Ruete: ‘We need quick decisions’ on the energy package

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The Commission’s Director-General for Energy and Transport, Matthias Ruete, spoke with EURACTIV on 28 September concerning the Commission’s efforts to create an internal market for energy in the EU. Ruete was upbeat about the creation of more European companies in the sector, despite efforts by some member states to create ‘national champions’, and hopes that EU legislators will agree quickly on the different aspects of the Commission’s third energy package in order to attract crucial investments.

Matthias Ruete is Director-General of the Energy and Transport Directorate at the European Commission.  

Concerning the EU’s stated objectives of competitiveness, sustainability and security of supply – can all of these objectives be obtained simultaneously, particularly if some measures, such as the promotion of renewables, may be quite costly for some member states? 

Very clearly, the approach we will be taking to renewables is an innovation-driven approach. It will also be an approach, probably, which will allow, through some mechanism of trade, the development of markets and the creation of competition also in the area of renewables. 

In the current Renewable Electricity Directive we already have the possibility of trading renewables through the guarantee of origin, at present clearly linked to physical trade. If you have renewable energy, which is certified by guarantees of origin, rather than selling it only in your country, you can actually sell it across borders – but you need the permission of the country where the energy is actually being generated. 

We are looking at this because if we want to have policy by 2020 to arrive at 20% of renewable energy, we have to face the fact that a number of member states just do not have the potential internally to develop renewable energy, and some member states who would have the potential, would have it only at an extremely high cost. If we found a way of creating a more fluent market, this could also be a very good innovation driver and could also help to develop what we call lead markets (see also related EURACTIV article on renewables trading).

How does the Commission intend to measure the renewables potential of member states?

We have a quite sophisticated model in terms of measuring the different potentials: wind potential, biomass potential and water potential. In reality, we have two models which allow us to have a relatively good vision of the potential of the member states. 

Potential is, on the other hand, sometimes controversial to a certain extent because if you want to have a really fine-tuned vision of potential you also have to see what the limitations are in terms of habitat, fauna and flora, Natura 2000, etc. You need to look at the political or environmental opposition at the local level, meaning that that there might be a potential for wind energy but there may also be a very strong opposition by the local population to additional wind power generators being put into place. 

To a certain extent, potential then becomes a more difficult concept. But you at least have to have a vision of what the EU could deliver, under conditions where renewable energy would be the accepted energy everywhere with no ‘nimby’ attitude. How far we then go in terms of determining the actual targets on the basis of potential… this is still a very open question.

Would a 13 percent increase for every country be an option?

This is a proposal which is being made by the renewables industry itself because they realised that a lot of the different models obviously lead us into a situation where we will be arguing about a lot of details. But we still have almost ten weeks till the 5th of December to decide where we are going. 

Let’s return to the idea of facilitating renewables trade between countries. Is this a generalisation of the green certificates? Would this be compulsory?

We are not at all at the end of our thinking on this. We also have a very clear commitment to making sure that existing structures which have worked well, such as feed-in tariffs, also need to be preserved. Feed-in tariffs can sometimes even further innovation policy. We also know, if you look at the actual situation at present, that green certificates are actually more expensive than feed-in tariffs. Is it because there are not enough offers on the market because there is no fluidity in the market? An economist would tell us that. The fact is that renewable energy based on green certificates costs more than feed-in tariffs. So all these questions still need to be looked at. 

To what extent are feed-in tariffs applicable to other EU member states? 

First of all, many member states, not only Germany, apply feed-in tariffs. Secondly, feed-in tariffs need to be digressive. They should not give a monopoly rent to an industry over a huge period of time. They are very useful in terms of kick-starting certain industries. But they should not allow a kind of protected niche industry to develop. If you look at the overall figures, at the moment the German market has been developing very well but it is not at the level of the EU average. 

Commission has always said that the three main objectives – sustainability, security of supply, competitiveness – enforce each other. But in the short run they do not… 

Yes and no. In terms of security of supply, clearly renewables offer a very good contribution; in terms of climate change and CO2, a very good contribution; in terms of costs and competitiveness – and this is why I said yes and no – you actually have to see it on a medium-term trajectory. We are developing a renewables industry in Europe which is extremely competitive, which is exporting – to China, to the US – in amounts which outperform some branches of conventional power-generation. So to a certain extent we have been building up a new industry. Yes, it has been subsidised; yes, it has led to higher electricity prices. But again, what is important in the medium-term is that there is phasing-out and that the industry as such becomes competitive. We have now the next generation of off-shore wind. So there is actually quite an amazing development. If you look at our January Strategic Energy Review, in terms of the spread of prices for the different energy technologies, we already have some technologies in the area of renewable technologies which are becoming competitive. So we clearly have top marks for two out of three and, let’s say, average marks for the third [costs and competitiveness].  

