Research Handbook on EU Energy Law and Policy 1786431041, 9781786431042

This authoritative Research Handbook presents, for the first time, a comprehensive overview of the most important resear

358 52 4MB

English Pages 576 [562] Year 2017

Report DMCA / Copyright

DOWNLOAD FILE

Polecaj historie

Research Handbook on EU Energy Law and Policy
 1786431041, 9781786431042

Table of contents :
Front Matter
Copyright
Contents
List of contributors
Acknowledgements
Table of cases
Table of legislation
1 Introduction
PART I INSTITUTIONAL ASPECTS
2 Competences in EU energy policy
3 External competences in energy and climate change
4 EU energy and competition: analysis of current trends and a first assessment of the new package
5 The European Energy Union
PART II EXTERNAL ASPECTS
6 The new global landscape and energy politics in the 21st century
7 The role of the ECT in EU–Russia energy relations
8 Global energy security and EU energy policy
9 Rule-maker or rule-taker? The EU and the shifting global political economy of energy
10 The International Energy Charter: a new impetus for global energy governance?
11 The EU energy security strategy in the Caspian Sea region: addressing the bear in the room
12 Russian energy projects and the global climate, geopolitics and development conundrum
PART III ECONOMIC, SOCIAL AND LEGAL ASPECTS
13 The dark side of power: corruption and bribery within the energy industry
14 Electricity and gas markets
15 Energy Justice: a concept to make the Pigouvian tax work
16 Energy and the law of the sea
17 Access to an effective remedy in business-related human rights violations in the context of oil and gas disputes
18 EU energy law in the maritime sector
19 A (legal) challenge to privacy: on the implementation of smart meters in the EU and the US
20 Paris Agreement: the evolution of international law standards in the post-ontological framework
21 Social science as a starting point?
PART IV ENVIRONMENTAL AND TECHNOLOGICAL ASPECTS
22 EU Emissions Trading Scheme: preventing carbon leakage before and after the Paris Agreement
23 Energy and environment
24 Are smart grids the key to EU energy security?
25 Renewable energy, waste management and the circular economy in the EU: solar PV and wind power
26 The role of renewable energy law and policy in meeting the EU’s energy security challenges
27 Energy futures: new approaches to energy choices
28 EU energy innovation policy: the curious case of energy efficiency
Index

Citation preview

RESEARCH HANDBOOK ON EU ENERGY LAW AND POLICY

RESEARCH HANDBOOKS IN EUROPEAN LAW This important series presents a comprehensive analysis of the latest thinking, research and practice across the field of European Law. Organised by theme, the series provides detailed coverage of major topics whilst also creating a focus on emerging areas deserving special attention. Each volume is edited by leading experts and includes specially-commissioned chapters from distinguished academics as well as perspectives from practice, providing a rigorous and structured analysis of the area in question. With an international outlook, focus on current issues, and a substantive analysis of the law, these Handbooks are intended to contribute to current debate as well as providing authoritative and informative coverage.   Forming a definitive reference work, each Handbook will be essential reading for both scholars in European law as well as for practitioners and policymakers who wish to engage with the latest thinking and ongoing debates in the field.   Titles in this series include: Research Handbook on EU Internet Law Edited by Andrej Savin and Jan Trzaskowski Research Handbook on EU Private International Law Edited by Peter Stone and Youseph Farah Research Handbook on European Social Security Law Edited by Frans Pennings and Gijsbert Vonk Research Handbook on EU Agriculture Law Edited by Joseph A. McMahon and Michael Cardwell Research Handbook on EU Criminal Law Edited by Valsamis Mitsilegas, Maria Bergström and Theodore Konstadinides Research Handbook on EU Public Procurement Law Edited by Christopher Bovis Research Handbook on EU Consumer and Contract Law Edited by Christian Twigg-Flesner Research Handbook on EU Institutional Law Edited by Adam Łazowski and Steven Blockmans Research Handbook on EU Labour Law Edited by Alan Bogg, Cathryn Costello and A.C.L. Davies Research Handbook on the Law of the EU’s Internal Market Edited by Panos Koutrakos and Jukka Snell Research Handbook on EU Administrative Law Edited by Carol Harlow, Päivi Leino-Sandberg and Giacinto della Cananea Research Handbook on EU Health Law and Policy Edited by Tamara K. Hervey, Calum Alasdair Young and Louise E. Bishop Research Handbook on EU Law and Human Rights Edited by Sionaidh Douglas-Scott and Nicholas Hatzis Research Handbook on EU Tort Law Edited by Paula Giliker Research Handbook on EU Energy Law and Policy Edited by Rafael Leal-Arcas and Jan Wouters

Research Handbook on EU Energy Law and Policy

Edited by

Rafael Leal-Arcas Professor of European and International Economic Law, Jean Monnet Chaired Professor of EU International Economic Law and Director of Research, Queen Mary University of London, UK

Jan Wouters Full Professor of International Law and International Organizations, Jean Monnet Chair ad personam EU and Global Governance, and Director of the Leuven Centre for Global Governance Studies and Institute for International Law, KU Leuven, Belgium

RESEARCH HANDBOOKS IN EUROPEAN LAW

Cheltenham, UK • Northampton, MA, USA

© The Editors and Contributors Severally 2017 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical or photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA UK Edward Elgar Publishing, Inc. William Pratt House 9 Dewey Court Northampton Massachusetts 01060 USA

A catalogue record for this book is available from the British Library Library of Congress Control Number: 2017939825 This book is available electronically in the Law subject collection DOI 10.4337/9781786431059

ISBN 978 1 78643 104 2 (cased) ISBN 978 1 78643 105 9 (eBook) Typeset by Servis Filmsetting Ltd, Stockport, Cheshire

I dedicate this book to my parents and my two grandfathers. All four spent their entire professional lives as medical doctors curing patients and serving those who were sick, providing them with a better and healthier future. Rafael Leal-Arcas Washington, DC, 23 December 2016 I dedicate this book to my loving wife and our seven children: David, Clara, Bernadette, Elisabeth, Pia, An-Katrien and Jozef. May our scholarly work be a source of inspiration and an appeal for a stronger European and international engagement. Jan Wouters Antwerp, 23 December 2016

Contents List of contributorsx Acknowledgementsxiii Table of casesxiv Table of legislationxvii  1 Introduction Rafael Leal-Arcas and Jan Wouters

1

PART I  INSTITUTIONAL ASPECTS   2 Competences in EU energy policy Kim Talus and Pami Aalto

15

  3 External competences in energy and climate change Ries Kamphof, Thijs Bonenkamp, Joren Selleslaghs and Madeleine O. Hosli

30

  4 EU energy and competition: analysis of current trends and a first assessment of the new package Leigh Hancher and Francesco Maria Salerno   5 The European Energy Union Thomas Pellerin-Carlin

48 67

PART II  EXTERNAL ASPECTS   6 The new global landscape and energy politics in the 21st century Klaus Segbers

105

  7 The role of the ECT in EU–Russia energy relations Andrey Konoplyanik

114

  8 Global energy security and EU energy policy Severin Fischer

150

  9 Rule-maker or rule-taker? The EU and the shifting global political economy of energy Thijs Van de Graaf

165

10 The International Energy Charter: a new impetus for global energy governance? Sijbren de Jong

179

vii

viii  Research handbook on EU energy law and policy 11 The EU energy security strategy in the Caspian Sea region: addressing the bear in the room Stratos Pourzitakis

192

12 Russian energy projects and the global climate, geopolitics and development conundrum Slawomir Raszewski

215

PART III  ECONOMIC, SOCIAL AND LEGAL ASPECTS 13 The dark side of power: corruption and bribery within the energy industry Costantino Grasso

237

14 Electricity and gas markets Guy Block and Elvira Saitova

257

15 Energy Justice: a concept to make the Pigouvian tax work Jan Schmitz, Kai Menzel and Fabian Dittrich

273

16 Energy and the law of the sea Stephen Minas

287

17 Access to an effective remedy in business-related human rights violations in the context of oil and gas disputes Youseph Farah and Malakee Makhoul 18 EU energy law in the maritime sector Beatriz Huarte Melgar

309 335

19 A (legal) challenge to privacy: on the implementation of smart meters in the EU and the US Max Baumgart

353

20 Paris Agreement: the evolution of international law standards in the post-ontological framework Antonio Morelli

370

21 Social science as a starting point? Michael Kattirtzi

395

PART IV  ENVIRONMENTAL AND TECHNOLOGICAL ASPECTS 22 EU Emissions Trading Scheme: preventing carbon leakage before and after the Paris Agreement Kati Kulovesi

417

23 Energy and environment József Feiler and Peter Vajda

432

24 Are smart grids the key to EU energy security? Filippos Proedrou

450

Contents  ix 25 Renewable energy, waste management and the circular economy in the EU: solar PV and wind power Feja Lesniewska

460

26 The role of renewable energy law and policy in meeting the EU’s energy security challenges Penelope Crossley

469

27 Energy futures: new approaches to energy choices David Elliott

486

28 EU energy innovation policy: the curious case of energy efficiency Jan Rosenow and Florian Kern

501

Index519

Contributors Pami Aalto, Jean Monnet Professor (International Relations) at the Faculty of Management, University of Tampere, Finland. He is also the Director of the consortium ‘Transition to a resource efficient and climate neutral electricity system’ (EL-TRAN), funded by the Strategic Research Council Max Baumgart, PhD candidate at both the University of Cologne and the University of Basel, lecturer at the University of Cologne and fellow in energy law at the Institute of Public Financial Law, Fiscal Law and Law and Economics at the University of St. Gallen Guy Block, Member of the Brussels and Paris Bar; Partner and Head of the Energy Department of the Janson Baugniet law firm Thijs Bonenkamp, MSc graduate in International Relations & Diplomacy at Leiden University and research assistant at Leiden University Penelope Crossley, Senior Lecturer in Energy and Resources Law, Faculty of Law, The University of Sydney Sijbren de Jong, Strategic Analyst at the Hague Centre for Strategic Studies (HCSS) and a Lecturer in Geo-Economics at Leiden University in the Netherlands Fabian Dittrich, Professor, University of Applied Sciences and Arts (Dortmund) David Elliott, Emeritus Professor of Technology Policy, The Open University, UK Youseph Farah, Senior Lecturer in Commercial Law, University of East Anglia, UK József Feiler, Senior Associate, European Climate Foundation Severin Fischer, Center for Security Studies (CSS), ETH Zurich, Switzerland Costantino Grasso, Lecturer in Business Management and Law, University of East London, UK; Global MBA Module Leader for Corporate Governance and Ethics, University of London, UK Leigh Hancher, Of Counsel, Allen & Overy LLP, Amsterdam and Professor of European Law, University of Tilburg, the Netherlands; Professor of EU Energy Law, EUI/FSR, Florence Madeleine O. Hosli, Professor of International Relations at Leiden University and Director, UNU-CRIS, Bruges, Belgium Beatriz Huarte Melgar, Lawyer (Managing Partner), Huarte International, and Secretary General of the International Organization for Fisheries, Aquaculture and other Marine Proteins (IOFAMP), Spain

x

Contributors  xi Ries Kamphof, PhD Candidate at Leiden University, Faculty of Governance and Global Affairs; Associate Research Fellow at the Clingendael Institute, the Netherlands Michael Kattirtzi, Research Associate in Science, Technology and Innovation Studies, University of Edinburgh, UK Florian Kern, Co-Director of the Sussex Energy Group, Senior Lecturer at the Science Policy Research Unit (SPRU) and Associate Editor of Research Policy, University of Sussex Andrey Konoplyanik, Adviser to Director General, Gazprom export LLC; Co-Chair Work Stream 2 ‘Internal Markets’, Russia-EU Gas Advisory Council; Professor of International Oil & Gas Business, Russian State Gubkin Oil & Gas University; Honorary Fellow, Centre for Energy, Petroleum & Mineral Law and Policy (CEPMLP), University of Dundee, Scotland, UK Kati Kulovesi, Professor of International Law, University of Eastern Finland Rafael Leal-Arcas, Jean Monnet Chaired Professor of EU International Economic Law, Queen Mary University of London, UK Feja Lesniewska, Senior Teaching Fellow, School of Law, School of Oriental and African Studies, University of London and Visiting Research Fellow, Centre for Commercial Law Studies, Queen Mary University of London, UK Malakee Makhoul, Lecturer in Law, University of Essex, and Advocate (Member of the Israeli Bar Association) Kai Menzel, Senior Lecturer, Federal University of Applied Administrative Sciences (Bruehl) Stephen Minas, Assistant Professor, School of Transnational Law, Peking University; Senior Research Fellow, Transnational Law Institute, King’s College London, UK Antonio Morelli, SJD candidate, American University Washington College of Law, Washington, DC, USA Thomas Pellerin-Carlin, Research Fellow, Jacques Delors Institute, France Stratos Pourzitakis, PhD Candidate, Hong Kong Baptist University, Department of Government and International Studies, EU Academic Program in Hong Kong Filippos Proedrou, Research Fellow in Social Policy (International Affairs), University of South Wales, UK Slawomir Raszewski, Department of War Studies, King’s College London, UK Jan Rosenow, Senior Research Fellow at the Centre on Innovation and Energy Demand, SPRU, University of Sussex; Honorary Research Associate at Environmental Change Institute, University of Oxford; Senior Associate at the Regulatory Assistance Project Elvira Saitova, Member of the Brussels Bar; Associate in the Energy Department of Janson Baugniet law firm, Belgium

xii  Research handbook on EU energy law and policy Francesco Maria Salerno, Lawyer, Gianni, Origoni, Grippo, Cappelli & Partners, Brussels, Belgium Jan Schmitz, European Commission; Visiting Professor, Queen Mary University London, UK Klaus Segbers, Professor for political science and Director of the Center for Global Politics, Freie Universität of Berlin, Germany Joren Selleslaghs, PhD candidate at Leiden University, Faculty of Governance and Global Affairs; EU & Innovation Consultant at PNO Consultants Kim Talus, Professor of European Energy Law at UEF Law School (University of Eastern Finland) and University of Helsinki, School of Law; Editor-in-Chief for OGEL Peter Vajda, Environmental Expert, Energy Community Secretariat Thijs Van de Graaf, Assistant Professor of International Politics, Ghent University, Belgium Jan Wouters, Full Professor of International Law and International Organizations, Jean Monnet Chair ad personam EU and Global Governance, Director of the Leuven Centre for Global Governance Studies and Institute for International Law, KU Leuven, Belgium

