DATAMONITOR VIEW 1
CATALYST 1
The European Union is attempting to create a new, comprehensive legal framework regarding energy issues. The processes, institutions and politics behind this agenda will determine the development and nature of markets, in which utilities operate. In order to prepare for this, utilities must understand the matrix in which EU energy policy is formed and the differing forces driving overall strategy. 1
SUMMARY 1
SOURCES 1
ANALYSIS 2
Decisions on EU energy policy are made in a complex and shifting institutional matrix 2
The EU's energy policy seeks to address three essential issues: market competitiveness, sustainability and security of supply 2
Thus far, the EU has struggled to forge a cohesive policy which satisfies these three competing agendas 3
These agendas compete within a complex and shifting institutional matrix in which the commission plays a central role in formulating and enforcing policy 4
The European Commission is the key 'driver' of all EU policy, by way of initiation and enforcement 5
The commission is distinctly pro-liberalization compared to the council, especially under its current head, José Manuel Barroso 5
The European Parliament remains an advocate of liberalization but has only limited legislative powers to promote this agenda 6
The Council of Ministers is the critical decision making body and represents individual states' national interests within the EU 6
This is a non-static model in that changes in the presidency and bureaucracy will precipitate changes in policy direction 7
There is no single EU energy market yet and although the third package will leave the door open to future liberalization, state interests will prevail 8
The European Commission has long held a liberal attitude towards how energy markets should function 8
Gains from the first and second packages have been slow to realize, as reflected in Market Competitiveness Index variation across Europe 10
The commission initially envisaged a third package which would force vertically integrated utilities to separate production and transport assets 11
The commission's proposals have been rejected by a Franco-German led bloc, which instead tabled a 'Third Way' alternative 12
The effective adoption of the TSO model elevates the role of regulators in determining how liberal gas markets will become 12
Contrary to EU legislation, many regulators follow government leads in determining tariffs and are subject to political interference 13
Although effective unbundling of gas assets is now unlikely to take place before 2011, liberalization is not completely off the agenda 13
The European Parliament is willing to accept the council's deal for gas but not for electricity - full unbundling seems non-negotiable here 14
The 'Third Party Clause' proved too divisive: individual member states will rule on third-party bids, with 'advice' from the commission 15
The EU has set itself ambitious renewables targets and a tight schedule in which to achieve them 16
Utilities face an uphill struggle to meet renewables targets 16
Capacity constraints in developing new wind generation assets render these targets unrealistic 18
Although the EU ETS is not designed to increase renewable generation it remains a core part of European attempts to reduce carbon emissions 19
The details of EU-ETS Phase III are currently subject to debate, but the scheme remains exclusively focused on emission reductions 19
The success of Germany's feed-in tariff compared to the UK's ROCs has prompted calls for European support for wind 21
In addition to carbon-focused legislation, the EU has also implemented the Large Combustion Plant Directive to combat environmental acidification 22
EU policies on a system wide or Member State level aimed at sustainability come at a financial cost and could lead to more gas 23
The EU is attempting to improve security through diversifying external supplies and encouraging storage and LNG solutions 24
European indigenous gas production is declining and will continue to do so 24
Gas will play an increasing role in Europe's generation mix because it is comparatively clean and there are capacity constraints in renewables 25
As European demand for new capacity grows, gas-fired power generation will drive demand for gas 26
This decline in production alongside growth in demand is precipitating a 'supply crunch' for Europe 27
Despite political friction, Russia will be crucial to meeting Europe's gas demand in the long term 28
However, underinvestment, mismanagement and the unstable fiscal regime in Russia present a credible threat to European security of supply 29
Carbon capture and storage may yet render coal a viable, clean solution to Europe's security objectives 31
LNG has been mooted as a solution to security concerns and hence Third Party Access rules have been slackened 32
The EU has tried to stabilize supply security by promoting gas storage through lax TPA regimes, arguably with perverse results 33
Although the commission will remain in favor of liberalization as a solution to security threats, regionalism is a more likely outcome 34
The EU will continue to make incremental changes but must make compromises in each field 35
There are key milestones in the future which will affect EU energy policy 35
Liberalization will develop on a regional, rather than pan-EU basis 35
Liberalization is unlikely to develop on an EU-wide basis 36
Environmental policies will be watered-down but not abandoned 37
Environmental policies will be weakened in most scenarios 38
There is little the EU can do to affect external security of supply and would be better served by focusing on internal issues 39
TPA derogation will continue to form a central tenet of internal security policy 40
Conclusions: Legislation can only come about through compromise but even when passed, there is no guarantee this will affect states' policies 41
APPENDIX 42
Disclaimer 42
Datamonitor Consultancy 42
Ask the Analyst 42
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