Periodical 7/1990

ENERGY IN THE

EUROPEANCOMMUNITY

* * ** * *

EUROPEAN DOCUMENTATION

~~~

Efficient production and use of energy is the key to future primary energyconsumption. Energy intensity in the coming decades will be determinedby the interaction of prices, technology, capital availability and environ-mental constraints. The dominant themes of the 1990s are the internalenergy market and the environment.

Security of supply, energy production and consumption must be recon-ciled with a steady improvement in environmental quality. The internal

energy market will provide a stimulus to economic activity and create amore favourable business climate. It will provide the basis through econo-mic growth for the development of more efficient technologies, facilitate

penetration of these technologies and help to reduce energy consumptionthrough more rational use of energy. Above all , this will lead to a declinein emissions.

The three objectives of:(i) sustained economic growth,(ij) a clean environment, and(iii) a secure energy supply at competitive pricesare not mutually exclusive. However, harmonious progress towards thesegoals is dependent on an effective common energy policy.

ISBN 92-826-1737-8

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OFFICE FOR OFFICIAL PUBLICATIONS

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Of) * OF THE EUROPEAN COMMUNITIES

*==-=*

* * * L-2985 Luxembourg

1I11~IHltlllllllllllll9 789282 617373

ENERGYI N TH E

EUROPEAN COMMUNITY(Fourth edition)

Manuscript completed in June 1990Cover: photo Burt Glinn , Magnum , Paris

Cataloguing data can be found at the end of this publication.

Luxembourg: Office for Official Publications of the European Communities, 1991

ISBN 92-826-1737-

Catalogue number: CB-56-89-538-EN-

~ECSC-EEC-EAEC, Brussels. Luxembourg, 1990Reproduction is authorized, except for commercial purposes, provided the source is acknowledged.

Printed in the FR of Germany

CONTENTS

INTRODUCTION

SUPPLY STRUCTURES PRIOR TO 1973

CZJ

(ill

THE COMMUNITY AND THE WORLD ENERGY MARKET

. THE FIGURES

. THE ROAD TO CRISIS

. EUROPE AND THE WORLD ENERGY MARKET FROM THE FIRST

CRISIS TO THE PRESENT

EUROPE AFTER THE OIL CRISES

. THE POSITION WHEN THE CRISES STRUCK

. THE COMMUNITY'S REACTION TO THE NEW SITUATION ON THEENERGY MARKET QZJ

. THE TOOLS AT THE COMMUNITY' S DISPOSAL AND THEIR

POTENTIAL U2J

COMMUNITY OBJECTIVES

ENERGY OBJECTIVES FOR 1995

. THE INTERNAL ENERGY MARKET

Areas of action: Horizontal barriersRemoval of technical barriersOpening up of public procurementApproximation of indirect taxationFree movement of goods and servicesState monopolies

Rules of competition and State aidCosts, prices, tariffs

InfrastructuresObstacles and priority measures in the individual energy sectors

Solid fuelsOil and petroleum productsNatural gasElectricity

ENERGY AND THE ENVIRONMENT

. FOSSIL FUELS

. NUCLEAR ENERGY

. CONCLUSIONS

OUTLOOK

FURTHER READING

INTRODUCTION

The Community is well on course for 1992the year in which the legal and technicalstructure of the internal market is to be inplace, ushering in the free movement ofgoods, services and capital. It goes withoutsaying that such a large economic area (theCommunity already has over 320 million in"habitants, a figure which will probably benearer 330 million in 1992) needs a blueprint

for a common energy supply. As we shall seelater, this is also what the people of Europewant. The 'script' for the ambitious internalmarket project, the Commission s WhitePaper adopted by the European Council inMilan at the end of June 1985, does not listenergy or energy policy in the section onplanned legislation. (There is an indirectreference concerning the opening up public procurement in the electricity andwater supply sectors.) Nevertheless, theenergy sector occupies a far more importantplace in the internal market programme thanmight at first appear.

Let us consider again briefly how the newArticle 8a of the EEC Treaty defines the inter-nal market:

The internal market shall comprise an areawithout internal frontiers in which the freemovement of goods, persons, services andcapital is ensured in accordance with theprovisions of this Treaty: Is energy a com-modity? A service? Or both? The prevailingview is that, while energy is a strategiceconomic commodity, energy marketing hasmore to do with services.

The internal energy market will therefore in-evitably differ in some important ways fromthe internal market in , say, the food industryor audiocassette industry. Furthermore, theindividual energy sources are also highlydiverse in character take water, coalmineral oil and nuclear energy-and naturehas distributed these resources (which weshall mainly consider collectively asprimary energy ' in the following) less than

evenly throughout the individual MemberStates. In addition, energy is used for dif-ferent purposes: depending on how it is pro-cessed , an energy product may be used as afuel , as a raw material or as motive power. Allof this has given rise to very complex struc-tures in the individual Member States and , ofcourse, the structures become even morecomplicated atthe level of the Community a whole.

However, a superficial glance will suffice toshow that there is little evidence of marketforces in the usual meaning of competingproducts and suppliers in the Europeanenergy industry and many ancillary sectors.For example, there is virtually no alternativeat present to oil in road transport or the

petrochemicals industry. There is at least achoice of primary energy inputs for heating,steam raising and blast furnace operationwith cost generally being the deciding factor.Electricity, the most widely used form ofsecondary energy, and natural gas, are com"monly subject to distribution monopolieswhich close off the market in theircatchmentarea, denying access to competitors. Theundertakings operating on such markets are

also highly diverse. Small and medium-sizedprivate companies exist side by side withpublic utilities, national private enterprisesand multinational concerns. These organiza-tional differences are compounded by dif-ferences in rights, privileges and obligations.And just to round off the picture, the energysector is influenced by different politicaltraditions in the individual Member Statesand, above all, differences in taxationpractice.

The net result is that differences betweenMember States in the energy sector areprimarily determined.bytwo factors: the typeof energy products available there and theconditions under which they are produceddistributed and used. Nature and historyhave thus produced a situation where the i n-

dividual energy markets in the Community'Member States are still strictly compartmen-talized and the free movement of energy pro-ducts consequently greatly hampered. Thishas inevitably had repercussions on the com-petitiveness both of the individual MemberStates and of the Community as a whole inthe international arena.

However, the objective of the internal marketis specifically to secure the Community'competitiveness and international prestigein the short to medium term. Energy has a keypart to play in this owing to its vital impor-tance for every sector of the economy and theindividual citizen. It is hoped that a moreopen energy market will reduce accessutilization costs and pave the way to morerational production through greater com-petition on the supply side. It will not only beprivate consumers who benefit, but also in-dustry wherever it requires energy to func-tion. If we consider that energy costs amountto between 25 and 30% of the productioncosts of steel , glass products, aluminium orbuilding materials, it immediately becomesclear that lower energy prices have a directimpact on product prices and thus on com-petitiveness. This results in more oppor-tunities for stable growth and better pro-spects for employment.The effects on the energy industry itself arealso likely to be positive. The removal of in-ternal barriers should provide the industrywith economies of scale in the production,transport and distribution of energy. This will

go hand in hand with an improvement in theEuropean producers ' financial situation and

ITI

international market position. Anothercrucial aspect is that a more integratedenergy market can decisively improve thesecurity of supply of the Member States andtheir economies. Last but not least, intra-Community trade in energy products is likelyto increase substantially, and thus reducecosts still further. These cost factors are by nomeans insignificant. The Commission hasput the costs of ' non-Europe' in the energysector, i.e. the additional costs that energyconsumers whether in industry or thedomestic sector - have to bear owing to thecurrent fragmentation of energy markets, atalmost 0.5 % of the Community grossdomestic product. For this reason alone, wecan but endorse the statement made by theCommission in its paper of May 1988 en~

titled 'The internal energy market'

: '

Theestablishment of a more integrated energymarket is of vital importance to the future ofour Community. We should thereforeendeavour to identify all the potential or ex-isting obstacles confronting the various

energy sources and the various MemberStates.' We shall return to this subject later.However, there are also objective constraintsacting on all energy sources and all MemberStates, independently of any other im-pediments or barriers they may encounter in-dividually. These are the security of supplyand the strategic nature of energy generationand energy products. These constraints wereabruptly revealed during the first oil crisis in1973. Let us therefore begin with the Com-munity position in the world energy

market.

THE COMMUNITY AND THE WORLD ENERGYMARKET

The world energy market has changed fun-damentally since the end of the SecondWorld War. Several factors have been im-plicated in this development:

(i) an increase of over 100% in primaryenergy consumption in the industrializedcountries in the first three decades up to theearly 1970s;

(ii) large-scale displacement .of solid fuels(hard coal and lignite), which covered over80% of energy requirements in the countriesof the future European Community after theSecond World War, by mineral oil andsubsequently, natural gas. Oil, which ac-counted for approximately 10% of Europeanenergy requirements at the beginning of the1950s, increased its share to 59% in 1973while solid fuels declined to 23%' (iii) the emergence of .a completely novelenergy source in the form of nuclear powerwhich covered just 4% of requirements in1973 together with geothermal energy andhydropower (now 12%);

(iv) two oil crises in 1973 and 1979-80 whichchanged the picture more radically than anyother factor.

A new trend has been emerging as a result ofincreased environmental awareness inbroad sections of the population , not only inCommunity countries, which has led tocritical questions being asked about themain energy sources - coal and oil as wellas nuclear energy - and the consequencesof intensive energy utilization in the form ofvisible and tangible deterioration of thenatural environment.

Let us now consider these factors in-dividually:

THE FIGURES

The development of the world economysince the end of the Second World War has

resulted in an unprecedented expansion ofenergy consumption. World consumption in1950 stood at around 1 900 million tonnes ofoil equivalent (a unit which measures thevarious energy sources according to theirequivalent calorific values, so that they canbe compared and added: one tonne of oilequivalent (toe) corresponds to 10 millionkilocalories (kcal); 14 years later consump-tion had already doubled, increasing to a

total of $073.5 million toe by 1988. It isestimated that man will have used as muchenergy in the latter half of the twentieth cen-tury as throughout the whole period of hisexistence on Earth until 1950. World energyconsumption increased by an average of per annum between 1950 and 1973, which istwice the known rates from the 19th century.Steady economic growth of well above S%on average over many years, rapid popula-tion growth of + 1.9% per annum andabove all , stable energy prices favour~d thi~trend.

These international trends were faithfullyreflected in Europe. Energy consumption in1973 in the Community of the Nine reachedapproximately 1 000 million toe. Atthattimeit was not possible to foresee that demand inEurope could become saturated, nor thatthere could be zero growth. It is therefore notsurprising that the Commission extrapolatedthe existing growth rates to arrive at a pro-jected energy demand of 1 800 million toefor 1985; for 1988 it assumed a doubling ofthe 1973 figure. It was also predicted that:

(i) the share of solid fuels would continue todecline to just 10% of demand in 1985;

(ii) the share of natural gas and oil would in-crease to 15 and 64% respectively in thesame year, and

(iii) there would be a massive expansion in-nuclear energy from 1.4% in 1973 to about9% in 1985. IIJ

(I)Europe needs an internal market without frontiers. The single European market needs an energy marketwithout frontiers.