Acknowledgements The financial help from two European Union grants is greatly acknowledged: Jean Monnet Chair in EU International Economic Law (project number 575061-EPP-1-20161-UK-EPPJMO-CHAIR) and the WiseGRID project (number 731205), funded by the European Commission’s Horizon 2020. Both grants have been awarded to Prof. Dr. Rafael Leal-Arcas. Prof. Dr. Rafael Leal-Arcas July 2017

xiii

Table of cases EUROPEAN Alands Vindkraft (C-573/12) ECLI:EU:C:2014:2037������������������������������������������������������������15, 60 Almelo (C-393/92) [1994] ECR I-1477���������������������������������������������������������������������������������������� 15 Borealis Polyolefine GmbH and OMV Refining & Marketing GmbH v Bundesministerfür Land-, under Forstwirtschaf, Umwelt und Wasserwirtschaft (joined Cases C-191/14 and C-192/14)�������������������������������������������������������������������������������������������������������������������������������423 DOW Benelux BV and Others v Staatssecretaris van Infrastructur en Milieu and Others (Case C-295/14)�������������������������������������������������������������������������������������������������������������������������������423 Esso Italiana Srl and Others, Api Raffineria di Ancona SpA, Lucchini in Amministrazione Straordinaria SpA and Dalmine SpA v Comitato nazionale per la gestione della direttiva 2003/87/CE e per il supporto nella gestione delle attivit. di progetto del protocollo di Kyoto and Others (Joined Cases C-389/14, C-391/14 to C-393/14 [2016] ECR���������������������������������423 Commission v Council (Case 22/70) [1971] ECR 263����������������������������������������������������������������� 37 Commission v France (C-158/94) [1997] ECR I-5819������������������������������������������������������������������ 15 Commission v Germany (Case C-61/84)������������������������������������������������������������������������������������291 Commission v Italy (C-159/94) [1997] ECR I-5793��������������������������������������������������������������������� 15 Commission v Netherlands (C-157/94) [1997] ECR I-5699��������������������������������������������������������� 15 Commission v Sweden (Case C-246/07) [2010] ECR 3317����������������������������������������������������������� 37 Commission decision of April 14, 2010, relating to a proceeding under Article 102 of the Treaty on the Functioning of the European Union and Article 54 of the EEA Agreement – Case 39351 – Swedish Interconnectors�������������������������������������������������������������������������������������������� 59 Costa v Enel, 6/64, [1964] ECR 585�������������������������������������������������������������������������������������������� 15 ECJ, Decision of 09 November 2010, (joined Cases C-92/09 and C-93/09) ECLI:EU:C:2010:662������������������������������������������������������������������������������������������������������������358 ECJ, Decision of 08 April 2014, (joined cases C-293/12 und C-594/12) ECLI:EU:C:2014:238������������������������������������������������������������������������������359, 360, 361, 362, 364 Eon Ruhrgas and Eon v Commission (T-360/09) T: 2012:332����������������������������������������������������� 49 Essent Belgium (C‑204/12–C‑208/12) EU:C:2014:2192 (judgment of 11 September 2014)���������� 60 Essent Belgium (C‑204/12–C‑208/12) EU:C:2014:2192 (judgment of 29 September 2016)���������� 60 Federutility and others (C-265/08) ECR 2010 p. I-3377, ECLI:EU:C:2010:205�������������������������� 59 Khodorkovskiy v Russia ECtHR 2011 Case no. 5829/04��������������������������������������������������� 251, 252 Owusu v Jackson (Case C-281/02) ECR[2005] I-1383����������������������������������������������������������������320 Parliament v Council (C-490/10) ECLI:EU:C:2012:525��������������������������������������������������� 20, 23, 29 Poulsen (Case C-986/90)������������������������������������������������������������������������������������������������������������292 PreussenElektra v Schleswag [2001] EUECJ C-379/98���������������������������������������������������������������476 The Netherlands v European Parliament and Council (Case C-377/98)�������������������������������������291 Vent De Col.re and others (C-262/12) ECLI:EU:C:2013:851������������������������������������������������������ 60 (judgment of 19 December 2013)������������������������������������������������������������������������������������������������ 60

INTERNATIONAL Aegean Sea Continental Shelf (Greece/Turkey) (Interim Measures) [1976] ICJ Rep 3���������������298 Bay of Bengal Arbitration between Bangladesh and India, In the Matter of, Award, PCA, The Hague, 7 July 2014�����������������������������������������������������������������������������������������������������������������298 Corfu Channel Case (Merits, Judgment), 1949 I.C.J. Rep. 46�����������������������������������������������������289 Dispute Concerning Delimitation of the Maritime Boundary between Ghana and Cote

xiv

Table of cases  xv d’Ivoire in the Atlantic Ocean (Ghana/Cote d’Ivoire, Request for the Prescription of Provisional Measures), Order of 25 April 2015����������������������������������������������������������������������299 Guyana/Suriname Case (Arbitral Tribunal) (Award) (2007)�������������������������������������������������������� 29 Hulley Enterprises Ltd (Cyprus) v Russian Federation (International Energy Charter, investment dispute settlement case, 03.02.2005)���������������������������������������������������������������������������������������145 Klockner v Cameroon, Ad Hoc Committee Decision, May 3, 1985�������������������������������������������330 Lotus, The (Judgment No. 9), 1927, P.C.I.J., Series A, No. 10����������������������������������������������������289 Maritime Delimitation and Territorial Questions between Qatar and Bahrain Merits, Judgment of 16 March 2001, ICJ Reports 2001�������������������������������������������������������������������������������������293 North Sea Continental Shelf Cases (Federal Republic of Germany/Denmark; Federal Republic of Germany/Netherlands), Judgment of 20 February 1969, ICJ Reports 1969�������293 Philippines v China, South China Sea Arbitration, Award, Permanent Court of Arbitration, 12 July 2016�����������������������������������������������������������������������������������������������������������������300, 301, 302 Veteran Petroleum Trust (Cyprus) v Russian Federation (International Energy Charter, investment dispute settlement case, 03.02.2005)���������������������������������������������������������������������145 Yukos Universal Ltd (UK - Isle of Man) v Russian Federation (International Energy Charter, investment dispute settlement case, 03.02.2005)���������������������������������������������������������������������145

NATIONAL Spain Tribunal Supremo sentencia no. 1425/2012, de 7 de febrero and sentencia no. 334/2016, de 2 de noviembre������������������������������������������������������������������������������������������������������������������������������� 60 The Netherlands Friday Alfred Akpan et al. v Royal Dutch Shell Plc et al, Court of The Hague, Judgment in motion contesting jurisdiction of 30 December 2009, Case No 330891/HA ZA 09-57�����������321 Friday Alfred Akpan et al. v Royal Dutch Shell Plc et al., Case C/09/337050/HA ZA 09-150, District Court of The Hague, 30 January 2013����������������������������������������������������������������������320 United Kingdom Amin Rasheed Shipping Corp v Kuwait Insurance Co [1984] AC 50�����������������������������������������331 Bodo Community and others v Shell Petroleum Development Company of Nigeria Ltd [2014] EWHC 1973 (TCC); [2014] EWHC 2170 (TCC)��������������������������������������������������������������������322 Chandler v Cape Plc [2012] EWCA (Civ) 525����������������������������������������������������������������������������320 Greenpeace v Secretary of State for Trade and Industry [2007] EWHC 311������������������������������405 Guerrero v Monterrico Metal plc [2009] EWHC 2475 [2010] EWHC 3228��������������������������������322 Motto v Trafigura Ltd [2011] EWCA Civ 1150��������������������������������������������������������������������������323 Porter v Magill [2002] 2 AC 357�������������������������������������������������������������������������������������������������333 R v Gough [1993] AC 646����������������������������������������������������������������������������������������������������������333 Shamil Bank of Bahrain EC v Beximico Pharmaceuticals Ltd [2004] EWCA Civ 19�����������������331 Vava and Ors v Anglo American of South Africa Ltd [2013] EWHC 2131 (QB), [2013] Bus LR D65����������������������������������������������������������������������������������������������������������������������������������������321 Yao Essaie Motto and Others v Trafigura Ltd and Trafigura Beheer BV [2011] EWCA Civ 1150���������������������������������������������������������������������������������������������������������������������������������������322 United States of America Al Shimari v CACI Premier Technology, Inc., 758 F.3d 516 (4th Cir. 2014)�������������������������������325 Baloco v Drummond Co., 767 F.3d 1229, 1238 (2014)���������������������������������������������������������������325 Cardona v Chiquita Brands International, Inc., 760 F.3d 1185 (11th Cir. 2014)����������������� 325, 332

xvi  Research handbook on EU energy law and policy Doe v Unocal, 395 F.3d 932 (9 Cir. 2002)�����������������������������������������������������������������������������������322 Friedman and others v. Public Utilities Commission, Maine Supreme Judicial Court, 12 July 2012���������������������������������������������������������������������������������������������������������������������������������������366 Kadic v Karadžić 70 F.3d 232 (2nd Cir. 1995)����������������������������������������������������������������������������323 Khulumani v Barclay Nat’l Bank Ltd., 504 F.3d 254, 2007 U.S. ������������������������������������������������324 Kiobel v Royal Dutch Petroleum, 621 F. 3d 111, 2010 U.S.��������������������������������� 324, 325, 332, 333 Kiobel v Royal Dutch Petroleum 133 U.S. 1659 (2013)��������������������������������������� 311, 323, 324, 333 Kyllo v. United States, Decision of 11 June 2001, 533 U.S. 27����������������������������������������������������366 Naperville Smart Meter Awareness v. City of Naperville, Decision of 26 September 2016, Case 1:11-cv-09299 (Northern District of Illinois)�������������������������������������������������������������������������366 Presbyterian Church of Sudan v Talisman Energy, Inc., 582 F.3d 244; 2009 U.S. ����������������������324 Smith v. Maryland, Decision of 20 June 1979, 442 U.S., 735�����������������������������������������������������365 Sosa v Alvarez-Machain, 542 U.S. 692������������������������������������������������������������������������������� 323, 324 Wiwa v Royal Dutch Shell, 226 F.3d 88 (2nd Cir. 2000)�������������������������������������������������������������322

