EuroElections 2009 : PES

In the second installment of this series, that pretends to round up the Energy policies put forward by the main political blocs running for the European Parliament, the analysis is on the Party of European Socialists - PES. The eternal runner up behind EPP-ED, never got more than one third of the seats at the euro-chamber. Nonetheless, through the alternating democratic process at state level, it has been having also a relevant role in shaping the European Union to what it is today.

PES is a federation of state parties that are either part of, or closely related to, the Socialist International, being the political group at the European Parliament that is formally closer to the way state parties function. Still, it gathers politicians with very different approaches to Society, diluting its identity.

Unlike in the US, where the word Socialism is a synonym for Planed Economics, in Europe it still retains some of its philosophical meaning of solidarity and equality. Especially during the rebuilding process ensuing the Second World War, Socialism (or Social-Democracy in some states) in Europe became associated with John Maynard Keynes' recipes for economic growth, in what can be considered a politicisation process of popular Economics. The oil crisis (that hit Europe most during the 1980-1985 period) brought this Social-Economic view into question, with refactored interpretations of Monetarism becoming popular again, especially among Liberal parties and but extending to large swathes of the population. That, coupled with the fast expansion of the European Union (that brought rapid economic growth to many states), ended up moving some state-level socialist parties much closer to Liberalism.

In recent years some socialist parties were able to implement policies that directly social equity, like indirect tax increases, in states as the United Kingdom or Portugal. On the other hand, in places like Scandinavia or France, socialists remain closer to post-WWII philosophies. Thus, the concept of an European socialist is today something rather hard to define and largely dependent on geography. For foreigner readers to understand, a large portion of PES would be registered with the Democrat party in the US, while the remainder would not find home at any other party there, even with the Socialist Party of America, largely a Scientific Socialist bloc.

To the election. As one of the parties with the largest electoral base, PES can afford a professional website full with media content. After a few years with pink, the party's colour is again red, prominent in the website's design. Right at the top is a link to a secondary website dedicated to the 2009 Campaign. This website is built around something called the Manifesto, the result of a public consultation that went from October of 2007 to July of 2008, in wich more than 3000 individuals reportedly participated. This consultation produced a draft that was discussed and approved by the PES Council in December of 2008.

Both the Manifesto and the election website are markedly directed at younger voters, with audio, video and printable contents. The language is most of the time simple and direct; the word "your" is present at large. There's also a clear attempt to promote the party's graphical image as an identifying symbol of its members. That might not mean it won't work for maturer audiences likewise.

The printable version of the Manifesto is that traditional electoral booklet that could be expected. The introducing remarks are less of a laid down ideological foundation and more of an action programme, still, it is enough to understand where the party stands in the political landscape; a few highlights are reproduced below.

The Party of European Socialists is committed to creating a fairer, safer society, tackling the challenges we all face by putting people first.

[...]

For us, the European Union is the vital link in the era of globalisation. It puts our countries in a stronger position to solve global problems that have an impact locally. We need more active cooperation in Europe to tackle our common challenges and improve people’s lives. The entry into force of the Lisbon Treaty, subject to ratification by all EU Member States, would make Europe better able to tackle common challenges democratically, transparently and effectively.

It is now 30 years since the first direct elections to the European Parliament, which has a key role to play in realising our vision of a European Union which puts people first. The Party of European Socialists is your voice, promoting your interests and championing your causes. We are committed to:


01. Relaunching the economy and preventing new financial crises
02. New Social Europe – giving people a fairer deal
03. Transforming Europe into the leading global force against climate change
04. Championing gender equality in Europe
05. Developing an effective European migration policy
06. Enhancing Europe’s role as a partner for peace, security and development

[...]

We need a strong progressive majority in Europe to introduce the progressive reforms that are essential to secure the future well-being of European citizens and society as a whole.

[...]

The global financial crisis has exposed the weaknesses of the unregulated market. These are very difficult times in the global economy. The past year has seen two unprecedented shocks - the worst credit crunch since the 1930s and a record surge in energy and food prices. We need active cooperation in Europe and globally to coordinate action and tackle the problems in national and international financial systems; and we need to take proactive action to transform the economy – through investments in key priorities - to secure a prosperous and sustainable future for everyone in Europe.

Conservatives have pursued a policy of blind faith in the market – serving the interests of the few rather than the general public – and we are now seeing the damage that badly regulated markets can do. But we know we can do something about this. We can relaunch Europe’s economy and create a fairer and safer society for all in a New Social Europe.

Our comprehensive progressive reform agenda to transform European cooperation - based on our values of equality, democracy, human dignity, solidarity, freedom and justice – can deliver the change which the people of Europe so desperately need.

There is a great deal of comparison made with the EPP-ED's policies, possibly a consequence of PES permanent second place at Parliament.

Moving through the Manifesto it becomes clear that Energy Policy is relegated to a second plane by the PES, with only one of its pages 60 pages dedicated to it (even considering that half of those pages contain pictures or graphical art). Three lonely paragraphs, buried in a section about Climate, attempt at a sort of extended policy view:

We propose to develop a European Common Energy Policy based on sustainability, energy security and independence, diversity of energy sources and solidarity between Member States in the event of energy crises. The EU should, for example, increase its renewable energy supply by taking the lead in building a High Voltage Electricity Transmission Network for the transportation of offshore wind energy from Northwest Europe and solar energy from southern Europe and North Africa.

While these are initiatives to welcome, there's no time framing nor any sense of urgency. The "for example" is quite unfortunate, it hints at the party not having a properly developed policy.

We will support a modern Common Agricultural Policy that promotes comprehensive rural development and values the fundamental role of farmers, recognising the role of agriculture in protecting the environment, ensuring food quality and security of supply, preserving the landscape, and protecting animal welfare and plant health. Biofuels can help to lower emissions in transport, but this should not come at the expense of European and global food production, environmental protection or biodiversity. The EU’s Biofuels Directive should be revised to ensure respect of this principle.

It is good to read about Agriculture in a text that prototypes an Energy Policy. It is good to acknowledge food production as a major variable in the Energy system. It is bad to ignore what EROEI is, and what it vaticinates for agro-fuels in temperate climates.

It is for each Member State to decide on whether to use nuclear power. However, given the importance of nuclear safety for all European countries, the monitoring of existing and new nuclear power plants should be coordinated at the European level.

PES adopts essentially the same posture as the EPP-ED on Nuclear, leaving development decisions for the state level. Is this the Common Energy Policy referenced in the opening paragraph? At PES this hand-washing is not only a symptom of lack of commitment, but possibly of serious internal differences on the matter. Apart from that, the proposal for Union level safety motorization is welcome.

There's a lot left to be desired for from such meagre lines. Digging deeper into the election website it is possible to find something a bit more elaborate. At the Documents page, under a section entitled "Save our planet", is buried a link to a resolution with the title "Secure energy supply and smart, green growth: a new social democratic energy policy [pdf!]". This is an 11 page document dedicated entirely to Energy, produced at the 7th PES Congress, held in December of ... 2006.

What can be called a vision and a mission are laid down at the opening:

High energy prices and the evident consequences of our changing climate underline the urgency of a new energy strategy for Europe and our planet. European socialists and social democrats agree that this new strategy has to meet five different, but interdependent challenges:

• it should tackle climate change and energy policy in a integrated way



• it has to address the security of energy supply concerns



• the new strategy should be based on the principle of sustainability



• it should focus on the economic opportunities this global challenge offers
  by developing new ecologically sound industrial policies



• the aim of the new strategy should be a common European market for energy that is based on the principle of solidarity and cooperation within the European Union

This document is worth to be read in its entirety, but for the sake of brevity, here is simply a digest. The document continues to underpin the party's energy vision, distancing itself from deregulation goals and proposing a social dimension to Energy Policy. After that, the proposed policy is materialized in six strategic lines; for each strategy the tactics devised are summarized below.

Tackling Climate Change

Referenced as "the most pressing problem", is tackled almost by a single line of action: expanding the Emissions Trading Scheme in both space and time. PES proposes the EU to lead a negotiation process to reform Kyoto in order to effectively guarantee a world-wide adherence to similar policies. As for Energy, this scheme is proposed to funnel resources into renewable energies and efficiency R&D. At the end is the proposal to accelerate the development of Carbon Capture and Sequestration (CCS) technologies so they can become mandatory after 2020 for every new fossil fuel power plant built.