We shall come back to the prognoses later.Suffice it to say here that none of them wasreally borne out. However, one result of thechanges in the relative shares of the variousenergy sources was that the Community'dependence on imports increaseddramatically, as .it had scarcely any oilresources of its own at the time. As the sharpincrease in energy demand was largelycovered by imported oil , the energy importsof the Nine temporarily accounted for 65%of the entire energy requirement. By con-trast, only 10% of demand had to be coveredfrom imports in 1950.

. SUPPLY STRUCTURES PRIORTO 1973

To sum up the trends outlined above,Europe s energy situation on the eve of thefirst oil crisis was the following.The inexorable growth in the role of oil as asource of primary energy had engendered astructural crisis in the coalfields of the UnitedKingdom, Federal Republic of Germany,

France, Belgium and the Netherlands, theconsequences of which have still not beenfully overcome.

Taking a Community view, this developmentin fact probably boosted solidarity betweenMember States. Owing to the lack of suffi-cient own oil resources, all Member Statesbecame importers of energy, although tovarying degrees. This led to a change in at-titudes. Previously, there had been a cleardistinction between those countries whichwere able to cover a large proportion of theirenergy requirement from own resourcesmainly coal, and those which were obligedto buy in energy from their neighbours.The substitution of oil for coal as the mainenergy source brought with it major shifts inthe location of industry. So long as coal hada predominant role, it was natural that thekey industries were located in or around thecoalfields. Oil , however, came into the Com-munity via the ports and coastal areas, andno longer only in the northwest of the Com-munity s territory where the oil industry had

hitherto been concentrated. Refineries andpetrochemical plants were set up in the portsof entry and in the hinterland, leading togreater economic development in regions farfrom the coalfields. However, overcapacities

have arisen in this sector at these locations,which are still creating problems today.These developments were accompanied byfar-reaching changes in the internationalstructures of the energy industry. The longunchallenged position of the multinationaloil companies with their highly integratedstructures - exploration , production , trans-

port, refining, storage and distribution in onehand gradually began to crumble. Firstly,the oil-producing countries were no longerprepared to accept this domination of themarket and , secondly, opposition also beganto stir in some importing countries.On the oil-producing side, the founding ofthe Organization of Petroleum Exporting

Countries (OPEC) was primarily responsibleforthis development In 1965, only five years

after the organization was set up, the

changed distribution of forces was reflectedin the imposition by Libya ora new taxationsystem on the concession companies, underthreat of a unilateral cut-back in the produc-tion volume. The importing countries ofWestern Europe in particular founded theirown national oil companies with govern-ment support or, where these already ex-isted, such as in the Netherlands and Italy, ex-panded their role. In order to secure max-imum national independence, these com-panies had to aim for a similar degree ofvertical' integration - from oil productionthrough to distribution as the existingmultinational concerns. They very quicklyexpanded their operations beyond nationalfrontiers.

The new situation also had an impact on rela-tions with the United States of America. TheUSA was able to satisfy its energy demandfrom domestic production , or at least fromthe American continent This gave it an ad-vantage over its competitors overseas, at leastfor so long as they obtained their oil supplies

The Community is producingless and less coal...

...

and yet in 7988 soild fuels

still accounted for about 28%of total energy production.

primarily from American sources. Howevera decision by President Eisenhower, de-signed to safeguard American oil suppliesdiverted large quantities of oil to WesternEurope from the much closer, but politicallyoften highly unstable countries of the MiddleEast. Europe, and Japan, too, despite thedistances involved, quickly availedthemselves of this supply source. Manyobservers regard this as the reason why japanand Western Europe in particular experi-enced faster and more uniform economicgrowth than the USA at the end of the 1960s.

THE ROAD TO CRISIS

The first sign of change appeared towards theend of 1969. Because world energy demandwas rising steadily and usually faster than theoil companies ' prognoses , and because therole of oil as an energy source was becomingmore important, the oil-producing countriesgradually gained the upper hand and werequick to realize the potential of thisfavourable new situation. By coordinating

their policies they endeavoured to increaseand stabilize thei r oil revenue as far as possi-ble, as the situation on the international ex-change markets was characterized by uncer-tainty owing to the floating of the dollar, thecurrency in which most oil transactionswere, and still are, effected. Oil revenue isthe most important, if.not the sole, source ofincome for many oil-producing countries.Other countries such as Algeria, Iran and , toa certain extent, Iraq have been able todevelop their agriculture and non-oil-relatedindustry on the strength of theirdemographic and geographical resources.For them , the revenue from oil exports was awelcome means of diversifying theireconomies, and the western industrializedcountries benefited enormously from theirpurchases of capital goods and basic in-frastructure. Other oil-producing countriesespecially in Arabia

, .

did not have thispossibility. Consequently, they invested thebalance of their income (usually the largerportion) after current expenditure and exten-sive investment in their own infrastructure (ill

Oil prices

1965 1970

abroad ('petrodollars ). These usually short-term investments constituted a large supplyoffloating capital that, if notthe di rect causecertainly contributed to some dangerouscurrency fluctuations. Whatever the specificdifferences between the individual coun-tries, they all had a common interest in pro-tecting their income against inflation andloss of purchasing power. These objectiveswere the driving force behind the oil-produc-ing countries ' policy from 1970. They werereflected in the Teheran and TripoliAgreements (1971) on higher oil prices and insome agreements in the following yeardesigned toadjustthese prices in the wake ofwild currency fluctuations.Many elements of the scenario for the first oilcrisis were therefore already present owingto the increasingly confident assertion by theoil-producing countries of their own in-terests. The trigger, but probably no more

1975 1980 1985 1990

than that, was the outbreak of the Yom Kip-pur War in October 1973. As on previous oc"casions, the Arab countries felt there wasjustification for using oil as a politicalweapon, although with the decisive dif-ference that this time they did not stop atthreats. In December 1973 the oil-producingcountries refused to fix their prices in agree-ment with the oil companies and announcedthat they would in future decide pricesunilaterally. Crude oil prices were im-mediately tripled and increased again .soonafter, with the result that ex-producer pricesat the beginning of 1974 were more than fourtimes their 1973 level.This abrupt increase in prices had serious

repercussions for the economies of thewestern industrialized countries. (The con-sequences were far more serious for develop-ing countries with little or no oil reserves,many of whose financial problems assumed

gigantic proportions as a result of thequadrupling of their oil bill.) We shall returnin the following chapter to the far-reaching

consequences of the oil crisis, some of whichare still in evidence today. For the present, itis sufficient to note that oil consumptionworld-wide diminished substantially in theyears after 1973. The effect of this verymarked trend, coupled with efforts to makemore rational and sparing use of energy, wasthat the Community was able to cater for de-mand without serious problerns up to and in-cluding 1978. The actual oil bill was lowerthan feared, as widespread inflation and thedecline in the value of the dollar had amoderati ng effect.

The crisis prompted President Nixon to callan international energy conference inFebruary 1974, in which, in .addition to thehost country the USA, the European Com-munity, all its Member States, Canada, Japanand Norway took part. The conference ap-pointed a coordinating group, whose workled to an international energy agreement andthe founding of the International Energy

Agency (lEA).

The lEA, which established its headquartersin Paris, has devoted itself to the followingrnain tasks:

(i) formulation and implementation of a pro-gramme of long-term cooperation in thedevelopment of energy sources and inenergy conservation

(ii) review of national energy-saving pro~grarnmes and development of new energysources,

(iii) improved information on the oil andnatural gas markets

(iv) establishment of a centre for energystatistics, and

(v) creation of a mechanism for restricting oildemand and sharing available supplies intimes of crisis.

Following several years of relative calm , newtensions appeared on the world market in1979. Duringthefirst halfofthatyear, the Irancrisis was reflected in a modest supplydeficit. However, as huge contingency sup-

plies were stockpiled in the light of ex-perience with the first oil crisis, supply con-tinued to contract resulting in higher priceson the spot markets (particularly on the Com-munity' s crucial Rotterdam market). OPECtook advantage of this situation to increaseofficial oil prices still further, causing them todouble in successive stages in 1980 as awhole compared with the December 1978

level.

Thus the price per barrel of crude oil hadrisen from under USD 3 to USD 36 as a resultof the two oil crises of 1973/74 and 1979/80.This was the time when OPEC was at thezenith of its influence and power. There weresome signs that the organization was aboutto go too far. Furthermore, the heavy energyusers among the industrialized countries ad-justed their behaviour considerably. Severalelements therefore coincided:

(i) the industrialized countries went into thefirst world-wide recession since the SecondWorld War, which lasted until the early

1980s. The customary growth rates gave wayto zero growth and , in some cases, decline(Community gross domestic product in 1975diminished by 1% in real terms);

(i i) th is depressed energy demand , so that theoil-producing countries were unable tomaintain the 1980 price level. Tensions sur-faced in OPEC, leadingto major problems inthe hitherto solid group. Saudi Arabia in par-ticular abandoned the policy of high prices.Oil prices gradually fell , in part because in-creased production in the North Seaweakened OPEC's position and some oi I de-mand was absorbed by greater use of nuclearpower and natural gas;

(iii) persistent international monetary in-stability, particularly in the form of erraticfluctuations in the dollar exchange rate, didnot only damage the finances of the in~

dustrialized countries. The oil-producingcountries ' revenue also deteriorated becauseof this development, which ironicallystemmed in no small measure from theirearlier, usually short-term, petrodollar in-vestments. Finally, one of the chief causes of

the international debt problem can also besought in the two oil crises.

EUROPE AND THE WORLDENERGY MARKET FROM THEFIRST CRISIS TO THE PRESENT

IBJ

It is clear from this summary that the directcause of the aftermath ofthefirstoil crisis wasEurope de facto tolerance of excessive

dependence on oil imports from politicallyunstable parts of the world such as the Mid-dle East. The lessons drawn from this interna-tionally were that dependence on such im-ports and thus economic vulnerability had tobe reduced at all costs. At the worldeconomic summitin Tokyo in 1979, the USA

Canada, Japan and the European Commun-ity agreed to pursue a common strategy toreduce oil consumption and hold imports inthe subsequent five years at their 1978 and

1979 levels, to promote energy saving andthe production and consumption of coal andto coordinate development of alternativeenergy sources. The target with regard toreducing oil consumption was actually sur-passed under the influence of the second oilcrisis. Energy consumption was reined inand imports quickly dropped below thelevels envisaged in Tokyo.

