Dirty fights for Europe’s Blue Banana. Geoeconomics in European affairs

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Economically, the European Union (EU) is a giant: it sits at the heart of a geographical space of 80 countries that depend on it for trade and investment, and even align themselves with its currency; moreover, the EU has the world’s largest single market; most multinational companies, therefore, depend on access to the region – which means complying with EU standards. With its regulatory powers, the EU should, therefore, profit widely from globalization. However, overlapping crisis such as the financial turmoil starting in 2008, the refugee crisis of 2015, and Britain’s recent decision to leave the Union, put Europe’s internal coherence into question. Apparently, the national grip on various policy areas remains a weighty obstacle for the pooling of the EU’s ample resources behind common policies.

Hence, the question remains whether the European Union is capable of reaching the internal cohesion necessary to organize Europe’s economic space effectively. To evaluate this question, the concept of geoeconomics in intra-European affairs is an interesting one, as it combines two strands of political theory: First, geoeconomics are based on the complex notion of strong reciprocal intersections between the economic and the political sphere; as a consequence, geoeconomics assumes that (some, not all) governments are guided by weighty companies, while (some) others guide large companies for their own geoeconomic purposes. Second, geoeconomics is rooted in realist IR theory, thus encompassing organized actions by governments to change their external environment in general, or the policies and actions of other states in particular so as to achieve the objectives that have been set by policy makers.

Essentially, geoeconomics, therefore, means states leveraging power via economic means to get other states to do what they would not do otherwise.

This idea of nation-states deploying economic weapons in international power struggles, e.g. productivity, trade balances and foreign investment – is not new. However, throughout the twentieth century the balance of power among nations was typically viewed through the lens of geopolitics, and only recently geoeconomics has (re-) emerged. In (Western-) Europe after 1945 on the other hand, geopolitical thought has been largely replaced by integration theories which see Europe as having developed beyond the anarchy of the international system.

Yet given that the European Union does not represent a fully unified political entity, it is unlikely that geoeconomics, this form of power politics through economic means, is completely contained by the (nevertheless dense) system of supranational institutions on the EU-level. Depending on the specific policy area or section of the Internal Market that are concerned, at least parts of the toolbox of geoeconomic statecraft can therefore be assumed of being available to national policy makers in Europe. And where such instruments are available, it appears rather likely that they are also in use. Geoeconomically motivated statecraft should hence (still) play a (more or less strong) role in the relations between European countries.

Moreover, Member States’ reluctance to transfer powers to supranational bodies is growing, and the EU is increasingly characterized by policy co-ordination between MS (as opposed to deeper Europeanization). In other words, politics on the European level have become somewhat deracinated from the supranationalist dynamics and the legislative framework that characterized supranational governance beyond the nation-state.

Of course entities such as the EU will not being replaced by nation states exerting influence through economic instruments, and neither can Europeanization of politics and business (e.g. lobbying) be ignored. But EU-level policy making can be assumed to happen increasingly under the absence of the Community method, that is based on decision-making logic/procedures characterized by voluntary and informal policy coordination between national governments and national representatives with an increasingly strong national rational.

Open power politics may still be unthinkable in this kind of European framework, but the importance of regional integration as a strategy to gain power by increasing market size and economic opportunities is losing its longstanding attractiveness, while government-company relations are intact on the national level. The decreasing inclination of national governments to govern Europe collectively through the various forms of European governance, should therefore be paralleled with a growing importance of geoeconomics for the behavior of individual EU Members vis-à-vis their neighbors.

Consensus, contradiction, and conciliation of interests: The geo-economics of the Energy Union

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Authors:

Thomas Sattich

Daniel Scholten, Assistant Professor, Delft University of Technology

Inga Ydersbond, Ph.D fellow/student, University of Oslo

Tor Håkon Inderberg, Senior Research Fellow, Fridtjof Nansen Institute

Introduction

European Union energy policy calls for nothing less than a profound transformation of the EU’s energy system: by 2050 decarbonised electricity generation with 80-95 per cent fewer greenhouse gas emissions, increased use of renewables, more energy efficiency, a functioning energy market and increased security of supply are to be achieved. Different EU policies (e.g., EU climate and energy package for 2020) are intended to create the political and regulatory framework for this transformation. The sectorial dynamics resulting from these EU policies already affect the systems of electricity generation, transportation and storage in Europe, and the more effective the implementation of new measures the more the structure of Europe’s power system will change in the years to come. Recent initiatives such as the 2030 climate/energy package and the Energy Union are supposed to keep this dynamic up.