Securing Europe’s energy supply

This strategy can be divided into two main tactics: a) procure an EU agreement on a timetable for fossil fuel reduction in coming decades and b) procure partnerships with major neighbouring energy suppliers (e.g. Russia, Norway, Algeria, Lybia) that are mutually beneficial, guaranteeing long term supply. At a wider international level, it is also proposed for the EU to use its negotiating powers to promote its climate agenda in energy exporting countries, as also social stability.

Investing in Energy efficiency

Not far from the goals proposed by the Commission a few months earlier, this is the section where the party goes at greater length detailing its proposed strategy. The tactical outline is the following:

• Energy efficient products - introduce new legislation to support the most efficient products, promote new technologies to support household - electricity supplier communications, among others;



• Buildings, planning and construction - reduce energy consumption in buildings up to 25% by 2020; instruments like the European Regional Development Fund can be used to provide for household refurbishing to low-income families; reform urban planning down to local level in order to reduce unnecessary transport and promote infrastructures such as district heating;



• Transport - strengthen alternative transport modes such as rail, inland waterways and maritime transport with better inter-modal competition rules; increase domestic bio-fuel production;



• Improving energy production - move from average electricity generation efficiency of 40% to a new generation of infrastructure than can reach 60%; improve electricity transmission and distribution;



• Consumers’ awareness - create an "energy culture" together with local and regional governance in order influence citizen's individual choices.

Promoting renewable energies

PES proposes the EU to go one step further from the goals already agreed upon in the 2006 Spring Council. It aims for more ambitious and long-term targets: 25% of renewables in primary energy by 2020, 50% by 2040. In the short term this is to be achieved almost exclusively by bio-fuels, with policies such as increasing the ethanol blended in petrol to 10%.

Diversifying Europe’s energy mix

This section is somewhat diffuse and repeats many of the points made earlier. New issues brought up are the decentralization of power generation and the need for a common Nuclear safety policy. The later is referenced as an important element of the EU's energy mix.

Value added: a European dimension of energy policy

A more political strategic line, calls for more cooperation at the EU level. Uniformise the internal market under the same political framework, with overcoming the market's discrimination for renewable energies as a goal.

Definitly, this is more than what the regular citizen could wish for, but it is a serious attempt at bringing together an Energy Policy. It quite resembles the Commission's proposals, but going further in many areas, both for the good as for the bad. There are interesting references to alternative modes of Transport and Urban Planning; Energy Efficiency is especially tackled in a much more integrated perspective than that of the Commission. Also relevant is the acknowledgement of the importance of the EU's neighbours and of the present role Nuclear has in the energy mix. On the negative side are the blatant promotion of agro-fuels and of-course, the suicidal CCS targets. It is pretty unbelievable to read in the same document proposals for an efficiency increase in power generation and proposals to reduce that same efficiency. All these incongruences bring into question many of the numbers that quantify the tactical goals laid down.

But what is more consternating is the absence of urgency in dealing with fossil fuel depletion, the sense that reducing these energies' consumption is dependent solely on the citizens' and politicians' will. Such is reflected in the way the party relegates Energy into the background, hiding its thorough approach from the common citizen and even failing to properly synthesize it. Can one day PES politicians reach the same level of energy lucidity Andris Piebalgs seems to have?

Andris Piebalgs : it may have peaked.

When elections approach, public office holders can sometimes feel that with their term coming to an end the political correctness is not that constraining anymore. That's precisely what seems to be happening with European Energy Commissioner Andris Piebalgs. In a note that could be your regular TheOilDrum post, the Commissioner talks about peak oil in the past tense and warns that present oil prices at relatively low figures are simply transient.

Below the fold the 8th May entry to the Energy Commisioner's weblog is reproduced in its entirety, for such words from a such stakeholder are a precious thing.

Emphasis added mid text.

Are we moving towards a new oil crisis?

One of the few good pieces of news in the current economic crisis (maybe the only one) is that oil prices have gone from the 147$ a barrel of July 2008 more than 100$ down to less than $50 a barrel on the international markets. However, in the last days we have seen oil prises rising and reaching the price of $58 a barrel for the first time in nearly six months. Nevertheless low oil prices are also good news for gas, since gas prices are normally linked to those of oil. If we remember the difficulties that European fishermen and truck drivers had last year we can imagine what their problems with be if in the middle of an economic crisis they had to deal as well with prices over 100% a barrel.

However, we should not be under any illusion. The current fall of oil prizes is just the consequence of an even more dramatic fall in demand due to economic crisis. I add to that the fears in the financial markets you will understand why investments in futures of any commodity except the safest ones (gold, for instance) are so rare. But the fundamentals that drive the energy markets have not changed. Once the economic crisis is over demand for hydrocarbons will soar again, particularly in the developing world. And some countries are preparing for that. For example the Chinese government has granted a credit to Russian State owned oil companies Rosneft and Transneft $25 bn. against daily supplies of 48,000 tonnes of oil for the next 20 years.

The world is aware that the production of the existing oil wells is decaying and that new discoveries are more scarce and more expensive. Some experts consider that global oil production may have peaked at 94 million barrels a day [sic - the correct figure would be arround 84 Mb/d]. The current economic crisis can make the situation worse. The lower prices that we are enjoying now can be in fact bad news. At this price oil producers have been forced to postpone many necessary investments in new production capacity. These investments take decades to be accomplished. In consequence, if the current economic crisis finished and demand recovers we could be facing huge shortage of supplies that can lead to extremely high prices.

How high? According to the Secretary General of the International Energy Agency (IEA), Nabuo Tanaka, oil prices could go up to as much as 200$ a barrel in the next 4 years. A quick look back on the situation of last year when prices were at a mere 147$ a barrel maybe gives an idea of what the consequences may be if the prices goes a 25% higher.

The current relatively low oil prices give a respite to prepare for the coming new oil crisis. We have to reduce our dependency in all those areas in which black gold is not indispensable, such as heating, or electricity production. For those areas which will have to continue to depend on it, like transport, we need to accelerate the research for alternatives, like biofuels, electric cars or hydrogen. And in all sectors, we have to accelerate our efficiency being aware that every barrel of oil that we are using is one of the last.

It is difficult to forecast when the next oil crisis is going to come. As Nobel Price Niels Bohr once put it “prediction is very difficult, particularly about the future”. But one thing is certain, one day we are going to run out of oil, and to prepare for that day we may be running out of time.

There isn't much to add to these lines, for anyone reading this post likely agrees fully with them.

Taking the opportunity, it may be perhaps time to reflect on this Commissioner's term. The Commission took office with oil prices below 40$ and saw them climbing above 140$, dealt with protests from professionals dependent on oil products: hauliers, fishermen, farmers and leaves office during the worst economic recession since at least 1980. While during the first half of its term both the Commission and the Commissioner were reluctant in accepting the hypothesis of serious Energy supply problems, they eventually aknowledged the situation.

First with the setting of the 20-20-20 goals but especially with the second Strategic Energy Review, the Commission showed to understand (even if partially) that Europe's energy entitlement is at risk. Acknowledging the Union's unsustainable dependence on imported Gas and the present importance of it's Nuclear park, where two relevant steps. To that adds some interesting initiatives like the Mediterranean Energy Ring or the Solidarity Plan. But the most positive point to this Commissioner's term ended up being the commitment to Energy Efficiency - the policy that can have most impact over the short term.

On the negative side are the sense of abundance inherent to the 20-20-20 goals, the promotion of damaging dreams like CCS, agro-fuels or hydrogen and the the Marketplace adulation. Although the 20-20-20 goals are in themselves defensible objectives, they were designed for a Europe of the past, when energy was easily accessible in the Market. As for agro-fuels et alia this was possibly more the result of certain lobbies, although here the Commission also evolved by limiting the number of CCS pilot plants and reconsidering it's bio-fuels goals. Nonetheless, the greatest shortcoming of the Commission's Energy Policy was the absence of an integrated approach to Transport, where the EU spends most of the oil it imports. Jet-fuel and Liquefied Petroleum Gas continue to be subsidized, the Union is still heavily dependent on road transport (especially for freight) the High Speed Rail network is not fully integrated and far from reaching all states. The weakest link seems to have been overlooked.