In the years immediately after the second oilcrisis, the strategy of reducing dependenceon oil as far as possible had considerable suc-cess. For example, Community gross primaryenergy consumption remained more or lessconstant between 1973 and 1985: it rosefrom 1029 million toe to 1053 million toe in1980, declining slightly again to 1 048

million toe in 1985. In 1973 the present 12

members of the Community together con-sumed 606 million tonnes of oiL This hadfallen to 552 million tonnes in 1980 and 457million tonnes in 1985, a figure which was,however, distorted by the miners ' strike in the

, i.e. it was artificially high. Oil produc-tion within the 12 Community countries in-creased from 13 milliontonnes to 93 milliontonnes in 1980 and 151 million tonnes in1985 (mainly due to North Sea oil); net oilimports fell from 643 million tonnes to 497

and 334 million tonnes respectively. A factworth noting is that the share of oil in totalenergy demand and dependence on im"ported energy declined by practically thesame amount: from 63% (65%) to 55%

(56%) and 46"10 (43%) respectively. Notablein this context is that 1985 was a year inwhich the recovery of the world economybegan to stabilize. As the lessons drawn fromthe two oil crises had obviously been takenon board (i.e. energy was being consumedmore rationally, new and less energy-inten-sive technologies were being applied andthermal insulation was being improved), itappeared that the iron rule that economicgrowth always implied increased energyconsumption no longer applied. The best in-dicator of this relationship is probably

energy intensity, i.e. the quantity of energyrequired to obtain a given volume of gross

domestic product. For every unit of GDP(USD 1 million at 1980 prices) the world con-sumed 616 toe in 1950, and still required 597toe in 1976, while by 1986 this had fallen to551 toe.In 1986 OPEC had also drawn lessons fromits experience since 1973 and returned to thesystem of fixed prices, the level of whichsteadied at about USD 18/barrel , or approx-imately half the level of 19.80 prices. At thesame time they agreed on a general ceilingon production and individual productionquotas per country. OPEC representatives ex"plicitly conceded at an internal Commissionseminaron energy policy in 1987 that the neteffect of the price fluctuations had beennegative both for the oil market and the inter-national economy.The picture, however, is still not complete.On presentation of its review of MemberStates ' energy policies in the light of theCommunity' s energy objectives for 1995, the

Commission noted in February 1985 that theCommunity was continuingto restructure itsenergy supply to reduce oil dependence.

Nuclear energy was seen as the chief alter-native. The share of oil in gross energy con-sumption declined from 51 to 47% between1982 and 1986. Solid fuels (particularly coal)dropped slightly from 24 to 22%. Natural gas

increased its share slightly from 16 to 17%while the share of nuclear power grew from7 to 12%.

However, the Commission also noted withsome concern that the decoupling of energydemand from economic growth (Le.

diminishing energy intensity) had sloweddown, at least as far as the period 1982-was concerned. The annual growth inenergy demand of 2% per annum on averagewas almost as high as the mean growth ratein GDP at 2.2%. In some countries such asFrance, Belgium, the Netherlands, Ireland

and Portugal , the de-linking trend had - ac-cording to the Commission actually beenreversed. Demand for electricity also ex-ceeded economic growth with an increase of3.3% per annum between 1982 and 1986.The Commission is therefore probably rightin concluding that the inclination to con-serve energy has diminished in the light oflower energy prices (in particular of crudeoil) recently. Has Europe forgotten thelessons of the two oil crises? Or is it in theprocess of doing so? Let us return again to1973 and the aftermath.

EUROPE AfTER THE Oil CRISES

TH E POSITIONWHEN THE CRISES STRUCK

The two crises which caused oil prices to in-crease twelvefold within a few years haddisastrous effects on the economies ofEurope and the whole world. The scars arestill visible today. The crisis in the steel in-dustry with stagnating sales following thebuild-up of overcapacities, which hit Europeparticularly hard from the middle of the1970s, was a direct consequence of the sud-den drop in demand for steel.

Although prices increased by approximatelythe same amount both times, their effectscould scarcely be compared. The first crisisin 1973 came at a time when utilization ofproduction capacities was running at a fairlyhigh level. In addition , raw material pricesoutside the energy sector were on the upturnwhich , together with a more expensivedollar, intensified the inflationary effects of

the oil crisis. Inflation rates in the Commun-ity, which during the 1960s had been run-ning at just over 4% , rocketed to an averageof 12% in the years 1973- , although thisfigure masks considerable differences fromcountry to country. Inflation rates of 15-20%were recorded in Ireland, Italy and Greeceby no coincidence countries with a par-

ticularly high dependence on importedenergy. At the same time, the balance of

payments in most industrialized countrieswas transformed into a deficit. Indebtednessgrew, which in turn led to disruptions in theinternational monetary system and a furthershrinking of world trade. The Community'gross domestic product declined in realterms by over 1% in 1975. In short, the worldwas in its first real recession since the SecondWorld War.

The second oil crisis broke before the conse-quences of the changed energy situation hadbeen completely assimilated and adjustmentprocesses were still in train. Growth rates

were positive again , but nothing like as highas in the early 1970s. The average growth ratein the Community between 1976 and 1979was 3.5%, compared with an average 5% inthe years 1969-70.

The economic situation , however, was tot-ally different. Capacity utilization was run-ningatamuchlowerrate, prices of many rawmaterials were stagnating or declining, andthe leading industrialized countries werecoordinating economic policy more effec-tively. As a result, a second recession in theyears 1979-80 was successfully avoided.Nevertheless, the crisis persisted for severalyears. Growth rates in the 24 member coun-tries of the Organization for EconomicCooperation and Development (OECD)averaged less than 1% during the years1980- , with just over 0.8% in the EuropeanCommunity, zero in the USA and about 3%in Japan. It was not until 1983 that a periodof recovery set in, in the course of whichgrowth rates regained the levels of the late1960s.

The employment situation, by contrast

showed little improvement and in somecases even deteriorated. Unemployment inthe Community, which affected 3.5 millionpeople in 1974, had risen to 5 million by 1975and hit the 10 million mark in 1981. The ac-cession to the Community of Greece in 1981

and Spain and Portugal in 1986 brought withit a substantial increase in unemploymentnot only in absolute terms but also as a

percentage of the working population. Therewere still no fewer than 15.5 million peopleout of work in the Community of the Twelveat the end of 1988, equivalent to an

unemployment rate of 10%.

THE COMMUNITY'REACTION TO THE NEWSITUATION ON THE ENERGYMARKET

Higher prices and the resulting recession af-fected energy consumption in a way thatbelied all experience since the Second

World War. Primary energy consumption

had increased steadily from 1950 to reachapproximately 1 000 million toe in 1973, theyear of the fi rst oil crisis, when the trend wasabruptly stopped. In the subsequent yearsconsumption in million toe developed asfollows: a drop in 1974 to 941 Mtoe and in1975 to 890 Mtoe was followed by a slow,but uneven , expansion to 947 and 942 Mtoein 1976 and 1977 respectively, and it was notuntil 1978 that consumption regained its1973 level. It peaked briefly at 1 012 Mtoe in1979 but crashed again to its 1973 level in

Primary energy consumption in the Community

Mtoe (Million tonnes of oil equivalent)1200

700

600

500

1970

1980 at 970 Mtoe owing to the second oilcrisis and even further in 1981 to 934 Mtoe.Gross primary energy consumption onlypassed the thousand million mark again in1985 (1 056 Mtoe) and 1986 (1 073 Mtoe).

These figures broadly reflect the ups anddowns of economic development duringthose years. Industrial activity had declinedby 8% between 1974 and 1975 and recoveredonly slowly thereafter. It was mainly physicalfactors that were responsible for this in thefirst phase, such as the interruption of sup-plies to some countries and, of course, theprice development itself which obliged con"sumers to hold back. At the same time, thecountries affected took measures to dampenergy consumption. What specific actiondid the Community take?

Although the 1973 oil price increase did notappear like a bolt from the blue as the warn-ing signs had been there, the crisis hit the

1975 1980 19901985

Community and most other heavy con-sumers unprepared. The oil crisis was theoverriding issue at the Copenhagen Summiton 14 and 15 December 1973, at which

representatives of the OPEC countries werehighly prominent, albeit unofficial , guests. Inview of the gravity of the situation, it wasagreed that energy policy measures shouldbe drawn up without delay, for which a newbody, the Energy Committee, was to beresponsible. It was to consist of represent-atives of the Member States chaired by aCommission Member; its brief was to securethe coordinated implementation of the Com-munity measures, facilitate exchange of in-formation and consultations betweenMember States and the Commission andsupport the Commission in formulating its

proposals. However, under the pressure ofevents, Member States initially began todecide and implement their own measureswithout proper coordination.The first essential fora coordinated approachwas to get the facts. Designing a commonenergy policy requires precise informationon the development of the energy marketand in particular the crude oil market. TheCommission did receive information on coaland nuclear energy on the basis of the ECSCand Euratom Treaties, but it was only in 1972that the Council enacted provisions givingthe Commission access to information onplanned investments in the oil , natural gasand electricity sectors, important data for theassessment of future demand and con-sumption.

Refinery in Antwerp. Even after two oil crises (so far), oil is still the Community's main primary energysource, covering about 45% of demand in 1988.

After the onset of the energy crisis, the Com-mission called on the Member States to pro-vide quarterly information on the develop-ment of oil and gas imports with abreakdown by company to enable the Com-munity to make a reliable assessment of thesupply situation. Two Council regulationsadopted in 1974 also required Member Statesto notify the Commission of imports of oilproducts and exports of hydrocarbons (oil,derived products and gas). From 1979 on-wards, in the light of the second oil crisis, oilimports were subjected to even closermonitoring in the form of a registrationobligation. In this way the Community

received some indication of the terms apply-ing to these transactions. Finally, theMember States decided in 1977 to collectand forward to the Commission data on coalimports from non-Community countries.

Of course the Commission did not just col-lect all this information for its own sake. Itspurpose was to serve as a basis for concertedaction by the Member States in order tosecure the implementation of commonpolitical guidelines and objectives. Suchconcerted action has not been confined tothe national authorities: the Commissionalso has regular contacts with marketoperators, i.e. the oil companies, the majortransport and distribution undertakings andthe coal and electricity producers. Con-sumers, too, are involved either individuallyor through their representative organi-

zations.

THE TOOLS AT THECOMMUNITY' S DISPOSALAND THEIR POTENTIAL

Armed with this information , the Commis-sion was better equipped to create the foun-dations of a common energy pol icy. MemberStates only gradually came to accept that acommon policy offered greater prospects ofsuccess in such a crucial area as energy sup-plies, particularly in times of crises, than ifevery State acted unilaterally. This insight didnot gain the same currency everywhere:

France, for example, fairly soon left the coor-dinating group set up by the WashingtonEnergy Conference which led to the foun-ding of the International Energy Agency,because it had reservations about somepol icy aspects. Nevertheless, the elements of

common energy policy graduallycrystallized and still form the backbone ofthis policy today. They include:

(i) the setting of common medium-termenergy objectives, to the achievement ofwhich every Member State is to contributeaccording to its ability. The first objectiveswere formulated in 1974. In 1980 they weremore precisely defined for the period until1990. In the spring of 1988 the Commissionpresented the objectives for 1995, which willbe considered later. The Commissionmonitors progress towards these objectivesand reviews Member States ' energy policiesat regular intervals;

(ii) the use of certai n Community instrumentsdesigned to supplement action by MemberStates whenever this is likely to prove moreeffective. These include joint researchdevelopment and demonstration program-mes, Community legislation in areas such asrational use of energy, harmonization of thekey components of price formation and coor-dination of relations with certain non-Com-munity partners. In addition , support for in-vestment in equipment and modernizationin the energy sector is provided from theCommunity budget and through loans fromEuratom , the European Coal and Steel Com-munity (ECSC), the New Community Instru-ment (NO) and the European InvestmentBank (EIB). Examples of such assistance in-clude participation in the financing of powerstations, capital equipment for coal minesand coal terminals, conversion of oil-firedplant to solid fuels, expansion and integratedoperation .of electricity networks, develop-ment of new energy sources and support forvarious energy-saving projects in industry,public buildings or in the operation of

district heating networks.

