Energy News from Brussels - Autumn 2012

EnergyNews from Brussels

Welcome to Hill+Knowlton Strategies’ quarterly update on key European regulatory developments that will directly impact businesses in the energy sector.

Autumn 2012

Cypriot Presidency of the EU Council - Energy Priorities Latest DevelopmentsInfrastructure, offshore oil and gas and renewables are the three main items on the energy agenda of the Cypriot Presi-dency of the EU Council during the second half of this year. Although it is for the first time at the helm of the EU Council, Cyprus set itself the bold targets of “steering the Union to-wards increased efficiency and stability, while pursuing eco-nomic growth and more solidarity among Europeans”. The energy field holds the potential of enabling at least some of these goals, and Cyprus is hoping to seize its chances.

On a first account, Cyprus aims for the member states and the European Parliament (EP) to reach an agreement on the Trans-European Energy Infrastructure legislation before the end of this year. Nearly a year ago, the European Commission (EC) released an energy infrastructure package that intends to stimulate the construction of new electricity, gas, oil and carbon capture and storage (CCS) projects. The EC and the stakeholders are supposed to come up with a list of real-life projects “of common interest” by the end of this year. At the same time, the task for Member States and MEPs is to agree upon the special subsidies these projects will benefit from via the so-called “Connecting Europe Facility” finan-cial instrument as of 2014. Closing the deal during its tenure would be a big achievement for Cyprus, as it considers energy infrastructure vital for stimulat-ing growth, investment and employment – highly relevant aspects in light of the strains imposed by the financial crisis on most EU states.

The second energy priority of the Cyprus Presi-dency is the legislative initiative on the safety of offshore oil and gas operations. In this sense, the Cypriots are pursuing the less ambitious goal of merely furthering the negotiations, rather than striking an agreement, between member states and the European Parliament. The Commission intends to oblige offshore operators in all EU ma-rine waters to assess risks, prove they can cope with a leak, and prepare emergency response plans. The majority of EU countries and MEPs share the opinion of the oil and gas industry that favours a directive (allowing for

a more flexible time frame for implementing new safety rules) rather than a regulation in this realm. Althought it is important that these legal aspects are dealt with, the debate on the contents of the draft legislation should not be underestimated. This will address very relevant issues, ranging from ensuring that polluters financially support the clean-ups, to spelling out under what conditions Arctic drilling can take place, and to how will the law be imposed on EU energy companies operat-ing overseas.

Third on the Cypriot energy agenda are renewables, on which the Presidency aims to present a political statement at the Transport, Telecommunications and Energy Council (TTE-En-ergy) on the 3rd of December. Reportedly, the Presidency is keen on including in the Conclusions the improvement of na-tional support schemes, the strengthening of cooperation and trade in RES, and the integration of RES in the internal energy market. This comes at a time when the European Commission

is about to release its long-awaited proposal on ILUC (indirect land use change) that may have an impact on the position of first generation biofuels in the renewable energy mix.

Another topic of great interest on the energy agenda in this context remains the internal energy market, on which DG En-ergy is expected to release a new policy paper on the 15th October. This will kick-start the debate on what should be the best market design and how to harmonize the so-called capacity markets (that reward energy production capability, rather that production per se, and are believed to have a bet-ter chance to mitigate the intermittent production of energy from renewable sources).

Apart from the four main courses outlined above, the Cypriot Presidency is confronting several others that feed into other sectors, such as climate, transport and environment. One example is the reform of the EU Emission Trading Scheme (regulating the sale of carbon allowances), where the possibil-ity for tighter emissions cap for 2030, inclusion of maritime transport and the inclusion of international flights in the ETS make the issue of direct relevance to energy producers and consumers. Another is the revision of the EU energy taxation directive – if the Cyprus Presidency is successful in galvanis-ing the opinions of EU finance ministers in November, there will be minimum tax rates for diesel based on the principle that it contains more energy and emits more CO2 than petrol, but actual prices will not have to reflect this.

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Impact & OpportunitiesCyprus assumed the Council Presi-

dency on the 1st July, and is holding the six-months rotating tenure for the

first time since its EU accession back in 2004. These are difficult times due to

the struggles to tackle the effects of the financial crisis. Besides the EU taking care-

fully negotiated steps towards a euro-zone banking union, Cyprus itself is confronting the

close-to-home effects of Greek economic disar-ray, Turkey’s political refusal to cooperate altogether,

and potentially the last leg of budgetary negotiations on the EU Multiannual Financial Framework (MFF). However,

this is also a rare chance for the only EU country represented by a Communist president to provide the EU with political leadership.

Nuclear Safety: Back in the Spotlight Latest DevelopmentsFollowing the incident at the Fukushima Daiichi nuclear power plant, Japan, caused by the March 2011 tsunami and earth-quake, the European Council responded by ordering “stress tests” of European nuclear power plants in order to determine their ability to withstand extreme events threatening plant safety.

An update on the stress tests published by the European Nuclear Safety Regulators Group (ENSREG) in April 2012 highlighted four main areas for improvement in the safety of Europe’s nuclear power stations, namely the assessment of natural hazards, periodic safety reviews, implementation of measures to protect containment integrity and the manage-ment of accidents resulting from natural hazards.

EU policy-makers are now awaiting the publication of the final stress test report in early October, which will include recom-mendations on how to overcome the deficiencies identified above, as well as the results of a planned report on the ability of Europe’s nuclear power plants to withstand terrorist attack. This had been omitted from the scope of the stress tests, due to concerns over publicising security weaknesses, and

a focus on safety as opposed to security. However, the EU Energy Commissioner Günther Oettinger re-quested such a report following the April update, so as to ensure that all risks are properly identified and remedied.

