In the framework of the energy research project between FEPS and IPPR (Institute for Public Policy Research) this is an initial report of the research so far.
It addresses the need for more cooperation within Europe to ensure an affordable and secure energy supply. Improved interconnection between European member states would reduce energy bills and assure supply, therefore faster implementation of electricity infrastructure should be key in the EU 2030 climate and energy package, if not before then. At a time when we need to be encouraging growth across the EU, greater integration of our energy systems would improve competitiveness along with trade and job creation. Furthermore, it would promote credibility of the EU institutions at a time when it is lacking by working to meet policy ambitions.
Author : Clare McNeil is a senior research fellow at IPPR
Europe is in the grip of fiscal austerity, with rising unemployment and protracted economic weakness following the 2008 financial crisis. High energy prices are adding to the challenge, squeezing vulnerable households and exposing businesses in Europe to competition from global economic counterparts like the US, where gas and electricity prices are significantly lower.
Anti-European sentiment is growing in many European countries, as the impact of the eurozone crisis has appeared to diminish the EU’s claims to be a ‘beacon’ of prosperity.1 Centralised decision-making on budgets, bailouts, and base rates has further undermined the democratic legitimacy of an institution which has often been detached from the polities of individual member states but appears more so now than ever before. As a result, faith in the European Union (EU) is diminishing and voter anger is rising across the continent. This has played out in the UK through the rise of Ukip and the increasingly Eurosceptic stance of the Conservative party.
Meanwhile, the rise of climate scepticism in the UK and across Europe is feeding more vocal political opposition to EU regulation and the cost of subsidies for renewable energy. These sceptical groups argue that Europe will become uncompetitive by ‘going it alone’ on reducing carbon emissions. This is despite the fact that many other countries, including China and the US, are taking climate change more seriously now than at any previous point.
These challenges will form the backdrop to negotiations between Europe’s political leaders as they seek a deal for a new climate and energy policy package for 2030. With key negotiations taking place in the next few years leading up to 2015, this report argues that European leaders will need to craft a policy agenda for 2030 that is in tune with the times. It should go beyond a focus on climate targets to place competitiveness and security of supply at its centre.
i. Europe needs to ‘cooperate to compete’
In 2012, industry gas prices were more than four times lower in the US than in Europe, with household gas prices and electricity prices also significantly lower.2 In the face of high energy prices and costs, greater European cooperation is needed to complete a single, interconnected energy market – this could reduce energy prices for consumers and business by €65 billion in 2015 compared to 2012.3 Greater intra-EU trading of domestic energy sources – such as wind and solar power – could reduce the costs in the overall energy system by up to €8 billion by 2020 and reduce investment costs by €7 billion. Maximising Europe’s indigenous energy supplies would also cut the EU’s foreign oil and gas import dependency, which is currently set to increase to more than 80 per cent by 2035.
ii. The UK needs the EU for affordable and secure energy
A more interconnected energy market in Europe could reduce UK consumer energy bills by over £200 million pounds annually4 and boost jobs, growth and exports in the UK over the long term.5 Being part of a larger, more diverse electricity system would also improve the UK’s long-term energy security.
In the short term, the UK’s electricity links with Europe could help the country to avoid an electricity ‘capacity crunch’. The energy watchdog Ofgem has warned that the UK will see electricity capacity margins drop from around 14 per cent in 2012 to 4 per cent in 2015/16 as Britain replaces ageing infrastructure and retires old fossil- fuel power stations. As a result, Ofgem has warned that the UK could face energy shortfalls or, in extremis, blackouts, particularly in 2015/16 and 2016/17. Ofgem cautions against relying on interconnection with other countries to maintain security of supply, highlighting concerns about the level of security of supply in neighbouring European countries. However, our analysis of past performance shows that UK and international connectors are highly reliable, even at times of high demand.6
iii. Winning public support
Unlike some areas of European policy, such as immigration or the economy, cooperation on energy attracts significant public support. Almost 80 per cent of European citizens are in favour of their country sharing energy in the event of shortfalls and 60 per cent of Europeans think they would be better protected through a coordinated European approach to energy policy than by national measures alone.7 A 2012 YouGov poll found that tackling climate change is one of only two issues out of 16 where those surveyed in six European countries felt the EU rather than national governments should have control.8 In the UK, when asked whether countries in Europe should cooperate more closely on climate change or handle the issue at the national level, 51 per cent of respondents answered ‘more closely’ while 20 per cent said ‘less closely’.9
A new purpose is needed to encourage growth across the continent and provide renewed legitimacy for European cooperation. Greater energy market integration meets shared goals on improving competitiveness, security of supply and sustainability while increasing trade and job creation. It is, therefore, a prize worth striving for.
If the UK is to reap the benefits of the single energy market and greater electricity connection with Europe, politicians will need to be prepared to explain why this is in Britain’s interests. At a time when trust in Europe’s institutions is at a low point, UK political leaders should be willing to argue that Britain’s self-interest can be served by working in Europe’s shared interest.
Greater energy market integration is needed to boost Europe’s competitiveness and improve levels of energy security
A single, interconnected energy market in Europe will reduce energy prices for
consumers and business and help accommodate an expansion of renewable energy. However, the construction of electricity connections between countries is not keeping pace with policy ambitions
Accelerating the deployment of electricity infrastructure should be a key aim of the EU 2030 climate and energy package. An ‘infrastructure target’ would help to define the level of transmission and distribution infrastructure needed to realise ambitions for a single energy market. This would need to reflect the different levels of electricity connection appropriate for different member states. EU 2030 negotiators should consider whether a target or alternative mechanism should be adopted for this.
Capacity mechanisms developed by member states, including the UK, to provide back-up capacity for renewable energy should be modified to ensure interconnection, electricity storage and demand-side responses are able to secure a significant proportion of capacity contracts as a means to ensure security of supply. The 2030 climate and energy package should ensure that capacity mechanisms in Europe are compatible, as far as possible.
This would also avoid the unintended consequences of introducing a capacity market early, which could include windfalls for existing generators, reducing the amount of low-carbon capacity which can be funded under the Levy Control Framework, and undermining the development of demand-side measures.
The UK needs interconnection with Europe to secure its short-term and long-term energy security
The UK does not currently rely on electricity connections with Europe to avoid electricity shortfalls. However, the UK should reassess this position given Ofgem’s warnings of an electricity capacity crunch over the next few years10 (particularly in 2015/16 and 2016/17) as generation capacity temporarily falls. Using electricity capacity from interconnectors would avoid the need to build expensive new generation capacity or interrupt industry energy supplies.
In the Energy Bill delivery plan, the UK government needs to set out clear objectives for the role interconnection will play in the energy system up to and beyond 2020. This should include setting out how interconnection, as well as other balancing technologies,11 will help to balance variable renewable power and ensure UK security of supply.
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