On the whole, the approach by the Com-munity and the individual Member States

COMMUNITY FOSSIL FUEL USE FOR COMBUSTION PURPOSES

Mtoe 1980 1987 1995 2000 2010

Solid fuels 235 230 247 275 322

Oil 494 419 480 466 428

Gas 184 207 236 250 276

Total 913 856 963 991 1 026

Total primaryenergy 1025 1 062 1 226 1 277 1 375

Communityfossil fueluse forcombustionas percentageof TPER

DOc. COM (89) 369 final, 8.2.1990

has been successful. The Community wasable to reduce its oil imports by 50% be-tween 1973 and 1983. It has also been

calculated that more rational use of energysaves the Community the equivalent of 250million tonnes of oil. At the same time, NorthSea oil reserves contributed around 130million tonnes; an equivalent volume of im-ports was saved through greater use ofnuclear energy and natural gas.Let us now examine this success moreclosely. If, instead of absolute consumptionfigures, we take energy intensity as a yard-stick i.e. the ratio of final energy consump-tion to gross domestic product - it emergesthat 10 of the current 12 Community coun-tries, including Spain which launchedenergy-saving programmes in the 1970s

have been able to improve this ratio by 20%(Community average). In particular Luxem-bourg (38.8%), Belgium (29.5%), Denmark(27.9%) and Ireland (27.6%) achieved ex-cellent results in the period 1973-82. Greeceby contrast, which had no such programmeat that time, paid for its growth with adeterioration of 1.9% in energy intensity.

To recapitulate: 1973 to 1982 was the periodin which the world suffered two oil crises.However, as the unpleasant memories beganto fade, the will to continue along the pathembarked upon slackened. Progress inreducing energy intensity rapidly diminish.ed: the impressive figure of 20% on averagefor the Community in the years 1973-shrunk by a factor of 10 to 2.4% in the fouryears from 1982 to 1986. The background atthe time was one in which the industrialrestructuring made necessary by the oilcrises had largely been completed and crudeoil prices stagnated and then began to slide.The picture is even more worrying when theMember States are considered separately.

Four countries, the Federal Republic of Ger-many, the Netherlands, Belgium and Ireland

not only failed to make any progress duringthis period, but energy intensity actually

deteriorated , i.e. they had to use more energyto achieve the same groWth rate. While in thecase of Germany the dimension involved wascomparatively small (-0.3%), in Ireland'case, for example, it was considerablygreater (-13%). As the Commission noted

the spring of 1988 ' Most Member States havereviewed their energy efficiency policies inthe light of the changed energy market con-ditions and the experience gained withvarious initiatives. The result of this reap-praisal has been the reduction (if not the totalelimination) of direct subsidy programmesfor energy efficiency investments . Only Italy,the Netherlands and Denmark maintainedtheir R&D spending at the same level duringthis period. The Federal Republic of Ger-many, for example, reduced its allocation forenergy efficiency R&D by a factor of morethan three compared with the figure ofECU110 million in 1981.

These alarming developments were situatedin a context of fundamental change. The fouryears from 1982 to 1986 were characterizedby the following main trends on the energymarkets:

(i) gross energy consumption in 1986 for theCommunity as awhole was about 8% higherthan in 1982 and some 4% higher than in1973;

(ii) the share of oil in gross energy consump-tion decreased from 63% in 1973 to 51% in1982 and 47% in 1986;

(iii) the share of net oil imports in grossenergy consumption fell from 62% in 1973 to38% in 1982 and 33% in 1986;

(iv) the share of natural gas in gross .energyconsumption grew from 11% in 1973 to 16%in 1982, and then remained more or lessstable (1986: 17%);

(v) the share of solid fuels in the Communi-ty' s energy balance was 23% in 1973 24% in1982 and 23% in 1986, i.e. relatively stable;

(vi) the share of hydrocarbons in electricitygeneration decreased from about 42% in1973 to 24% in 1982 and 16% in 1986;

(vii) the share of solid fuels in electricitygeneration increased from 45% in 1973 to48% in 1982 , but fell back to 42% in 1986;

(viii) the share of nuclear power in electricitygeneration, however, increased steadilyfrom 8% in 1973 to 21% in 1982 and 37% in1986.

These are significant changes, both withregard to the relative position of the in-dividual energy sources and , partly as a con-sequence of this, the Community'dependence on imports (and hencevulnerability). How are events expected todevelop until 1995? Are the 1982-

developments in line with the prognoses?What is the importance of the internalmarket scheduled for 1992? These are someof the questions we shall consider in the nexttwo chapters.

COMMUNITY OBJECTIVES

ENERGY OBJECTIVESFOR 1995

In spring 1985 the Commission presented its1995 energy objectives. The followingtargets were set in the individual sectors:

(i) the efficiency of final energy demandshould be improved by at least 20%;

(ii) oil consumption should be reduced toaround 40% of energy consumption and netoil imports thus maintained at less than one-third of total energy consumption in theCommunity;(iii) the share of natural gas in the energybalance should be maintained in order to en"sure secure and diversified supplies;

(iv) the share of solid fuels in energy con-sumption should be increased;(v) efforts to promote consumption of solidfuels and to improve the competitiveness

solid fuel production .capacities in the Com-munity should be continued;(vi) the share of electricity generated from oiland gas should be reduced to under 15% in1995;

(vii) the output from new and renewableenergy sources should be substantially in-creased to enable them to make a significantcontribution to the total energy balance.The first review undertaken by the Commis-sion in spring 1988 on the basis of informa-tion from the Member States indicated thatthese objectives would probably be onlypartly achieved. The main results of the in-terim review were:

(i) the efficiency of final energy demand wasunlikely to improve by the figure of at least

20% specified for 1995;(ii) the share of oil in gross energy consump-tion was I ikely to drop to around 43 %; Com-

In terms Qf air pollution nuclear energy can be regarded as a clean technology...

munity net oil imports would representabout one-third oftotal energy consumption;

(iii) the share of natural gas in the energybalance would probably be more or lessmaintained;

(iv) the share of solid fuels in gross energyconsumption was likely to increase slightly;

(v) the share of oil and gas in electricitygeneration was likely to drop below 15%;the share of solid fuels and nuclear energywas likely to be 44% and 38% respectively;

(vi) renewables would probably representabout 2% of the Community's total energybalance.

The Commission viewed these national pro-jections with some degree of scepticism. Itconsidered the estimates of future consump-tion of solid fuels to be too high and in factdid not exclude a drop in their market share.It believed that a 'comfortable degree of cer-tainty' only existed with regard to the share

of oil and gas in electricity generation andthe market share of natural gas. As far asnuclear energy is concerned, the after-effectsof the Chernobyl accident were still inevidence at the time of the review (there isstill disquiet in some countries, particularlywhen , as in the Federal RepublicofGermany,the public gets to know of potentially seriousincidents belatedly and seemingly purely bychance).

The most alarming finding in the Commis-sion s view is that efforts to improve energyefficiency might not have the desired suc-cess. In this event, it estimates that energyconsumption in 1995 may be between 70

and 110 million toe higher than the target.This would not only add between ECU 8 and13 thousand million to the energy bill at cur-rent oil prices, but 'would be a serious set-back making the Community much morevulnerable to supply shortages or price risesor both... A setback in this area of energy effi-

...

but the subsequent costs, especially as regards the environment, are considerable. For exampleradioactive waste has to be 'disposed of' (plant in Tihange).

ciency would also worsen the Community'international economic competitiveness

jeopardize security of supply by increasingenergy import needs and hinder en-vironmental progressThe pursuit of energy efficiency was pro-bably also the main motive for the Thermieprogramme presented by the Commission atthe beginning of March 1989. It was design-ed to provide financial support anddisseminate technological know-how in thefollowing sectors:(i) energy efficiency,

(ii) renewable energy sources

(iii) clean coal technologies

(iv) oil and gas prospecting and develop-ment.The Commission therefore sounded anurgent warning in its review of MemberStates' energy policies , for the Communitycan not afford to tolerate any weaken i ng of itsinternational competitiveness, particularly ata time when it is poised to reap the promiseddividends of the internal market with theelimination of all barriers to the free mov~ment of persons, goods, services and capitaland, by this token improved com-

petitiveness on world markets. When weconsiderthatthe internal energy market con-

stitutes an important part of the internalmarket as a whole, the ci rcle is complete. Letus therefore turn our attention to the internalenergy market, which is one of the Commis-sion s priority objectives.

THE INTERNAL ENERGYMARKET

We have alreadyseen that energy is a specialcase and that an internal energy market willdiffer in some respects from the internalmarket in other sectors. The drive for greatercompetition reaches its limits where it in"terferes with the security of supply. A con-tinuous, fine-meshed energy supply reasonable prices is crucial to the smoothoperation of the internal market in all othersectors and in order to secure and promote

competition. The Commission is thereforeconvinced that the public sector can con-tinue to have a role in the internal energy

market. Having said that, the internal energymarket is a sector like any other and barriersmust be removed. Indeed, the barriers in thissector may even be more deeply entrenchedand more vigorously defended by those theyhave hitherto protected than in other areas.The firmness of purpose required is thereforeall the greater.

Areas of action: ' Horizontal' barriers

The White Paper on completing the internalmarket adopted by the European Council inMilan at the end of June 1985 and the work-ing paper on the internal energy market(COM(88) 238) set out the course to befollowed. Specifically, the following areasare involved:

(i) the application of Community law; thisvery general concept concerns actionagainst Treaty infringements in relation totrade barriers, competition and subsidies;

(ii) the removal of technical barriers throughharmonization of statutory provisions andstandards;

(iii) the opening up of public procurementincluding the Commission s plans to extendthis principle to the energy sector;

(iv) the removal offiscal barriers, in particularthe approximation of indirect taxation.

Removal of technical barriersThese barriers concern legally binding na-tional regulations and standards of a gener-ally voluntary character, both of which differfrom one country to another. They affect notonly the manufacture of equipment used byenergy producers, but also the appliances

used by the final consumers. Since the begin-ning of May 1985, the Council of Ministershas applied the ' new approach', which con-sists in defining only the essential health andsafety requirements of machinery and equip-ment. The translation of these requirementsinto technical specifications is then a matterfor the standardization committees of Euro"pean industry, CEN and Cenelec. Herein lies

oneofthekeys to opening up public procure-ment markets.

