CONSERVATIVE MEP FOR SCOTLAND

EU Referendum: Energy

The purpose of this paper is to consider whether membership of the EU provides an advantage to the UK in terms of energy and of climate change.

01.06.2016.

The purpose of this paper is to consider whether membership of the EU provides an advantage to the UK in terms of energy and of climate change.

I am a member of the European Parliament’s Environment (ENVI) Committee, the lead committee on Climate Change and a substitute member of the Energy (ITRE) Committee. I am the spokesman of my party on Energy & Climate Change. I have also been a member of the European Parliamentary delegations to both the COP 20 (Lima) and COP 21 (Paris) UN Climate Change talks.

Energy Island

The UK’s position as an island on the western edge of Europe plays a significant role in its energy profile. In the past, geography dictated that the UK be self-sufficient in energy generation; it could not readily rely upon cross border export. Back in 1995 the UK was one of only two EU Member States (out of today’s EU-28) able to export excess energy.[1] Even in 2003 the UK was by far the biggest energy producer in Europe, producing 245 million tonnes of oil equivalent - as much energy as France and Germany combined.[2] 

The UK is no longer energy ‘independent’. By 2013 UK energy production had more than halved compared with 2003 (109mt of oil equivalent). We produce less than either Germany or France. Furthermore, in contrast to 1995 when the UK exported 16% of energy generated, today the UK imports 42% of the energy it needs to satisfy domestic demand.  No country in Europe has seen such a drop in energy production or a consequential rise in energy dependence as the UK.

Today, 40% of our imported coal comes from Russia, 50% of our imported oil and 55% of our imported gas from Norway, and interconnectors to France, Belgium, Norway, the Netherlands and Ireland supply on average 6% of our daily electricity needs (more on interconnection later).
The reason for the sustained transition to energy dependence is the result of two factors: the closure of coal-fired power stations (to reduce greenhouse gas emissions), and, the fact that the UK’s nuclear plants are reaching the end of their life and not being replaced (at their peak nuclear power satisfied a quarter of the UK’s energy needs). Successive UK (and Scottish) Governments have turned to renewables to plug the electricity capacity gap.  In the four years from 2010 to 2014 electricity supply from renewables increased from 6.8% to 19.1%.  However, due to the intermittency of renewables not all of that supply has been consumed, far from it; over the same period our renewables consumption has only risen from 3.8% to 7%.[3]  Indeed, the past few years have been marred by reports that the Scottish and UK Governments have had to pay renewables generators to turn off their windmills for fear of overloading the grid, while come the winter brown outs are feared. A cautionary tale of over-reliance on intermittent renewables. Hinkley Point represents the most significant investment in constant electricity supply, but the plant will not come online until 2025 at the very earliest.

In the last 10 years, a series of electricity interconnectors between the UK and EU (and non EU) countries, have become important in delivering electricity during peak demand.

Irrespective of the Brexit question, the UK faces an energy choice: build greater electricity generating capacity at home, or import more electricity via interconnectors from abroad.

Energy Liberalisation

Over the last two decades the EU has successfully liberalised its energy markets, creating the market conditions necessary for cross border interconnection. The first liberalisation directives were adopted in 1996 (electricity) and 1998 (gas), with the second package which introduced the right for consumers to choose between their suppliers passed in 2003 and the third which stipulated the separation of companies’ generation and sale operations form their transmission networks in 2007. Liberalisation broke up the state monopolies of energy supply and grid operation. The removal of barriers that prevented alternative suppliers from importing or producing energy was a critical step in delivering interconnection between Member States.

While EU energy liberalisation benefited the UK by extension, the UK had already liberalised its own energy markets beginning in the 1980s. Indeed, the British model was widely used as a basis for EU energy liberalisation.

Interconnectivity

The UK, like much of northern Europe, has sought to encourage the development of renewable energy in general and wind power in particular. The intermittency of wind power, and the failure to invest in storage, has resulted in a growing challenge of balancing demand and supply.  Increasingly the UK has sought to redress the balance by physical connection of its electricity supply with its near neighbours.

