April 2014 – The European Council, composed of the Heads of State or Government of Member States of the European Union (the “EU”), held its spring meeting on 20-21 March 2014 amidst the Crimean crisis. European energy policy issues dominated the agenda in addition to – and complementing – the concerns over the situation in Ukraine. It was therefore no surprise that the European Council’s Conclusions adopted on 21 March 2014 focused on finding the key elements of a coherent new European energy and climate policy.
Antecedent
The EU has been struggling for some time to determine the final pillars of its future energy and climate policy. Confronted with difficulties in creating a truly integrated internal energy market by the original deadline of 2014, seeing the collapse of the EU Emission Trading Scheme (“ETS”) in 2013, trying to tackle structural problems in the European wholesale electricity markets and contemplated national capacity markets in certain key Member States, it is no wonder that European policy makers have not yet agreed on the way forward for Europe’s troubled energy markets.
In its energy policy conclusions published at its May 2013 meeting (read our comments here), the European Council had urged the European Commission to find solutions to core issues such as the lack of necessary investment in Europe’s energy infrastructure, the EU’s dependency on energy imports, the slowed-down creation of the internal energy market, and the detrimental effect of high energy prices on the competitiveness of Europe’s industries. In response, the European Commission published in January 2014 a new package of energy and climate proposals for the period of 2020 to 2030 (the “2030 Energy and Climate Package”, on which we also commented).
Underlying the seriousness of the situation, the Magritte Group of CEOs of Europe’s leading energy companies (ENI, E.ON, GDF Suez, Iberdrola and RWE, among others) published an urgent call for energy policy reform in anticipation of the March 2014 European Council meeting, putting forward a set of nine recommendations to reform Europe’s energy and climate policy.
A new tone in European energy policymaking
Being used to the often general tone and sometimes vague formulation of high-level European policy measures, one may be surprised by the clarity and directness of the energy policy conclusions set forth this time around by the European Council. An apparent consequence of the Crimea political crisis, the European Council Conclusions prescribe clearly defined tasks, give specific directions and set short deadlines for the European Commission to develop and adopt the new European energy policy framework.
Key conclusions and clear directions by the European Council
The European Council Conclusions call upon the European Commission and Member States to take clear and decisive steps in four important energy policy areas:
- achieving an early agreement – by October 2014 at the latest – on the new European energy policy framework;
- speeding up efforts to complete the internal energy market, in particular in the area of energy network interconnections;
- intensifying efforts to reduce Europe’s high gas dependency; and
- moderating energy costs borne by energy consumers.
Early agreement on new European energy policy framework
The new European energy policy framework should be based on the European Commission’s 2030 Energy and Climate Package, with a reformed EU ETS playing a key role.
In order to achieve an early agreement on the new policy framework and take a final decision by October 2014, the European Council invites the Council and the European Commission to rapidly develop the following elements:
- analysis of the implications for individual Member States of the Commission's 2030 Energy and Climate Package proposals for EU-wide targets for emission reductions and renewable energy;
- elaboration of mechanisms resulting in an overall fair effort sharing and foster the modernisation of the energy sector;
- development of measures to prevent carbon leakage; and
- measures for long-term planning security for industrial investment to ensure competitiveness of Europe's energy-intensive industries.
The European Council is thus committed to pushing for the EU ETS reform, is keen on implementing new measures to modernise Europe’s energy sector and intends to ensure long-term planning security for industrial investments – which would all be welcomed by market players.
Speeding up efforts to complete the internal energy market
The European Council Conclusions also urge the European Commission to speed up efforts to complete the internal energy market by the end of 2014, including:
- speedy implementation of measures to achieve interconnection of at least 10% of installed electricity production capacity for all Member States which should also include the improvement and creation of reverse flows;
- effective and consistent implementation of the Third Energy Package; and
- effective application and enforcement of EU rules on market integration and energy efficiency.
This means that the European Council is pledging significant network infrastructure development for the coming period and emphasising the importance of reverse flows.
Intensifying efforts to reduce Europe’s high gas dependency
As an evident response to the Crimea crisis and its potentially severe impact on the EU’s energy security, the European Council Conclusions call for more efforts to reduce the EU’s high gas dependency. The European Council Conclusions point to the following key measures to attain this objective:
- accelerating diversification of energy supply both in terms of infrastructure development and enhanced deployment of renewable energy sources and other indigenous energy sources;
- increasing energy efficiency measures; and
- developing further interconnections both within the EU and with third countries.
In addition, the European Council Conclusions call for the following steps to be taken:
- developing the Southern Corridor in the natural gas sector, including developing further gas supply routes through Eastern Europe;
- facilitating natural gas exports from North America to Europe; and
- increasing transparency of energy-sector related Intergovernmental Agreements.
In view of potential sudden disruptions of energy supply, the European Council pledges that Member States will show solidarity with countries that may suffer from gas shortages.
Stemming from these conclusions, we can expect a wave of major gas transmission, supply and interconnection infrastructure development in the coming period, all with the backing of EU institutions and resources.
Moderating energy costs borne by end-users
Further to the energy prices analysis forming part of the European Commission’s 2030 Energy and Climate Package, the European Council Conclusions call for more efforts to moderate the energy costs borne by energy consumers, in particular by:
- changing the current renewable energy support mechanisms to a more cost-effective and market-based system;
- more investment in energy efficiency and demand-side management;
- better use of power generation capacities available throughout the EU – as opposed to solely relying on a national approach;
- promotion of domestic energy resources; and
- addressing the issue of contractual linkage of gas and oil prices.
The European Council Conclusions are significant not only because they signal change to the current renewable energy support schemes, but also because they suggest a new approach to utilising existing power plant capacities in Europe. In addition, it could also give real impetus for the exploration of the EU’s indigenous resources and, for the first time, could put long-term gas contract pricing matters on the agenda of Europe’s energy policymakers.
Next steps
The European Council has tasked the European Commission with preparing by June 2014 a number of analysis and policy measures ahead of the European Council’s next meeting, with a view to taking a final decision by October 2014, including:
- proposals for specific network interconnection objectives for the period until 2030;
- an in-depth study of EU energy security; and
- a comprehensive plan to reduce the EU’s energy dependence.
Hence the coming months of June and October will likely bring further clarity and hopefully set the ground for the EU’s new energy policy framework.
For more information contact Kristóf Ferenczi, Partner and Head of Kinstellar's Energy practice, at +36 1 428 4471 or .