and South-East Europe

Then there is the European network of oil pipelines, which is far from perfect from a point of view of security of supply. According to the Commission, it needs to be strengthened in central and eastern Europe, in particular so that the EU can diversify towards supplies from the Caspian sea. The Odessa-Brody-Plock pipeline is designated as a priority project.

Finally, smart grids could be subject to additional legislation under the third liberalisation package of 2009. The Commission notes that the transition from the current grid infrastructure to an infrastructure based on smart metering and smart grid technologies is not progressing as fast as it needs to.

Smart grids could be subject to additional legislation under the third liberalisation package of 2009

Landis+Gyr, a global leader in smart metering technology, agrees. ‘The Commission has created a platform on smart grids to determine the priorities but sometimes the discussions about standards are used to justify a reluctance to invest’, the company says. ‘The interoperability of systems and investments need to be given a big boost much more than just via standards’. Landis+Gyr sees the obstacles as being ‘political and regulatory in nature. The technology is there, it just has to be put in place.’

Not satisfied

In the longer term, the Commission wants to create “electricity highways” to connect the excess production of wind power in the North sea and that of solar power in the south of Europe to the big hydro-storage centres in the Scandinavian countries and the Alps, to feed the big centres of consumption in the heart of Europe. The forum of electricity regulators (known as the Florence Forum) will be tasked with studying the feasibility of a ‘modular development plan’ with the aim of starting on these electricity highways from 2020.

Offshore wind power projects depend on the development of new power networks

The Greens in the European Parliament are not satisfied with this timing. ‘We do not understand why the decision to build a DC cable linking the North Sea Wind area with the industrial load centres of Germany, and the hydro storage in Switzerland with the Milan region should only be taken in 2020,’ they comment.

A second long-term priority are the technical and practical arrangements for a future CO2 transport network. Preparations for these need to start already before 2020, the Commission says. The question is, though, whether Europe will have a significant CCS (carbon capture and storage) capability by 2020. In its own PRIMES reference scenario, the Commission notes that ‘the (CCS) demonstration power plants which are already planned, will be constructed and only marginal further development is projected until 2030’.

Yannick Jadot, a French MEP from the Greens/ALE group in the European Parliament, says that ‘Europe needs a big project in favour of renewable energies, not infrastructure for CCS technology that is still being trialled. Nor does Europe need EU-Mediterranean interconnections which, given the slow development of renewable energies in the medium term, will be above all destined to import electricity produced from fossil energies through Italy’.

Real innovation

So how does the Commission intend to bring all these projects to reality? First of all it intends to rely on regional initiatives, similar to the BEMIP in the Baltic Region and the initiative for the offshore networks in the Nordic region.

In addition, the ten-year plans of the European transmission system operators for gas and electricity networks (ENTSO-G and ENTSO-E) will serve as a basis for a ‘rolling programme’ that will be updated every two years. The first list of projects will therefore need to be ready by 2013. Once projects are designated as ‘of European interest’, this will allow them to benefit from European funding.

Here, Brussels is taking a new step, which is the real innovation of this infrastructure package, namely the creation of new European intervention tools in two areas: authorisation procedures and public financing. The Commission notes that authorisation procedures badly need to be simplified and accelerated. It

Once projects are designated as 'of European interest', this will allow them to benefit from European funding

wants member states to set up ‘one-stop shops’ that should function as the interface between the promoters of projects on the one hand and local, regional, national and even European authorities on the other. Such European authorities would coordinate everything relating to the authorisation procedure except the final decision, which would remain up to the current competent authorities.

The whole authorisation procedure should be completed in five years maximum, including possible appeals. This means that the population will need to be involved early, warns the Commission. It even asks that precise frameworks for each of the parties concerned are set up, within such a procedure, including minimal compensation for people who are affected.

Antonella Battaglini, Executive Director of the joint industrial and NGO group Renewables-Grid-Initiative (RGI) is not fully satisfied with this assurance. She is concerned that ‘insufficient attention has been given to building public support for infrastructure development, in terms of communication strategies, participatory planning and avoiding unnecessary environmental impacts’.

Taxpayer pays

Last but not least the question is where the necessary funds will come from. The Commission estimates that, by 2020, no private takers will have been found for €60 billion worth of investments, even if the authorisation procedures will have been streamlined. To deal with this problem, the Commission proposes a better allocation of costs and a better leveraging of public and private funding.

Last but not least: where will the necessary funds come from?

Although the ‘user pays’ principle will continue to be the rule, the Commission believes that exceptions should be made if necessary, for example in the case of offshore power, security of supply measures and intelligent networks. These projects sometimes require investments in neighbouring countries, which makes it difficult to recover costs from national network tariffs. However, the package is not entirely clear on this issue and the Commission promises that it will propose guidelines to allow a broader allocation of costs for cross-border projects next year.

The association of the European energy regulators (CEER) agrees. ‘One area where more political guidance could also be considered concerns security of supply standards against which cross-border investments should be assessed. More clarity could be provided in assessing the trade-off between the cost of additional infrastructure and the resulting level of security of supply.’

The Commission will take a two-track approach to the public funding issue. On the one hand, it will pursue joint technical and financial assistance initiatives with international financial institutions. On the other hand, by the spring of 2011, it will propose a new financial instrument as part of the budgetary negotiations for the 2014 to 2020 period.

This instrument will combine several financial mechanisms to accommodate the risks and needs of each project at different stages of development. In addition to the usual types of support (subsidies and

Without investments in the energy infrastructure Europe's entire energy strategy will fall to the ground

interest bonus), the new instrument will attempt to make up the current shortfalls in financing debts and capital by means of shares, supporting funds and even targeted financial instruments (bonds, risk-sharing, loan guarantees for public-private partnerships). In some cases this might mean that the “user pays principle” is supplanted by the “taxpayer pays” principle.

The next step will be for the European Parliament and the Council of Ministers to express their views on the merits the infrastructure package. One problem is that it comes at a time of tight national and European budgets. That is no doubt why the Commission is laying so much stress on the urgent need to invest in the energy infrastructure of the 21st century. Without this, Europe’s entire energy strategy – surely one of the mainstays of the European Union – will fall to the ground.