Table of legislation EUROPEAN UNION Commission Decision of 27 April 2011 determining transitional Union-wide rules for harmonized free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of the European Parliament and of the Council (OJ L130, 17.5.2011, p. 1)������422 recitals 1, 4����������������������������������������������422 Commission Decision of 5 September 2013 concerning national implementation measures for the transitional free allocation of greenhouse gas emission allowances in accordance with Article 11(3) of Directive 2003/87/EC of the European Parliament and of the Council (2013/448/EU) (OJ L240, 7.9.2013, p. 27)���������������������������� 422–423 Commission Decision of 27 October 2014 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, for the period 2015 to 2019 (OJ L308. 27.10.2014, pp. 114–124)���������������������������������������������422 Commission Regulation (EU) 2015/1222 of 24 July 2015 establishing a guideline on capacity allocation and congestion management (OJ L 197, 25.7.2015, pp. 24–72)������������������������������������������� 64, 263 Council Directive 75/442/EEC of 15 July 1975 on waste (OJ L 194, 25.7.1975, pp. 47–49)�������������������������������������������464 Council Directive 90/377/EEC of 29 June 1990 concerning a Community procedure to improve the transparency of gas and electricity prices charged to industrial end-users (OJ L 185, 17.7.1990, pp. 16–24)��������������������������258 Council Directive 90/547/EEC of 29 October 1990 on the transit of electricity through transmission grids (OJ L 313, 13.11.1990, pp. 30–33)�������259 Council Directive 91/296/EEC of 31 May 1991 on the transit of natural gas

through grids (OJ L 147, 12.6.1991, pp. 37–40)�������������������������������������������������259 Council Directive 92/75/EEC of 22 September 1992 on the indication by labelling and standard product information of the consumption of energy and other resources by household appliances (OJ L 297, 13.10.1992, pp. 16–19)������������������������504 Council Directive 96/61/EC of 24 September 1996 concerning integrated pollution prevention and control (OJ L257, 10.10.1996, pp. 26–40)������������������������418 Council Directive 1999/31/EC of 26 April 1999 on the landfill of waste (OJ L 182, 16.7.1999, pp. 1–19)���������������������464 art 1��������������������������������������������������������464 Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity (OJ L 283, 31.10.2003, p. 51)�������������������24, 278, 279 recitals 2–7����������������������������������������������278 recital 11����������������������������������������� 279, 280 recital 28�������������������������������������������������279 art 4��������������������������������������������������������279 art 19���������������������������������������������� 279, 280 Annex I, II�������������������������������������������� 279s Council Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply (OJ L 127, 29.4.2004, pp. 92–6)��������������� 22, 159 Council Directive 2009/119/EC of 14 September 2009 imposing an obligation on Member States to maintain minimum stocks of crude oil and/or petroleum products (OJ L 265, 9.10.2009, pp. 9–23)�����������158 Decision No 1364/2006/EC of the European Parliament and of the Council of 6 September 2006 laying down guidelines for trans-European energy networks (OJ L 262, 22.9.2006, pp. 1–23)���������������������������������������������������342 Decision No 994/2012/EU of the European Parliament and of the Council of 25 October 2012 establishing an information exchange mechanism

xvii

xviii  Research handbook on EU energy law and policy with regard to intergovernmental agreements between Member States and third countries in the field of energy (L299, 27.10.2012, pp. 13–17)����76 Decision (EU) 2015/1814 of the European Parliament and of the Council of 6 October 2015 concerning the establishment and operation of a market stability reserve for the Union greenhouse gas emission trading scheme and amending Directive 2003/87/EC (OJ L264, 9.10.2015, pp. 1–5)��������������� 420 recital 5���������������������������������������������������420 Directive 94/22/EC of the European Parliament and of the Council of 30 May 1994 on the conditions for granting and using authorizations for the prospection, exploration and production of hydrocarbons (OJ L 164, 30.6.1994, pp. 3–8)����������������������347 Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data (OJ L 281, 23.11.1995, pp. 31–500)�����������������������357 Directive 96/30/EC of the European Parliament and the Council of 19 December 1996 concerning common rules for the internal market in electricity (OJ L 27/10)������������������������259 Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity (OJ 1997, L 27, 30.1.1997, pp. 20–29)����������������16, 48, 49, 53, 78, 79, 128, 129, 130, 131, 133, 259, 260 Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas (OJ L 204, 21.7.1998, pp. 1–12) �����������16, 48, 49, 53, 128, 129, 130, 131, 133, 158, 259, 260 Council Directive 1999/32/EC of 26 April 1999 relating to a reduction in the sulphur content of certain liquid fuels (OJ L 121, 11.5.1999, pp. 13–18)���������343 Directive 2000/53/EC of the European Parliament and of the Council of 18 September 2000 on end-of life vehicles (OJ L 269, 21.10.2000, pp. 34–43)�������464 Directive 2001/77/EC of the European

Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market (OJ L 283, 27.10.2001, pp. 33–40)������������������ 49, 476 art 4��������������������������������������������������������476 Directive 2001/80/EC of 23 October 2001 on the limitation of emissions of certain pollutants into the air from large combustion plants (OJ L 309, 27.11.2001, pp. 1–21)��������������������������440 Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (OJ L 108, 24.4.2002, p. 33–35)�������������51 Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector (OJ L 201, 31.7. 2002, pp. 37–47)�������������������������357 Directive 2002/91/EC of the European Parliament and of the Council of 16 December 2002 on the energy performance of buildings (OJ L 1, 4.1.2003, pp. 65–71)�������������502, 505, 507 Directive 2002/96/EC of the European Parliament and of the Council of 27 January 2003 on waste electrical and electronic equipment (WEEE) - Joint declaration of the European Parliament, the Council and the Commission relating to Article 9 (OJ L 37, 13.2.2003, p. 24–39)��������������� 464, 466 Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC (OJ L 176, 15.7.2003, p. 37)�������������� 3, 16, 48, 53, 119, 128, 129, 130, 131, 133, 136, 259, 260, 261 art 3(6)����������������������������������������������������477 Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas (OJ L 176/57–78)���������� 3, 16, 48, 53, 119, 128, 129, 130, 131, 133, 136, 158, 259, 260, 261 arts 21–22�����������������������������������������������119

Table of legislation  xix Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowances trading within the Community (OJ L 275, 25.10.2003, pp. 32–46)�������� 339, 418, 421, 422, 440 art 9��������������������������������������������������������419 art 10a(5)������������������������������������������������423 Directive 2005/89/EC of the European Parliament and of the Council of 18 January 2006 concerning measures to safeguard security of electricity supply and infrastructure investment (OJ L 33, 4.2.2006, pp. 22–27)���������22, 263, 270 Directive 2006/32/EC of the European Parliament and of the Council of 5 April 2006 on energy end-use efficiency and energy services and repealing Council Directive 93/76/EEC (OJ L 114, 27.4.2006, pp. 64–85)�������������������502 Directive 2008/56/EC of the European Parliament and of the Council of 17 June 2008 establishing a framework for community action in the field of marine environmental policy (OJ L 164, 25.6.2008, pp. 19–40)�������������������341 Directive 2008/98/EC of the European Parliament and of the Council of 19 November 2008 on waste and repealing certain Directives (OJ L 312, 22.11.2008, pp. 3–30)��������������������������464 arts 5, 8���������������������������������������������������465 art 15������������������������������������������������������465 Directive 2009/16/EC of the European Parliament and of the Council of 23 April 2009 on port State control (OJ L 131, 28.5.2009, pp. 57–100)��������� 337, 338 Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC (OJ L 140, 5.6.2009, pp. 16–62)������������20, 22, 49, 160, 175, 345, 395, 461, 476, 477–479, 483 recital 25�������������������������������������������������477 art 2(j)�����������������������������������������������������477 arts 2–4���������������������������������������������������461 art 6��������������������������������������������������������478 arts 7–11�������������������������������������������������478 Directive 2009/29/EC of the European Parliament and of the Council of 23 April 2009 amending Directive

2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading scheme of the Community (OJ L140, 5.6.2009, pp. 63–87)�������������������������������������������������419 recital 21�������������������������������������������������419 recital 26�������������������������������������������������425 art 9��������������������������������������������������������419 art 10(b)��������������������������������������������������425 Directive 2009/30/EC of the European Parliament and of the Council of 23 April 2009 amending Directive 98/70/EC as regards the specification of petrol, diesel and gas-oil and introducing a mechanism to monitor and reduce greenhouse gas emissions and amending Council Directive 1999/32/EC as regards the specification of fuel used by inland waterway vessels and repealing Directive 93/12/EEC (OJ L 140, 5.6.2009, p. 88–113)��������� 172, 345 Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC (OJ L 211, 14.8.2009, pp. 55–93)�������������� 17, 26, 48, 49, 50, 51, 53–54, 55, 57, 61, 62, 76, 128, 129, 130, 131, 133, 171, 173, 176, 216, 261, 262, 263, 264, 364, 368 recitals 33, 34��������������������������������������������55 arts 9, 10��������������������������������������������� 54, 56 art 22��������������������������������������������������������56 art 37��������������������������������������������������������56 Annex I, para 2���������������������������������������365 Annex I, para 2(1)��������������������������� 356, 361 Annex I, para 2(4)��������������������������� 361, 363 Annex I, para 2(5)��������������������������� 357, 363 Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (OJ L 211, 14.8.2009, pp. 94–136)������������������17, 26, 48, 49, 50, 51, 53–54, 55, 61, 62, 76, 119, 128, 129, 130, 131, 133, 158, 171, 173, 176, 216, 261, 262, 263, 264 arts 9, 10��������������������������������������������� 54, 56 art 13(4)����������������������������������������������������56 art 22��������������������������������������������������������56 art 34 �������������������������������������������������������55 arts 35–36�����������������������������������������������119 art 41��������������������������������������������������������56

xx  Research handbook on EU energy law and policy Directive 2009/125/EC of the European Parliament and of the Council of 21 October 2009 establishing a framework for the setting of ecodesign requirements for energy-related products (OJ L 285, 31.10.2009, pp. 10–35)���������������������������������� 502, 506–507 Directive 2010/30/EU of the European Parliament and of the Council of 19 May 2010 on the indication by labelling and standard product information of the consumption of energy and other resources by energyrelated products (OJ L 153, 18.6.2010, pp. 1–12)���������������������������������������������504 Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings (OJ L 153, 18.6.2010, pp. 13–35)������������������ 502, 505 Directive 2010/65/EU of the European Parliament and of the Council of 20 October 2010 on reporting formalities for ships arriving in and/or departing from ports of the Member States (OJ L 283, 29.10.2010, pp. 1–100)�������������������������������������������������342 Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions (integrated pollution prevention and control) (OJ L 334, 17.12.2010, pp.17–119)��������������� 438, 441 art 8��������������������������������������������������������441 art 30(2)��������������������������������������������������440 art 79������������������������������������������������������441 Directive 2012/19/EU of the European Parliament and of the Council of 4 July 2012 on waste electrical and electronic equipment (WEEE) (OJ L 197, 24.7.2012, pp. 38–71)����464, 466, 468 recital 6���������������������������������������������������465 art 1��������������������������������������������������������464 Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC (OJ L 315, 14.11.2012, pp. 1–56)������������29, 175, 368, 395, 502, 506 art 1��������������������������������������������������������361 arts 3, 5, 6�����������������������������������������������506 art 7��������������������������������������������������������506 arts 8­12���������������������������������������������������506

art 9(1)���������������������� 356, 357, 361, 362, 364 art 9(2)(b)��������������������������������357, 359, 364 Directive 2012/33/EU of the European Parliament and of the Council of 21 November 2012 amending Council Directive 1999/32/EC as regards the sulphur content of marine fuels (OJ L 327, 27.11.2012, pp. 1–13)����������� 340, 343 Directive 2013/30/EU of the European Parliament and of the Council of 12 June 2013 on the safety of offshore oil and gas operations and amending Directive 2004/35/EC (OJ L 178, 28.6.3013, pp. 66–106)���������������� 315, 347 art 20������������������������������������������������������315 Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings (OJ L 182, 29.6.2013, pp. 19–76)�������������������255 Directive 2014/89/EU of the European Parliament and of the Council, 23 July 2014, establishing a framework for maritime spatial planning (OJ L 257, 28.8.2014, pp. 135–145)�����������������������289 para 1�����������������������������������������������������289 Directive 2014/94/EU of the European Parliament and of the Council of 22 October 2014 on the deployment of alternative fuels infrastructure (OJ L 307, 28.10.2014, pp. 1–20)����������� 349, 351 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups (OJ L 330, 15.11.2004, pp.1–9)�����������������������������316 Directive (EU) 2015/2193 of the European Parliament and of the Council of 25 November 2015 on the limitation of emissions of certain pollutants into the air from medium combustion plants (OJ L 313, 28.11.2015, pp. 1–19)�������� 440 EC Treaty art 6��������������������������������������������������������278 art 93������������������������������������������������������278 art 95�������������������������������������������������� 20, 22 art 100������������������������������������������������������22 art 175(1)�������������������������������������������� 20, 22 Energy Community Treaty 2006�������� 129, 130, 131, 442