What seems most difficult for European politicians to grasp is that the coming decline of fossil fuel consumption will be imposed by Nature and the Market, it won't be an option. With this weblog entry Andris Piebalgs definitely distances himself from that class of energy illiteracy, and just for that deserves praise.

When the largest party at Parliament, EPP-ED, writes in its campaign booklet that CCS and hydrogen are energy sources, one has to feel fortunate for having an Energy Commissioner capable of writing the lines above. Yes, it took the whole term to get there, but it eventually did. It seems unlikely that Commissioner Piebalgs can continue in office. Especially with the realization of the importance of the energy link with Russia, the largest states will possibly fight for this important office. Being the appointee from Estonia, Andris Piebalgs will likely see his place occupied by a German or Italian Commissioner for the next term. If member-states chiefs and the Parliament are able to agree on someone with the same understanding of Energy as Andris Piebalgs it won't be bad.

But alas, these lines end up highlighting how ineffective the current political system in preparing in advance and planning for the long term - only when the crisis hit comes the direct acknowledgement of a problem. Tragic.

Hat tip to Rembrandt for pointing Andris Piebalgs' original entry.

EuroElections 2009 : EPP-ED

This post starts a series intending to reflect on the policies on the field of Energy proposed by the main political parties/blocks running for the 2009-2014 term at the European Parliament. Consulting the information made available on-line, either at home-pages, electronic leaflets or booklets, this series will look into the guidelines on Energy Policy that each party is proposing to euro-citizens.

Starting is the EPP-ED, the Cristian-Democrat block that has held the largest number of seats at Strasbourg since the Assembly's first day.

EPP-ED is a congregation of regional Conservative or Cristian-Democrats parties plus a few scattered Liberal parties. Most of these parties are used to be rotatively in power at state level and can be seen as the largest molders of what the European Union is today. With the largest electoral base, both at state- as at union-level, the party is also home to the ideas behind most of the policies and legislation put in place by the Commission and the Parliament.

The present Commission was shaped by the EPP-ED, largely influencing the name choice for Commissioner positions. Commission President, José Manuel Durão Barroso, although a Liberal, is a member of EPP-ED through his home state party – PPD/PSD – a Liberal party that has the largest militant base in Portugal.

The party's home-page is pleasant looking and well organized; although more focused in showing the work already made or in development by the parliamentary group. There's also an entire webpage solely dedicated to this year's election, a good place to know further the party's stance and the proposed programmes on other fields of action beyond energy.

It didn't take much time to find a booklet presenting the party's political guidelines for the 2009-2014 term. This booklet is very good, presenting not only the political programme but also a sum up of the party's ideology and its place at the present geo-political landscape. After messages from the group's parliamentary leaders comes a section that explains the values at the core of the party's ideology, of which the main section is worth to reproduce:

The European Union needs to update, reassert and modernise its values: freedom, democracy equality, the rule of law, along with respect for human rights, including those of minority groups These values are common to all Member States, in a society characterised by pluralism, non-discrimination, tolerance, justice, solidarity and equality between men and women.

The essential pillars of our political activity must be to safeguard family values – particularly in response to challenging demographic trends and a falling birth rate – and to defend freedom of education. After all, the family is the basic unit that enables people to overcome crises, help each other, and prepare for the future. Our policy must be to strengthen families, ensure inter-generational solidarity and the passing on of values and heritage. The EPP-ED Group supports the laicism of the State, where this is a positive secularism that protects freedom of religion in a spirit of cooperation based on dialogue, mutual respect and reciprocal independence.

Economic rights are not secondary rights. They must be forcefully reasserted. Our Group believes that freedom of education, research, enterprise and competition are individual rights and the basis of a healthy and prosperous economy. There can be no justification for infringing these rights, which must, on the contrary, be further enhanced.

The value of effort, work, ownership and saving is insufficiently upheld. The current reforms aimed at reducing the burden on those wishing to work, save and invest must be continued.

A full page of this booklet is dedicated to Energy Policy, that his headed by the following title: Developing a coherent energy policy in the context of measures to combat climate change and sustainable development. The party's vision is resumed in a single paragraph:

The EPP-ED Group supports the establishment of a diversified energy mix, promoting higher energy efficiency in all activity sectors, the completion of the internal energy market and the development of a coherent foreign energy policy

And after it four strategic lines are laid down:

Towards a zero or low-CO emitting energy mix

The EPP-ED calls for:

• more investment in R&D for clean technologies such as carbon capture and storage, hydrogen and methanol energy, biofuels, biogas and biomass, which will allow us to rely on indigenous sources of energy in a sustainable way;
  
  


• more emphasis on clean energy technologies such as nuclear energy on the part of those States that favour it, the use of clean technology when using fossil fuels and the use of renewable wind, marine, solar and thermal energies;
  
  


• large-scale renovation of the cities (building stock, district heating systems, public transport);
  
  


• increased cooperation and dialogue between Member States in order to avoid drastic consequences for the price and quantity of imported sources and for the overall levels of the EU’s CO2 emissions.
  

The first four elements put forward are CCS, hydrogen and methanol “energy” and biofuels, which are even called “indigenous sources of energy”. A worst starting would be hard to imagine, leaving a lot to be desired for on the party's understanding of what is energy. A positive note goes for the reference to urban planning and its role in Energy Policy. Still, one can't stop thinking that these lines are simply a gathering of names that have a good echo with the press; yes, Nuclear is there, but lightheartedly, but only for those who want it.

Energy efficiency as a key driver of competitiveness and respect for the environment

Energy efficiency in all sectors represents the most cost-effective and rapid way to reduce our energy dependence on imports, rationalise consumption in households and industry and drastically reduce our CO2 emissions. This requires the involvement of all economic and social sectors.

The EPP-ED Group advocates:

• fiscal incentives for citizens and companies undertaking renovation works in the building sector and for the purchase of energy efficient vehicles and appliances;
  
  


• providing users with accurate information so that they can rationalise their energy consumption, encouraging new technologies such as smart meters in particular;
  
  


• continuing the rapid development of cogeneration in our energy-intensive industries and encouraging other sectors of industry to follow suit.
  

Things get better at this stage, the efficiency message is now well absorbed by the political class who understand how simple and light tactics can have an important impact in energy consumption (like the Labelling Directives). Naturally, one may or may not agree with specific tactics as fiscal incentives for vehicles substitution, but nonetheless, the election of Efficiency as a priority is quite welcome.

The internal energy market as enabler of open competition, higher efficiency and cost-reflective prices

Completion of the internal energy market is essential to the success of our security of supply and environmental goals. However, many obstacles to the free movement of gas and electricity within the EU still remain: lack of interconnection capacity between Member States; lack of harmonisation of basic technical rules; political protectionism; and the coexistence of 27 different regulatory frameworks.

The EPP-ED Group supports:

• further technical and regulatory harmonisation, placing all companies on a level playing field so that they can serve customers throughout the Union, increase interconnection capacity, and create competition in isolated and closed-off areas;
  
  


• setting up social programmes for vulnerable sectors of society without interfering with the market;
  
  


• encouraging a truly integrated and open market in order to ensure that energy prices reflect actual production costs; an efficient market is also essential to encourage the significant investment necessary for the introduction of renewable energy sources.
  
  

Using rhetoric similar to that of the Commission, EPP-ED advocates that increasing the competition in the internal market can secure energy supplies from abroad and moreover, foster investment in renewables. On the later, Jérôme had the opportunity to explain just recently why this isn't the case. As for the former, why more competition between, say Portuguese and Spanish companies can bring more oil from, say Angola to Europe is something that only this party and the Commission seem to know – especially in the face of natural depletion. None of this goes at saying that liberalizing the internal market is an undesirable objective; while it's priority is mainly an ideological choice, it's effect on the problems Europe is facing today is largely limited.

Creating supportive energy diplomacy.

The EU represents more than 500 million consumers and therefore needs to establish a real energy diplomacy.

Solidarity mechanisms need to be established between Member States in case of emergency situations. The gas supply crisis over the past two years as well as the two EU-wide blackouts have demonstrated the need to improve physical interconnection and rapid reaction mechanisms, in order to avoid the potentially critical consequences these events can have on the economy and on society.