I have written extensively on the potential of electrical interconnection[4] to bring jobs, investment, and reduce fuel bills.  As a result of such pressure, the countries around the North Sea are on the verge of signing a memorandum of understanding to create a fully integrated North Sea electricity grid (using a model that I and my fellow MEPs fought hard to promote)[5].

It is important to note, however, that any North Sea Grid will depend upon Norway (which declined to join the EU in 1972 and again in 1994). As the only country with enough capacity to store renewable electricity in quantity - via its pump storage hydro power stations - Norway is pivotal to the success of any North Sea Grid. In reality, grid development will be driven by economic necessity and technological feasibility rather than EU membership. 

When it comes to political will and breaking down technical barriers, the primary driver of this interconnection project has not been the EU, but rather a small yet powerful coalition of the willing called ‘The North Seas Countries’ Offshore Grid Initiative’ (NSCOGI).  NSCOGI was formed when the ten countries surrounding the North Sea (the UK, Ireland, Belgium, France, Luxembourg, the Netherlands, Germany, Norway, Sweden and Denmark) signed a Memorandum of Understanding in 2010[6] to determine the potential for a North Sea Grid and develop scenarios to make it a reality.

Increasing interconnection between Member States is a key part of the Commission’s ambition to create an Energy Union[7],[8], which will address the reality that the EU as a whole imports 55% of its energy, its energy infrastructure is ageing and the internal energy market is incomplete.[9] A North Sea Grid will cost a trillion euros to realise in full. Who will foot the bill? Well, each participating nation will be expected to contribute, as will the private sector, but it is the EU which will provide much of the money (of course it could be argued that this is just re-packaged Member State money in the first instance…). 

The primary EU funding mechanism, the €315 billion ‘Juncker Fund’[10], is overwhelmed with competing demands (2028 projects are currently under consideration) and there is still no sign of the cash flowing any time soon. The EU has yet to step up to the plate on the North Sea Grid, or to set out the conditions under which it anticipates the full delivery of Energy Union. The jury is still out on the EU’s ability to deliver an integrated energy policy.

State Aid Rules

The EU is expressly forbidden from interfering in the right of Member States to determine their own energy mix (despite regular attempts by MEPs). Whether it be building a gas fired power station, extracting more oil from the North Sea or fracking for gas, the EU cannot prevent it. At least that is true on paper.

However, when the UK announced its intention to build the Hinkley Point nuclear station, Austria took the UK to court[11], claiming that the state aid[12] required to build the plant would distort the European market. Despite the fact that the Commission had signed off the state aid to Hinkley Point, Austria was unsatisfied.  State aid rules exist to ensure that funding for projects such as Hinkley Point do not provide commercial advantage to one company over another. They are the difference between allowing major government-funded projects to progress or not. The decisions are taken by Commission officials, with no oversight by the Parliament or Council.

Whilst the EU’s state aid rules may be logical, they can be abused. Austria’s concern with Hinkley point was less to do with market distortion and everything to do with Austria’s ideological opposition to nuclear power. Whether, post Brexit, the UK would be bound by state aid rules as part of a single EU energy market is not clear, but it is worth again noting that Norway, outwith the EU, is bound by such rules. 

At the end of the day the court found no fault with the UK’s Hinkley Point subsidy but the case is a reminder that even the Member State rights guaranteed by the treaty can be circumvented.

The Commission and Fossil Fuels

Whilst the EU cannot expressly restrict the UK’s choice of energy sources, there is little doubt that EU law can have a dramatic impact on fuel choice and the pace of fuel change. 
The Large Combustion Plant (LCP) Directive sought to restrict the emissions from coal fired power stations and other heavy carbon-emitting plants. It was updated in 2010 and renamed the Industrial Emissions Directive (IED). The IED heralded the end for the UK’s coal-fired power stations like Longannet and Cockenzie. Some 10% of the UK’s total electricity capacity was lost as a result of the directive. However, had the UK been outside the EU, it is likely that a comparable domestic law would have been adopted with the same ambition in mind, since the UK is one of the leading climate change campaigning nations.