Table of legislation  xxi EU Charter of Fundamental Rights�� 8, 314, 318, 319 art 7��������������������� 8, 354, 357, 358, 359–360, 363, 364, 368, 369 art 8��������������������������������� 358, 359, 368, 369 art 47���������������������������������������������� 318, 319 art 51������������������������������������������������������318 art 52(1)��������������������������������������������������361 European Atomic Energy Community Treaty 1957�����������������15, 39, 73, 148, 257 European Coal and Steel Community Treaty 1951���������������������������������������15, 194, 257 European Convention for the Protection of Human Rights and Fundamental Freedoms�����������������������������251, 318, 319 art 3��������������������������������������������������������251 art 5(1)(b)�����������������������������������������������252 art 5(3)����������������������������������������������������252 art 6��������������������������������������������������������318 art 8��������������������������������������������������������358 art 13������������������������������������������������������318 European Parliament and Council Directive 94/62/EC of 20 December 1994 on packaging and packaging waste (OJ L 365, 31.12.1994, p. 10–23)�������������������464 Regulation (EC) No 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for crossborder exchanges in electricity (OJ L 176, 15.7.2003, p. 1)������ 3, 16, 48, 53, 119, 128, 129, 130, 131, 133, 136, 261 Regulation (EC) No 1775/2005 of 28 September 2005 on conditions for access to the natural gas transmission networks (OJ L 289, 3.11.2005 pp. 1–13)��������������������������������������48, 158, 216 Regulation (EC) No 864/2007 of the European Parliament and of the Council of 11 July 2007 on the law applicable to non-contractual obligations, (OJ L 199, 31.7.2007, pp. 40–49) (Rome II Regulation)������ 321, 331 art 4(1)����������������������������������������������������331 art 14������������������������������������������������������332 Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (OJ L 177, 4.7.2008, pp. 6–16) (Rome I)���������������������������������������������������������331 Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy

Regulators (OJ L 211, 14.8.2009, pp. 1–14)����������������������������� 17, 26, 48, 49, 50, 51, 53–54, 55, 57, 61, 62, 76, 128, 129, 130, 131, 133, 136, 158, 159, 171, 173, 176, 216, 262, 263, 264 art 6(2), (3), (4)�����������������������������������������59 art 8����������������������������������������������������������57 art 9(1)������������������������������������������������������57 art 16(1)����������������������������������������������������57 Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for crossborder exchanges in electricity (OJ L 211, 14.8.2009, pp. 15–35)�������������� 17, 26, 48, 49, 50, 51, 53–54, 55, 58, 61, 62, 76, 128, 129, 130, 131, 133, 136, 171, 173, 176, 216, 261, 262, 263, 264, 269 recital 6���������������������������������������������������263 recital 17���������������������������������������������������58 art 3����������������������������������������������������������54 art 4����������������������������������������������������������58 art 6����������������������������������������������������������58 art 6(2)����������������������������������������������������263 art 9����������������������������������������������������������59 art 9(2)������������������������������������������������������59 art 17��������������������������������������������������������55 art 17�������������������������������������������������� 55, 57 art 17(5)����������������������������������������������������57 art 17(7)����������������������������������������������������55 art 17(8)����������������������������������������������������55 art 18��������������������������������������������������������58 Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks (OJ L 211, 14.8.2009, pp. 36–54)��������������������� 17, 26, 48, 49, 50, 51, 53–54, 55, 57, 61, 62, 76, 128, 129, 130, 131, 133, 136, 158, 171, 173, 176, 216, 261, 262, 263, 264 recital 16���������������������������������������������������58 art 3����������������������������������������������������������54 art 4����������������������������������������������������������58 art 6����������������������������������������������������������58 art 9����������������������������������������������������������59 art 9(2)������������������������������������������������������59 art 18��������������������������������������������������������58 art 36��������������������������������������������������������55 art 36(4), (5)����������������������������������������������57 Regulation (EC) No 67/2010 of the European Parliament and of the Council of 30 November 2009 laying

xxii  Research handbook on EU energy law and policy down general rules for the granting of Community financial aid in the field of trans-European networks (OJ L 27, 30.1.2010, pp. 20–32)����������������������������81 Regulation (EU) No 994/2010 of the European Parliament and of the Council of 20 October 2010 concerning measures to safeguard security of gas supply (OJ L 295, 12.11.2010, pp. 1–22)��� 18, 23, 28, 76, 159 recital 20���������������������������������������������������18 arts 3, 9–12�����������������������������������������������18 Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (REMIT) (OJ L 326, 8.12.2011, pp. 1–16)������������������������������57 art 16(1)����������������������������������������������������57 art 16(4)(c)������������������������������������������������57 Regulation (EU) No 1255/2011 of the European Parliament and of the Council of 30 November 2011 establishing a programme to support the further development of an integrated maritime policy (OJ L 321, 5.12.2011, pp. 1–10) reg 2(e)����������������������������������������������������292 Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (OJ L 351, 20.12.2012, pp. 1–32) (Brussels I)�������320, 322, 323 art 1��������������������������������������������������������320 art 2.1�����������������������������������������������������320 art 4������������������������������������������������ 320, 321 art 62���������������������������������������������� 321, 322 art 63.1���������������������������������������������������320 Regulation (EU) No 347/2013 of the European Parliament and of the Council of 17 April 2013 on guidelines for trans-European energy infrastructure (OJ L 115, 25.4.2013, pp. 39–75)���������������������������������������������������34 Regulation (EU) No 1290/2013 of the European Parliament and of the Council of 11 December 2013 laying down the rules for participation and dissemination in “Horizon 2020 - the Framework Programme for Research and Innovation (20142020)” and repealing Regulation (EC)

No 1906/2006 (OJ L 347, 20.12.2013, pp. 81–10)�������������������������������������������348 Regulation (EU) No 508/2014 of the European Parliament and of the Council of 15 May 2014 on the European Maritime and Fisheries Fund (OJ L 149, 20.5.2014, pp. 1–66)���������������������������������������������������341 arts 41, 48�����������������������������������������������343 Regulation (EU) No 176/2014 of 25 February 2014 amending the Regulation (EU) No 1031/2010 in particular to determine the volumes of greenhouse gas emission allowances to be auctioned in 2013–2020 (OJ L56, 26.2.2014, pp.11–13)���������������������������420 Regulation (EU) 2015/757 of the European Parliament and of the Council of 29 April 2015 on the monitoring, reporting and verification of carbon dioxide emissions from maritime transport, and amending Directive 2009/16/EC (OJ L 123, 19.5.2015, pp. 55–76)�������������������������������������������������337 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) (OJ L 119, 4.5.2016, pp. 1–88)������������������������������357 Single European Act 1986����������������20, 37, 258 Treaty of Lisbon amending the Treaty on European Union and the Treaty establishing the European Community, signed at Lisbon, 13 December 2007 (OJ C 306, 17.12.2007, pp. 1–271) ���1, 18, 19, 20, 28, 31, 36, 40, 45, 139, 141, 171, 177, 197, 202, 278, 475, 501 Treaty of Rome 1957�������20, 121, 128, 129, 257 Treaty on European Union 2009 (TEU)�����314, 475 art 2��������������������������������������������������������314 art 3������������������������������������������������ 361, 363 art 3(3)����������������������������������������������������314 art 4��������������������������������������������������������278 art 4(3)������������������������������������������������ 37, 76 art 11������������������������������������������������������276 art 5(2)����������������������������������������������������314 art 5(3)�������������������������������������������� 314, 478 art 5(4)����������������������������������������������������314 art 6��������������������������������������������������������314 art 15(1)����������������������������������������������������39

Table of legislation  xxiii art 17(1)����������������������������������������������������39 art 21(3)����������������������������������������������������39 art 22(1)����������������������������������������������������39 Treaty on the Functioning of the European Union 2009 (TFEU)��������������18, 257, 475 art 2(2)�������������������������������������������� 477, 478 art 4���������������������������������������������������� 31, 40 art 4(1)����������������������������������������������������314 art 11�������������������������������������������������� 18, 21 art 21������������������������������������������������������315 art 37��������������������������������������������������������21 arts 81, 82�����������������������������������������������318 art 101������������������������������������������������ 50, 51 art 108(3)��������������������������������������������������60 art 113����������������������������������������������������278 art 114������������������������������������������������ 20, 22 art 122������������������������������������������ 18, 19, 23 art 122(1)�������������������������������������������� 18, 22 art 126������������������������������������������������������65 art 170������������������������������������������������������18 art 191�������������������������������������18, 20, 35, 40 art 192��������������������������������� 20, 23, 278, 280 art 192(1)�������������������������������������20, 22, 464 art 192(2)�������������������������������������������� 21, 24 art 192(2)(c)����������������������������������������������21 art 194����������1, 18, 19, 20, 21, 22, 23, 28, 29, 39, 60, 278, 290, 314, 469, 477 art 194(1)���������������������������������������� 314, 477 art 194(1)(a)����������������������������������������������18 art 194(1) (b)��������������������������������������� 18, 28 art 194(1)(c)�������������������������������18, 278, 361 art 194(1)(d)����������������������������������������������18 art 194(2)������������ 18, 21, 23, 24, 60, 314, 477 art 194(3)�����������������������������������24, 157, 314 art 211������������������������������������������������������38 art 221������������������������������������������������������39 art 258������������������������������������������������������50 art 260(3)��������������������������������������������������26

INTERNATIONAL TREATIES AND CONVENTIONS Agreement between the Republic of Cyprus and the Arab Republic of Egypt on the Delimitation of the Exclusive Economic Zone, 17 February 2003�����300 Agreement between the Government of the State of Israel and the Government of the Republic of Cyprus on the delimitation of the exclusive economic zone, 17 December 2010, UNTS 2740����������������������������������������������������300 Bilateral Investment Treaty between the Government of the Hashemite

Kingdom of Jordan and the Government of the Republic of Singapore (2004) art 13������������������������������������������������������329 Energy Charter Treaty 1994 (ECT)������ 3, 4, 43, 114, 126, 130–149, 173, 179, 180, 186, 195 art 7���������������������������������������� 127, 137, 138 art 7(5)����������������������������������������������������186 art 18������������������������������������������������������125 art 24(3)������������������������������������������ 147, 148 art 26������������������������������� 141, 144, 145, 188 art 26(3)��������������������������������������������������329 art 26(8)��������������������������������������������������145 art 27������������������������������������������������������148 art 45(1), (2)��������������������������������������������187 art 47(3)��������������������������������������������������141 Equator Principles III, June 2013������� 329, 330 principle 6�����������������������������������������������330 General Agreement of Trade and Tariffs 1947 (GATT)��������������� 121, 127, 149, 242 art 5��������������������������������������������������������127 International Centre for the Settlement of Investment Disputes���������������������������330 art 42������������������������������������������������������331 International Convention for the Prevention of Pollution from Ships, London, 2 November 1973, amended by the 1978 Protocol (London, 1 June 1978) 1340 UNTS 184 (MARPOL)�������������� 304, 336 Annex VI���������������������������������304, 336, 343 reg 5(4)���������������������������������������������������304 International Energy Charter (IECT) May 2015�����������������������������������������5, 179–189 International Maritime Organization, 1974, SOLAS, International Convention for the Safety of Life at Sea����������������������350 International Maritime Organization, 1978, International Convention on Standards of Training, Certification and Watchkeeping for Seafarers����������351 International Maritime Organization, 2008 Guidelines and Standards for the Removal of Offshore Installations and Structures on the Continental Shelf and in the EEZ. IMO Resolution A.672��������������������������������������������������304 International Maritime Organization, 2009, Interim Guidelines on Safety for Natural Gas-Fuelled Engine Installations in Ships���������������������������350 art 1.1.3��������������������������������������������������350 International Maritime Organization, 2017, International code of safety for ships using gases or other low-flash point fuels����������������������������������������������������350

xxiv  Research handbook on EU energy law and policy International Ship and Port Facility Security Code, 2003������������������������������������������351 Japan and the Republic of Korea, Agreement concerning joint development of the southern part of the continental shelf adjacent to the two countries, Seoul, 30 January 1974����������������������������������������������������301 Maritime Boundary Agreement between the Government of the State of Israel and the Government of the Hashemite Kingdom of Jordan, 18 January 1996�� 300 Memorandum on the Regime of the High Seas, UN Doc. A/CN.4/32, 14 July 1950����������������������������������������������������293 MERCOSUR���������������������������������������������121 North America Free Trade Agreement (NAFTA)�������������������������������������������121 Organization for Economic Cooperation and Development (OECD)���������� 43, 121, 179, 243 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions 2009����������������������������������������������������243 art 1(1)����������������������������������������������������243 OECD Guidelines for Multinational Enterprises (OECD Publishing 2011) s I������������������������������������������������������������326 Office of the High Commissioner for Human Rights, ‘Guiding Principles for Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework’ UN New York and Geneva 2011, HR/PUB/11/04 (UNGPS)��������� 7, 309–313, 315, 326, 331 Principles 12, 13��������������������������������������312 Principle 17������������������������������������� 313, 328 Principle 25���������������������������������������������326 Principle 26���������������������������������������������318 Principle 29���������������������������������������������326 Principle 30���������������������������������������������328 Principle 31������������������������������327, 328, 330 Paris Agreement on Climate Change 2015, UNFCCC/CP/2015/L.9/Rev.1�������� 5, 8, 9, 30, 41–42, 84, 88, 94, 95, 113, 164, 217, 264, 278, 336, 370–394, 418, 424, 428, 430, 434, 446, 463, 483 art 2.1(a)�������������������������������������������������370 art 4���������������������������������������������������� 84, 95 art 4.3, .4, .9��������������������������������������������427 art 6.2�����������������������������������������������������427 art 6.4�����������������������������������������������������428 Peace of Westphalia 1648����������������������������106