Reading the header of this section one could even get the idea that the EPP-ED is proposing an European Foreign Minister/Ministry, but that's not exactly the idea. Nonetheless, solidarity and physical interconnection are some of the added strengths the Union can provide and their reference is welcome.

All in all, this programme doesn't differ much from what the Commission stood for during the term that now ends. The booklet's section on energy is close to a condensed version of the Commision's Energy Reviews. Being so, the same problems are present: it is understood that something is wrong, although not quite well what; the recipe: throw at it all that the hand can reach, well mixed with a liberalized internal market. It turns out that some of what is being thrown at the problem is actually lumber into the fire.

On a positive note is the attempt to build a thorough Energy Policy, composed by four strategic lines, submitted to an integrated vision. These strategies are not properly realised by concrete goals, which even at this level of contact with the broader public should be possible. A few tactics are put forward, that as explained above, do not exactly conform to the vision and strategies outlined. A sense of lack of commitment ends up emerging from the programme as a whole.

Calling CCS an “indigenous source of energy” is one of the most hilarious things ever present in a energy text.

London G-20 meeting: the last chance?

On the 24th of March, Frank Biancheri, head of of the LEAP2020, published in the Financial Times the following open letter directed to the G20 leaders gathering in London on the 2nd of April:

Ladies and Gentlemen,

Your next summit takes place in a few days in London; but are you aware that you have less than a semester to prevent the world from plunging into a crisis that will take at least a decade to resolve, accompanied by a whole series of tragedies and ferment? Therefore, this open letter by LEAP/E2020, who saw the arrival of a « global systemic crisis » as early as three years ago, intends to briefly explain why it happened and how to limit further damage.

[…]

Until now you have merely been concerned with the symptoms and secondary effects of this crisis because, unfortunately, nothing prepared you to face a crisis of such an historic scale. You thought that adding more oil to the global engine would be enough, unaware of the fact that the engine was broken, with no hope of repair. In fact, a new engine must be built, and time is running out, as the international system deteriorates further each month.

[…]

LEAP'S THREE STRATEGIC RECOMMENDATIONS

1. The key to solving the crisis lies in creating a new international reserve currency!

The first recommendation is a very simple idea: reform the international monetary system inherited post-wwii and create a new international reserve currency. The US Dollar and economy are no longer capable of supporting the current global economic, financial and monetary order. As long as this strategic problem is not directly addressed and solved, the crisis will grow. Indeed it is at the heart of the crises of derivative financial products, banks, energy prices... and of their consequences in terms of mass unemployment and collapsing living standards. It is therefore of vital importance that this issue should be the main subject of the G20 summit, and that the first steps towards a solution are initiated. In fact, the solution to this problem is well-known, it is about creating an international reserve
currency (which could be called the « Global ») based on a basket of currencies corresponding to the world’s largest economies, i.e. US dollar, Euro, Yen, Yuan, Khaleeji (common currency of oil-producing Gulf states, to be launched in January 2010), Ruble, Real..., managed by a « World Monetary Institute » whose Board will reflect the respective weight of the economies whose currencies comprise the « Global ». You must ask the imf and concerned central banks to prepare this plan for June 2009, with an implementation date of January 1st, 2010. This is the only way for you to regain some control over currently unwinding events, and this is the only way for you to bring about shared global management, based on a shared currency located at the centre of economic and financial activity. According to LEAP/E2020, if this alternative to the currently collapsing system has not been initiated by this summer 2009, proving that there is another solution than the « every man for himself » approach, today’s international system will not survive this summer.

If some of the G20 states think that it is better to maintain the privileges related to the « status quo » as long as possible, they should meditate the fact that, if today they can still significantly influence the future shape of this new global monetary system, once the phase of global geopolitical dislocation has started they will lose any capacity to do so.

[...]

Further detail of LEAP2020's analysis was given by Frank in an interview to the Guns and Butter radio show.

There will be other issues discussed at the meeting: tax heavens, shadow accounting practices, reserve requirements, but the global reserve currency system, that, as was known during at least the last 40 years, seems to have ceased to exist, is the most important of all.

How did it get here.

The first attempt to reach a global monetary system was held at Bretton Woods in the US in the Summer of 1944, with the end of the Second World War in sight. An agreement was reached between 44 nations in the Allies' side, that enacted the IMF, the prototype of the World Bank and a new monetary system for commercial relations. This system (named Bretton Woods) established fixed exchange rates between currencies, defining narrow fluctuations of paper currencies against gold.

This Bretton Woods system lasted for more than two decades along which countries kept on increasing paper currency supply, but managed to maintain gold prices under control by injecting reserves into the market. The system began to fail in May of 1968 when world wide panic closed down most gold trading markets. Investors had lost faith in central banks' ability to redeem the fiat currency they had issued. In the Summer of 1971, bending on the weight of increasing energy imports and the Vietnam war, the US was forced to pull out of the Bretton Woods system, abandoning the direct convertibility of the US dollar into gold.

During the following months, with the dollar loosing half of its value against gold, most other countries abandoned fixed exchange rates against the dollar. A new system emerged, with major currencies used in international trade adopting floating exchange rates.

Following came a period of about ten years between the first oil shock and the pinnacle of the early 1980s recession, when currencies slowly depreciated without much economic growth happening in the western world. During this time the foundations of the present system were launched. Perhaps the most important action towards it was the birth of the Carter Doctrine. As the economic crisis was overcome, a symbiotic relationship developed between the Midde East and the West, in exchange for military protection (conserving the ruling elites) oil producers provided easy oil that fostered economic growth in its turn reinforcing that military power. Oil producing countries stored their wealth in US Treasury bonds and other debt instruments becoming creditors of the military power that kept them safe; the flow of cheap oil allowed the economic growth that justified the faith on the US currency. This was the Petro-dollar system.

While in a different stance, US allies in the NATO framework (also Japan and Oceania) ended up also benefiting from this new system. They couldn't export debt as the US did, but benefited both from the flow of cheap oil and of the rising protective military power at the western side of the Atlantic. Two decades of unprecedented economic stability and growth unfolded.

But History is relentless. By the mid 1980s this system was being used chiefly in the Atlantic – Middle East trade, with the USSR and its allied still in place, and in a trade environment much narrower than today. As oil prices collapsed in 1985, events were set in motion that brought down the USSR both in political, military and economic terms; in 1989 the Berlin wall fell and in 1991 Russia detached from the former republics of the Warsaw Pact. In 1992 the Maastricht Treaty created a new market of international dimension; in 1999 the Euro was born and in 2001 China joined the WTO, paving the way far a major, now liberalized, economy entering the world market. At the same time other important players emerged, with Russia becoming again the world's largest oil producer and a major energy exporter, not forgetting countries like Brasil or India.

What started as a bonding scheme between two regions, became the system that prices global trade today. Not only the usage of the US dollar as reserve currency became global, it became much more intense with imports and exports having far greater weight in individual economies than 20 years ago. This scheme resulted into the US Federal Reserve setting monetary policy for the whole world, while in fact its targets and gauges are solely on the US economy.

The recent years.

After 2000 the US embarked on a monetary and fiscal policy expansion with little parallel in history: interest rates were brought down to the floor, the monetary mass grew in excess of 10% annually, an expansionary budget stimulated demand for goods and services, many of them imported from countries that accumulated US bonds and other forms of fiat currency. From 2002 to 2007 reserve currency held by central banks grew in excess of 20% annually. In parallel, lax financial regulations and reserve requirements helped creating a pile of invisible debt (out of balance sheets) on that expanding demand and monetary mass, according to some amounting today to more than the world's annual GDP.

Did this incredible expansion ended because oil production plateaued? That's an interpretation, although other views are possible. Oil prices entered the rising phase in 2004, in 2005 were raw materials and 2006 food: no matter what the underlying reason, the supply side stopped following the demand expansion. When Ben Bernanke became chairman of the US Federal Reserve and tried to change course by raising interest rates, so that at least some strain would come to the monetary expansion, it was already too late: the US economy couldn't expand anymore in order to generate the wealth promised by all the debt issued in previous years.

Without that physical growth, the result was simply default on debt. Without the proper leadership from either the US government or the Federal Reserve, panic took over last September and during two months the world assisted to one of the sharpest demand retractions in history. The awkwardness of the moment is that in order to stimulate demand once more the prescription in the US seems to be an expansionary budget and monetary policy. And here's the main problem: this policy threatens the value of US dollar reserves held abroad.