Following the election I negotiated the Medium Combustion Plant (MCP) Directive with an aim to restrict the emissions from combustion plants and engines which generate electricity and heat. Although not specifically aimed at offshore oil and gas platforms, the UK Government were of the view that North Sea production would fall by a third if the directive were adopted without amendment. Fortunately I was in a position to table a series of amendments to exclude offshore platforms from the Directive[13]. It could be argued that this is an example of the European Parliament doing its job, but it is a reminder of the impact that EU-law making can have even in areas deemed to be national competences.
There is little doubt that the days of electricity produced from coal burning were numbered the moment the UK agreed to the LCP. However, this was already an energy priority of the UK Government. The UK Energy Secretary Amber Rudd has committed to eliminating coal from the UK energy mix by 2025.  The reality is that the UK and the EU have been travelling along a similar path in terms of climate change commitments (although it could be argued that the UK is travelling at a faster pace).

Climate Change

Climate change is a global problem[14]. The EU prides itself on being a global leader in the fight against climate change. As I wrote in my blogs from the Paris Climate Change conference[15], the European Commission drove the ‘High Ambition Coalition’ which called for the rise in global temperature to be halted at well below 2oC.[16] Yet, for all the rhetoric, the EU will be among the last of the parties to the UN climate change process to ratify the climate change deal[17]. Indeed, as the lead Parliamentary negotiator on the reform of the EU’s carbon market legislation I know that the 1.5oC temperature target for which the EU Energy Commissioner fought so strongly in Paris is unlikely to be included in the agreed law.  The Commissioner is on record as saying that the new limits must await the arrival of his successor. It is highly unlikely the new targets will be incorporated into any laws during the mandate of the current Commission. So how effective is the EU in tackling climate change? And does the UK benefit from being a part of the club?

The strongest argument in favour of the EU’s role in addressing climate change is that it encourages certain Member States to be more ambitious than they otherwise might have been. Take Poland, a Member State heavily reliant on coal, with a climate-sceptical government. Despite Poland’s reticence, it signed up to the EU’s 2030 climate change package (which will see CO2 emissions cut by at least 40% by 2030). Financial encouragement may have been required[18], but this is where the EU comes into its own: for better or worse it can horse-trade cash and policy to find political solutions and secure consensus.

That’s all well and good, but the question at stake is not whether or not the EU can lift all boats, it is whether or not the UK benefits from membership. If Poland represents the sceptical end of climate change, then the UK really is in the vanguard. The UK Climate Change Act[19] commits the UK to reducing emissions by 80% by 2050.  Secretary of State Amber Rudd is on record saying she would like to surpass the EU 2030 target (of at least 40% reduction) and instead go for 50%, something that is politically impossible for the EU as a whole to do. Recently Energy Minister Andrea Leadsom announced that the UK will join a small group of countries to enshrine in law a zero carbon emissions target[20].  There is no doubt that just as certain EU states would prefer the EU to be less ambitious, the UK ambitions are curtailed by the lowest common denominator principle.

The Emissions Trading System (ETS)

It would be remiss of me to omit the ETS from this paper because it is the energy and climate policy in which I am most involved. As Parliament’s lead draftsman and negotiator on the ETS reform it is my duty to propose changes to the system and to steer them through Parliament. 

The ETS is the world’s largest cap and trade market for carbon emissions.  The idea behind the system is simple: for every tonne of CO2 that power companies and industry emit, they must buy an allowance.  In order to reduce emissions, the number of allowances available for purchase is capped and reduced year on year.  However, the system right now is not working - too many allowances on the market (as a result of depressed demand during the economic downturn - has depressed the price. ETS market failure has meant that Member States have had to adopt unilateral measures if they wish to drive forward low carbon generation. The UK adopted a carbon floor price[21] (likely to be copied by France). However the majority of EU states have are simply waiting for the ETS to work.

As a market based mechanism, the EU ETS is the best driver of emissions reduction because it does so in a cost-effective way.  Unilateral Member State action, like the UK’s carbon floor price, while giving a boost to the UK’s low carbon generation sector distorts the single energy market and further undermines the objectives of the ETS and wider Energy Union.