UNCITRAL Model Law on International Commercial Arbitration (1985)�����������141 art 12������������������������������������������������������333 art 27������������������������������������������������������332 UN Convention against Corruption, Resolution 58/4 of 31 October 2003������ 5, 238, 239, 244 UN Convention on the High Seas, Geneva 1958 art. 24 ����������������������������������������������������303 UN Convention on the Law of the Sea (UNCLOS)����������� 6, 7, 287–308, 346, 347 preamble�������������������������������������������������287 art 1��������������������������������������������������������347 art 1(1)����������������������������������������������������296 art 1(3)����������������������������������������������������297 art 1(4)����������������������������������������������������303 Pt II��������������������������������������������������������290 arts 2, 3���������������������������������������������������293 arts 17–19�����������������������������������������������293 art 24������������������������������������������������������303 art 33(1), (2)��������������������������������������������294 Pt III�������������������������������������������������������290 Pt IV�������������������������������������������������������290 Pt V��������������������������������������������������������290 art 55������������������������������������������������������294 art 56������������������������������������������������������294 art 56(2)��������������������������������������������������295 art 58(1)��������������������������������������������������295 art 60(1)��������������������������������������������������294 art 74(1), (2)��������������������������������������������297 art 74(3)��������������������������������������������������298 Pt VI����������������������������������������������� 290, 294 art 76(1)��������������������������������������������������295 art 77 (1), (2)�������������������������������������������294 art 77(3)��������������������������������������������������295 art 77(4)��������������������������������������������������294 art 79(1), (4)��������������������������������������������295 art 81������������������������������������������������������295 art 82������������������������������������������������������296 art 82(1), (2)��������������������������������������������295 art 82(3)��������������������������������������������������296 art 82(4)��������������������������������������������������295 art 83(1), (2)��������������������������������������������297 art 83(3) �������������������������������������������������298 Pt VII������������������������������������������������������290 art 86������������������������������������������������������296 art 89������������������������������������������������������296 Pt VIII����������������������������������������������������290 art 121(1)–(3)������������������������������������������297 Pt IX�������������������������������������������������������290 art 123�������������������������������������������� 290, 298 PT X�������������������������������������������������������290 Pt XI����������������������������������������������� 290, 291 art 133(a)������������������������������������������������296

Table of legislation  xxv art 136����������������������������������������������������296 art 137(1), (2)������������������������������������������296 art 140����������������������������������������������������297 Pt XII��������������������������������������������� 290, 303 art 194(1), (3)������������������������������������������303 Pt XIII����������������������������������������������������290 Pt XIV����������������������������������������������������290 Pt XV���������������������������������������������� 290, 297 Annex IX������������������������������������������������291 art 1��������������������������������������������������������291 art 5(1)����������������������������������������������������291 UN Framework Convention on Climate Change���������� 31, 37, 41–42, 94, 217, 218, 303, 426 UN Framework Convention on Climate Change, Kyoto Protocol 1997������ 69, 175, 217, 278, 373, 389, 418, 421, 424, 427, 502 UN General Assembly International Covenant on Civil and Political Rights, 16 December 1966������������������������������318 art 2(3)����������������������������������������������������317 art 14 �����������������������������������������������������317 UN General Assembly, Resolution 69/292, A/RES/69/292, 6 July 2015�����������������305 UN General Assembly Resolution No.1803 of 1962�����������������������������������������������124 UN General Assembly Universal Declaration of Human Rights, 10 December 1948�����������������������������������318 arts 8, 19�������������������������������������������������318 UN Human Rights Council, Elaboration of an International Legally Binding Instrument on Transnational Corporations and other Business Enterprises with Respect to Human Rights, 25 June 2014, A/HRC/26/L.22/ Rev.1���������������������������������������������������313 UN Sub-Commission on the Promotion and Protection of Human Rights, Draft Norms on the Responsibilities of Transnational Corporations and Other Business Enterprises with Regard to Human Rights, E/CN.4/Sub.2/2003/12/ Rev.2, 26 August 2003 (Draft Norms)��������������������������������������� 311–313 GP 1�������������������������������������������������������311 WTO Agreement: Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1867 U.N.T.S. 154, 33 I.L.M. 1144 (1994)������������������ 108, 117, 126, 127, 130, 340, 346, 418, 424, 425 art 20��������������������������������������������������������88

NATIONAL Brazil Anti-Corruption Act (Federal Law 12,846/2013)���������������������������������������254 Canada Corruption of Foreign Public Officials Act (S.C. 1998, c. 34)���������������������������������253 Italy Anti-Corruption Law: Law no. 190, 6 November 2012�����������������������������������254 Decree n. 49/2014 Attuazione della direttiva 2012/19/UE sui rifiuti di apparecchiature elettriche ed elettronice (RAEE)�����������������������������466 Mexico National Anti-Corruption System 2016������254 Spain Real Decreto 110/2015, de 20 de febrero, sobre residuos de aparatos eléctricos y electrónicos�����������������������������������������466 The Netherlands Code of Civil Procedure art 7��������������������������������������������������������321 United Kingdom Bribery Act 2010�����������������������������������������254 s 7�����������������������������������������������������������254 United States of America Alien Tort Claims Act 28 US Code § 1350����������������������������������� 311, 323–325 Dodd-Frank Act 2010 s 1504������������������������������������������������������256 Energy Independence and Security Act 2007����������������������������������������������������366 s 1305������������������������������������������������������367 Foreign Corrupt Practices Act 1977������������243

1. Introduction1

Rafael Leal-Arcas and Jan Wouters

This is the first ever research handbook on the energy law and policy of the European Union (EU). It is intended to be a reference work of high-quality original contributions, providing a state-of-the-art snapshot of this rapidly evolving area, situated within the broader context of international economic law and governance. The coverage of the handbook has been deliberately made as wide as possible, spanning a breathtaking variety of topics and developments in the EU’s law and policies regarding energy, fully acknowledging the multi-faceted and multi-layered nature of this vast arena. In order to make the handbook user friendly, we have divided it into four thematic parts. Part I (Chapters 2–5) deals with the institutional aspects of EU energy law and policy. Part II (Chapters 6–12) concerns their external aspects. Economic, social and legal aspects are covered in Part III (Chapters 13–21). Last, but not least, in Part IV (Chapters 22–28) environmental and technological aspects are dealt with. Part I, on institutional aspects, contains four chapters which each deals with intricate institutional issues of EU energy law and policy. The first question to start with, as always, is whether and to what extent the EU has a competence to act in this area. Chapter 2, by Kim Talus and Pami Aalto, answers precisely that question. It argues that energy has been at the core of the EU project since the beginning. However, only the Lisbon Treaty, which entered into force on 1 December 2009, created an explicit legal basis for EU action in this area. Article 194 of the Treaty on the Functioning of the European Union (TFEU) now provides for objectives of EU energy policy and a framework to enact EU-level regulation in this area. Talus and Aalto examine the vertical division of competences between the EU and its Member States. While the primary focus of their chapter is on the interpretation of the TFEU and its Article 194 in particular, it also discusses questions relating to multilevel governance in the context of EU energy policy. In Chapter 3, Ries Kamphof, Thijs Bonenkamp, Joren Selleslaghs and Madeleine O. Hosli make the case that energy and climate change are salient topics in the external relations of the EU and its Member States. Both energy and climate are policy areas that fall under the scope of ‘shared competences’, but in their external relations dimension they generate different effects in practice. This is partly due to substance: climate action constitutes a global common goods challenge, whereas energy security is more of a national concern, largely demarcated by EU Member State sovereignty. There are also important ‘trade-offs’ and linkages between these two areas. Institutionally, differences exist, since there is a universal (Paris) agreement on climate change mitigation, while such an agreement is absent in the areas of global energy (security) – barring the reference in

1   What follows draws from a compilation of the abstracts of each chapter in this Research Handbook.

1

2  Research handbook on EU energy law and policy the UN’s 2015 Sustainable Development Goals to the objective (SDG 7) to ‘ensure access to affordable, reliable, sustainable and modern energy for all’. The authors also make the claim that future research should aim to combine the analysis of EU and Member State external action on energy and climate change, as these agendas are aligned and sometimes respective policy avenues contradict each other. Furthermore, research could focus on the effects of other actors, such as the private sector, local authorities, populist parties or major third parties, such as Russia, on the external policies, institutional framework and the global scope of action of the EU. Chapter 4, by Leigh Hancher and Francesco Maria Salerno, analyzes competition in the context of energy policy. With three waves of internal energy market legislation already adopted and a fourth just tabled, a key question the authors pose is ‘Do we have an institutional structure that can effectively deliver the ambitious goals of the EU energy and climate change policy?’. To answer this question, the chapter employs a benchmark comparison, using general EU competition law as a point of reference for an effectively enforced EU policy. It compares the current as well as the emerging institutional structure of EU energy market regulation with that of EU competition law, to assess the extent to which there is a ‘competition law-ization’ of energy market institutions. The authors find that the Third Package of 2009 created an institutional structure that shares a number of features with competition law, hence laying the grounds for an effective institutional structure. The new ‘Winter’ package, unveiled in November 2016, builds on the institutional acquis. However, there are also new trends – in particular a shift to relying on tools that require more EU Member State co-operation with the European Commission. This trend might limit the effectiveness of competition law-ization, unless such co-operation concerns aspects that are complementary to the core subject matter of competition law. Chapter 5, on the European Energy Union, by Thomas Pellerin-Carlin, argues that the Energy Union is the Commission’s flagship initiative for Europe’s energy future. Building on existing EU energy policies, the Commission laid out its Energy Union Strategy in February 2015 to achieve the objective of moving away from an economy driven by fossil fuels, to provide a new deal for consumers, and to overcome the current fragmentation of a European energy system currently characterized by uncoordinated national policies. The author first puts the Energy Union in context and then studies it under each of its five dimensions: energy security; an integrated European energy market; energy efficiency; decarbonization; and research, innovation, and competitiveness. The chapter concludes by saying that the Energy Union project is much more than a slogan, at least in the eyes of the Commission. It then proposes fields for further research that may bring further light on the Energy Union in particular and EU energy policy in general. Part II of this handbook (Chapters 6–12) deals with the external aspects of EU energy law and policy. Chapter 6, ‘The new global landscape and energy politics in the 21st century’, by Klaus Segbers, makes the case that both Europe and Asia are deeply affected by major structural changes in the global landscapes. After the end of the East-West Conflict, i.e., after 1990, Europe and Asia were exposed to (but were also shaping) this new configuration. Whether these major changes will lead to a new structure or to more disorder remains to be seen. Segbers sketches the main directions of changes in the inter- and trans-national structures, and then tries to relate these changes to current energy issues. He argues that the world is undergoing deep changes, probably the most significant since 1945. A world based on