In the case of hydrocarbons, for example, im-

pediments arise from differences in formula-tions of petroleum products introduced bythe refiningindustry to comply with differingrequirements on national markets. Only afew criteria have been harmonized so far inCommunity legislation. For example, a stan-dard (EN-28) for unleaded petrol defines anumber of common characteristics forpetrol, but leaves other specifications toMember States' discretion.

Opening up of public procurementIt is not only in the energy sector that theCommunity is entering uncharted territory.As the Commission noted: 'This is thereforean extremely vast area which is little knownand where intervention by the publicauthorities, such as it is, is rarely official. Itmay, nevertheless, be very effective and , in aCommunity which is still in the making, na-tional chauvinism is often a natural reaction.The Commission should examine whetherthese practices constitute an obstacle to areduction in energy prices/costs, the first andforemost objective of the internal energymarket, and whether they are compatible

with the Treaty rules . These ' behaviouralanomalies ' undoubtedly exist in the case ofall energy equipment and all Member States.

Approximation of indirect taxationThe differences in the way in which energyis taxed in the Member States are widely con-sidered to be a major, if not the biggest,obstacle on the road to an internal energy

market, just as the approximation of thevarious systems of indirect taxation isgenerally considered to be the most difficultaspect of the whole internal market pro-gramme. The issue in the energy sector isabove all VAT and the approximation of ex-cise duties on petroleum products, par-ticularly petrol and diesel. There are enor-mous differences between the MemberStates in this respect: the cumulative burdenof VAT and excise duty on premium petrolranged from ECU 2S0 to ECU 650/m

3 at the

end of 1987. The Community average wasECU 400/m , with the result that the devia-tion ofthe two extremeS from this mean was-40% and +60% respectively. At the sametime, the excise duty on heavy fuel oil variedfrom zero to nearly ECU SO/tonne. It is clear

that such differences are bound to have animpact on competitiveness in the countriesconcerned.

Free movement of goods and servicesArticles 30 to 36 on the free movement ofgoods are among the key provisions of theTreaty and are also by the same token a cor-nerstone of the internal market programme.These provisions also apply to energy exceptfor coal , for which , however, Article 4a oftheECSC Treaty lays down the same principles.As the Commission noted in its 1988 paperon the internal energy market, the two provi-sions ' prohibit any measures by the MemberStates which either directly or indirectly, ac-tually or potentially constitute a barrier to in-tra-Community trade. They lay down theprinciple that every product which is legallymanufactured and commercialized in oneMember State may circulate freely within theCommunity' . This principle was endorsed bythe landmark ' Cassis de Dijon ' judgment ofthe European Court in 1979, and it has beensuccessfully used to dismantle some for-midable historical trade barriers such as thenational purity requirements for beer

spaghetti and sausage. Derogations from thisprinciple are permitted only if justified ongrounds of public security, protection ofhealth and life of humans, animals or plantsin accordance with Article 36 of the EEC

Treaty.

Member States have, however, adopted alarge variety of national measures on thebasis of the provisions for exemptions,

although it is by no means always certain thatthey can be justified pursuant to Article 36.They include, for example, importlicencere-quirements, the requirementtopresent a cer-tificate of origin, rules requiring bilateralreciprocity of imports and exports, provi-sionslaying down different requirements forimports and exports, restrictions or re-

quirements regarding the storage of goodsrestrictions on the useof national utilities, ex-hortations to buy national products, pricecontrols and, last but not least, provisionsspecifying certain technical requirements ofa product.

Such measures, to the extentthatthey cannotbe justified , constitute an infringement oftheTreaty. However, even where they arejustified , there are limits to Member Statesfreedom to adopt measures on thesegrounds: they must respect the principle ofproportionality, they have to be in pursuit of

legitimate aim and they have to benecessary to the attainment of this aim. Ifthere are alternative measures which imposeless damaging restrictions on the exchangeof goods and services between MemberStates, then only these measures will be ac-ceptable in Community law.

State monopoliesIn view of the special quality of energy, inparticular the need to guarantee security ofsupply, national monopolies are a commonphenomenon in this sector. The oil market ischaracterized by import and distributionmonopolies for products from non-Com-munity countries. The Accession Treatieswith Spain and Portugal specifically directthem gradually to open up such structures. Inaddition , Member States have retained anddelegated to public or private enterprises ex-clusive rights to import and export otherenergy products. This is particularly the casein the gas and electricity sectors. Anotherpractice is for States or regional authorities togive public or private enterprises exclusive

rights of transport and distribution. It willtherefore have to be exam i ned whether suchexclusive rights hinder or even prevent tradebetween Member States. In particular, it willhave to be examined whether this situation iscompatible with Articles 30 and 37 on thephasing out of monopolies of a commercialcharacter. In the gas and electricity sectors inparticular, the problem can be reduced totwo issues, the resolution of which is likely tobe crucial to the whole question of an inter-nal energy market.

(i) How can the requirements of free trade inelectricity and gas in the Community bereconciled with the need for a high level ofquality and security ofsupply?(ii) Under which conditions might large in"dustrial customers of local and regionalenergy distributers be granted direct accessto a given resource?Common to both reflections is that they offerthird parties the possibility of access to ex-istingtransport networks, so that one or moreundertakings would pay for use of the trans-port infrastructure.

Ruks of rompeuuoo and Stare amCompliance with the Treaty rules of competi-tion and the provisions on State aid (and

Commission monitoring of this compliance)is essential to the creation and consolidationof the internal energy market. Any trade bar-riers resulting from the conduct of one orseveral undertakings are covered by the com-petition rules of the EEC Treaty. In view oftheir importance, the main provisions are setout on the page .opposite.It is worth emphasizing in this connectionthat public undertakings and undertakings

which the national authorities have grantedspecial or exclusive rights are also in princi-ple subject to the competition rules of theTreaty.

An issue with a direct bearing on competi-tion is State aid , for the granting of State aidalmost always involves distortion , or at leastimpairment, of competition. However, levelsof aid to the different energy production sec-tors vary considerably. The coal industry isthe most prominent recipient of support,although the ECSC Treaty originally expli-citly prohibited subsidies in order to preventunfair competition on the Community coalmarket. However, unlike steel, the otherpillar' of the Coal and Steel Community,

coal did notfall victim to displacement com-petition , for the markets for coal have largelybeen national markets, intra-Communitytrade in coal being relatively insignificant.The purpose of the national aid granted sub-ject to special Community permission was

Article

1. The following shall be prohibited as incompatible with the common market: allagreements between undertakings, decisions by associations of undertakings andconcerted practices which may affect trade between Member States and which haveas their object or effect the prevention, restriction or distortion of competition withinthe common market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;(b) limit or control production, markets, technical development or investment;

(c) share markets or sources of supply;(d) apply dissimilar conditions to equivalent transactions with other trading partiesthereby placing them at a competitive disadvantage;(e) make the conclusion of contracts subject to acceptance by the other parties of sup-plementaryobligations which, by their nature of according to commercial usage, have

no connection with the subject of such contracts.2. Any agreements or decisions prohibited pursuant to this article shall beautomatically void.

Article

Any abuse by one or more undertakings of a dominant position within the commonmarket or in a substantial part of it shall be prohibited as incompatible with the com-mon market in sO far as it may affect trade between Member States.Such abuse may, in particular, consist in:

(a) directly or indirectly imposing unfair purchase or selling prices or other unfairtrading conditions;(b) limiting production, markets or technical development to the prejudice of con-sumers;(c) applying dissimilar conditions to equivalenttransactions with other trading partiesthereby placing them at a competitive disadvantage;(d) making the conclusion of contracts subject to acceptance by the other parties ofsupplementary obligations which , by their nature or according to commercial usagehave no connection with the subject of such contracts.

Article 90

1. In the case of public undertakings and undertakings to which Member States grantspecial or exclusive rights, Member States shall neither enact nor maintain in forceany measure contrary to the rules contained in this Treaty, in particular to those rulesprovided for in Article 7 and Articles 85 to 94.2. Undertakings entrusted with the operation of services of general economic interestor having the character of a revenue-producing monopoly shall be subjectto the rulescontained in this Treaty, in particular to the rules on competition , in so far as the ap-

plication of such rules does not obstructthe performance, in law or in fact, of the par-ticular tasks assigned to them. The development of trade must not be affected to suchan extent as would be contrary to the interests of the Community.3. The Commission shall ensure the application of the provisions of this article andshall , where necessary, address appropriate directives or decisions to Member States.

not to protect German coal from French

competition or vice versa, but rat~er to pre-vent the total demise of domestic coal pro-

duction. An example of such State aid is theGerman hard coal levy, which is a source ofirritation to the other Member States, in par-

ticular France. For even though the coal levy,which is intended to make domestic coal aviable proposition for electricity generators,is financed by the final consumer throughelectricity prices and not by the State, thereis no denying that it is equivalent to a subsidyto the coal producers. Whatever the merits ofthe case, the existing provisions on nationalcoal aid expire at the end of 1993 when thewhole issue will have to be renegotiated inthe light of the internal market. We shallreturn to this aspect later.

However, aid is also granted in other energysectors. It may not be so visible, but it is noless effective for that. It includes investmentaid for power station construction andallocations to research and development orto nuclear energy with an effectequivalenttoaid. The use of energy pricing practically asa form of aid to final consumers, in particularlarge industrial customers, also belongs inthis category. This, too, is a practice whichneeds to be examined with a critical eye inorder to ascertain whether, in its presentform, it really is compatible with an internalenergy market.

Costs, prices, tariffsThat the Commun ityenergy market today ischaracterized by major differences in costsprices and tariffs requires no further explana-tion. The differences would already be con-siderable even without the differences in na-tional taxation. In theory, the solution is sim-ple: the principal driving forces of competi-tion and trade should be ' realistic' costsprices and tariffs, meaning that they aredetermined under objective, transparentconditions in particular without in"terference from the public authorities, moreoften than not for reasons that have nothingto do with energy. This highly complex sub-ject and possible remedies are considered ingreater depth below. Commission surveys inthis area reveal a number of recurringthemes: differences in cost structures in theindividual Member States lack transparency in price formation , particularlyfor major customers, and total inconsistency

between prices and tariff structures for thevarious energy types, especially between gasand electricity and with regard to price levelsin the Member States.

As expected, this sector proved to be a highlysensitive one. The Member States have tradi-tionally been reticent on the subject ofenergy pricing, as their reaction to a Com-mission paper of autumn 1984 entitled 'Theapplication of the Community' s energy pric-ing principles in Member States ' demon-strated. In June 1985 the Councilacknowledged that it was unable to reachagreement on the conclusions of this paper.However, the implications of the internalmarket are such that matters cannot be leftthere. If the compartmentalized markets ofthe energy sector are to be opened up totransnational competition , it is essential tohave comparative data on energy prices inorder to bring greater transparency to priceformation with due regard for confidentiality.It will also be necessary to examine pricestructures in the Member States in order toascertain whether differences in treatmentbetween industrial customers and privatehouseholds, between different sectors of in-dustry and within a given sector are plausibleand compatible with the requirements of theinternal energy market. The transparencyand objectivity of the terms, cost structureand pricing principles of energy supplies inthe Community will also be the subject ofscrutiny. The electricity industry is regardedby the Commission as something of a testcase.