Is massive financial support not needed, especially regarding carbon capture and storage? 

If we want CO2-free energy production in the EU, we actually have three ‘legs’. We have renewables, we have nuclear, and we have the potential of carbon capture and storage (see also related EURACTIV article on this issue). 

By 2020, everyone is telling us, if we want to get to 20% renewables share you are already pushing your luck because it is an extremely ambitious aim. If you translate that in terms of electricity production, just as a rough calculation, you would have about one third of the electricity production we should already rely on with renewables. But everybody is saying that this comes at a price, and this is probably the most which we will be able to develop by 2020. So we also clearly need to see what the two other ‘legs’ are capable of delivering. 

So the renewables will not ‘fly’ without the other two?

Let me put it this way: if we phase out nuclear, we may in the end only be compensating the phasing out of nuclear by the renewabables so we will actually not make the gains we want to in terms of CO2-production. If you look at present planning inside the EU in terms of developing nuclear, the share of nuclear will go down, from 14.5% to about 9%. In reality, even if we have a 6% gain in terms of renewable energy, the actual equation will be zero in terms of CO2. In some member states, renewables are only compensating the phasing out of nuclear. 

So you have these three legs. The third leg is CCS, which is at the beginning. The more we work on it, the more we realise that it is actually quite expensive. There are a number of prerequisites to developing a good approach to carbon capture and storage. First of all, you obviously have to develop and try out different technologies. Second, you have to look at the overall legal framework, because legal frameworks often do not allow the transport or the storage of CO2. Third, you have to look at the public acceptability. This is a very important element. And therefore we have to be able to demonstrate the safety of the approach so that we do not have worries, as we do in the nuclear field, in terms of waste storage. 

We also need to make sure that we have a good framework, both in terms of allowing for state aid and for public finance. Because conventional power generators have already become more expensive over the last year. We are in a sellers-market at the moment. There are too many countries in the world that actually want to buy energy generators, and because of that prices have exploded. A CCS-based power plant has less efficiency, plus you have the additional costs of the whole process plus storage, and because of that there is also a strong push from the public side which is needed in terms of financing CCS. Frankly, we do not have enough money from the Community budget so we have to see whether the member states are actually putting their money where their mouth is, and we have to see how we can create the appropriate networks at EU level in order to give a little start to CCS-demonstration projects, which will then allow them to be projects of European interest.

Can you say what the status of the projects is at the moment?

There is no status at the moment because right now we are only going to come forward with a communication on carbon capture and storage on 5 December. We will be developing our approach in terms of identification of the demonstration projects in the course of 2008. 

What then are the main financing options for renewables and CCS?

On renewables, we obviously we have some research money, but primarily it has to be done at the level of the member states. They need to be free to decide how they want to do it so we need to create the appropriate conditions for state aid in our environmental guidelines as well. But at the same time, we also need to make sure that the market is not distorted. On CCS, it is a similar situation. In reality, we need to give some freedom to the member states to develop these technologies. We can do what we can on the EU level, but with an intelligent energy and research programme which – if you take all the money combined – is still under €3 billion over the seven-year period, you do not have a lot of money either for CCS, or for renewables. 

Do you share the concern that the crisis on the US credit market could have spillover effects and negatively affect the financing of the renewables industry?

We are obviously watching the situation very closely but at the same time there are some cushioning effects. We have, over the last years brought our house into order in a number of member states. If you look also at the new member states, alluding to the enlargement policy, one strong element was that even before they became members we started talking to them about the state of state finances, the way pensions were provided for… Overall – and this is unfortunate – at least to a certain extent – also reflected in the strength of the euro – we have a house which is in order. But we have to see over the next few months. It is an important period. For instance, due to the value of the euro, we are more cushioned against the oil price increases, which today is at $83 per barrel. 

…and expected to rise to $100 per barrel by 2008 according to some forecasts. 

In our assumptions we are still at $40 per barrel. So if the price actually goes to $100 per barrel, renewable energy becomes a bargain, particularly if you add an EU-ETS price onto that….

Let’s speak about the third energy package and unbundling. Why did the Commission come up with these two options?  

Well we have always talked about that, we have been very, very consistent. Since the Green Paper of March 2006, we have always said that we would prefer ownership unbundling, but we would also be prepared to contemplate a different approach, which would be the independent systems operator. 

Why: we are in reality not interested in ownership unbundling per se. What we are interested in is that we have an internal market where we have competitors which have access to the network. We are interested in the development of the network, which enables the internal market, which allows the integration of competitors and which creates the necessary interconnections. 