Setting new EU targets, however, is not necessarily the same as meeting them. The impact of EU energy policy is likely to have considerable geo-economic implications for individual member states: with increasing market integration come new competitors; coal and gas power plants face new renewable challengers domestically and abroad; and diversification towards new suppliers will result in new trade routes, entry points and infrastructure. Where these implications are at odds with powerful national interests, any member state may point to Article 194, 2 of the Lisbon Treaty and argue that the EU’s energy policy agenda interferes with its given right to determine the conditions for exploiting its energy resources, the choice between different energy sources and the general structure of its energy supply.

The implementation of new policy initiatives therefore involves intense negotiations to conciliate contradicting interests, something that traditionally has been far from easy to achieve. In areas where this process runs into difficulties, the transfer of sovereignty to the European level is usually to be found amongst the suggested solutions. Pooling sovereignty on a new level, however, does not automatically result in a consensus, i.e., conciliate contradicting interests. Rather than focussing on the right level of decision making, European policy makers need to face the (inconvenient truth of) geo-economical frictions within the Union that make it difficult to come to an arrangement. The reminder of this text explains these latter, more structural and sector-related challenges for European energy policy in more detail, and develops some concrete steps towards a political and regulatory framework necessary to overcome them.

Background

Despite some areas with well-integrated power systems (e.g., Scandinavia), European electricity supply still has a largely national (e.g., French), or sub-national (e.g., Bavarian) basis. This, however, does not imply that there is no integration: interconnections exist between most neighbouring countries and regions, and in some of these areas the power transmission infrastructure has significant exchange capacity (e.g., Germany and the Netherlands). In sum, the power system in Europe can be described as a heterogenic patchwork of semi-integrated and non-integrated regional, national and sub-national power systems. Power generation, transmission, distribution and consumption in Europe can thus only partly be described as European.

On various dimensions, EU energy policy aims at breaking the still prevalent national rationale in the energy sector, and at convincing actors that the exchange and trade of electricity within national boundaries is no longer an adequate option. Following these EU policies the system of power generation, transmission and consumption in Europe would take steps towards becoming a European one. The basic assumption behind these policies is that the structure of today’s European power system is sub-optimal and further integration development of the European grid infrastructure is expected to create economies of scale and utilise more of the technical capacity seen from a European level. EU energy policy is therefore expected to result in a more efficient power system with less overcapacity but greater security of supply and lower electricity prices. Moreover, it is widely believed that a deeper integrated system is crucial for the integration of more renewables.

Historically, the involvement of the European Community on the field of energy developed only recently. Due to long investment cycles and permitting processes, and interest structures in the power sectors, the European Union could only partly achieve stronger integration. The Energy Union and the 2030 climate and energy package therefore have to be understood as the latest steps of a continuous effort to accomplish deeper integration of power systems in Europe. The successful implementation of these latest initiatives may, however, run into difficulties, as they – just as earlier initiatives – imply a change in location of generation capacity beyond national borders, thereby altering the topography of the existing power system:

  • Market integration, which is the gradual creation of a Europe-wide market for electricity by means of grid integration and common market rules, implies that new competitors to domestic producers emerge, and that electricity companies which are not efficient enough to withstand competition in a European market will get into trouble, while other utilities (including foreign) will be able to strengthen their market position. Moreover, a European power market implies that the interconnection capacity (shortage) along borders will cease to protect domestic markets from foreign competition; a successful EU market integration policy thus increases the likeliness of generation capacity to migrate beyond national borders.
  • Promotion of renewables implies three important changes to the European power system: first, some countries are better qualified to become competitive producers of renewable energy than others. Countries may also offer better incentives for expanding capacity. Second, most new renewable generation capacity will be of an intermittent nature. Increasing the use of this form of power generation in one part of Europe therefore also implies potential growing balancing costs elsewhere. Third, renewable electricity implies distributed generation, and hence allows for a business model that brings together a larger number of smaller generation units dispersed over larger territories. National authorities may therefore decide to keep power systems decentralised in order to protect particular industries from the competitive pressures of European markets.
  • Supply diversification implies two distinct impacts on energy systems in Europe: First, diversification will lead to altered entry points to the European energy system, for example new LNG terminal capacity (e.g., in Central and Eastern Europe) some member states might perceive a risk of losing power generation to regions closer to new entry points, and are likely to oppose further steps in such a direction. Second, stimulating the construction of inter-member state transmission infrastructure is a main part of the EU’s supply diversification strategy, as outlined in the Energy Union communication. Yet increased interconnection capacity would not only increase the ability to secure and stabilise power supplies, but (as in the case of market integration) also contribute to shifts in power generation capacity.