Differences in tariffs of industrial customersare immediately obvious. In 1986 thesecustomers paid ECU Z19/1O0 kWh in Parisbut ECU 9.84 in Dusseldorf, and ECU 10.in Milan compared with ECU 8.95 in Rot-terdam.

This and other inconsistencies led the Com-mission to launch an initiative for greatertransparency in price formation in spring

1989. A draft directive is designed to requirethe supply undertakings to notify the Com-mission of the prices and terms of gas andelectricity supplies to industrial customers

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and to provide information on existing pricesystems and the breakdown of customers byconsumer category. The Commission willtreat these data confidentially to the extentthat they are subject to commercial secrecy.

!ill

InfrastructuresGenerally speaking, the Community alreadyhas efficient energy infrastructures. There aredense transport networks for natural gas,crude oil and oil products and more par-ticularly for electricity. The integrated net-works for public electricity supply extendbeyond Community borders:

(i) the UCPTE grid takes in Belgium, theFederal Republic of Germany, France, Italy,Luxembourg, the Netherlands, Spain, Por-tugal and Greece. Austria, Switzerland andYugoslavia are also connected. Denmarktoo, is part of the grid and so, since 1985, is

the UK;

(ii) Nordel is the interlinked network of elec-tricity supply companies in DenmarkFinland , Norway and Sweden;(iii) The Ufipte grid is formed by the supplycompanies of France, Spain and Portugal;

(iv) the Sudel grid links Italy, YugoslaviaGreece and Austria.

Many Community countries are thus in-tegrated in several grids. Ireland, by contrastis not connected into any other system. Oneof the Commission s priorities is therefore toextend the integrated electricity network toIreland and to improve the linkage withGreece. Expansion of the European long-distance gas pipeline network is perhaps aneven more immediate priority. As yet, fiveMember States - UK, Ireland , Spain, Por-

tugal and Greece - are not linked into thissystem. Theconditions for a common naturalgas market will be met only when thesecountries are also integrated.

The instruments dedicated to the achieve-ment of greater economic and social cohe-sion of the Community by the EuropeanCouncil in February 1988 could also be usedto improve Community infrastructures. Aspecific share to be determined of the struc-

tural Funds, which are to be doubled by

1993, could be allocated for this purpose, aswell as resources from the European Invest"

ment Bank and other financial instrumentsspecifically intended to impart fresh impetusto the drive for cohesion. It would, for in-

stance, be worth clarifying how a regionalpolicy programme such as Valoren, designed

to improve the utilization of local energysources in less developed regions, can con-tribute to this process. Another possibilitywhich would , however, first have to be sanc-tioned by the Council , would involve theCommission s proposals for infrastructureprojects of Community interest.

Three types of infrastructure should be con-sidered here: reception infrastructurestorage infrastructure and transport anddistribution infrastructure. Specifically, thiscould involve:

(i) the development of port reception in-frastructure for coal (coal terminals as mainor transhipment ports) and natural gas (ter-minals for deliveries of gas in the unalteredstate or as LNG);

(ii) where transport infrastructure is con-cerned, the newly created legal form of theEuropean economic interest grouping

(EEIG)' which came into force in 1989 couldserve as an instrument of common operationof existing networks, an increase in theircapacity or the development of newnetworks;

(iii) with regard to storage, the creation of aCommunity oil and/or natural gas storagecapacity is conceivable, which , by virtue ofits location and size, could reduce storagecosts and increase security of supply in theevent of supply difficulties.

Such infrastructure projects could cover allenergy sources, e.g. in the case of solid fuelsthere is scope for long-distance pipelines totransport water-coal mixtures or oil-coalmixtures. Another possibility would be to ex-pand the existing pipeline network forpetroleum products. However, the most in-teresti ng prospects exist for electricity, wherethe first task would be to extend the existinggrid interconnection to all Member States.

This is the background to a proposal for adirective presented by the Commission at theend of September 1989 (COM(89) 336)

designed to increase the transit of electricitythrough transmission grids in the Commun-ity. The Commission advances the view thatgreater integration of the electricity industryand increased trade in electricity - which atpresent accounts for only 4% of consump-tion- could reduce the cost of supply to the

consumer, improve security of supply and

facilitate rapid, flexible reactions to suddensupply bottlenecks. The estimated savings

speak for themselves. In the short term, i.

up to 1992 , ECU 1 300 million annuallycould be saved , in the medium term to theyear 2 000 the annual saving ranges betweenECU 2 300 and 5 300 million and the long"term forecast for the year 2010 is for a savingof between ECU 6000 and 13 000 million.The breadth of the range in the medium- andlong-term forecasts is explained by the dif-ferentassumptions regarding construction

new power stations and/or modernization.The issue of third-party access both forlarge industrial customers and energydistributors ~tothetransport network is cur-

rently being discussed in the context of

open internal market. The Netherlands andthe UK already have fairly definite plans inthis direction. The Commission is discussingthis novel idea with all interested parties,namely the Member States and energy pro-ducers, distributors, network operators andconsumers, including private consumers.The Commission s proposal for a Council

regulation requiring Member States to notifyinvestments of Community interest in theenergy sector (COM(89) 335) is another in-itiative with a similar purpose, i.e. optimumuse of energy production and supplystructures.

Obstacles and priority measures in theindividual energy sectors

Solid fuelsIn 1988 solid fuels accounted for around28% of Community energy production. A

total of 185 million tonnes of coal equivalent(tce) were produced in the Community as awhole in this reference year. (Thetce is a unitcalculated in a similar way to the toe, namelyin terms of equivalent calorific value. Onetce is equivalent to 0.7 toe.) The UK ac"counted for 46% of this production, theFederal Republic of Germany 40%, while theremainder was distributed between Spain

(7%), France (6%) and Belgium (1%). The

Federal Republic of Germany is by far thelargest producer of brown coal and peat(66%); it is followed by Greece (19%), Spain(8%) and Ireland (5%). For several years now,or at least since the beginning of the first oilcrisis, there has been a trend towards higherimports of hard coal , which have shown ahigher proportional increase than consump-tion. The most important Community sup-pliers by volume are the USA, Australia

South Africa and Poland. Intra"Communitytrade in coal amounted to approximately 8.million tcein 1988. This mainly concernedtraditional supplies of coking coal and cokefrom Germany and much smaller volumes

steam coal from the UK.

Except in the United Kingdom, where majorrestructuring took place in the first half of the1980s, the financial situation of the coal in-dustryhas deteriorated. The principal reasonfor this is the fall in prices of imported coalexpressed in national currencies, which havea considerable impact on prices of Com-

munity-produced coal.

All producers, whether private, public

mixed companies, have been hit by thedecline in profits. This is despite the fact thatmining companies in the three main pro-ducer countries at least (UK Federal

Republic of Germany and Spain) have

guaranteed long-term sales contracts withlarge customers such as foundries and powerstations, in the case of which the mechanismfor fixing prices does not, in the words of theCommission, ' necessarily correspond tomarket realities . The content of theseagreements is as follows:

(i) in Germany, electricity producers haveundertaken in the ' Jahrhundertvertrag' to

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purchase 640 million tce of German coal ir-respective of their requirements (until 1995)and the economic situation (until 1991). A

charge is levied on electricity consumptionin the form of the ' Kohlepfennig . The pro-

ceeds from this are used to compensate theelectricity producers for the price differencebetween Community coal purchased at costprice and heavy fuel oil in respect of 22million tce and for the price difference bet-ween Community-produced and importedcoal in respect of 11 million tce;

(ii) in the UK, there are supply agreementsbetween British Coal and the Central Elec-

tricity Generating Board;

(iii) in Spain, Carbuni6n , the mining com-panies ' association , agreed on a system ofawarding contracts for coal supplies topower stations with the electricity pro-ducers ' association (Unesa).

These agreements do not explicitly rule outthe use of coal from other Community coun-tries. However, they do considerably restrictcompetition from imported coal and otherenergy sources. Between 1965 and 1986,

some ECU 50 000 mi II ion were spent on aidschemes and other measures to support cur-rent production and this figure has recentlyincreased significantly as a resultofthe fall inworld prices for coal and the value of thedollar, Whereas in 1986 the average price forimported coal was about USD 50ft, theaverage cost price of Community-producedcoal was more than USD 100ft, i.e. more than

double.

It is clear in the light of such price differencesthat the Community coal industry will con-tinue to have difficulty in standing on its ownfeet in future. Aid can still be paid until 1993but the Commission makes authorizationsubject to compliance with the followingaims:

(i) improvement of the competitiveness of thecoal industry, and thus greater security ofsupply;

(ii) creation of new production capacitiesprovided that they are economically viable;

(iii) solution of the social and regional pro-blems related to developments in the coal in-dustry.

Oil and petroleum productsDespite two energy crises, oil is still the mainprimary energy source in the Community,and will remain so in the foreseeable future.In 1988 oil accounted for approximately

45% of the Community s primary energy re-quirements. Total oil consumption, in-

cluding supplies to shipping and air trans-port, amounted to approximately 517milliontonnes. The Commission estimates that totalenergy consumption is likely to increase andwith it oil consumption, although to a lesserextent, as the share of oil in primary energyconsumption should fall slightly to between42 and 45%. The share of oil products in

energy consumption varies greatly accor-ding to sector of activity, ranging from 12% inelectricity generation to 97% in transport.Unlike the other sectors, where substituteenergy sources are already extensively used(nuclear power), in transport the consump-tion of oil products has grown steadily, andthere are many signs that this trend will con-tinue at least in the medium term.

By contrast to most other energy sectors, the

oil market can be regarded as one which isalready subject to extensive competition. Anumber of factors have helped to bring thisabout:

(i) integration of the Community crude oiland petroleum products industry in theglobal markets, where national undertakingsand independent distribution companiesoperate alongside international concerns;

(ii) the ample supply of petroleum productsfrom Community refineries, which cangenerally satisfy Community demand , andfrom refineries in non-Communitycountries;

(iii) the lack of a network structure, whichprevents distribution monopolies from aris-ing: with oil , unlike natural gas and elec-tricity, the consumer can choose between anumber of competing suppliers; lTI)

CONSUMER PRICES FOR PETROLEUM PRODUCTS(NET OF DUTIES AND TAXES)

Situation at 14 September 1987

Residual

Price net Premium Regular Auto- Heating fuel oil

of tax: petrol petrolmotive

gas oilhigh

gas oil sulphur

1000 I 1000 I 1000 I 1 000 I tonne

EEC

averagein ecu 1 187 164 188 156 107

(%)

Belgium 102 110 104

Denmark 115 132 114 115 108

FR of

Germany

Greece

Spain 104 110 102 104

France 114 101 114

Ireland 128 140 133 119 142

Italy 102 102

Luxembourg 114 124 101 113 101

Netherlands 106 100 104

Portugal 109 113 133

UnitedKingdom 106 114 105 116 112

Source: Commission oil prices bulletin No 403.The average is obtained by weighting the quantities consumed in each country in 1985.