Ownership unbundling is just a means to this objective, to make sure that power generators do not take investment decisions which are only led by their own company interests and which to a certain extent may mean that scarcity is better than fluidity. That is the whole philosophy behind it. Because of that, we think that a second-best independent systems operator – as we have it already in some member states, although not in the form which we are proposing – can also deliver. Now in the debate in the Council will hopefully be about the validity of our arguments and about how to achieve these objectives. 

Do you see a risk that during negotiations between Parliament and Council the ISO-option will get diluted and you will end up with a dual system? What would be the Commission’s reaction if this happens?

We are just at the beginning of the negotiation process. At the moment we are waiting for member states to bring us the arguments and to try to pick holes in our packages, but I think we have a very solid package. 

You do recognise that there is a risk of having a dual system?

Yes, or even the triple system. In reality, you always have to see that we are talking about the systems without talking about the nature of the ownership. I am talking about state ownership or private ownership, which we are not touching due to article 295. But clearly, you have very different visions if networks should be owned privately or publicly. This – at least to a certain extent – also has some impact on the overall structure of the energy industry. 

We are here in a very complicated and important time for the EU. I do not think that the ideal system exists anywhere in the world. Even the US has very different systems as such. We are trying collectively to work towards a better system, which in reality should follow our principles of the internal market, European grid, no discrimination, interconnections. 

Going back to the potential risks of a dual situation: Is there a risk of competition being distorted to the advantage of those countries which oppose the unbundling of the energy sector?

This depends very much on the ISO and how it is structured. I clearly said that one of the elements which is important in this context is the investment decisions. 

Why does the Commission see a need for the unbundling of the gas market?  

On the basis of our analysis, we found that on balance there was no argument for differentiating between electricity and gas. We also have a situation where we have huge gas storages in the EU. We are moving towards a market where we will be importing liquid natural gas. To a certain extent, we felt – and we have also demonstrated it in our impact assessment – that there was no reason to differentiate between gas and electricity. 

So that means taking the gas storage capacities as part of the network that should be unbundled, essentially looking forward to a future situation more than the current one?

Yes.

Consider also that if the argument is true that we virtually do not have any production of gas and most of the companies are involved in transport, then my rhetorical question would be: why are you opposed to unbundling if you are not active in production?

What about the reaction of Gazprom to the reciprocity clause? 

The reaction of Gazprom was actually extremely positive: they are willing to engage in a debate in the EU. On the day that we came out with our package, there was some interest in it for Gazprom. We are also pushing here for a network that makes it easy for third parties to access it. This is why the whole debate about reciprocity is to a certain extent a wrong debate because in reality – if you think back to the discussion that we had on the energy charter – we were pushing the questions of third party access to pipelines. 

We are making here a package where there is no way that we are putting into question the third party access to the gas network. What we want is a level playing field in terms of being sure that companies are unbundled so that there is no difference between countries investing inside and outside the EU. We have not at all targeted the question of production whether it is electricity generation or gas production; we are only targeting the network. 

How do you ensure that there are no proxy companies? 

This is why we have very clear provisions in our proposal which post the burden of proof to the company that wants to invest, because obviously we have better means of knowing whether companies are actually unbundled inside the EU because of our regulators. To a certain extent, we also need a level playing field there. 

Could you further elaborate on this burden of proof clause? 

The company has to convince us in the certification process that it is unbundled.

How would this work in the case of third countries?

We have a certification process applying to all companies from third countries or EU countries. It is the same process. In reality, in our proposal there exists this double approach – one approach is to say we would not want a company from a third country to have control over a network unless there is an international agreement. Then there is the second element which is the overall process of certifying companies that want to own a network in terms of them being unbundled. 

Would that not create possible openings for WTO cases?

Our lawyers have looked at this very closely and are very much convinced that we conform to WTO rules. 

Concerning long-term gas supply contracts and the question of possible market distortions versus supply security: how does the energy package deal with that?

We have always said that it is quite useful – also from the perspective of security of supply – to have upstream long-term contracts. The real question is does this create a monopoly situation in terms of potential competition inside the European market, which then allows companies that have insured long-term contracts to dominate the EU prices.

The real question there is whether we have such a situation. Now we have competition rules which apply to these cases. But we have also envisaged in our proposals a power for national regulators to decide that gas release programmes should be developed as we also have the possibility for national regulators to have virtual power plants, which to a certain extent would oblige the dominant companies in the market to release certain quantities of electricity or gas and make them available to traders. 

This is a model which is actually already applied in a number of our member states. You find this in the articles 22 and 24 of the respective proposal in the gas and electricity directive.

So these companies would become virtual gas suppliers…

You would have a access to a sort of pool. 

And who would decide about the size of the pool?