Introduction  3 rules is possibly being replaced by something as yet unknown. There are more actors and fewer certainties. States are losing relevance, and global flows are reducing governments’ role. Segbers further argues that carbon-based energy, which has been fueling global growth for decades and co-deciding the weight of nations, is both deeply embedded in the new global disorder and contributes to it. Chapter 7, by Andrey Konoplyanik, argues that the Energy Charter Treaty (ECT; signed in 1994, entered into force in 1998) occupies an objective (economically justified) place within the evolving international energy governance system, in particular within the evolving system of investor-state investment protection mechanisms (i.e., international energy producing companies vs resource-owning host states). This system has been developing since the Middle Ages, starting from the colonies (which, from the beginning of the industrial revolution, provided security in raw materials supply for the metropolitan states), through initially territory-oriented ‘traditional’ concessions (from 1901), which were later modified to project-oriented ‘modernized’ concessions (from 1948) and risk-service contracts (from the 1960s), and which gave birth to different instruments of investment protection/stimulation in national law both in the mother countries of the energy investors and in the resource-owning sovereign host states. The growth of international trade and investment, including in energy, in the 20th century gave birth to the development of international (first bilateral, then multilateral) instruments of trade and investment protection/stimulation. Firstly, the net of bilateral instruments has evolved (first in trade, then in investment) in the case of bilateral investment treaties since 1959. The rocketing increase in their numbers due to radical changes in the political map, mostly in Europe in the 1990s, stimulated the development of multilateral trade and investment treaties as risk-mitigation instruments for international flows of energy trade and investments, mostly between West and East in Eurasia and between the dissolving USSR and the enlarging EU. The ECT has become the first multilateral treaty of its kind to secure the ongoing cross-border energy flows (with increased importance for its transit component) from the East to the West, which are to be balanced by the investment flows – at that time still to be developed – from the West to the East, to their mutual benefit. Today the Energy Charter Treaty is still the only energy-specific multilateral instrument of international law, being a culmination of the development of investment and trade protection mechanisms in international energy. Within the EU, the ECT has been considered an external energy policy instrument of the EU. Despite the generally widespread perception that it was Russia who lost interest in the ECT (especially following the Yukos case), which culminated in the withdrawal of Russia from its provisional application of the ECT in 2009 and the accompanying statement of the Russian Government that it had no intention of ratifying the ECT, the EU has also begun to lose interest in the ECT since the adoption of the EU Second Energy Package in 2003, triggering a legal conflict between the ECT and the EU Energy acquis. This conflict has resulted in an increasing number of investor-state disputes by investors from EU Member States (all of which are ECT Contracting Parties) against EU governments and finally culminated in the withdrawal of Italy from the ECT in 2016. Konoplyanik argues that the ECT has passed through different periods of importance in Russia-EU energy relations – from a high level in the 1990s, with a peak of mutual interest in 2002 (when the process towards finalization of the draft multilateral Transit Protocol to the ECT – which never materialized – began), to diminishing importance since

4  Research handbook on EU energy law and policy then for both parties through the 2000s, despite a growing interest in the ECT by other participants of the international energy community beyond Russia and the EU, which culminated in the signing of the International Energy Charter (additional and complementary to the European Energy Charter) in May 2015, without Russia as a Party to the Charter. As a result of (1) the cumulative response of the global economy – on both energy demand and supply – to the oil price rises since the 1970s and the periods of high oil prices in the first half of the 1980s and from 2000 through around 2015; (2) COP-21 limitations on energy demand growth, through the establishment of an upper limit of CO2 ­emissions; and (3) growing importance of the international campaign against energy poverty, there is an expected change of paradigm in international energy development (from a perceived peak supply to a peak demand vision). The dominant trends in international energy governance will most probably be changing from access to non-renewable energy resources to access to capital, financial resources and innovations, plus the minimization of negative environmental impacts from energy investments/development. The new role of the ECT, and its expanded version on the basis of the International Energy Charter and ­instruments to follow, might evolve. The withdrawal of both Russia and Italy from the ECT has devalued and reformed the latter. It is worth considering this evolving set of multilateral instruments of international law not as a treaty between the West and the East, as it was treated initially, but as a North-South – or even South-South – treaty within the expanding community, mostly in developing countries who have been acceding to the ECT in recent years. This means that further development of common rules of the game for cross-border energy value chains from the current paradigm of international energy development (based on the perception of ‘peak supply’) to a new one (based on the perception of ‘peak demand’) should take place. This is why the international campaign against energy poverty and joint development of a level playing field for such international efforts might become the dominant trend and driving force behind the further evolution of the ECT and related instruments. In the view of Konoplyanik, all of this might again, on the new step of evolution of the international energy markets/economy, attract the attention of the political and business elites in both the EU and Russia to these energy-specific multilateral instruments of international law. Chapter 8, on global energy security and EU energy policy, by Severin Fischer, makes the point that global energy security challenges have significantly changed over the course of the last decades. However, market failures remain at the heart of the problems and governments have to deal with them. This chapter concentrates on energy security challenges for the EU and on the strategies, as well as how policymakers in the EU have been dealing with oil- and gas-related supply problems. It ends with an overview of how the new concept of the ‘Energy Union’ is trying to implement a more coordinated approach. Chapter 9, by Thijs Van de Graaf, states that the EU’s energy policy does not stand on its own, but is heavily influenced by the international political economy, that is, the shifting balance between states and markets in the world economy. The chapter begins by summarizing the key historical shifts in the global political energy economy, which provides the contextual backdrop against which the EU has attempted to develop its own energy policies and regulations. Next, it describes the key features of the EU’s traditional liberal approach to energy governance, focusing on the internal energy market, the attempts to

Introduction  5 export those internal energy market rules to neighboring countries, and the policies to encourage decarbonization. The following section argues that the EU may be shedding some of its liberal attitudes in favor of a more mercantilist energy governance strategy. The final section concludes and raises some suggestions for future research. Chapter 10, ‘The International Energy Charter: a new impetus for global energy governance?’ by Sijbren de Jong, reminds us that on 21 May 2015 the International Energy Charter (IECT) was signed at a ministerial conference in the Netherlands. In its set-up, the IECT aims at a wider global engagement and at balancing out the interests of energy consuming, producing and transit countries, whilst ensuring sovereign equality of states irrespective of their levels of economic development. Amidst some of the profound shifts that have taken place in international energy markets over the past decades, the IECT aims to add an additional layer of governance to the global energy landscape as, in institutional terms, the Treaty was born out of the idea that international energy markets suffer from a lack of appropriate governance. At present, an encompassing treaty or institution that is able to cover the whole spectrum of energy issues, and give a voice to all relevant stakeholders as such, does not exist. The chapter assesses the question of whether the IECT is able to fill this void. Chapter 11, ‘The EU energy security strategy in the Caspian Sea region: addressing the bear in the room’, by Stratos Pourzitakis, argues that energy security has become a buzzword in EU politics, topping the agenda of politicians, policymakers and researchers. The chapter analyzes EU energy security strategy in relation to the Caspian Sea region. Growing dependence on Russian gas imports has become a major concern among EU institutions and most EU Member States, especially after the 2006 gas dispute between Russia and Ukraine. To this end, Brussels has been introducing a multi-faceted strategy which aims at mitigating Russian gas supply risks. In this context, the Caspian Sea region can play a pivotal role, offering alternative energy supply sources that bypass Russia. Chronic inefficiencies in the EU policymaking mechanism and diplomacy, however, hamper Brussels in its attempts to establish a realistic and effective energy security policy that will meet the current challenges vis-à-vis an evolving concept of energy security. Chapter 12, by Slawomir Raszewski, looks at the key existing and planned gas transit projects to export natural gas from Russia and provides a critical analysis of existing conceptual debates concerning energy and the EU. Having in mind the changing global energy and climate policy landscape, the chapter first discusses the energy–environment nexus to contextualize natural gas within the emerging global climate narrative after the Paris Agreement on Climate Change of 2015. By doing so, the chapter seeks to present the ‘bigger picture’ and likely repercussions, should the emerging global climate policy become widely applied. Drawing on these macroeconomic issues, the chapter then discusses natural gas from a geopolitical angle and analyzes existing and planned natural gas projects. Having outlined the projects, the chapter draws on conceptual debates, outlining the challenges and opportunities that natural gas projects produce within the broad remits of climate change, geopolitics and development. Part III of the Research Handbook (Chapters 13–21) deals with the economic, social and legal aspects of EU energy law and policy. Chapter 13, by Costantino Grasso, shows that, as recently demonstrated by the ‘Panama Papers’ and ‘Bahamas Leaks’ scandals, corruption is rife in our societies. Quoting Kofi Annan’s opening statement to the United Nations Convention against

6  Research handbook on EU energy law and policy Corruption of 2004: ‘It undermines democracy and the rule of law, leads to violations of human rights, distorts markets, erodes the quality of life and allows organized crime, terrorism and other threats to human security to flourish’.2 The origins of this social plague may be traced back to the beginnings of human civilization. However, it appears that this kind of unethical behavior is particularly rampant in the energy sector. This chapter introduces the topic of corruption and analyzes the reasons behind the fact that, almost unexpectedly, over the course of the last two decades, corruption has gradually moved from the margins to the center of the international political stage. The chapter then tries to explain why, in the energy sector, such a criminal phenomenon has traditionally been so wildly rampant and its effects have proven to be extremely dramatic. Finally, the chapter offers a vivid depiction of a recent tale of dishonesty, which is emblematic of the way in which corrupt practices are commonly perpetrated within the energy industry. Chapter 14, on electricity and gas markets, by Guy Block and Elvira Saitova, analyzes major changes in EU legislation related to electricity and gas markets. After presenting the liberalization process of the electricity and gas markets in the EU, the authors examine recent developments that aim to adapt the current market rules to new market realities and conclude by outlining the key challenges for the future. Chapter 15, on Energy Justice, by Jan Schmitz, Kai Menzel and Fabian Dittrich, makes the case that economists agree that a tax on externalities is one of the most efficient means to internalize the social cost of environmental pollution. However, political reality in democracies has shown complications in the rate-setting exercise. Without the willingness of voters to bear their full share of the social costs through taxation, rates are nearly always too low to fully internalize even the lowest estimates of the social costs of environmental damage and climate change. Furthermore, in its currently applied versions, such a tax acts as a regressive form of taxation, since energy expenses relative to disposable income are higher for low-income households than for higher-income households. The solution the authors propose to these two problems is straightforward: the entire revenue of energy taxation should be given back to voters. Doing so on a per capita basis, reimbursing each household with the average amount of the energy tax paid, leaves the incentive structure of the taxation setting intact. Under such a setting, the payable energy tax is higher the more energy is consumed, while, after reimbursement, the average household bears no tax burden at all. Only households with above-average energy consumption pay net energy taxes, whereas low-energy households would receive a net transfer. Energy savings continue to pay off individually, because the individual household can save energy (and enjoy lower tax payments) with the reimbursement remaining untouched. In the political realm, this should allow for much higher energy tax rates. Chapter 16, ‘Energy and the law of the sea’ by Stephen Minas, states that the zonal entitlements and functional rights and obligations of the United Nations Convention on the Law of the Sea (UNCLOS) govern access to offshore energy resources and transit of energy resources via international shipping. Ongoing technological developments are deepening the nexus between the oceans and energy, placing increased pressure on the law of the sea in the management of overlapping activities and the resolution of disputes. These developments have led to increasing levels of energy-related pollution in the forms 2

  https://www.unodc.org/documents/brussels/UN_Convention_Against_Corruption.pdf, iii.

Introduction  7 of oil pollution, inadequate disposal or abandonment of offshore platforms and greenhouse gases from international shipping; the deployment of marine renewable energy installations; the discovery of previously unknown resources in the Exclusive Economic Zone, continental shelf and ‘Area’; and efforts to exploit the energy resources of the Arctic. In addition, energy considerations constitute a significant feature of ongoing disputes over maritime territory, such as in the Eastern Mediterranean. UNCLOS offers a robust frame for regulating these novel conditions. Minas argues that the EU has an important role to play as a policy innovator and leading contributor to the development of international oceans law. Chapter 17, by Youseph Farah and Malakee Makhoul, argues that EU oil and gas companies occupy a significant share of the extractive industry and have a significant global reach. While this can bring benefits for communities by creating wealth and jobs, adding value and providing services, sometimes corporate activity can have an adverse effect for people and the environment. When this happens, the people whose human rights have been affected often seek reparation, and expect the company to be held to account. Victims have increasingly sought a remedy in the home state of the parent company, either in relation to its direct act or the unlawful conduct of its subsidiary in the host state. Whilst there are some isolated success stories, the evidence suggests that victims choosing court litigation within the EU, or in other home states such as the US, continue to face factual and legal challenges. Farah and Makhoul place the debate within the EU’s commitment to business and human rights. The Commission has endorsed the ‘United Nations Guiding Principles on Business and Human Rights’ (UNGPs) and has committed to supporting their implementation, encouraging companies to adhere to internationally recognized human rights, guidelines and principles. In relation to the oil and gas sector, the Commission issued a non-legally binding ‘Oil and Gas Sector Guide on Implementing the UN Guiding Principles on Business and Human Rights’, advising on how to implement the corporate responsibility to respect human rights in daily business operations. Farah and Makhoul argue that, for several reasons, the ‘Oil and Gas Sector Guide on Implementing the UN Guiding Principles on Business and Human Rights’ does not go far enough in improving access to a remedy. Specifically, they advocate that, due to the unique legal and business structure of oil and gas companies’ engagement, it is important for those victims of business-related human rights violations in the oil and gas sector to be involved in unilaterally binding alternative dispute resolution processes to complement a state’s duty to offer an effective access to a remedy for victims of business-related human rights violations, and that this may improve the effectiveness of the UNGPs. Chapter 18, by Beatriz Huarte Melgar, argues that environmental targets for reducing emissions of greenhouse gases (GHG) is particularly relevant in the maritime sector because about 90 per cent of world trade is transported by sea, with maritime transport responsible for 2.5 per cent of total GHG emissions worldwide. In this regard, the EU, based on International Maritime Organization conventions, developed a strategy, applicable from 2013, that involves measures affecting the energy market and which aims to reduce GHG emissions within the maritime sector. It has also implemented an integrated maritime policy which covers areas as diverse as fishing, shipping and ports, and the marine environment, and has promoted the use of liquefied natural gas for ships.