State of play: a European catch-22

Each of the above-mentioned policies has distinct implications for the power sector of individual member states and thus the geo-economic balance in Europe. To protect their (national) economic assets, each member state will assess the impact of these elements of European energy policy on its national power sector; organised interests within the national energy sector on the other hand will analyse the impact of the three policies on their businesses and start to influence the bargaining position developed by their national governments. Implicitly or explicitly, both sides of the still-existing tight state-company relationships will define a position to be taken in EU-level negotiations towards other European governments and the diverse set of actors on the European level. The resulting frictions at the EU-level would be negligible if the balance between winners and losers was approximately equal across member states, and if the regulatory framework established a level playing field and net gains for all market players; yet, not every country or energy company is likely to benefit equally from the changes involved with new EU policies on the field of energy.

If implemented and effective, EU energy policy may increase dependency on the goodwill and the capability of (power and grid companies in) neighbouring states to uphold electricity supply in another. Europe is hence confronted with a ‘catch-22’: on the one hand are the advantages of European energy policy, but on the other the potentially painful adaptations of power generation, distribution and consumption imply risks for the national (power) industry. Existing or future instruments of EU energy policy will have to overcome reluctance to integrate power systems; where these instruments will be needed, and what form they will have to take, largely depends on  variations in member states’ benefits and costs involved with adapting the national energy sector to the ends of EU energy policy.

Taking stock of the various characteristics of national energy systems in Europe is imperative before new EU policies can be negotiated effectively. Moreover, strongly differing political positions on energy-related matters (e.g., renewables, shale gas and nuclear power) between member states need to be identified and systematically analysed. Both the analysis of national energy systems and policies will allow the identification of latent conflicts of interests between member states and options to settle them by means of existing or new instruments of European Union energy policy. Such an analysis of the state of play will ideally help in finding an EU-level energy policy framework capable of overcoming the geo-economic antagonisms that otherwise might constitute a major impediment for the negotiation and/or implementation of new measures and more integration, responding to the questions above. Currently, therefore, three questions need to be addressed:

1.)   Which countries, regions and companies are likely to benefit or lose from the energy transition that follows the EU agenda in the field of energy policy, and in what ways?

2.)   How will these geo-economic consequences affect patterns of consensus, cooperation and conflict between member states at the European level of energy policy?

3.)   Does the European Union have the necessary instruments at its disposal to overcome conflicts of interest, and if not, what instruments could be developed to achieve this?

Prospects

If policy makers at the European level are to successfully negotiate and implement the Energy Union and the 2030 climate and energy package, they need to find a way to balance the geo-economic frictions between member states caused by EU energy policy. A regulatory framework is needed that is capable of easing geo-economic concerns through transparent governance structures such as co-ownership of grid assets or co-decision making of grid operations, whether between two or more countries or at the EU level. Moreover, at the business level clear contractual agreements between parties regarding energy and cash flows are another means to avoid potential conflict and handle eventualities. Hence, addressing the root causes of conflicting interests is necessary in order to provide institutional means to handle outcomes of EU energy policy that otherwise could be labelled unfair.

The latest developments in the field of EU energy policy do, however, still resemble an eclectic process: the goals are clear, but as of today there is no clearly formulated and fundamental analysis of those geo-economic factors and interests which partly foster, and partly contradict, the implementation of new measures to reach these goals. Issues like the unfinished unbundling process (i.e., of long-established and poorly transparent structures of command and control) or the insecurities surrounding price formation in the renewables sector persist; as a result, the EU’s efforts to stimulate the construction of new (renewable) generation capacity and new interconnectors between member states simultaneously fall short of the possible. Hence, before discussing new EU policies, the will to address those factors that contradict the goals of EU energy policy is imperative. Only then can a fitting framework of measures, instruments and regulations be found that conciliates interests that do not consent.

Thus, in order to reach to reach the goals of EU 2030 and the Energy Union, the will to openly identify and address economic antagonisms caused by EU energy policy is needed. Addressing the three above-mentioned questions is crucial in this regard; however, they have not yet been discussed in full depth by European policy makers and EU-level analysts. In order to come to a binding political agreement, these questions should hence serve as the basis of a systematic and transparent exploration of potential benefits and losses for individual member states resulting from today’s EU energy policy. Only on the basis of such a discussion can the necessary instruments to conciliate various multi-dimensional and more-or-less contradictory private and national interests be identified. Therefore, a high-level group should be initiated that brings together representatives of governments and the energy sector to openly discuss these issues.