This autumn/winter will also see the publication of the Commission’s nuclear safety proposal, which will aim to strengthen deficiencies in the nuclear safety legislative framework. The stress test interim report in November 2011 identified possible new measures including common criteria for the siting, the design, the construction and the operation of nuclear power plants; enhanced independence of national regulators; cross-border nuclear risk management plans between Member States to prepare better for a nuclear emergency and to coordinate their response actions; a European approach to liability; and the development of EU Research Programmes focusing on nuclear safety. This proposal will be issued by the European Commission’s Directorate General for Energy and negotiated by Member State representatives in the Council, with the Parliament having only a consultative role under the terms of the Euratom Treaty which governs EU nuclear policy.

The report and proposal will therefore once more open up the discussion on the use and safety of nuclear safety at EU level, at a time when national governments are continuing to discuss their use of the power source. The French President, François Hollande, has vowed to shut down the Fessenheim plant in Alsace, France’s oldest, by 2016, while the Belgian authorities are to report in December on the safety of the Doel 3 reactor after cracks were discovered in the reactor core in August. The uncertainty over the future of Japan’s nuclear en-ergy programme following Fukushima will meanwhile continue to feed into arguments from nuclear energy’s opponents re-garding the sector’s future viability.

Impact & OpportunitiesThe latter months of 2012 will see renewed debate among EU policy-makers over the use and safety of nuclear power, centred on the stress test report and ensuing legislative pro-posal on nuclear safety. It will be important for industry to re-spond to the stress test report by putting across the message that nuclear energy is safe and has a prominent role to play in delivering the EU’s carbon reduction goals for 2020 and the following decades. Furthermore, it is essential that industry demonstrates that it is willing to cooperate with the Commis-

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sion and other authorities in addressing any concerns which may be raised by the stress tests report, while providing the Commission and Council with the expertise and insight nec-essary to ensure that the nuclear safety proposal is appropri-ate and workable for industry and regulators alike.

Energy efficiency: New EU law agreed Latest DevelopmentsOn 11 September, the European Parliament threw its weight behind the energy efficiency directive in its plenary session, with 632 MEPs voting in favour and only 25 against. Green MEP Claude Turmes (Luxembourg), rapporteur on the dos-sier and responsible for negotiating the directive on behalf of the European Parliament, said that by giving the green light to the Directive, the European Parliament is adopting the missing pillar of the EU’s climate change strategy proposed in 2007.

The new law sets out legally binding measures to step up Member States efforts to use energy more efficiently at all stages of the energy chain – from the transformation of energy and its distribution to its final consumption. Measures include:

• A3%renovationrateforpublicbuildingswhichare“centralgov-ernment-owned and occupied”;

• A legalobligationformemberstatestosetnationalenergyef-ficiency targets from March 2013, and

• AnobligationoneachEUmemberstatetodrawuparoadmapto drive energy efficiency improvements in households, indus-tries and transport sectors..

In addition, the new Directive also covers additional measures on energy audits and energy management for large firms and require-ments for increasing the use ofcombined heat and power genera-tion (CHP). On public procurement, the text is considered weak, as the EU member states wanted to avoid additional obligations which, the Parliament says, could have made the EU a lead market for ef-ficient products and services.

Investmentsneeded toachieve the20%targetareestimatedat€40-50 billion a year. However, most stakeholders involved in the debate seem to agree that the new measures, once implemented, will make a contribution to reducing the EU’s energy dependence. According to Pieter Liese, a Christian Democrat member of the European Parliament from Germany, “for every euro invested in energy efficiency measures, we obtain the same result as for two euro invested in renewable energy”.

Other stakeholders, like the European consumer organisation criti-cized the directive on the grounds that it not only lacks ambition but also places the greater part of the burden on consumers. Ac-cording to BEUC Director General Dominique Goyens, consum-ers stand to lose the most from the implementation of the Energy Efficiency Directive, as it will result in energy companies charging more to compensate for the cost of the scheme.

Impact & OpportunitiesThe new legislative framework on energy efficiency is expected to ensurethattheEUwillmovefrom9.7%toabout15%ofenergyefficiency gains in 2020. Fears subsist, however, as to the actual implementation of the approved measures, considered compli-cated and burdensome.

The publication of the new law in the EU Official Journal is foreseen for October 2012. The 27 EU countries will have up to 18 months to transpose it into their national legal systems.

Duncan Burns

Executive Vice-president and global energy practice head+1 202 333 7400

Glen Hodgson

Director & Head of Energy Practice, Brussels+32 2 737 95 39

European CommissionAs the EU’s executive body, it represents and acts in the “general interest” of the European Un-ion as a whole. It is the only EU institution that can propose legislation. It also acts as the guardian of the EU treaties and oversees the implementation of EU legislation across the 27 Member States.

European ParliamentIt is the only directly elected EU institution, having acquired increased powers throughout the years. The 754 members of the European Parliament sit in thematic committees and are split into pan-European political groups, of which the largest are the Christian Democrats, the Socialists and Democrats and the Liberals. Together with the Council of the EU, it has the power to amend, approve or reject legislation proposed by the Eu-ropean Commission.

Council of the EU/EU CouncilA co-legislator, along with the European Parlia-ment, it represents the voice of the 27 EU coun-tries. These have permanent representative of-fices in Brussels, which work together with the ministers in the capitals. There is a six-month rotating presidency of the Council of the EU, whereby Member States take turns to set the agenda and chair meetings.

European CouncilThis EU institution comprises the heads of state or government of the 27 EU Member States who meet regularly in Brussels. Its mission is to define the general political direction and priorities of the European Union. The European Council does not exercise legislative functions. Its current presi-dent is the Belgian Herman van Rompuy.