8  Research handbook on EU energy law and policy Accordingly, this chapter aims to explain how the EU implements energy measures to reduce GHG emissions from the shipping sector. Chapter 19, by Max Baumgart, argues that smart meters offer a way to address the challenges created by the growing production and availability of volatile renewable energies, but that they also create problems with respect to data protection. The implementation of interoperable smart meters on EU-law grounds creates concerns with regard to its compatibility with Article 7 of the EU Charter of Fundamental Rights. The EU should therefore adopt an area-specific protection concept, containing detailed rules to remove the concerns about the legality of interoperable smart meters. The chapter gives a detailed analysis of the smart-meter-related EU legislation and, to put the implementation of smart meters in a more general context, gives an overview of the implementation of smart meters in the United States. Chapter 20, by Antonio Morelli, states that if it is too soon to assess the real impact of the Paris Agreement on Climate Change, it is beyond doubt that the deal adopted at the COP21 represents a landmark in the evolution of international law standards. Envisaged within Tom Franck’s post-ontological framework, the analysis in this chapter illustrates how the Paris Agreement fosters shared universal standards and an effective solution in addressing universal challenges, such as climate change. The political debate as to whether the Paris Agreement consists of only words and promises or forms an effective commitment enters the legal arena in terms of a dichotomy between binding and non-binding sources of international law. The provisions of the Agreement are the result of a heterogeneous combination of both sources, which respectively come into play depending on the elements that are at stake. Through the harmonization of those instruments, it is possible to promote the universality of the standards without weighing down the rising commitment of the major stakeholders involved in solving climate change. From this perspective, the Paris Agreement combines the action of both state and non-state actors, either during the phase of negotiation or in the implementation of the deal. The contribution of those stakeholders is going to be extremely relevant in their commitment to reducing carbon emissions and energy consumption. In this context, this chapter demonstrates how the Paris Agreement, letting different sources coexist and not collide, sets the pace for the evolution of new standards in international law. Chapter 21, by Michael Kattirtzi, argues that social science is underrepresented in the domain of energy policy. This chapter builds on social scientists’ criticisms of policy construction and delivery in the UK by exploring how energy policy that was formed on the basis of social science evidence might look. Drawing on experiences in the UK but with relevance to other EU Member States, six perspectives are offered as a starting point for energy policy debates. The chapter begins with a focus on energy efficiency, considering three distinct perspectives for achieving reductions in citizens’ energy demand: segmentation models; behavioral studies; and social practice theory. It then turns our attention to energy generation, focusing on what social science can tell us about policy development with regard to energy infrastructures and the placing of infrastructure projects, before discussing the sociotechnical transitions literature as a perspective through which to understand the whole energy system. The chapter concludes with some reflections on the steps that policymakers and researchers can take to ensure energy policy is better grounded in social science.

Introduction  9 Part IV of the handbook (Chapters 22–28) deals with the environmental and technological aspects of EU energy law and policy. Chapter 22, by Kati Kulovesi, explains the basic functioning of the EU Emissions Trading Scheme (ETS). It highlights challenges related to the emissions cap and oversupply of emission allowances and focuses on carbon leakage in the context of the ETS. The chapter then reviews the debate on border carbon adjustments (BCAs) in the EU over the past fifteen years, introducing and discussing recent proposals. It analyzes the impact of the Paris Agreement on Climate Change on the risk of carbon leakage in the EU, examining the extent to which this new global climate treaty can be expected to level the playing field for European industries. The chapter proposes reforms of the ETS for the fourth trading period of 2021–2030, with a view to implementing the EU’s contribution to reducing greenhouse gas emissions by at least 40 per cent from 1990 levels by 2030 under the Paris Agreement on Climate Change. Kulovesi argues that, while the Paris Agreement lays down the basic legal structures needed to step up global climate policy efforts, it is far from establishing a global carbon price and levelling the playing field for the manufacturing industry. The chapter highlights, however, that there is currently no evidence of carbon leakage having taken place as a result of the EU ETS and takes a critical stance towards proposals to strengthen carbon leakage protection under the ETS, especially by introducing BCAs. The chapter concludes that the question of carbon leakage remains relevant in the EU even after the conclusion of the Paris Agreement. Chapter 23, ‘Energy and environment’, by József Feiler and Peter Vajda, departs from an assessment of the ‘energy trilemma’ – that is, energy security, energy equity and ­sustainability – and places these issues in the context of environmental economics and the internalization of external costs. It briefly touches upon the two main approaches in EU environmental law that address these concerns, namely ‘command and control’ measures and market-based instruments. It assesses the imperative of an energy transition and puts forward certain proposals for future research with the aim of realizing the highly needed mainstreaming of the environmental and climate topic within international energy law and policy as well as economic law and governance. Chapter 24, by Filippos Proedrou, argues that the transition to low-carbon energy systems is the pivotal political economy issue for the EU, as it stands at the nexus of energy, politics and markets. With power markets developing into dynamic energy system integrators, smart grids emerge as the all-powerful structures that can help achieve the EU’s three principal energy security goals, namely sustainability, security of supply and affordability. Smart grids integrate renewable sources at the upstream level, advance overall renewable generation, including self-generation, enable energy efficiency and conservation, and promise to achieve low-carbon security and hedge against the volatility of international energy markets. On the other hand, smart grids call for high upfront investments and the establishment of functional markets that necessitate large-scale engagement by citizens, incentivization and education, as well as for bridging the yawning gap between textbook economics and the economy’s actual workings. Moreover, while realizing that the transition to constantly balanced power loads by means of demand response management is highly promising, it may also generate a handful of adverse results. This chapter aims to critically discuss the trade-offs involved in the roll-out of smart grids and the existent barriers. In doing so,

10  Research handbook on EU energy law and policy it provides a clear overview of the current state of the art and suggests future research pathways. Chapter 25, by Feja Lesniewska, argues that renewable energy is perceived as a primary ingredient in the world’s transition to a green, clean, low-carbon sustainable economy from a brown, dirty, high-carbon unsustainable one. The global renewable energy installed capacity, especially for wind and solar power, has increased rapidly in the last decade as countries have adopted laws and policies to mitigate climate change and air pollution, as well as to improve energy security. As the sector matures, the focus on renewable energy needs to turn to considering system infrastructure design to ensure that the take-makedispose rationale that contributed to the unsustainable fossil fuel economy is not perpetuated under the guise of a green low-carbon economy. The EU is a leader in installed solar photovoltaic (PV) and wind energy capacity. It also has a well-established waste management legal framework that is based on hierarchy and producer responsibility principles. Lesniewska considers how the EU is responding to the future challenges that waste management from end-of-life cycle solar PV panels and wind turbines pose. It questions whether steps taken to date are in line with the more advanced agenda laid out in the EU’s Circular Economy Action Plan of 2015 that calls for a paradigm shift in developing law and policy which pursues holistic sustainability goals in relation to resource management throughout the value and supply chains. Chapter 26, by Penelope Crossley, examines the complex and heterogeneous nature of the energy security challenges faced by EU Member States. It considers whether collective action at an EU level to increase the deployment of renewable energy may be a solution to these challenges. The chapter critically analyses the current state of European energy security and the history of EU interventions into the renewable energy sector. It then examines whether the recent changes to European energy law and policy are likely to solve the EU’s energy security concerns by facilitating accelerated deployment of renewable energy. It concludes that, given the complex economic and political circumstances in which the EU currently finds itself, unless there are binding national targets and clear guidelines for implementing the 2030 target of 27 per cent renewable energy, it may be difficult to motivate all EU Member States to engage in collective action to accelerate their uptake of renewable energy. This could have serious implications for the energy security of the EU, with levels of import dependency predicted to rise by 2030. Chapter 27, by David Elliott, argues that the EU faces some major energy policy choices and a need to move away from fossil fuels, with nuclear energy and renewables often being presented as solutions, but also as polar opposites; in effect defining different pathways forward. Taking a wide view, Elliott explores this polarity, asking whether these two options are indeed mutually exclusive. The chapter concludes that, although some hybrid mixes may be possible, in many ways they are technically incompatible and also reflect differing views on how society should develop. Those views will shape any specific prescriptions for energy technology research, development and deployment, although technological development and practices may influence what is deemed to be possible and desirable. Given that context, some research issues are outlined at the end of the chapter. The last chapter, Chapter 28, by Jan Rosenow and Florian Kern, looks at EU energy innovation policy, which is key to addressing many European policy ambitions. While traditionally much of EU energy (innovation) policy had been focused on supply-side technologies, we are now seeing increasing attention paid to innovation for reducing energy

Introduction  11 demand or increasing energy efficiency. Even though both the ambition and number of EU policies has been increasing significantly, academic analysis of the role of such EU policies for innovation and deployment of energy efficiency technologies is scarce. The authors critically discuss the ways in which EU energy efficiency policy is driving innovation and technology deployment on the basis of a review of the existing literature on the issue. First, using market transformation theory, Rosenow and Kern position the various EU policy instruments in energy innovation policy along the different stages of market transformation. Secondly, the authors identify key research challenges going forward, which include: the role of EU energy efficiency policy within a multi-level governance structure; the lack of institutionalization of EU energy efficiency policy; the need for more comprehensive policy evaluations; the importance of a better understanding realworld policy mixes; and the potential for applying a socio-technical approach to energy efficiency in the EU. The authors conclude that the lack of an explicit innovation strategy for energy demand constitutes a barrier to achieving the ambitious EU energy efficiency targets. Furthermore, the conventional understanding of market transformation is unlikely to allow for the transition at the scale and speed required to make a significant contribution to mitigating climate change across the EU.

PART I INSTITUTIONAL ASPECTS

2.  Competences in EU energy policy Kim Talus and Pami Aalto*

1.  EUROPEAN INTEGRATION AND ENERGY Energy has been a central area of EU law and policy from the very beginning. Two of the three founding treaties focused on energy: the now extinct European Coal and Steel Community Treaty and the European Atomic Energy Community Treaty. In addition, the more general European Economic Community Treaty included energy within its scope. One of the notorious early judgments from the European Court of Justice, Costa v Enel,1 from 1964, known by EU law specialists for establishing one of the most significant general principles of EU law – the supremacy of EU law over national laws – concerned energy and confirmed the role of the energy sector as part of the economic activities covered by EU law and policy.2 However, as is always the case, law only functions within the boundaries set by politics, and in those early days political sensitivities surrounding the energy sector meant that in practice it was not subject to the EU market integration project.3 In those early days, the energy sector was very much a politically loaded sector; energy was perceived as an activity where the state had a central role. Both the electricity and natural gas markets were organized under state-owned or licensed monopolies and divided along the borders of EU Member States. No internal market in energy was in place, nor planned. The 1956 Spaak report had already concluded that electricity and gas were nationally organized and therefore integration would not make sense. However, while the same report also excluded the hydrocarbon sector from the area of potential integration, as the sector was controlled by multinational oil companies, it did propose the atomic energy sector as a subject suitable for integration, as it would facilitate overcoming the significant financing requirements.4 For the reasons set out above, energy was consciously excluded from the process of

 *  Funding in respect of this chapter has been received from the Strategic Research Council, project no. 293437 (‘Transition to a resource efficient and climate neutral electricity system, EL-TRAN’).   1 6/64 Costa v Enel [1964] ECR 585.   2  This was later confirmed in a number of cases. For example, C-393/92 Almelo [1994] ECR I-1477; C-157/94 Commission v Netherlands [1997] ECR I-5699; C-159/94 Commission v Italy [1997] ECR I-5793; C-158/94 Commission v France [1997] ECR I-5819.   3  Even today, the energy sector continues to be an area where political priorities sometimes supersede the strict application of EU laws. For an example, see C-573/12 Ålands Vindkraft (ECLI:EU:C:2014:2037). For a detailed analysis of the case, see S.L. Penttinen; ‘Ålands Vindkraft AB v Energimyndigheten – The Free Movement Law Perspective’, OGEL 3 (2015), https://www. ogel.org/.   4  Spaak Report. Available at: http://www.unizar.es/euroconstitucion/library/historic%20docu​ ments/Rome/preparation/Spaak%20report%20fr.pdf (accessed 11.9.2016), pp. 126–7.