There is another side to the present crisis worth observing: countries that followed alternate monetary policies to those set by the Fed seem to be suffering the most. Those that opted for high interest rates in order to fend price inflation and/or demand enjoyed an influx of foreign investment lurking for easy profits. When the crisis hit that investment simply vanished, examples were Iceland, and Russia to some extent. At the other end were countries like Japan that during this decade had been battling problems of employment or lack of internal demand, employing expansionist measures even sharper than the US; they are now facing an influx of currency that threatens to engulf demand and massively destroy employment.

In conclusion: a regional currency running world trade had two main negative effects: impaired specific monetary policies in other regions, formating them to the issuing region, and pegged wealth in store to the economic health of a single region: the issuer. Exacerbating these problems is the hegemonic position the currency issuer gets, allowing it to leave beyond its means - what Frank Biancheri calls the reserve currency curse – the budget and trade deficits can apparently be expanded without limit, but at some point it makes foreigners wonder, and when that time comes the issuing region is engulfed in debt. A global economy running on a regional currency seems almost like a scheme designed to self destruct.

The confidence wanes.

The policies needed to bring the US economy back into contact with reality have thus the parallel effect of deriding the wealth stored by those economies that grew on exports during the past few years: be it expensive lasting goods (e.g. Germany, Japan), consumer goods (e.g. China) or energy (e.g. Middle East, Russia). The confidence on the US dollar as a reserve currency is severely demaged and as the LEAP2020 implies, it will probably never come back. No wonder then that China is openly calling for a new reserve currency system:

Zhou Xiaochuan, governor of China's central bank, has proposed to create a super-sovereign reserve currency as part of reform in the international monetary system.

The desirable goal of the international monetary system is to "create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies," he said.

Zhou said the Special Drawing Right (SDR) of the International Monetary Fund (IMF) has the potential to act as a super-sovereign reserve currency in a signed article posted on the website of the People's Bank of China Monday.

This backs up earlier calls from another major holder of reserve currency, Russia, that seems to be heading a group of nations with the same intent:

China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.

[…]

Russia met representatives of China, India and Brazil ahead of the G20 finance ministers meeting last week, as the big emerging powers seek to up their influence on decision making globally. Their first ever joint communique did not mention a new currency but the source said the issue was discussed.
"They (China) did not formally put forward their position for the G20 summit but unofficially they had distributed their paper regarding the same ideas (the need for the new currency)," the source told Reuters, speaking on condition of anonymity.

But China has not sticked solely to articles in the western press and meetings with other reserve currency holders. Ever since the country announced its intention to make the Yuan a reserve currency, several currency swaps have been announced with its main commercial partners, Argentina being the last of a list that includes South Korea, Malaysia, Hong Kong and Belarus.

What could happen then if a new coordinated reserve currency fails to emerge? The answer is simple: the US dollar will stop being the world trading benchmark. A period will then unfold during which trading nations won't have a clear worldwide unit to value their goods, much less to store value for future trading. Possibly, some regional currencies might be tried on a geographically limited basis, and another alternative might emerge with a currency for which there isn't much policy to go about: gold. The consequences of such transition will be immense; an Hungarian mathematician called Antal Fekete, claims to already be getting signs in that sense, with gold futures entering backwardation late last year. This is a rather technical issue, way beyond the aims of this simple essay, but with or without backwardation, it is important to know what Fekete foresees [pdf!] in case the present system ceases to exist without a clear replacement:

I have to go back to the collapse of the Western Roman Empire after the abdication of the emperor Romulus Augustus on September 4, 476 A.D. It was followed by the Dark Ages when the rule of law, personal security, trade of goods against payment in gold and silver could no longer be taken for granted. Gold and silver went into hiding, never to re-emerge during the lifetime of the original holders. It is plausible to see a causal relationship between the fading of the rule of law and the complete disappearance of gold and silver from trade. Virtually all observers say that the first event caused the second.

I may be in a minority of one to say that causation goes in the opposite direction. The disappearance of gold and silver coins as a means of exchange was a long-drawn-out, cumulative event. In the end, no one was willing to exchange gold and silver coins for the debased coinage of the empire. At that point the empire was bankrupt; it could no longer pay the troops that defended its boundaries against the barbarians threatening with invasion. This is not to say that the empire did not have other weaknesses. It did, plenty of it. But the overriding
weakness was the monetary weakness. Centuries after centuries the Mint of the empire could attract less and less gold and silver. Because of this, the empire was forced to debase its coinage and the deterioration continued until the bitter end, when the gold flow to the Mint completely dried up.

[…]

The history of the monetary system of the United States [and of the World] shows an ominous parallel to that of the Western Roman Empire. As long as gold and silver was still used in trade at least to some extent, the Western Roman Empire was limping along. The modern equivalent of the disappearance of gold and silver is epitomized by the progressive vanishing of the gold basis [meaning the vanishing confidence in the US dollar as an effective long term wealth storage medium].

Coming from a different perspective, this scenario ends up remarkably close to what Frank Biancheri calls “every man for himself”: the break down of global commercial bonds, a drastic reduction in global trade and the emergence of several regions of influence deploying different economic and monetary policies, in a world resembling Europe in 1914.

A small but important sign of this unfolding change of the world's monetary system is the recent news that the US sate of Montana is considering a return to gold and silver as means of payment and state accounting units.

Europe.

Europe has possibly the most complex stake in this meeting. On the one hand it is home to about one third of the world's reserve currency, having to some extent benefited from the advantages of being a reserve currency issuer (although in its case the reserve currency issued is a relatively small fraction of total currency in circulation). On the other hand, it holds the third largest foreign currency reserve in the world, being a major creditor of the US.

Two other issues are worth nothing in Europe's stake, first, it is heavily dependent on energy imports, thus being highly vulnerable to world trade disturbances, and more so when its major fossil fuel suppliers are entering terminal decline: Norway, in the case of oil and gas, and Russia in the case of oil. Another important point is that about half of the world's reserve gold is in Europe, as so considerable sums in privately owned bullion and monetary jewelry.

All things considered, Europe is possibly the region having most to benefit (or more to lose in the opposite case) from a new reserve currency system not reliant on a single regional issuer. Up front, for it would prevent serious impact on world trade and the possible consequent disruption of energy imports, but also because it would prevent the Euro from somehow becoming a substitute for the dollar, shifting the “reserve currency curse” to the eastern side of the Atlantic.

Enter the Khaleeji.

There is still another possibility to unfold if a new reserve currency system isn't put in place. After several years of talks and on/off reports in the press about its arrival, the Gulf Cooperation Council states decided in the wake of the present crisis to precipitate the creation of its common currency, the Khaleeji. This is another sign of the confidence break up in the US dollar as a reserve currency, from countries that so far had their currencies pegged to it. It is shaping up to be something like the Euro, governed by a Middle East Central Bank. Interestingly, there's only one country from this block attending the G20 meeting, Saudi Arabia.

Speculation as come about on this new currency being backed by a physical entity, in contrast with the other fiat currencies of the main world trading blocks. Gold is the usual suspect, but that's unlikely, for the region doesn't hold much gold (compared to Europe) and a good part of what it has is non-monetary jewelry.

The important thing about the Khaleeji is that it will be backed by the economic health of countries whose main economic activity is energy production and export. This makes it a real improvement over the US dollar, the Yuan or the Euro, and a potentially emerging reserve currency in case an agreement fails at the G20.

Beyond a new reserve currency system.

The last paragraph contains an obvious caveat: if the Khaleeji comes to be a fiat currency, its backing by energy is purely abstract, shakily built on confidence. And that is the main problem world leaders face today, irrespective of what role energy prices had on the crisis unfolding, one thing is certain: if the energy flow to the world economy can't grow anymore, then all abstract currencies are condemned as long term wealth storage media.

Without economic growth to support their expansion, abstract currencies loose their main advantage over commodities: a supply totally detached from economic activity allowing for monetary policies supporting employment, wealth or international relations. As expansionary measures are put forward to revive an economic growth that might no longer be possible, paper currencies will rapidly deride in value, menacing public confidence invested on them.