lEI

(iv) the transparency of international priceswhich are formed in response to supply anddemand on the Rotterdam and Genoa spotmarkets.

However, that is only one side of the story.There are still a great many obstacles to beremoved before there can be talk of a true in-ternal market in oil and petroleum products.

TAXATION OF NATURAL GASVALUE-ADDED TAX (VAT) ON SALES OF

GAS (AS PERCENTAGE OF PRICE NET OFVAT)

1987

BelgiumDenmarkFR of GermanyGreeceSpainFranceItaly (domestic)Italy (non-domestic)NetherlandsLuxembourgUnited KingdomIrelandPortugal

18.

181

20-

The tax applied generally h; 18 % except for ex-

tractive and manufacturing industries (in-cluding printing and publishing) which benefitfrom reduced tax of 9%.

The 6% tax applies only to sales of gas to thehorticultural sector.

As we have already seen, these include dif-ferences in consumer prices before tax.These already constitute considerable distor-tions, which are aggravated when dif-

ferencesin taxation are taken into account.

In addition, the Commission considers thatthe following obstacles in the oil sectorshould be removed as a matter of priority:

(i) differences in the rules and technical stan-dards applying to motor fuels and otherpetroleum products;(ii) differences in the quality standards forpetroleum products, the principal problembeing more stringent environmental stan-dards in some Member States and thus thequestion of whether the principle of mutualrecognition can be applied in this field;

(Hi) obstacles arising from the existence of oilmonopolies;(iv) certain provisions concerning the

monopolies which are at present permittedsuch as exclusive rights of refining and of

marketing national products, and the pro-hibition of cross-frontier delivery;

(v) obstacles relating to internal transport inCommunity countries.

Natural gasThe widespread use of natural gas in theCommunity energy industry is a relatively re-cent phenomenon, but its progress has beenalmost meteoric. Natural gas really came in-to its own in Europe with the discovery in1959 of the giant Groningen field in theNetherlands, followed by other significantfinds in the North Sea. In the 15 years from

1971 to 1986, its share of primary energy con-sumption doubled from 9 to 18%. Large off-

shore fields were also discovered in Norwayand the UK. Norway and other traditionalsuppliers such as the Soviet Union and

Algeria are now the chief source of the Com-munity' s gas imports, which currently standat around 35% of consumption and will pro-bably reach 40% and more by the year 2000.Natural gas is likely to remain a major con-tributor to the Community's primary energybalance because of the security of supply itoffers and, increasingly important, in view ofits environmental advantages.

The following obstacles to completion of theinternal market in natural gas must beovercome.

(i) State of the European gas grid. The Com-mission feels that the Community shouldpromote integration above all by connectingthe UK, Ireland, Spain , Greece and Portugalinto the interconnected network.

(ii) Price transparency. This criterion is con-sidered to be crucial to the completion of theinternal market and concerns off-tariff sales

of natural gas to industrial customers. Prac-tices vary widely from one Member State toanother: sales to industrial consumers arebased on pre-set tariffs in France, Italy, the

Netherlands and Belgium , while individualcontracts for large consumers are concludedin the UK and Germany. However, even incountries with pre-set tariffs, individual largeconsumers or groups of undertakings fromthe same industry may obtain special rates.

The Commission has forwarded to the Coun-cil a proposal on greater transparency in off-tariff sales which safeguards the confiden-tiality of the individual contracts.

(iii) Differences in tax rates. Here, too, theproblems are primarily due to differences inVAT rates. As in the case of oil , the solutionwill have to be sought in an approximation ofthe rates.

Electricity

Electricity is a vital part of the energy balanceof the Community, as in every other part ofthe industrialized world. Most primaryenergy, including nuclear energy, solid fuelshydropower and other renewables, is used togenerate electricity which has made asignifi-cant contribution to reducing dependenceon oi I. In 1988, 34% of all primary energy ona Community average was used to generateelectricity, and up to 42% in France. Elec-tricity' s share of Community final energyconsumption is 18.1%.

In considering the internal market in elec-tricity, it should be borne in mind that elec"tricity is a very special form of energy. It is byfar the most common, and hence almost theclassic, form of secondary energy, and isgenerated from the primary sources listed inthe preceding paragraph. It has two maincharacteristics: it cannot be stored, and it isessential to the running of a modern

economy.These two featu res determ i ne the structu re ofthe electricity sector. As electricity cannot bestockpiled, supply and demand must bematched at all times. However, supply struc-tures must be efficient and flexible enough tocope with sudden surges in demand. It is forthis reason that security of supply is as impor-tant with regard to electricity as to otherenergy sources. As we have already seen,Member States have responded in differentways to this requirement. The coexistence ofdifferent generation, transport and distribu-tionstructures, which have also developeddifferently in the individual countries forhistorical reasons, considerably complicateefforts to complete the internal market in

electricity. The Commission considers jointaction in the following areas to be a matter ofpriority.

(i) Statutory standards and requirements.Technical requirements for the supply of

electricity to consumers must be harmon-ized. National differences in environmentalprotection standards and security re-quirements which are important cost factorsand thus have a direct effect on the com-petitive situation of individual undertakings,must be approximated. The same applies tothe differing requirements for the authoriza-tion of new power stations.

(ii) Monopolies and exclusive rights. Itshould be examined whether existing supplymonopolies can be allowed to continue. Thesame applies to exclusive rights to use thesupply and interconnected transportsystems, particularly where this affectscustomers ' ability to obtain supplies fromsources other than their allotted regionaldistributer. In addition, exclusive rights to

operate high-voltage grids must be scruti-nized, again in so far as they affectthe use oflow-cost production sources and the supplyof electricity to distributors under the mosteconomic conditions. Finally, electricity pro-ducers themselves are far from free in theirchoice of primary energy.

(Hi) Electricity prices and costs. A minimumdegree of harmonization of price and tariffstructures is essential. There is also a need fortransparency with regard to prices to largecustomers, production costs of electricitygeneration , prices at which electricity istransferred between national systems andprices of primary energy sources. Exactlywhat is required will have to be assessed interms of the role of cost and price transpar-ency in an open Community market.

(iv) Infrastructure. Ireland and Greece mustbe fully integrated into the interconnectedgrid system to put them on an equal footingwith the other Member States. Anotheraspect worth examining would be theseparation of electricity generation andoperation of the grids (e.g. by setting upoperating companies).

ENERGY AND THE ENVIRONMENT

It is broadly accepted that at least two impor-tant energy sources - oil and coal- pollutethe environment. Nuclear energy poses en-vironment problems of a quite different, butequally serious, nature concerning reactorsafety and the risks attaching to the transportand storage of radioactive waste.

The Community finally agreed on maximumlimits for pollutant emissions from power sta-tions and motor vehicles only after pro-tracted discussions. New upper limits forvehicle emissions have meanwhile beenadopted which are considerably more

stringent than the previous ceilings andmake necessary the use of the regulatedthree-way catalytic convertor. Lengthydiscussions also took placebefore maximumemission limits could be agreed for newlarge combustion installations.

The consultations for the directives on thelead content of petrol and the sulphur con-tent offuel oil were almost equally time-con-suming. A common feature of all thesemeasures is that they allow Member Statesleeway to adopt more stringent provisions.The legal basis forthisis the new Article 100aof the EEC Treaty as amended by the SingleEuropean Act, paragraph 4 of whichauthorizes Member States to apply morerigorous measures on environmental orhealth grounds. This raises two questionsrelevant to the free movement of goods.

(i) Wi II Member States with stricter standardsallow products meeting the less stringentcriteria of other Community countries intofree circulation in their territory from 1992?

(ii) What will be the effect of differing provi-sions on the respective imports? Itis alreadyemerging that imports of products meetingless rigorous quality criteria are on the in-crease in Community countries with laxerstandards.

It will beextremelydifficultto implementthevarious provisions introduced into the Treatyby the Single European Act in sectors such as

energy and environment policy, whose ob-jectives appear to be at odds with each other.However, this is just the task set by theamended Treaty: ' Environmental protectionrequirements shall be a component of theCommunity' s other policies . The Commun-ity is also required to take as a basis a highlevel .of protection, which translates tostringent statutory provisions (and com-pliance with them) in all Member States. Thecosts this will involve in individual MemberStates will differ owing to differences in theirindustrial structure. The Commission plansto relieve the burden in structurallyunderdeveloped countries by expanding theuse of natural gas or electricity through co-financing of infrastructures of Community in-terest, in order to replace some of the energysystems based on coal or oil. Neverthelessthere are other issues to be considered.

However much importance is attached tolegitimate environmental concerns, theCommunity cannot afford to neglect thesecurity of supply aspect and the re-

quirements of the internal energy market free movement of goods, persons ... . The

same is true of the Community' s competitivesituation in international markets. Thesedivergent goals will have to be ' carefully

weighed on the basis of cost-benefitanalyses. The latter will also have to take ac"count of the social and environmental costsof the individual energy options, eventhough calculating them is extremely dif-ficult.

Of course, it remains true that the most en-vi ronment-friendly energy is energy which isnot consumed and therefore does not needto be generated. This is also the simple

answer to the question of environmentalcost. A survey among US electricity supplyutilities has shown that investments of USD19000 million would be necessary in thenext 10 years in order to create additional"

capacity of 30000 MW, compared with onlyaround USD 6 000 million that would be

n~eded to save this additional quantity ofelectricity through the use of more efficientequipment (least-cost planning).