It is the national regulators that will have to decide the size on the basis of some objective conditions. If, for instance, we have a situation where the buying and the selling price is disproportionate there may be a possibility to intervene. 

Concerning cross-border mergers in the energy sector – is this good news for the Commission?

This is actually very good news for us because if you think back to the 90s when we did the internal market, we suddenly had attempts at cross-border mergers, we had the market play – tough rules being applied in terms of competition – but in reality you have and more companies positioning themselves as European companies. 

That means that they are seriously accepting that we are moving towards the reality of a single European market. To a certain extent you can see here similar movements that we saw in the 90s in other areas, e.g. in the insurance or the banking sector, when suddenly Dutch, Belgian, German or Spanish companies are starting to think of themselves more as European companies. And this is good news because this also means that the industrial sector – where to choose between a cosy, protected national market and a more integrated, more competitive European market – you will have more and more companies that will decide for the European market. 

This explains why we may have some problems with some governments and companies on the unbundling issue. But in general terms we actually have a very strong support for further steps in terms of creating the internal market. 

But the mergers are still not happening and, if so, they mainly happen on the national market, for instance in France where you see national champions emerging… 

This is not true, for instance if you look to Spain. In France, EDF has also bought a large share in a major German energy producer. I can understand the debate that is going on but now you have an Austrian company that wants to position itself as being a European player. You will have more and more of these things happening. So I am actually quite happy. 

How do you see the industrial strategy of some member states to build national champions before going international?

Here I would like to support very much what Mrs. Kroes keeps saying: that what we want is international champions which are based in Europe. That is the best thing. Sometimes the attempts to build national champions in order to then take the second step actually backfires completely, because if a national champion is not exposed to competition, it will not be capable of becoming the international champion which we really want. 

So is the current situation, this two-step approach, not a setback for you?

You are obviously trying to get me to comment specifically on what is happening in France – but there the jury is out. 

Let me refer to an example from a different sector, namely the railway sector. There we have had very different developments within the EU, but still very similar movements overall (which have maybe started slightly earlier): those companies that wanted to build a national champion, for instance in the area of rail freight, have lost shares and those companies that considered themselves more internationally-minded and that were developing a more offensive strategy were in a way better situation than the ones that were strengthened as national champions. I am not saying that this will be the same in the energy sector, but there are enough examples that proved this two-step-approach as having gone terribly wrong. 

Do you know if companies are hedging their investment bets, waiting for the outcome of this new energy package?

I do not have any clear proof but what for me is extremely important is that we hopefully know by the end of next year where we are moving in terms of our future emissions-trading systems, in terms of the internal market, and in terms of the renewables.

Clearly companies would be ill-advised if they were to go ahead just in terms of their investment decisions on the basis of the status quo. For me, one of the major important elements for European politics in the next year has to be deliver the contours of the future energy market, including the future contours of our emissions-trading system. If we do not do this, we will probably delay investments, and if this goes on until 2011 we are actually destabilising. So we need quick decisions. 

Do you have any regrets how the money of the structural funds has been spent? 

Yes, I have regrets that we do not have enough mobilisation of structural funds in the energy field. 

Are too many roads being built?

We have been pushing very hard in the road sector. On the transport side at least in some countries there have been significant efforts made to put some money in other forms of transport. It is clear that new member states also need to invest into roads, also for the economic development. We are trying to push them towards not leaving aside the rail because we do not want to repeat the failures inside the old European Union and should rather build on the strength of the rail. 

But in terms of energy we face the same phenomenon as with the 7th framework programme: Energy has only moved to the top of the European and national agendas over the last one and a half years and most things have already been decided and looked at an earlier stage. Unfortunately, I fear that on the structure and cohesion funds, on the energy side, our new member states are missing an opportunity. 

Could the Commission still review this?

We have been trying to pass the message on but as you know these structural funds are very much a bottom-up process which comes from the member states. And very often these types of top-level decisions in terms of policy re-orientation have a trickle-down effect which takes three to four years. You also have to see, as I know from the enlargement process, that project preparation takes an awful long time. And it would also be unwise to say “Let us now have 10 percent of the money in energy” but not any projects ready. You should not just think from policies. You also have to look at the actual capacity to spend the money.

Do you think that at least spending will indirectly stimulate better economic conditions to then stimulate more sustainable development?

This is the only hope and I am pretty sure that this is going to happen if you look at the projections in terms of GDP developments in the new member states which have still much higher projections than the old member states. 

Do you see the attitudes developing as well in the new member states towards more renewables and energy efficiency?

I think that the opportunity of more trade in renewables may also create an opening and an interest in the development of these industries in the new member states, bearing in mind their huge potential in this area. Carbon capture and storage also is obviously an extremely important technology to be developed in the new member states, which still rely to large extent on coal for electricity generation. 

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