A new world reserve currency, resembling the old Ecu for instance, could indeed re-instate balance in world trade, but it won't be in any way a solution for the deriding value of abstract currencies and the policies founded on them. But it would at least bound international players together into finding a way forward.

The water snakes are back onshore

Local newspapers today are making major headlines again with “the first commercial wave farm of the world”. But for the wrong reasons, the state TV website published an article yesterday with the following opener:

The three Pelamis machines of the wave farm in Aguçadoura, that was considered by the Portuguese Government as a “flagship” of the country's leadership in renewable energy, where taken out of the sea and have been onshore, at the Leixões shipyard, for 4 months.

The two Pelamis units deployed in September were at sea for only 2 months and there's no date set for a return to operation.

The article continues:

Talking to the news agency Lusa, Rui Barros, from the Companhia de Energia Oceânica (part of the Babcock & Brown group, the project owner) said a recurrent problem was detected with the bearings of the hidraulic jack's articulations in all of the three machines, prompting their move out of sea.

[…]

According to Rui Barros, the continuing problems with these bearings that are submerged, forced the transport of the three machines back to shore by mid November, “so that an inspection could take place”.

“We then verified that the problem was serious an extensive, a generalized problem and not fortuitous.” he explained.

Since then, Pelamis Wave Power, Babcock & Brown's technological partner e maker of these machines, “entailed a discussion” with the company that provided the bearings, being set for April the arrival at Portugal of new parts to repair the equipment.

“I'm awere that there's a team from Pelamis ready to come to Portugal to substitute the bearings”, said Rui Barros.

According to this official, replacing the bearings will take about a month, after which the machines can again be brought to high sea, resuming the testing they were being subject to.

“I'm convinced that, if no other problem brews up, before the end of Summer we shall have the three machines totally free for commercial production. But it is all, if, if, if...”, he said.

But other problems are menacing the project, the credit crisis is hitting Babcock & Brown hard, that was forced to sell assets to cover its debt, including the Pelamis project. Now it becomes known that the consortium announced in September between this company, tow local ones and another Australian investor was never signed. A second article gives further insight:

[…] the consortium announced six months ago between EDP, Efacec, Babcock & Brown and Pelamis for the development of the Aguçadoura wave farm and of a Portuguese 'cluster' in the field of wave energy never came to be.

[…]

“The initial assumptions of this project were altered and EDP is renegotiating them with Babcock & Brown”, said to Lusa an official from the Portuguese electric company. Underlining that it is still “committed to the project”, EDP didn't clarify if it is interested in buying the stake of the Australian fund.

[…]

On the Portuguese 'cluster' for wave energy, Rui Barros considered it “seriously compromised at the moment”.

The “race” for Portugal's leadership in this renewable energy field is already lost, for if the Aguçadoura wave farm was the first of its genre at the world level, “soon it will stop being so”, concluded Rui Barros.

There are several points worth making on this new development, but first it should be stressed that errors and faults are part of any engineering process. Such is the case for during the architecture phase details are missed and during the implementation phase things not always go as planned. In fact it is the process of testing, error discovery and correction that allows for the improvement of the final product. Knowledge improves when the product fails, not when it works as expected.

Nonetheless, a bearing leakage at this stage seems somewhat strange, especially considering that in situ tests were previously run in Scotland and in Portugal. Speculation can be made that either the bearing provider changed the manufacturing process or that the provider itself was changed in the meantime. In any event the commercial phase of the Aguçadoura project is now running almost 4 years behind the initial schedule.

On a larger scope the compromise of the wave power development 'cluster' is disheartening. And a proclaimed “flagship” project for the country being put at risk by the collapse of an investment fund managed at the other side of the world has its dose of irony. One gets the feeling it was all fireworks and that unfortunately Portugal might not have either the knowledge or the capital to be the “Denmark of wave power”. Being home to the technology and at the moment attracting the investment of E.On, Scotland seems to be righteous owner of that title.

Finally, the reserves I expressed earlier on the maturity of the technology seem to be vindicated by this new development. On the financial front, this new delay almost guarantees that the Aguçadoura project will be a money sink. As for EROEI, every error and fault corrected will improve the design and the assembly and deployment processes, thus also improving net energy. Still it seems now more than justified to at least postpone the 70 million € Aguçadoura II project, until this pilot project reaches an higher state of maturity.


Previously at EuropeanTribune: 

The First Wave Energy Farm of the World...It's About Time...


Previously at TheOilDrum: 

Tapping The Source: The Power Of The Oceans
Pelamis: A Shot in the Dark?

Have Oil prices bottomed out?

This post is a translation to English of an article penned by Jorge Nascimento Rodrigues and published in the 28th of February in the Economy section of the journal Expresso, the largest weekly publication in Portugal. It is built on the insight kindly provided by TheOilDrum contributor ace.

Jorge Nascimento Rodrigues is a free-lance journalist and author, editor of JanelaWeb.com and GurusOnline.tv

Crude Oil
February closing with the barrel close to 45 dollars

Crude oil prices might be back to a mid term bull dynamics, says Australian analyst. February behaved on significant oscillations from one day to the other and the American variety [WTI] climbed 10%, going from 40,78 dollars to 44,76 per barrel.

The minima for the price of a barrel of crude oil, since the peak in July of 2008, might have happened before the Christmas of 2008, advances the analyst from TheOilDrum, Anthony Eriksen, a Canadian mathematician seeded in Sydney, Australia, where he specialized in energy and mining investments.

The conclusion that can be made is that the price of a barrel might be back to a mid term bull trend, after the fall from 145 dollars to less than 50 in the span of only six months last year.

Eriksen reminds that prices of the American crude (WTI) and of the European (Brent) touched then the minima of 31,41 dollars per barrel in 22/12/2008 and 34,04 dollars on Christmas Eve, respectively. This year, the lowest prices occurred last week, on the 18th of February, with values of 34,62 for the WTI and 39,10 for Brent.

The International Energy Agency (IEA) points to a variation interval between 40-45 dollars per barrel, which would still be below the wishes of many producing countries that point to a minimum of 50 dollars for many of the projects they have in scope to be viable, both economically as technologically, underlines the analyst.

The price of a barrel of the American WTI variety reached on the 26th of February a figure slightly above 45 dollars and closed at 44,76 dollars. The Brent vareity closed the month with a price (44,72 dollars) practically identical to the opening figure (44,46).

Daily Brent Blend prices since last September. Source: UpstreamOnline.com; image not in original article.

Wild Oscillations

Notwithstanding, the fundamental behaviour of prices during this year has been what some analysts ironically dub “wild oscillations”.

The months of January and February have been fertile with that kind of very close extreme variations; at least 11 cases were observed for the WTI variety solely in February: on 10/2 declined 5% and climbed 10% on 13/2; on 17/2 declined 7% and climbed 14% on 19/2; on 23/2 declined 3,6% and climbed 4,2% on 24/2, 6,6% on 25/02 and 8,5% on 26/2, to go down again on the last trading day of the month. This reveals the high volatility of the agents' behaviour in this market.

To where can these extreme oscillations go and in what measure can the barrel price climb again above 50 dollars or fall below 30 dollars, derives, according to Eriksen, from the “fight” between two heavy weights.

On the one hand the impact of the crisis on the demand of this commodity, continuing to reduce it below 85 million barrels daily (mbd) – the last estimate by the IEA points to 84,8 mbd. This daily figure was still inferior to supply in January of 2009, that was around 85,2 mbd, resulting in a difference of 400 thousand barrels daily.

On the other hand there are several political and physical factors that can influence supply, producing scarcity in the market. Something that didn't happen yet, in spite of the cuts programmed by OPEC, that “should already be enforced in 89% relatively to the commulative cuts announced since September that mount to 4,2 mbd, according to Bloomberg”, says Eriksen.

Black Swans

The analyst underlines that, in the political plane, sudden geoplitics changes in productive regions (namely in the Middle East that continues to be potentially flammable with issues like Israel/Palestine and Iran) or a collapse of the dollar due to the dragging financial crisis or to the political behaviour of the main American currency supporters, can make the crude oil price shot up without previous warning. It would be the surging of inesperate “black swans” to the international scene.

Physical constraints can also have a negative influence on supply. Eriksen refers that the group of oil producing countries outside OPEC seem to have already reached, together, a production peak.