While all this may appear obvious, wil-lingness to conserve energy has dwindledrapidly in the Community in the last fewyears. The 1988 Commission finding stillholds true, that the medium-term objectiveof a minimum 20% energy efficiencyim-provement by 1995 will not be possible if nonew policy measures are introduced at Com-munity and/or national level. The impressiveimprovements of the past - more than 20%improvement between 1973 and 1982, aperiod in which there were two oil crises slowed down to a meagre 3% between 1982and 1988. As the Commission noted in itsautumn 1989 paper on Energy and the En-vironment (COM(89) 369) ' low energyprices acting as a disincentive to energy effi-ciency investments have not changed fun-damentally in recent years and energy is stillavailable in abundant quantities, althoughthis situation is not in line with long-termexpectations

The Commission has therefore taken the in-itiative. At the end of 1989 it announced theSAVE programme to improve efficiency ofenergy use and energy saving, which is toconcentrate on measures that will yield themaximum savings fastest. SAVE is designedto supplement the Thermie programme forthe promotion of technologies to increaseenergy efficiency. The Commission has alsoproposed a series of measures in other areasall of which , however, are geared to the sameobjective. They include:

(i) efficiency standards for energytechnologies and for appliances;

(ii) speed limits in the Community;

(iii) standards for vehicle fuel consumption;

(iv) measures to improve transport systems,such as support for public transport in cities;

(v) criteria for insulation standards taking in-to account the different climatic conditionsin the Community;

(vi) elimination of legal and economic bar-riers to facilitate and increase sales of heat

and power to energy distributors andend-users.The most direct means of getting the marketto pay for the risk of environmental damagewould be to raise energy prices sufficientlyto reflect the full social costs. Higher costswould make it worthwhile to use energymore rationally. However, this brings us backto the problem of how to quantify preciselythe social and environmental costs. TheCommission s approach is to examine thepracticality of fiscal measures as a means ofpromoting more rational use of energy. It isconsidering the following:

(i) a CO2 tax

(ii) differentiation of existing taxes to rewardenergy saving, and

(i ii) a system of 'anticydi cal' taxes to promoteenergy efficiency, i.e. higher taxes whenenergy prices are low and vice versa.This, briefly, is what the Commission con-siders to be the essential framework for anenvironmentally responsible energy policy.What is the situation on the supply side?What are the advantages and disadvantagesof the various energy sources?

FOSSIL FUELS

The main emissions from fossil fuel use aresulphur dioxide, nitrogen oxides and carbondioxide. Energy activities contribute about90% of man-made SO2 and NOx emissions.Stationary combustion installations (chieflypower stations) are the largest source of SO2emissions, whereas transport is the maincontributor to NOx emissions. Technologiesfor the control and reduction of these emis-sions are available. Post-combustion controlin particular necessitates high investmentcost and occasionally involves increasedenergy consumption. The InternationalEnergy Agency has recently estimated thatthe capital cost of flue-gas desulphurizationcan account for 15% of the total investmentcosts for a coal-fired power station. Thetransport sector remains an area of concernfor the Commission. Fuel consumption con-

tinues to grow, and efficiency improvementsas well as statutory and technical measuresto reduce vehicle emissions are cancelled

out by growing numbers of cars and biggercar engines.As yet there are no emission limit values forthe greenhouse gases produced in the com-bustion of fossil fuels, in particular carbondioxide, which is responsible for over 50% ofthe greenhouse effect. The following

diagrams show the likely development of theemissions to the year 2010 in the Com"

munity:

NUCLEAR ENERGY

From the point of view of pollutantemissionsto the air, nuclear energy is indisputably aclean technology. Nuclear power stations donot emit any of the greenhouse gases.

However, nuclear energy has social and en-vironmental costs of a different, no less

critical type. The nuclear fuel cycle itself andthe dismantling of nuclear power stations atthe end of their life create radioactive wasteswhich have to be dealt with.The figures are nevertheless impressive.Nuclear energy currently accounts for 34%of electricity production in the Community.If the 140 or so nuclearreactors in operationin the Community were closed down and theelectricity they generate had to be producedfrom coal , this would result in a further 550million tonnes of CO2 emissions in additionto the 785 million tonnes already producedfrom the burning of fossil fuels to generateelectricity. CO2 emissions would thereforeincrease by 70%. Replacing nuclear energyby natural gas would increase carbon diox-ide emissions by 'only ' 242 million tonnes.This relationship applies world-wide. If allthe electricity currently produced in around430 nuclear reactors throughout the worldwere to be generated from coal , the current

global 21 000 million tonnes of CO2 emis-sions from burning fossil fuels would in-crease by a further 16000 million tonnes, i.e.almost four-fifths.

Ii2J

On the question of final disposal of radioac-tive waste, the Commission is confident thatsafe solutions can be found. A report by inter-national experts commissioned by the Com-munity was presented in the summer of1988. It concluded that vitrified high-levelwaste could be safely disposed of in thegeological formations examined, providedthat appropriate sites were selected and thatrepositories were designed and built accord-ing to sound engineering practice.

CONCLUSIONS

A number of conclusions can be drawn fromthe analysis of the advantages and disadvan-tages of the various energy sourCes.

Emissions from fossil fuel use will decreasein the case of SO2 and NOx, but increase inthe case of CO2 unless political measures toprevent this are taken. As the Commissionnotes in its paper on energy and the environ-ment: 'This is an inevitable consequence ofgrowth , not only economic growth but alsobasic growth of population . The Commis-sion therefore stresses that it is essential tocontinue and intensify efforts to conserveenergy. With regard to the supply side of theequation , the Commission has put up fordiscussion a number of initiatives with apositive environmental impact.

How much longer can we afford to waste energy?

OUTLOOK

Efficient production and use of energy .is the

key to future primary energy consumption.Energy intensity in .the comingdecades willbe determined by the interaction of prices,technology, capital availability and en-vironmental constraints. The dominantthemes of the 1990s are the internal energymarket and the environment.

Security of supply, energy production andconsumption must be reconciled with asteady improvement in environment quality.The internal energy market will provide astimulus to economic activity and create amore favourable business climate. It will pro-vide the basis through economic growth forthe development of more efficienttechnologies, facilitate penetration of thesetechnologies and help to reduce energy con-sumption through more rational use ofenergy. Above all , this will lead to a declinein emissions.

The three objectives of (i) sustainedeconomic growth, (ii) a clean environmentand (iii)a secure energy supply at com-petitive prices are not mutually exclusive.However, harmonious progress towardsthese goals is dependent on an effective com-mon energy policy.

Energy consumers bear the brunt of the costs ofmarket compartmentalization which the Commis-sion estimates at half percent of gross domesticproduct.

FURTHER READING

EC PUBLICATIONS

Community energy and completion of theinternal market. Information report.Rapporteur: M. von der Decken.Economic and Social Commitee, Brussels,EC 1988.

Report on European co;J.1 policy.Rapporteur: Norman West.European Parliament, Committee on energy,research and technology. Luxembourg, EP1988, 39 pp. (PE 116.001/fin,) EP Documents1988/0147 A2.

The m;J.in findings of the Commission'sreview of Member States' energy policies.The 1995 Community energy objectives.Commission , Brussels, EC 1988, 2 Vols

137 pp,COM Documents 1988/174 finalNol. 1-

Terence Daintith , Leigh Hancher:Energy str;J.tegy in Europe: the leg;J.1framework.European University Institute, Berlin , deGruyter, 1986, IX , 190 pp. , Series A: Law. 04.

Report on the follow-up to the 1995

energy objectives.Rapporteur: Gordon Adam. EuropeanParliament, Committee on Energy, Research

and Technology, Luxembourg, EP 198721 pp. (pE 111.365/fin.). EP Documents1986/242.

Towards continuing policy for energyefficiency in the Europe;J.n Community.

, Commission , Brussels, EC 1987, 10 pp.

COM Documents 1987/223 final.

Report on research and energy policy

me;J.sures to counteract the risingconcentration of c;J.rbon dioxide in theatmosphere (the greenhouse effect).Rapporteur: James Fitzsimons. EuropeanParliament, Committee on Energy, Researchand Technology, Luxembourg, EP 1986EP Documents 1986/68 A2,

Energy efficiency in the EEe.Commission , Brussels, EC 1985,

Evaluation report on the energydemonstration progr;J.mme.

Commission , Brussels EC 1985, 48 pp.COM Documents 1985/29 final/2.

New Community energy objectives.Commission , Brussels, EC 198538 pp. + Annex,

COM Documents 1985/245 final.

Member States ' energy policies: m;J.in issuesfor the future.

Commission , Brussels, EC 1984, 10 pp.COM Documents 1984/693 final.

Draft Council Regulation (EEC) amendingRegulation (EEc) No 1056/72 on notifyingthe Commission of investment projects ofinterest to the Community in the petroleumnatural gas and electricity sectors.COM 89/335,

Proposal for a Council Directive on thetransit of natural gas through the majorsystems,COM (89) 334 final.

Towards completion of the internal marketfor natural gas.

Communication from the CommissionCOM (89) 334.

Amendment to the proposal for a CouncilDecision concerning the adoption of acommunity action programme for improvingthe efficiency of electricity use.COM (89) 22.

Proposal for a Council Regulation (EEC)

concerning the promotion of energytechnology in Europe.COM (89) 121 final;COM (89) 121 final/2 of 4. 1989.

European technologies for energymanagement - Thermie programme(Communication from the Commission).COM (89) 021/1.

Transparency of consumer energy prices(Communication from the Commission),COM (89) 123 final;COM (89) 123 final/2 of 30.5.1989.

Evaluation of technological programmes inthe field of energy.(Communication from the Commission tothe Council).COM (89) 164.

Amendment to the proposal for a CouncilRegulation (EEC) c::oncerning the promotionof energy technology in Europe - Thermie.COM (90) 89 final.Official Journal C 111 , 5.5.1990 p, 13.

Proposal for a Council Regulation (EEC)

amending Regulation (EEC) No 2592/79laying down rules for carrying out theregistration of crude oil imports in theCommunity provided for in Regulation (EEC)

No 1893/79.COM (90) 43 final.

Energy and the environment(Communication from the Commission tothe Council).COM (89) 369 final.

Nuclear industries in the Community, thenuclear power station design andconstruction industry and completion of theEuropean single market (update of theillustrative nuclear programme for theCommunity - PINC, adopted by theCommission in 1984 under Article 40 of theEuratom Treaty and published in 1985

together with the opinion of the ESC),

COM (89) 347 final.

Proposal for a Council Directive on thetransit of electricity through transmissiongrids.COM (89) 336 final - Syn 207.

Increased intra-Community electricityexchanges. A fundamental step towardscompleting the internal energy market(Communication from the Commission).COM (89) 336,

Draft Council Directive c::oncerning aCommunity procedure to improve thetransparency of gas and electricity pricescharged to industrial end-users.COM (89) 332.

OTHER PUBLICATIONS

Energy policies in an uncertain world.Ed. by Peter Pearson, Basingstoke,Macmillan 1989, XXXI , 113 pp.

j. G. van der Linde, R. Lefeber:D ' International Energy Agency captures the

development of European Communityenergy lawjournal of world trade.1988, 22/05, pp. 5-25.

The list of obstacles to be overcome

complete the single energy market. Aninitial European Commission analysis.Suppl. a: EEC energy policy and the single

market of 1993.

Brussels, Prometheus 1988, 89 pp,

Buckens M. M.

EEC energy policy and the single market of1993.Suppl.: the list of obstacles to be overcometo complete the single energy market.

Brussels, Prometheus 1988, Iv, 382 pp.

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European Communities - Commission

ENERGY IN THE EUROPEAN COMMUNITY(fourth edition)

Luxembourg: Office for Official Publications of the European Communities

1991 ~ 45 pp, - 16,2 x 22.9 cm

European Documentation series 7/1990

ISBN 92-826-1737-

Catalogue number: CB-56-89-538-EN-

This booklet for non-specialists discusses the energy situation of the Community and the outlook to theyear 2000.