Like nearly all of the EU’s energy and climate policies, it is debatable whether the UK would continue to participate in the ETS should it leave the EU.  Successive UK governments have been unwavering supporters of the ETS. And the ETS is not limited to EU members, Norway, Lichtenstein and Iceland are also participants.
The Verdict

Whether within the EU or outwith, the direction of travel of the UK would have been broadly similar in terms of energy and climate change.

Both the UK Government and the EU have embraced decarbonisation, and the policy levers adopted would have been broadly similar irrespective of whether the UK was in or out of the EU.  In many respects the UK has helped raise the ambition of the EU, and its withdrawal would be more likely have a detrimental impact on the EU than the other way around.

The liberalisation of energy markets, following the British model, has been a success for the EU and the UK too has benefited. It is debatable whether the EU would have made such progress in this area without the involvement of the UK. There are still elements of liberalisation yet to be realised, but the UK was an early adopter. Again the absence of the UK from the EU would be more likely to have a negative impact on the EU than vice versa.

The UK has become more dependent upon energy imports. Whilst this trajectory could be reversed, it is debatable whether energy independence is either necessary or desirable. That being said, such dependence does not hinge upon membership of the EU. The UK is a tempting energy market, and the various interconnectors thus far constructed owe little to the EU and everything to do with the desire of providers to enter the lucrative UK energy market.  Going forward, the determination and adoption of common rules to facilitate further interconnectivity may see the EU as a key driver of common standards, but the role of NSCOGI should not be underestimated, and that is not an institution of the EU.

The role of the EU in funding macro-scale energy projects, and developing investor confidence, will be important. Although it can be argued that the funds are ultimately drawn from member state tax payers, the projects should have a value which is worth more than the sum of their parts. However, to date the EU has been coy about funding, and the funds thus far identified are heavily over-committed. It remains to be seen whether the EU will indeed drive forward the macro level projects envisaged in the Energy Union.

In the area of energy and climate change, on balance it would seem that the EU has more to lose from the exit of the UK than the UK would necessarily have to lose by exiting.

 

[1] Denmark is the only other Member State capable of exporting energy: http://ec.europa.eu/energy/sites/ener/files/documents/2014_pocketbook.pdf

[2] http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Energy_production,_2003_and_2013_(million_tonnes_of_oil_equivalent)_YB15.png

[3]https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/450298/DUKES_2015_Chapter_6.pdf

[4] http://www.euractiv.com/section/uk-europe/opinion/north-sea-grid-will-prove-eu-is-serious-about-energy-union/

[5] http://www.ianduncan.org.uk/sites/default/files/energy%252520union%252520-%252520realising%252520a%252520north%252520sea%252520grid.pdf

[6] http://www.benelux.int/files/8113/9625/9202/MoU_NSCOGI.pdf

[7] http://www.planete-energies.com/en/medias/close/five-pillars-european-energy-union

[8] http://ec.europa.eu/energy/infrastructure/transparency_platform/map-viewer/

[9] http://europa.eu/rapid/press-release_IP-15-4103_en.htm

[10] http://ec.europa.eu/priorities/jobs-growth-and-investment/investment-plan_en

[11]  http://www.theguardian.com/world/2015/jul/06/austria-files-legal-complaint-against-uk-hinkley-point-c-nuclear-plant

[12] State aid is defined as an advantage (either monetary, market share or other) that is given to a company by a State.

[13] http://www.ianduncan.org.uk/index.php/site/article/a-short-break-from-campaigning

[14] http://www.euractiv.com/section/climate-environment/opinion/the-uk-is-sinking/

[15] http://www.ianduncan.org.uk/index.php/site/paris#sub1

[16] https://unfccc.int/resource/docs/2015/cop21/eng/l09r01.pdf

[17] http://www.ianduncan.org.uk/index.php/site/article/will_the_eu_ratify_the_paris_agreement_on_time

[18] http://www.euractiv.com/section/energy/news/poland-says-will-cooperate-on-climate-change-for-a-fee/

[19] https://www.theccc.org.uk/tackling-climate-change/the-legal-landscape/global-action-on-climate-change/

[20] http://www.theguardian.com/environment/2016/mar/14/zero-carbon-emissions-target-enshrined-uk-law

[21] https://www.gov.uk/government/publications/carbon-price-floor-reform