Power Struggles: The Intra-Community Implications of EU Energy Policy

Authors: Daniel Scholten, Thomas Sattich, Inga Ydersbond

EU policies to integrate energy markets, promote renewable energy, and diversify supply are aiming at a competitive and sustainable European power sector. The resulting dynamics should largely affect the systems of electricity generation, transportation and storage in Europe: With increasing market integration come new new competitors; coal and gas power plants face new renewable challengers domestically and abroad; and diversification towards new suppliers will bring new trade routes and infrastructure. All in all, EU policies to integrate power markets, promote renewables, and diversify supply will thus profoundly reshuffle national energy assets. The impact of the three EU policies is thus likely to have considerable ‘geopolitical’ implications for individual member states and affect their capability to negotiate, agree on, and/or implement further measures. We conduct a thought experiment which explores potential benefits and losses for individual member states implicit to Europe’s ‘energy transition’, and the political concerns which may be expected to arise as a consequence.

Regarding their impact on the future shape of the European power system, and their relevance for relations between EU member states, the following three EU energy policies stand out: Market integration, the promotion of renewable energy, and supply diversification. Each of these policies has individual implications for the ‘geopolitical’ situation in Europe, and will cause frictions between member states.

Market integration

In an attempt to integrate power markets, the EU developed different policies and legislations to finalise the Internal Electricity Market (by the end of 2014). Capital-intensive and redundant overcapacities would be reduced to a minimum in such a European market, thereby saving large financial means. From a national perspective market integration implies, however, that new competitors to domestic producers emerge, and that electricity companies which are not efficient enough to compete on a European market will get into trouble, while other utilities (including foreign) will be able to strengthen their market position. Moreover, a European power market implies that the interconnection capacity (shortage) along borders will cease to protect domestic markets from foreign competition; a successful EU market integration policy thus increases the likeliness for generation capacity to migrate beyond national borders.

Renewable transition

The promotion and integration of renewables implies three important changes to the European power system:

First, every country or region has access to at least some form and amount of renewable sources of energy; yet some countries are better qualified to become competitive producers than others, because renewable energy sources are denser at certain locations (e.g. the North Sea), and the technological and economical capabilities for their exploitation differ. Production will therefore shift to those countries that have access to better and more sources of renewable energy, offer better incentives for expanding capacity, and can exploit them more cost-efficiently. As a result, countries which decide to exploit their own renewable sources to cover their consumption will (potentially) become (more) self-reliant, with the need for cross-border energy trade (potentially) becoming smaller. Other countries might prefer to import energy, i.e. to buy from EU energy and power markets; as a consequence their strategic focus will shift from the access on overseas fossil fuel resources towards the ownership, management, and protection of grids (and other supply routes for renewables) in order to secure imports.

Second, most renewable generation is of an intermittent nature. Large scale adaptation of the power transmission infrastructure are necessary to harness renewable energy sources such as wind and solar. Increasing the use of this form of power generation in one part of Europe therefore implies also growing balancing costs elsewhere. Moreover, countries that feature cheap balancing services (e.g. dispatchable hydropower or other storage means), standing reserves, interconnector capacity, or renewables that can deliver in times of peak demand, will gain influence over neighbouring countries. Without a regulatory framework that clarifies costs and benefits of renewable electricity generation and transport, conflicts will arise.

Third, renewable electricity implies distributed generation in so called combined power stations. Contrary to today’s big, centralized fossil fuel or nuclear power plants, this form of power generation hence allows for a business model that brings together a larger number of smaller generation units dispersed over larger territories. Where the option of distributed generation is chosen, energy markets become rather locally oriented, and are likely to involve a mix of private and communal companies. Regions/countries with a focus on this business model would hence be less present on the integrated EU market. Decentralised power systems could therefore be an interesting way to protect particular industries from the competitive pressures of European markets.

