Select Committee on European Scrutiny Twenty-Eighth Report



8. TRANS-EUROPEAN ENERGY NETWORKS

 

(a)

(23332)

6990/02

COM(02) 775

 

(i) Commission Communication "European energy infrastructure".

(ii) Draft Council Decision amending Decision No. 1254/96/EC laying down a series of guidelines for trans-European energy networks.

(iii) Commission Report on the implementation of the guidelines for trans-European energy networks in the period 1996-2001.

(b)

(23358)

7291/02

COM(02) 134

 

Amended draft Council Regulation amending Council Regulation (EC) No. 2236/95 laying down general rules for the granting of Community financial aid in the field of trans-European networks.

 

Legal base:

(ii) Article 156 EC; co-decision; qualified majority voting

   

Document originated:

(a) 20 December 2001

(b) 12 March 2002

Deposited in Parliament:

(a) 25 March 2002

(b) 3 April 2002

Department:

Trade and Industry

Basis of consideration:

EMs of 25 April 2002

Previous Committee Report:

None; but see footnotes below

To be discussed in Council:

June 2002

Committee's assessment:

Politically important

Committee's decision:

Cleared

 

 

Background

  8.1  The Commission says that, although it has already tabled proposals[13] providing for the full opening of the Community markets for gas and electricity and for effective third party access, an adequate infrastructure (and access to it under non-discriminatory conditions) is equally important as a pre-condition of the creation of the internal market in these two areas. It has therefore in the first of these documents reported on the implementation from 1996-2000 of the guidelines for trans-European energy networks; produced a Communication which seeks to identify the remaining problems regarding infrastructure and ways of resolving them (which it sees as representing a first step towards addressing some of the issues identified in its Green Paper "Towards a European strategy for the security of energy supply"[14]); and put forward a draft Decision which would amend the Decision (No. 1254/96/EC[15]) laying down the existing guidelines.

The current documents

  8.2  In its Communication, the Commission says that the European electricity market is already well interconnected compared with regional markets elsewhere in the world, but that lines are often congested, and some Member States — including the UK — relatively isolated as a result, with import capacities well below 10% in relation to their domestic generation capacity. It also makes the point that, even where capacity is used less intensively, congestion may occur where inadequate arrangements exist for allocating capacity or there are long-term capacity reservation agreements. Whatever the cause, the Commission draws attention to the adverse consequences for the internal market, not least in terms of maintaining national retail price differentials, and for the security of supply; and it suggests that any such problems are likely to increase over time. Having said that, the Commission also says that it is difficult, if not impossible, to define an ideal level of interconnection capacity, but that it believes that a certain minimum level in each Member State would be justified, suggesting a reinforcement of the networks at various borders, including those between UK and Ireland and France respectively.

  8.3  So far as natural gas is concerned, the Communication points out that the Community market has been steadily expanding, including geographically, since 1960, with its share of the primary energy supply balance rising in that time from less than 2% to nearly 24%, due in large measure to increased demand for power generation. Despite this, the Commission notes that large differences remain between Member States, and that natural gas is unlikely to become a universal service. On the other hand, it also points out that, in contrast to electricity, more than 60% of current gas consumption crosses at least one border, albeit in most cases because gas is imported from different supply sources rather than as a result of a real competitive internal market. The Communication further contrasts the position with that for electricity by noting that lack of available capacity has not hitherto been a major constraint, though it expects this to change as demand continues to increase. It also says that there are a number of missing links, with Finland and Greece being isolated from the European network, but that there are already links with some parts of the network in central and eastern Europe (which serve as transit countries for Russian gas exports to the Community). This in turn leads the Communication to refer to the parallel need for an adequate external infrastructure to handle the expected increase in the Community's dependence on third country supplies.

  8.4  Against this background, the Communication concludes:

that without adequate levels of infrastructure, and with continued and persistent high levels of congestion, a real internal energy market cannot be expected to develop;

that adequate infrastructure is essential to ensure effective and increased levels of security of supply, and is of particular importance to the development of renewable energy sources;

that the key to progress lies with the undertakings which have successfully developed the present networks, and that the Community therefore needs to ensure that incentives exist to use existing capacity efficiently and to build new infrastructure;

that, in addition, action at Community and Member State level is vital to resolve bottlenecks and to ensure the construction of missing links, which industry alone will not address.

  8.5  It goes on to suggest that, although a single "interconnector target" may be a crude instrument, it would help to encourage a rapid development of the internal market. It therefore proposes that, as a reasonable initial target, all Member States should achieve a level of electricity interconnection equivalent to at least 10% of their installed generation capacity, with higher targets being set where this level is already exceeded, but significant levels of congestion nevertheless occur.

  8.6  The Communication also suggests that, in addition to the rapid adoption of its proposals for the opening of the internal markets for gas and electricity, this action should be reinforced by a number of steps taken under the following headings:

— Improving the use of existing infrastructure

  8.7  The Commission says that it is vital to ensure transparency in network utilisation by improving auctioning procedures; to implement fully congestion capacity guidelines so as to develop effective competition; and to consider the action needed at Community level to ensure that cross-border tarification is based on non-discrimination and reflects costs.