In spite of good perspectives in cases like Brasil (that, nonetheless, can reach “a production plateau around 2011”, according to the studies of this analyst) and Canada for a few more years, global supply from this group is diminishing, with high decline rates in extreme cases like the Gulf of Mexico (around 20%). In 2009 production should decline in Russia, Mexico, Norway and the United Kingdom.

Concerning OPEC a continuation of the programmed cuts policy is to be expected, with a renewal already in the 15th of March, when the cartel meets again. A pressure group formed by Algeria, Iran, Iraq and Venezuela is playing to that tune, according to quotes issued during the last week and a half.

ace adds this final comment:

There remains great uncertainty about key OPEC producer Saudi Arabia's true oil reserves as they are kept as a national secret. The last time that Saudi had a production peak was in 2005 at 9.6 mbd.  There is a risk that Saudi Arabia's true crude oil reserves could be much smaller than official estimates implying that future production will stay below the 2005 peak.

SER-2 [03] Communication on the Security and Solidarity Action Plan

Continuing the analysis of the Second Strategic Energy Review (SER-2) the insight is this time on the document entitled “Communication from the Commission to the European Parliament, the Council, The European Economic and Social Committee and the Committee of the Regions". This is a formal document that details the Energy Security and Solidarity Action Plan, presented in the Memo reviewed last time.

This post tries to highlight important aspects that aren't referenced in the Memo and presents the tactic actions proposed by the Commission to put the Plan into practice.

On the introductory section of the document the following paragraph is worth highlighting:

However, complementary measures are necessary to attain all three underlying objectives of the EU's new energy policy: sustainability, competitiveness and, above all, security of supply. For example, the EU is projected to remain dependent on imported energy - oil, coal and especially gas – for many years to come. Europe's indigenous production of fossil fuels is declining. As a result, net imports of fossil fuels are expected to stay at roughly today's levels in 2020 even when the EU's climate and energy policies are fully implemented.

These lines pretty much wrap up the motives and expectations that drive European Energy Policy at the moment: internal fossil fuel depletion is fully acknowledged forcing an end to the growing consumption, but faith still remains on an ever available foreign supply. This expectation of stable imports is a very relevant aspect of SER-2, that will become more clear in the analysis of following documents.

For each of the five strategic lines that compose the Action Plan the Commission sets a number of steps that more or less correspond to a chronological setting of the tactics that implement these strategies. Following is a digest of these.

Promoting infrastructure essential to the EU's energy needs.

First step: the EU should agree that the projects outlined by the Commission are energy security priorities. These are the infrastructure projects described in the Memo, listed below. The Communication goes at some length describing them, a worthy reading that for the sake of brevity isn't fully reproduced here.

• Baltic Interconnection Plan - to be developed in 2009 with the aim of connecting the remaining isolated energy markets in Europe, covering gas, electricity and storage. A regional Summit will be held in the second half of 2009 to start its implementation.




• Southern Gas Corridor - connecting to the Caspian and Middle Eastern sources. On a first phase the objective is to build pipelines to Azerbaijan and Turkmenistan, Iraq and Mashreq countries, later eyeing Uzbekistan and Iran; no objective time frame is given.




• Liquefied natural gas – still this year the Commission shall propose an LNG Action Plan aiming to foster regasification capacity in Europe as well as liquefaction capacity in gas exporting nations. This plan is seen as vital to states that are today dependent on a single supplier; the Solidarity Plan should facilitate the transport of gas liquefied in coastal states to inner states.




• Completion of the Mediterranean Energy Ring - linking Europe and North Africa with gas and electricity interconnectors, essential to develop the region's solar and wind resource. By 2010 the Commission shall present a Communication outlining the links that are missing from the plans set by the December 2007 Euromed Energy Ministerial meeting and the Mediterranean Solar Plan adopted in Paris in July 2008.




• North-South gas and electricity interconnections within Central and South-East Europe - a continuation of the New European Transmission System (NETS) initiative to create a common gas transmission system operator, the Energy Community Gas Ring, the priority interconnections identified by the Energy Community ministerial in December 2007, and the Pan-European Oil Pipeline.




• Blueprint for a North Sea offshore grid - in order to interconnect national electricity
  grids in North-West Europe and plug-in several planned offshore wind projects. Together with the Mediterranean Ring and the Baltic Interconnection projects, the Commission aims at a future European Supergrid.

Second step: detail these actions identifying financing needs and potential sources of finance. These needs will be identified by the Commission in collaboration with member states, industry, energy operators and regulators and the Parliament. The work shall take place during 2009 and 2010 resulting in a series of Communications.

Third step: implementation 2010 onwards. This last step will most likely require a budget reformulation; the Commission has today for this area a budget of 22 million euros, provided by the TEN-E instrument, that is visibly insufficient for projects of the dimension outlined above. Accompanying SER-2, a Green Paper is tabled to launch a reflection on the replacement of TEN-E for a new instrument, the EU Energy Security and Infrastructure Instrument, with other range of executive possibilities.

A greater focus on energy in the EU's international relations

The document goes at some length discussing economic relations in the energy field with several countries, describing several tactics to strengthen such ties. Energy is posed as essential content of the EU's foreign relations, both at the trade and political levels, something that the document alludes to not being exactly the case at the moment. Below is a digest of the tactics put forward.

• Norway - supplier of 24% of the EU's gas imports and 16% of its oil imports, is already integrated in the European Economic Area. The Commission aims at deepening further energy relations with Norway, collaborating with it for the maximization of the energy output from the Norwegian continental shelf, include its wind resource.




• Ukraine, Republic of Moldova and Turkey - negotiations are under way for these three countries to join the Energy Community, a programme to create a south-eastern energy market subject to the EU's legislation for the internal market, and security of supply of gas and electricity (with discussions on the way for an extension to oil). The Commission expects this programme to kick-start a reform of these countries' energy sector, especially an upgrade of Ukraine's gas transit infrastructure.




• Belarus - on a single sentence the document calls for the development of a specific strategy to secure the transit of energy from Russia through this neighbouring country.




• Russia - is and will for long be the EU's largest energy partner (read supplier). The Commission shows the intent of renegotiating the 1997 Partnership and Cooperation Agreement, replacing it by a new agreement deepening the EU's relations with Russia. Two goals are proposed: the liberalization of Russia's internal market (which according to the Commission would facilitate its reform) and the establishment of transit rules across the pan-European continent. So far Russia has constrained negotiations on a new Agreement to its accession to the World Trade Organisation




• Caspian - the Commission calls for the development of a Partnership with the countries of this region along the same lines of that developed with Russia. Empowered by the Council's decision to give high priority to the relations with these countries, the Commission will work to strengthen the Baku process and to build bilateral relationships.




• Iraq and the Gulf Cooperation Council - already in cooperation with the EU through the EU-OPEC Energy Dialogue. The Commission will develop further relations with these countries in the field of hydrocarbons (e.g. clean technologies) and procure bilateral agreements to secure the energy supplies from the region.




• Australia, Canada, Japan and the US and emerging consumer countries (China and India) - promote cooperation with these countries for the transparency of international energy markets and to commonly address sustainability issues.




• Latin America and the Caribbean - home to alternative energy suppliers with whom the EU is already developing multilateral and bilateral partnerships. Brasil is referenced as an important supplier of biofuels.




• Algeria, Egypt, Libya and Nigeria - already important suppliers of energy, these countries are part of a continent with great potential, not only in what concerns hydrocarbons, but also on renewable energies. The major goal put forward by the Commission is the Trans-Sahara Gas Pipeline, that it pretends to secure with bilateral agreements using instruments such as European Neighbourhood and Partnership Instrument, the European Development Fund and the European Investment Bank.

On Nuclear energy the document poses the following tactic:

With the Instrument for Nuclear Safety Cooperation, the EU will cooperate with and assist third countries in improving their nuclear safety culture and the safety of their operating nuclear power plants. For emerging countries intending to build nuclear power plants, the EU will help in the development of competent and independent nuclear regulatory authorities, capable of ensuring that the new plants are built according to international nuclear safety standards and operate in accordance with the highest standards.