Supply diversification

Security of energy supply has been on the policy agenda since the oil crises in the 1970s, and especially since the Ukrainian crises in 2005/2006 and 2009. Two dimensions of these EU policies can be identified:

First, external relations between supplier and transit countries outside the EU. Diversification away from Russian and Middle Eastern energy sources towards other regions will lead to altered entry points to the European energy system, for example new LNG capacity; gas grid capacity in those regions will hence have to be increased. Given that the integration of European energy markets proceeds, power generation and transmission capacity might follow these changes. Member states in risk of losing power generation to regions closer to new entry points are thus likely to oppose further steps in such a direction. Another example would be solar PV imports from North Africa which would necessitate new HVDC and interconnector capacity at the Southern European border; member states which are located too far away to benefit from potentially lower electricity tariffs in the Southern regions might feel inclined to oppose the use of European funds to stimulate the construction of the necessary power transmission infrastructure.

Second, stimulating the construction of inter-member state transmission infrastructure is main part of EU’s policy on supply diversification. Common grid planning and Projects of Common Interest for electricity and gas grids are two important instruments in this regard. Yet more interconnection capacity would not only increase the ability to secure and stabilise power supply, but (as in the case of market integration) also contribute to shifts in power generation capacity. Supply diversification through more cross-border interconnection capacity hence implies increased dependency on the will and the capability of (power companies in) neighbouring countries to uphold and stabilize electricity supply. Moreover, the stimulation of interconnectors is currently pursued without a clear legal framework for such an integrated market. Potentially the EU’s internal approach to supply diversification therefore opens the door to continuous fears about the reliability of neighbouring countries. Clear agreements and regulations are therefore necessary to avoid mistrust among member states.

What does it all mean?

While EU policies are aiming at the modernisation of Europe’s power system, member states have enough reasons to worry as to their relative position in the emerging European energy system: Bigger markets, growing transmission capacities, new (renewable) energy carriers, and new supply routes represent greatly altered framework conditions for the future evolution of the power system. And not every country is likely to benefit equally from changes involved with a European power system such as the relocation of power generation capacity and the accompanying infrastructure effects. The internal geopolitical frictions resulting from these EU policies would probably be negligible if the balance between winners and losers were approximately equal in all EU member states, and if the regulatory framework established a level playing field for all market players which promises an overall net gain. But what if a substantial part of Europe’s power generation capacity would – for example – move towards North-Western Europe?

In short, the EU policies discussed above will cause increased economic activity in some countries, whereas others will lose parts of their power industry, and hence produce winners and losers. It seems therefore likely that member states will consider increased participation in the EU power market as a matter of strategic choice: Even though large parts of the electricity generated in Europe might one day be transmitted through a truly European grid system, governments will attempt to keep self-provision for areas of vital state interests and economic reasons, while local communities may desire to become self-sufficient in their power supply. The successful implementation of EU policy to integrate markets, increase renewables, and diversify supply therefore requires at least three different key elements:

– High levels of mutual trust between member states must be reached in order to increase the political acceptance of shifts in power generation and transmission capacities implicit to the EU policies under discussion
– Economic instruments and a regulatory framework are necessary to ease the geopolitical concerns of EU member states
– Co-ownership and/or shared control over grid assets and their operation, either between groups of countries or on the EU level.

See also:

Power Struggles: The Intra-Community Implications of EU Energy Policy

Upcoming event

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Energy scarcity and the struggle for secure energy supply are key political issue both in China and the European Union. Both therefore develop policies to encourage the use of renewables, hoping that this form of energy will reduce import dependency on fossil fuels and the environmental dangers involved with their use. The year 2020 is an important landmark in this regard: While policy makers in China recently opened the process towards the next 5 years plan (2015-2020), the European Union set itself the goal to increase renewables to 20 per cent until that point.

In view of the differences between the socio-economic systems of China and the EU, the approach chosen for this ‘energy transition’ should differ. An open question is, however, how far the two policies are actually apart and what both parties could learn from each other. It is thus time to compare and discuss the similarities and differences between the approach China and the EU chose for the transformation of their energy sector towards the stronger use of renewables. Analysing the topic through the following questions, we want to contribute to this discussion:

What support regimes for renewables have been adopted, and why?

What is the role of public authorities on different levels of the political system?

What role do leading companies play, and what is their relationship with the government?

Are there preferences for certain forms of renewables, and why?

Do the targets and outcomes differ, and why do they differ?

What are the domestic and global impacts of both policies?

When: Probably 1/12 or 08/12 2014, 12-2pm (tbc)

Where: Institute for European Studies, Pleinlaan 5, 1050 Brussels

Speakers: Duncan Freeman (Brussels Institute of Contemporary China Studies), Dörthe Fouquet (European Renewable Energy Foundation), Commission official (tbc), Chinese Mission to the EU official (tbc)

Organisation and Chair: Thomas Sattich