— Ensuring a stable and favourable regulatory environment for new infrastructure

  8.8  The Commission stresses the importance of government creating a regulatory environment which provides clear financial incentives for infrastructure companies, and pursuing policies which set out the respective responsibilities of the different players. It suggests that the Council of European Energy Regulators should be asked to put forward guidelines in this area.

— Political commitment at Community and national levels

  8.9  The Commission points out that congestion is not just a problem for the Member States most immediately concerned, but for the Community as a whole, in as much as it detracts from the internal market. It considers that Member States need to take appropriate action to resolve congestion where it is highlighted in this Communication, and it says that it will in future produce an annual report on security of supply in the two energy sectors, which will highlight progress on infrastructure and review priorities.

— Gas supplies to Europe

  8.10  In view of the increasing reliance of the Community on gas imported from third countries, and the massive investment[16] needed to accommodate this, the Commission regards it as essential to remove any unnecessary constraints, particularly in long-term supply contracts. It therefore intends to produce a Communication on the Community's external energy policy, and has invited the Council of European Energy Regulators to establish which actions are needed to ensure the commercial and financial conditions conducive to long-term investment in the gas supply infrastructure.

  8.11  The rest of the Communication addresses the Community's political and financial support for infrastructure projects. It says that, in most cases, such support is not required, but that there are exceptions — for example, where a non-viable project is a priority for social or regional reasons, or a project is essential for the completion of the internal market. For this reason, the Community has already adopted (in Decision No. 1254/96/EC) guidelines for trans-European energy networks, setting out objectives and priorities, and identifying about 90 projects of common interest, which are eligible for up to 10% financing from the Community.

  8.12  The Commission considers that these arrangements should be amended in two ways. First, it has proposed that the guidelines in Decision 1254/96/EC should be altered so as to identify among the projects of common interest those which should be categorised as priorities[17], on the grounds that they will have a major impact on completing the internal market and reinforcing security of supply. In addition, projects of common interest would be defined more broadly so as to provide greater flexibility, the focus of support would be shifted from pre-investment feasibility studies to the development phase, and the priorities for trans-European networks would be rearranged in the light of developments since 1996. In particular, the latter would include two new priorities, namely completion of the internal market by filling in missing links and tackling congestion problems, and the connection of renewable energy production to the networks.

  8.13  In addition, the Commission has proposed in the second of these documents that the maximum level of Community funding for priority projects should be 20%, double that for other projects identified as being of common interest. As such, it is in line with the increase already proposed[18] in the case of the trans-European transport network.

The Government's view

  8.14  In separate Explanatory Memoranda of 25 April 2002, the Minister of State for Industry, Energy and the Environment at the Department of Trade and Industry (Mr Brian Wilson) deals with each of these documents in turn. He says that the Government welcomes the analysis in the Commission's Communication, supports the single energy market as a key priority, and has often emphasized the importance of an integrated, liberalised market for improving the prospects for security of supply. However, he also draws attention to a number of points on which the UK has reservations. These include:

the setting of 10% electricity interconnection target, which would require the UK to construct a number of sub-sea interconnectors, which may not otherwise be needed;

the need to clarify aspects of the changes proposed in financial support for trans European energy networks, such as precisely what is meant by the development phase;

the interconnection of renewable energy production, which the UK considers to be aimed more at achieving the integration of peripheral regions, and as unlikely to have a significant impact on the internal market or on renewable energy supply.

  8.15  In his second Explanatory Memorandum, the Minister says that, whilst the UK is prepared to be flexible, it would like to explore further the rationale for increasing the maximum grant from 10% to 20%, where it is concerned that, even though the Commission proposes that expenditure should be contained within the existing energy budget for trans-European networks (currently 20 million euros a year), there will nevertheless be an upward pressure. He also believes that there could be risk of subsidising projects capable of being funded fully from the market.

Conclusion

  8.16  Though these documents deal with an important subject, on which it is clearly right to report to the House, they can to a considerable extent be regarded as stemming from previous documents which have been considered and debated in European Standing Committee. In view of this, together with the Government's general welcome for what is proposed, and the intention that any changes in the basis of financial support should be contained within the existing Community budget, we do not think any further consideration of the documents is needed. We are therefore clearing them.

 


13   (22385) 7218/01; see HC 152-iii (2001-02), paragraph 1 (31 October 2001) and HC 152-vii (2001-02), paragraph 3 (21 November 2001); Official Report, European Standing Committee C, 28 November 2001. Back

14   (22096) 5619/01; see HC 28-xi (2000-01), paragraph 2 (4 April 2001); Official Report, European Standing Committee C, 28 November 2001. Back

15   OJ No. L.161, 29.6.96, p.147. Back

16   The Commission puts this as in excess of 200 billion euros between now and 2020. Back

17   12 projects have been identified in this category, seven relating to electricity networks, and five to gas. Three involve the UK (increased electrical interconnection capacity with continental and northern Europe, and with Ireland and Northern Ireland, and gas pipelines to the Netherlands, Germany and Russia). Back

18   (23038) 15111/01; see HC 152-xx (2001-02), paragraph 16 (6 March 2002); Official Report, European Standing Committee A, 13 March 2002. Back

 
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