Jeremy Wilcox is a Director of Infascan, a Brighton-based energy consulting group specialising in analysis of strategic and financial issues for the international power business
Three strategic programmes primarily direct energy policy: security of supply; market deregulation and competition; and environmental emission reductions. For any energy policy to be prudent and effective these three strategic areas should be both convergent and mutually beneficial. If they are not the realisation of the individual strategic goals are compromised as all three are inextricably linked. Traditionally, the most important strategic issue has been that of security of supply as it maps out the broad infrastructure of energy policy and ensures the provision of energy. Over the past couple of years most Western governments have sought to revise overall energy policy in the light of increasing environmental concerns and the changing energy import-export balance, as most EU nations will become net importers of gas within the next twenty years. In addition these countries will increasingly have to look to the rich natural oil reserves of Russia and Opec.
In theory, deregulation policy should dovetail with overall policy on security of supply issues and this is largely the case. However, if deregulation policy is flawed it can have a counter impact on security of supply issues. The experience of California is a classic example of introducing market deregulation policy that was not convergent with overall security of supply issues. Without the security of supply required Californian electricity prices surged in a freely competitive market as demand outstripped supply.
California is also a good example of conflict between environmental policy and overall energy policy. The reason that California lacked sufficient security of supply – too few refineries and power plants to meet increasing energy demand – was primarily because environmentalists objected to the emissions these plant produce. It could therefore be argued that, with respect to California, the policies of security of supply, deregulation and the environment were more divergent that convergent. But is it possible to have the ideal of long-term security of supply, competitive (cheap) energy prices and falling emissions? In its inaugural report on energy and the environment the European Environment Agency concluded that EU progress towards meeting Kyoto is insufficient (see this month’s news). While the report shows that EU greenhouse gas emissions fell 3.5 per cent between 1990 and 2000 they are expected to return to their 1990 level by 2010 unless additional countermeasures are implemented. But within this 3.5 per cent reduction, energy related emissions, which constitute the largest component, fell considerably less.
The stark reality of the report’s conclusions is that current emission reduction initiatives are simply not sufficient to meet the goal of 8 per cent reduction in greenhouse gas emissions from the 1990 levels by the period 2008-2012. We should not be surprised by these conclusions.
Central to the poor prognosis for emissions reduction is market competition. Increasing competition in the energy sector has seen prices fall between 1985 and 2001 even though the level of taxation has increased. The result is increasing energy demand and a reduced incentive towards energy saving. In addition, the continued subsidisation of fossil fuels in Europe, particularly the coal industries in Germany and Spain, reduces the incentive to embrace new renewable energy sources. At the same time there has been increasing pressure in Europe (with the exception of Finland) to phase out nuclear, a zero emissions fuel.
Almost two years after the EU delegation at COP6 argued that the US was wrong to walk away from the Kyoto Protocol it seems that the US was correct in its approach as the emissions reduction targets set out in the Protocol may well be unachievable in competitive energy markets. It is becoming apparent that there may be less synergy between market competition and emissions reductions than the EU originally envisaged. While consumers would like to have cheaper energy and be subject to lower emissions some trade off between the two is required.
Emissions reduction requires investment, but this cannot be allowed to impact on energy security. The reality for Europe could well be that while its deregulation, energy security and environmental programmes are, individually, sound, they are not sufficiently convergent to enable benefits across all programmes.
Although the EU has seven years to achieve its 8 per cent emission reduction goal the reality is that current initiatives need to be revised urgently. Part of the problem is the skew in European emission reductions with some countries more successful than others in reducing emission levels. For the EU to be successful in meeting its emission objectives all EU member countries have to be in tandem, even allowing for trading in emission permits to enable member countries to remain in compliance.
But a more important consideration will enter into competition and overall energy policy. In the UK the government has recently raised concerns that electricity prices are dropping to unsustainable levels, potentially jeopardising investment in renewable energy sources. Similar pricing scenarios are likely in other EU countries as competition thresholds increase.
The issue for the EU may be whether competition has to be compromised to ensure emissions reduction targets and the impact this could have on the overall economy. Of equal concern is the generation feedstock mix. Coal still commands a healthy market share of European generation and by subsidising coal it becomes a protected market. Not only does this limit emission reduction it reduces the economic incentive to invest in new and alternative generation sources. Phasing out nuclear power also has a detrimental impact on greenhouse gas emissions, and Europe still appears undecided on the long-term value of nuclear energy.
In the same week that the EEA report was issued the Bush administration conceded that emissions do contribute to global warming and climate change, but that the benefits of sustaining economic growth outweigh the potential dangers of emissions. The US appears to take the view that it is better to learn to adapt lifestyles to account for climate change than to impair the economic health of the country. Europe, by comparison, appears to prefer limiting the potential of economic change, but in doing so may have to be prepared to give away some of the economic upside as a result.
While all governments should base energy policy on ensuring security of supply they may have to choose whether it is more important to have a freely competitive market with fluctuating energy prices based on supply and demand, or whether they prefer to set competition limits to achieve emissions targets.