Closing this section a reference is made to the construction of a common foreign energy strategy. The Commission expresses that to make such common policy a reality, a single foreign energy representative is not needed, but a proper planning and effective coordination of State level with Commission level policies. To that goal the Commission proposes to identify concrete mechanisms to ensure transparency between these two executive planes. It goes further with possible legislative measures:

[…] the Commission will consider proposing a revision of Regulation 736/96 which obliges Member States to notify to the Commission investment projects of interest to the Community in the petroleum, natural gas and electricity sectors, in order to increase its relevance to today's energy challenges. The Commission will consider how best to further develop early warning systems with key neighbouring energy partners.

Improved oil and gas stocks and crisis response mechanisms

The Commission starts this section by noting that the mandatory oil stocks regime, in place since 1968, has been successful in response to short term disruptions. Part of its success has been the relatively loose implementation leaving to each state the choice between ad hoc government stocks, industry stocks or a combination of the two. Still, the Commission will propose new legislation to improve the system, making it more transparent and less permeable to speculation.

At present, the EU publishes data on the level of strategic oil stocks for each Member State. Unlike the US, it does not publish information on the level of additional commercial oil stocks held in the EU. In order to improve oil market transparency and limit the effects of uninformed speculation, the Commission proposes that the EU now takes the step of publishing, on an aggregated basis, the level of commercial oil stocks held by EU oil companies on a weekly basis.

The Commission held off from proposing mandatory strategic gas stocks, mainly for its costs: five times those of oil stocks. Preference is given to harmonisation of security of supply standards and emergency measures, allowing for a better EU-wide coordination on crisis response. Diversifying supplies, especially with the build up of LNG infrastructure, is also given as a better alternative to strategic storage.

It is quite possible that this view will be rendered outdated during the next months, given present stock levels in the UK.

A new impetus on energy efficiency

This section of the Action Plan tables a further package towards the goal of 20% improvement in energy efficiency, adding up to the legislation presently under discussion at Parliament. This new package brakes down the following way:

• Energy Performance of Buildings Directive - to be revised broadening its scope, simplifying its implementation and developing energy performance certificates for buildings.




• Energy Labelling Directive - also to be revised in order to broaden its scope, from solely home appliances today to a wider range of energy-using products; classifications for a series of products groups will be revised or introduced anew. A new energy label for car tyres will be introduced under a separate legal instrument.




• Ecodesign Directive - its implementation will be intensified, with minimum requirements to be adopted in coming months for: light bulbs, electrical equipment in standby and off-mode functions of devices, street and office lighting equipment, external power supplies and
  simple set-top boxes for televisions; shortly after will follow: washing machines, dishwashers and refrigerators, boilers and water heaters, motors, and televisions. This Directive together with the Labelling Directive should allow the EU to save 96 Mtoe by 2020.




• Cogeneration Directive - in inception, with a Communication and technical details to its implementation to be published shortly.




• Covenant of Mayors - together with other financial and legal instruments will be used by the Commission to disseminate best practices on energy use, recurring to benchmarking and networking mechanisms.




• Cohesion Policy Funds - to be used promoting energy efficiency improvements in the industry, commerce, transport and public buildings, cogeneration and local energy production, innovation for sustainable energy, and training for monitoring and evaluation of energy performance. Funds from the Cohesion Policy will be used with the same intent.




• Green Tax Package - this will be presented to align the Energy Tax Directive with the energy and climate change package and propose the employment of VAT and other fiscal instruments in promoting energy efficiency.

Making better use of the EU’s indigenous energy reserves

This section opens up with pretty straightforward numbers:

Energy produced within the EU represents 46% of the total consumed. Before the 20-20-20 initiative, this was set to fall to 36% by 2020. Implementation of the new Energy Policy would keep it at around 44% of EU consumption.

The following energy sources are approached in the Communication:

• Renewable - this is one of the “twenties" already agreed upon: growing the renewable share of the market from 9% today to 20% by 2020. This target will be empowered by the Renewable Energy Directive after which the Commission will focus on monitoring its application. In this line the Commission will produce a Communication entitled “Overcoming Barriers to Renewable Energy in the EU", that will identify difficulties in scaling up renewable energies (e.g. grid constraints) and propose measures to deal with them. In this chapter the Commission will work with the European Investment Bank and the European Bank for Reconstruction and Development to set up a proposed EU Sustainable Energy Financing Initiative, in so facilitating the mobilization of funds needed for the proposed growth of these energies.




• Oil and Gas - for these traditional energies the Commission proposes to focus on developing the remainder of the conventional reserves and properly assess and produce unconventional reserves as shale and peat. The Commission will also work towards more transparency in the refining market and to ensure adequate diesel refining capacity in the future; a Communication on Refining Capacity and EU Oil Demand shall be presented in 2010.




• Coal - seen by the Commission as a virtually infinite energy source whose usage will grow around the world as inside the EU, among an healthy international market. Carbon Capture and Sequestration (CCS) will be introduced in 12 commercial scale demonstration plants up to 2015. Only by then will the Commission consider imposing mandatory CO2 emissions standards and only if the Emission Trading Scheme proves unsuccessful by then.




• Nuclear - the Commission notes that although Uranium supplies are well diversified and stable, and that Uranium prices do note have a major impact in the final price of electricity, the majority of Nuclear plants operating in the EU will reach the end of designed lifetime in the next 10 to 20 years. No policy tactic is defined in support of Nuclear, leaving the Commission that decision to each state. Nonetheless, it pretends to guarantee an high standard of safety by developing common legislation for nuclear plant safety and waste management.

---

The Communication closes with a few guidelines “Towards a Vision for 2050". This is still a rather immature vision composed by an open list of issues to tackle. For the sake of brevity, these issues are simply listed without further deepening:

• Decarbonising the EU electricity supply by 2050.




• Ending oil dependence in transport.




• Low energy and positive power buildings.




• A smart interconnected electricity network.




• Promoting a high-efficiency, low-carbon energy system throughout the world.

Final comments

The sheer size of the infrastructure build up plans plainly shows that the Commission has gained the sense of urgency that the moment requires. Unfortunately there is a clear over reliance on Natural Gas, especially in the ambitious plans for a Southern Corridor and the build up of LNG infrastructure. On the former, if a single transition country can be the source of the trouble seen in recent weeks, a lot is left to be desired from such international project; on the later the Commission seems to be underestimating the competition for LNG contracts from other international importers.

The document makes no acknowledgement of Norway's and Russia's depletion, the former on Oil and Gas the later at least on Oil. The intent to liberalize Russia's internal energy market is maladjusted and could even be seen as offensive by this partner. There are no moral or economic grounds on which the EU can promote Thatcher's Politics abroad.

The weekly publication of commercial stocks is quite welcome. Transparency driven initiatives like this not only benefit the market as can bring citizens closer to the Commission and promote a unified vision of the EU.

It is encouraging to see that the Commission is not actually blindly pushing CCS forward but instead putting it as a sort of last measure; even so, the 12 demonstration projects should be called into question. On the other hand the Commission doesn't perform any visible assessment of future coal supplies from exporting countries, not even acknowledging recent constraints in the international coal market.

This carefulness with CCS might actually make room for Efficiency measures to have a real impact. The approach taken by the Commission based manly on regulatory market legislation can have swift and important effect on energy consumption. The labelling tactics can also have an extra benefit in the present time of economic difficulties: it creates a product differentiation mechanism from which EU companies can benefit, valuing goods fabricated internally, that although more expensive, are more energy efficient. The Commission can go as far as forbidding altogether low efficiency products from entering the EU's market.

The laissez faire position the Commission takes on Nuclear energy boarders on irresponsibility. If this internal energy source is set to decline in coming decades the EU either needs a strategy to invert that trend or to fill the gap with other energy sources. On this point it is important to note that there's no renewable energy capable of performing the baseload role Nuclear has today. While hydroelectric and tidal power can effectively produce energy on a predictable basis, the continuous production of a Nuclear power plant isn't replicable. Even if the tactics to promote renewable energies laid down above come to fruition a parallel programme is needed to develop/implementing energy storing mechanisms.

The reflection on the Commission's energy budget is quite welcome. The Community should agree in due time how these projects are executed (in case they are approved) either by reinforcing the European budget, by state execution (in which case leaving the Commission solely on a coordinating role) or by a combination of the two. Ideally, a framework for the execution process of pan-European energy projects should be brought about.

Finally, how can any Energy Policy be successful, at this particular moment in time, without taking Transport as a central target of action is something only this Commission seems to know.