EU: Energy Infrastructure (EUC Report)

Lord Deben Excerpts

Monday 29th July 2013 Grand Committee

[Lord Kerr of Kinlochard]

I entirely agree with the noble Lord. An exchange of ideas of the kind that the noble Lord, Lord Maclennan, was talking about, would be highly desirable and moderately helpful. However, the committee’s report talks about the application of the state aid rules. We are moving on from something like the European semester on economic policy to something like the entity talked about in the French-German paper at the end of May, which would have fiscal rules enforceable with sanction powers. That is not likely to happen in the short term, but I do not think that full application of the rigour of state aid rules is either necessary or desirable at the present stage of the development of EU energy policy.

Paragraph 98 deals with nuclear power. The Commission is trenchantly urged by the committee to address outstanding issues, particularly liability, waste and, again, state aid. Why? Is it plausible that the Commission could find a solution that would satisfy the nuclear French and the now anti-nuclear Germans? What are we supposed to do? I do not understand the purpose. Do we need a single common answer? Provided that safety rules and high safety standards are enforced across the whole of the Union so that safety is assured—remember that the closure of their Chernobyl-style plants was a precondition for accession countries joining the European Union—subsidiarity should apply. I do not see why there need be an EU regime for waste or a particular EU level of liability rules, let alone state aid rules. I note that the Government’s response passes over this recommendation in silence. I find that silence sensible and eloquent.

On the subject of border taxes, I know that what we are talking about are global border taxes, but that seems like the argument that a financial transaction tax would be fine if it was global, when we know that it is not going to be. Paragraph 133 talks about the idea that imports from countries with low energy costs and environmental policies that we deem inadequate should be subject to an import tax in order to reduce carbon leakage. The Commission opposed this, citing huge administrative complexity. I agree, and I would also cite higher costs for our businesses and consumers, the certainty of retaliation against our exports and the probability that the precedent would prove interesting to those on the French left, for example, who regularly call for restrictions on imports from countries where labour costs are low.

[Lord Deben]

Does the noble Lord not also agree that this particular recommendation is often used by those who do not want to improve what we have but who always seek something that in their mind would be perfection, which we do not have; and that this is a dangerous route to go down because it normally means that we do not do either?

[Lord Kerr of Kinlochard]

The noble Lord is a great expert on such things. I will only say that I agree that it is a mirage. If we were to do it not as part of a global agreement, we would damage ourselves very seriously. If we believe in free trade, open borders and low tariffs, we need to be very careful of well intentioned exceptions.

My fourth point is that I am uneasy—I am getting into deep theological territory—about the call in paragraph 126 of the report for binding EU-level 2030 targets on energy consumption. What growth assumptions would underpin that target? If a member state of the European Union managed, by the skill of its economic policies and the energy of its population, to achieve an astonishingly high growth rate and therefore higher energy use, what would we do about the binding target? Would it mean that the state would have to be fined? If so, we would need to amend the treaty to give ourselves the power to do that. Let us not go there. Again, the Government’s response seems to be wisely silent on this recommendation.

Lastly—and here I am probably taking a step too far and pushing my luck too hard—I am not sure that I buy even paragraph 103, which has a marvellous ex cathedra ring to it when it states:

“Member States must be under no illusion: failure to agree a 2030 framework will restrict investment”.

I am in favour of a 2030 emissions target, but I am not 100% convinced that whether there is one will have much effect on the quantum of investment. Such targets undoubtedly have an indirect effect on the energy mix in member states. The mechanism is peer pressure from colleagues in the Council.

In fact, energy mix decisions probably owe more to what national electorates want or are prepared to wear, but there is no doubt that targets have some effect on energy mix. However, I doubt whether they affect the quantum of investment because companies do not base investment decisions on such targets. They are moved to invest or not invest by the clarity, consistency and credibility over time of the policy regimes in force in member states, and by whether profits will be permitted. Companies like profits. If they are going to invest, they want some kind of assurance about profits.

What deters investment is uncertainty, not targetry. What deters investment in this country is in part the hypocrisy of doubling the social and environmental costs paid by the energy consumer through his utility bills—the carbon taxes, installation costs, smart-metering costs and other energy-efficiency costs that have doubled in the past 12 months—while at the same time supporting and encouraging populist criticism of the industry for putting up prices. Of course it will put up prices if it has to charge all the levies in its bills. I find it objectionable to make the consumer rather than the taxpayer foot the bill for environmental policy. That seems to me to be socially regressive. But if you do not allow profit, you will not get investment. For the investor, long-term targets are neither here nor there. That may sound cynical but it is true.

I will turn to where the noble Lord, Lord Giddens, took us and talk about gas. The report sees it as a transition fuel and the committee worries that investment in gas could be at the expense of investment in renewables. I prefer to go with Energy Commissioner Oettinger who argues:

“Without gas, renewables have no chance”.

I do not mean just the intermittency problem. The fact is that when the EU economy takes off again, if emissions are to stay down, we need to replace coal with gas. That would cut emissions by 50%, which is the biggest single thing that we could do.

Poland today is 90% dependent on coal burn for its electricity generation. No wonder Poland leads the way in shale gas, with more than 130 concessions already granted. Coal-burn generation is increasing across the EU and in this country. Seaborne Appalachian coal is back on the market here, driven out of the US power market by shale gas. The speed of the shale gas revolution is striking. I think that the committee may have slightly underestimated its scale and effects. I am not talking principally about indigenous UK reserves or even EU reserves, although that story is quite dramatic.

At paragraph 74, the report quotes the British Geological Survey estimate of UK reserves of 150 billion cubic metres. However, last month the British Geological Survey raised its estimate from 150 billion to 37 trillion cubic metres, which is more than 500 times our current annual gas consumption. I do not expect us to exploit the Bowland shale nearly as quickly or efficiently as the Americans are exploiting Eagle Ford and the Bakken, or as quickly as the Chinese are already starting to, and will, exploit theirs.

I am talking about—as was, I think, the noble Lord, Lord Giddens—the effect on global markets and the new ability to access tight gas, coal-bed methane and shale gas. In the US, gas prices for industrial users fell between 2005 and the end of last year by 66% in real terms. In Europe, there was a 35% increase. That is because the US has shale and we do not yet. US emissions went sharply down. It is a delightful irony that just as the US Administration were angrily rejecting the Kyoto targets, the USA’s emissions were peaking. The US has easily met the targets that it rejected—because it has got shale. Therefore, it is burning less coal.

The US will export. I predict that the US chemical industries’ efforts to prevent exports will not succeed. The LNG price at European ports will therefore fall. Already, the Nigerian, Angolan and Qatari LNG intended for the United States is coming here because our price is three times the US price, or heading for Japan, Korea and China, where it is six times the US price. Clearly, these disparities will not last. World prices will fall.

Already, the Nigerians and the Dutch have had to give up pipeline gas prices linked to the oil price. The Russians are being forced to follow.