Megawatts of Controversy EU Energy Plan Calls for Radical Emissions Reductions

The European Commission has developed an energy policy plan for the coming years. Its highlights include ambitious climate protection goals, promoting more competition in energy markets and a possible rehabilitation of emissions-friendly nuclear power.

The document drafted by the European Commission bears the straightforward title: "An Energy Policy for Europe." The word "Confidential" is stamped on each of its 25 pages.

There are good reasons for this. A small group of experts at the European Union headquarters in Brussels has spent months developing what amounts to a master plan for Europe's energy policy of the future. The document contains highly specific measures on climate protection policy, energy security and the creation of a well-functioning competitive system in the continent's electricity and natural gas markets.

As inconspicuous as it may seem, this document could fundamentally alter Europe's energy supply. The Commission even goes so far as to characterize its plan as marking the dawn of a "new industrial revolution."

A "High Level Group" is still working feverishly on fine-tuning the last details of the comprehensive concept Commission President José Manuel Barroso plans to unveil on Jan. 10, 2007. But, details aside, it is already clear that European utility companies can expect to see changes on an unprecedented scale coming their way. Particularly the German market, with its four dominant utilities, will face immense challenges with serious consequences for investments, energy prices and the reliability of the energy supply.

Specifically, the European Commission plans to

  • drastically expand climate protection goals; over and above the current agreements, the plan calls for a 35 percent reduction in CO2 emissions in the EU by 2035, and 50 percent by 2050;

  • promote renewable energies, which would make up 20 percent of primary energy consumption in the EU by 2020, with the consumption of biofuels increasing to 10 percent;

  • implement an open market system of trading in electricity and gas, which would enable individual consumers to select their own energy providers throughout the EU;

  • encourage the major utility companies to sell their vast electricity and natural gas networks, thereby guaranteeing effective competition.

The concept is scheduled for final ratification at the summit meeting of European heads of state in March 2007 -- under the aegis of German Chancellor Angela Merkel after Germany assumes the rotating EU presidency .

This places Merkel in a tricky position. On the one hand, she has made it clear that climate protection will be one of the key goals of her EU presidency. On the other hand, the Barroso Commission's proposals will be particularly hard on German industry.

Dubious practices

According to the Dec. 1 internal document, major utility companies like Germany's RWE and E.on and Sweden's Vattenfall will be required to sell off their electricity and natural gas networks, which are valued in the billions. Neelie Kroes, the European Commissioner for Competition, believes that new players in the market will only be able to become established if there is a clear separation between power production and power transport through the networks. To support her theory Kroes has spent months gathering evidence of the questionable competitive practices of Europe's energy giants.

The Commission also plans to eliminate artificial bottlenecks in the energy supply among respective member states by investing heavily in cross-border networks. In the past, monopolistic utilities were able to restrict the cross-border electricity and gas trade by keeping power and gas lines undersized, effectively preventing foreign competitors from gaining access to domestic markets.

An EU regulatory agency with extensive powers would monitor the new system, ensuring that energy prices are based on supply and demand and national governments are prevented from intervening.

The consequences of this part of the EU energy plan would be sweeping, especially for Germany. While many other EU countries, such as Great Britain, separated power grids from production long ago, the major electric utilities still control Germany's costly power lines.

In Germany, the Bonn-based Federal Network Agency currently ensures that oligopolies do not take advantage of their powerful positions to engage in unfair competitive practices. But if the new EU plan becomes reality, Germany's entire system would have to be changed.

Putting up a fight

It is already clear that the major electric utilities will not accept such radical changes without putting up a fight. They have been warning the German government for weeks that a government-mandated sale of network assets would border on the unconstitutional. The industry has made it clear that it will fight such measures with "all means" at its disposal.

Merkel received a taste of the utilities' wrath last week, when they and other German companies bombarded Merkel's Chancellery with sharply worded letters of protest against Brussels' plans to require the German economy to reduce its target for annual CO2 emissions by 12 million tons. The Commission ruled Germany's CO2 emissions in the period 2008-2012 must not exceed 453 million tons per year, down from Berlin's proposal of 465 million tons.

Industry outrage notwithstanding, this reduction is ridiculously small compared to the European Commission's aims under its energy plan for the coming years. According to the internal document, the EU would assume a "global leadership role in climate protection" and in the "development and use of efficient energy technologies." In concrete terms, this entails a 35 percent reduction in CO2 emissions over 1990 levels by 2035 and a 50 percent reduction by 2050.

This vastly exceeds the levels called for under current agreements and would be virtually impossible to achieve without massive intervention in the existing system -- and without price hikes.

A threat to economic recovery?

In a letter to Commission President Barroso in late November, Günter Verheugen, the German Commissioner for Enterprise and Industry at the EU, warned that the new plan's climate goals could be too ambitious, because they could cause electricity costs in the EU to skyrocket by up to 10 percent, with potentially adverse effects on the continent's nascent economic recovery.

Much is at stake, especially for energy-intensive industrial segments and Europe's electric utilities. If the Commission has its way, the ever-increasing price of CO2 certificates under the EU's emissions trading scheme  would force electric utilities to retrofit their aging coal power plants. In addition, the plan calls for restricting the approval of new plant construction to those with zero emissions of climate-damaging CO2. The regulation would even apply to gas and coal power plants.

The plan's goals are no less ambitious when it comes to the expansion of renewable energies, such as solar, wind and biomass, calling for an increase in their share of primary energy consumption from the current level of seven percent to 20 percent by 2020. Electric utilities would even be required to up their renewable energy quotient to 34 percent. By comparison, the Commission estimates that Germany, with its many wind turbines, barely manages to achieve a 6 percent renewable energy quotient today, which already ranks it among Europe's leaders in the use of environmentally friendly energies.

An economic opportunity?

According to the Commission document, the annual cost of changing the system to suit its specifications would amount to about €18 billion. As daunting as this figure is, EU officials in Brussels are convinced that it would be money well spent. A large-scale expansion of renewable energies would enable European industry to reduce its dependency on increasingly expensive petroleum imports. At the same time, European manufacturers could see growing opportunities to successfully sell their new technologies in the global market.

But even these measures would not suffice to achieve the climate goals it has set for itself, writes the Commission. To make up for the shortfall, the plan will promote both energy savings and the expansion of nuclear power. According to the Commission document, nuclear power is a relatively inexpensive and low-emissions means of generating electricity that would be difficult to forgo, especially with the goal of climate protection in mind.

Although the Commission plans to leave it up to each member state to decide whether to abandon the controversial technology, the states would have to ensure that when shutting down nuclear power plants they replace them with largely emissions-free alternatives.

German energy utilities have already prepared themselves for this scenario. Following E.on's lead in Great Britain, they plan to invest more heavily in nuclear power plants abroad in the future. Once the EU energy market is completely deregulated, they speculate, they will be able to sell electricity generated at foreign nuclear plants to their German customers. Because this is a scenario that does not jibe with the German government's decision to abandon nuclear energy altogether, the coming weeks and months will likely see intense discussion over the Barroso plan.

At a meeting of European heads of state two weeks ago, Chancellor Merkel indicated that she is unwilling to accept the EU energy concept in its entirety. These are delicate issues, Merkel said, which revolve around the "tough representation of interests -- also for Germany."

Translated from the German by Christopher Sultan