15

16  Research handbook on EU energy law and policy European integration.5 For a long time, the energy sector and national energy monopolies were protected from the effects of EU law. In the late 1980s, the EU’s approach to the energy sector changed. This was largely impacted by the developments in the United States and United Kingdom and the positive early experiences of these countries. A state-controlled sector started slowly changing into something more market-oriented. Faith in market forces was exceptionally strong in the 1980s and 1990s. US companies were advocating the benefits of free competition and the free market approach in the EU. These positive examples of successful market liberalization encouraged other European leaders to begin gradually opening up national markets to competition. The idea was that, as a result of such competition, the markets would become more efficient and consumers would benefit both from lower prices and from the freedom to choose from a wider range of suppliers. Governments could step aside and limit their role to ensuring the proper functioning of the market.6 In the 1990s, the various directives constituting the so-called First Energy Package7 were adopted. These reflected the political realities of the 1990s and had an unambitious content. The First Energy Package did, however, lay down a regulatory basis for future regulation of this area. Negotiated or regulated third party access to electricity and gas networks and functional unbundling of network and other energy sector activities were among the key issues covered in the directives. However, it was clear that these first steps were not in themselves sufficient to create a functioning energy market. At issue was only the initial phase, moving towards a competitive market. In 2003, the Second Energy Package8 was adopted. Its aim was to speed up the process of creating competitive gas and electricity markets.9 The new directives and regulations contained in it included more detailed sector-specific obligations, which were intended to achieve further liberalization of the European energy markets. The new legislative instruments included provisions on national energy market authorities, regulated third party access to networks, and functional and legal unbundling, as well as creating a regulatory framework for cross-border interconnectors.   5  For an overview of the early years of the EU, see T. Daintith and L. Hancher, ‘The Management of Diversity: Community Law as an Instrument of Energy and Other Sectorial Policies’, 4(1) Yearbook of European Law (1984), pp. 123–67. The historical development of EU energy law is examined in detail in K. Talus, EU Energy Law and Policy: A Critical Account (Oxford University Press 2013).   6  See A. Belyi and K. Talus (eds), States and Markets in Hydrocarbon Sectors (Palgrave 2015) and K. Talus, EU Energy Law and Policy: A Critical Account (Oxford University Press 2013).   7  This package included Directive 98/30/EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas (OJ L 204, 21.7.1998, p. 1) and Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity (OJ L 27, 30.1.1997, p. 20).   8  This package included Directive 2003/55/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC (OJ L 176, 15.7.2003, p. 57); Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC (OJ L 176, 15.7.2003, p. 37); and Regulation (EC) No 1228/2003 of the European Parliament and of the Council of 26 June 2003 on conditions for access to the network for cross-border exchanges in electricity (OJ L 176, 15.7.2003, p. 1).   9  The 2003 package is also called the ‘acceleration package’.

Competences in EU energy policy  17 The Third Energy Package was adopted in 2009.10 It introduced a raft of new regulations and included internal market directives for electricity and gas with rules on ownership unbundling and new powers for national regulators, regulations on access to electricity and gas networks, and on the establishment of a new, EU-level energy ­authority: the Agency for the Cooperation of Energy Regulators (ACER). In addition to these regulatory instruments, the Third Energy Package created a competence to enact further legislation in respect of issues relating to the functioning of the energy markets. This is to be done through a new type of instrument in EU energy law, known as ‘network codes’. These network codes have already been issued in different sub-sectors of the energy markets.11 At the time of writing this chapter, a new wave of legislative proposals is in progress. The  newly created Energy Union, one of the flagships of the current Juncker Commission, is based on the three objectives of the EU energy policy: security, sustainability and competitiveness. It has five ‘guiding dimensions’ that should help in realizing these objectives: (1) energy security, solidarity and trust; (2) a fully integrated European energy market; (3) energy efficiency contributing to moderation of demand; (4) decarbonizing the economy; and (5) research, innovation and competitiveness. These in turn are delivered through 15 action points and 43 initiatives.12 The first concrete proposals under the Energy Union label focused on security-related issues, natural gas and external elements of EU energy law and policy: gas security, intergovernmental agreements, liquefied natural gas (LNG) (as well as heating and cooling).13 The second wave will come about six months later with a focus on low-carbon economy.14 Many other proposals are scheduled to be introduced in the course of 2016 and 2017. If accepted by the Council and the European Parliament, the Energy Union packages will once again significantly change the EU legislative framework for energy.

10   Regulation (EC) No 713/2009 of the European Parliament and of the Council of 13 July 2009 establishing an Agency for the Cooperation of Energy Regulators (OJ L 211, 14.8.2009, p. 1); Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity and repealing Regulation (EC) No 1228/2003 (OJ L 211, 14.8.2009, p. 15); Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks and repealing Regulation (EC) No 1775/2005 (OJ L 211, 14.8.2009, p. 36); Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC (OJ L 211, 14.8.2009, p. 55); Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (OJ L 211, 14.8.2009, p. 94). 11   http://www.acer.europa.eu/en/electricity/fg_and_network_codes/pages/default.aspx (accessed 15.9.2016). 12   Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank, A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy (COM/2015/080 final). 13   See Commission press release, Towards Energy Union: The Commission presents sustainable energy security package, Brussels, 16 February 2016 (IP/16/307). 14   See Commission press release, Energy Union and Climate Action: Driving Europe’s ­transition to a low-carbon economy, Brussels, 20 July 2016 (IP/16/2545).

18  Research handbook on EU energy law and policy

2.  THE EUROPEAN UNION POLICY ON ENERGY One of the changes brought about by the Lisbon Treaty was the explicit inclusion of energy as an area of shared competences under Article 4 of Part I of the TFEU. The more specific details of the Union competences and their exercise in the area are set out in the energy specific Article, also a novelty introduced by the Lisbon Treaty.15 The Union policy on energy is based on three basic objectives: a competitive internal market; security of energy supply; and sustainability. According to Article 194 TFEU, EU energy policy is to have four elements that to a certain degree are both internally intertwined and related to other policy-oriented provisions of the TFEU. These four elements will now be briefly discussed and contextualized. First, EU energy policy shall ensure the functioning of the energy market (Article 194(1)(a) TFEU). Through this aim, energy policy is to enhance, in particular, the free movement of goods, services and capital within the energy sector, and the free movement of energy between Member States. This connects to a second aim of the energy policy – it shall promote interconnection between energy networks (Article  194(1)(d) TFEU). A well-functioning energy infrastructure is a prerequisite for a well-functioning market. This objective was added as a separate EU energy policy objective with the Lisbon Treaty. Prior to that, the idea of interconnecting EU energy markets was based on general internal market objectives, as well as forming the legal basis for trans-European networks (Article 170 TFEU). This Article provides that ‘the Union shall contribute to the establishment and development of trans-European networks in the areas of transport, telecommunications and energy infrastructures’. A third objective of EU energy policy is to ensure security of energy supply in the Union (Article  194(1)(b) TFEU). Security of supply in the EU energy policy entails the constant availability of affordable energy with minimal social costs, including environmental costs. In addition to the energy-specific Treaty Article, energy security is also covered by Article 122, which relates more generally to ‘severe difficulties [that] arise in the supply of certain products, notably in the area of energy’. Finally, the promotion of energy efficiency, energy saving and the development of new and renewable forms of energy is an objective listed under Article 194(1)(c) TFEU. This last aim also relates to Article 11 TFEU and sustainable development, as well as the ­environmental competences under Article 191 TFEU. The requirement that energy policy shall be formulated ‘in a spirit of solidarity between Member States’ accentuates the interdependence of Member States’ energy policies and actions. Article 194 TFEU also recognizes Member States’ energy rights in the areas of taxation and in determining the conditions for exploiting their energy resources, choices between different energy sources and the general structure of energy supply in each Member State. The next section will focus on Union competences for energy, and examine both the

15   For the developments towards this new energy specific Treaty Article, see L. Hancher and F. Salerno, ‘Energy Policy after Lisbon’, in A. Biondi, P. Eeckhout and S. Ripley, EU Law after Lisbon (OUP 2012), pp. 365–400.

Competences in EU energy policy  19 interrelations between energy and other competence areas as well as certain specific ­questions that arise under Article 194. 2.1  ‘In the Spirit of Solidarity’ One of the new elements under the Lisbon Treaty is that energy solidarity now appears prominently in the language of the TFEU. This is the case with the new energy-specific Article 194 TFEU (‘Union policy on energy shall aim, in a spirit of solidarity between Member States, to: [. . .]’), as well as the more general Article 122 TFEU (‘in a spirit of solidarity between Member States’ and that these difficulties in supply may be experienced, ‘notably in the area of energy’). Solidarity can be seen as one illustration of the new interdependencies between previously separate national markets. With an increasing interconnection of markets, the actions and policies of one country will have effects on the other Member States. An illustration of this is the sudden increase of renewable energy in German markets and the negative effects on the country’s neighbors through periodical surges of power (overflow). Another way of viewing energy solidarity in the TFEU is to see the introduction of solidarity references as an attempt to create a corrective mechanism to the failure of the markets to achieve security of supply. The notion of solidarity was only introduced after it became increasingly clear that the markets had failed to create security of supply. A market-based security of supply scheme of the 1980s and 1990s was replaced or complemented by a public-sector-based solidarity scheme. Supply disruptions, like those that occurred in the flow of natural gas from Russia through Ukraine, were not sufficiently addressed by market forces. As such, a public-sector-driven response mechanism was necessary: enter solidarity.16 It has specifically been argued that the reference to the solidarity principle in Article 194 TFEU was introduced in response to requests made by the Polish Government and relates primarily to concerns over the security of gas supply from Russia (illustrated in the Russian-Ukrainian/Georgian gas disputes).17 In addition to the new Article 194 TFEU and its solidarity reference, the wording of Article 122(1) TFEU was also changed to include both the reference to solidarity and to energy. The new wording is that:

16   In line with this, Regulation (EU) No  994/2010 of the European Parliament and of the Council of 20 October 2010 concerning measures to safeguard security of gas supply and repealing Council Directive 2004/67/EC (OJ L 295, 12.11.2010, pp. 1–22), adopted under Article 194(2) TFEU, builds heavily on the solidarity approach. It reflects a stronger role for the state and public sector in ensuring security of supply. (See Articles 3 (noting that security of gas supply is shared between the state and the markets) and 9–12 (placing the responsibility for security of supply on the state). Also, recital 20 specifically notes that the ultimate responsibility for gas supply security lies within the state.) The Regulation formalizes the response mechanisms at state, regional and EU level, all in the spirit of solidarity. 17   J-P. Pielow and B.J. Lewendel, ‘Beyond “Lisbon”: EU Competences in the Field of Energy Policy’, in B. Delvaux, M. Hunt and K. Talus (eds), EU Energy Law and Policy Issues (Intersentia 2011), p. 300. For the reasons and background behind these disputes, see J. Stern, ‘The RussiaUkrainian Gas Crisis of January 2006’, 4(1) OGEL (2006) and S. Pirani, J. Stern and K. Yafimava, The Russo-Ukrainian Gas Dispute of January 2009: A Comprehensive Assessment, NG 27 (Institute for Energy Studies, February 2009).

20  Research handbook on EU energy law and policy Without prejudice to any other procedures provided for in the Treaties, the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy.

2.2  Union Competences in the Field of Energy and the Internal Market No specific legal base was created for energy in the Treaty of Rome, nor did the Single European Act or other subsequent Treaty modifications prior to Lisbon Treaty bring this about. However, the lack of a precise legal basis for energy policy and energy regulation was not a significant obstacle in the past.18 Instead of a separate legal basis and EU-level competence for energy, the progress in this area was mainly driven through the competences for the internal market (Article 95 EC, now 114 TFEU) and for the environment (Article 175(1) EC, now 192(1) TFEU).19 This has of course meant that regulation has focused on areas that can be connected with these two policy areas. Under Article 114, the European Parliament and the Council can, acting in accordance with the ordinary legislative procedure, adopt the measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which have as their object the establishment and functioning of the internal market. Adopting legislative Acts regarding energy on this legal basis was possible because energy forms part of the pursuit of creating a functioning internal market. This concerns, in particular, the directives on internal electricity and natural gas markets and the regulations targeting cross-border elements of the internal energy market. This means that all three internal energy market packages (1990s; 2003 and 2009) were adopted under the general internal market competence. With Article 194 TFEU, measures aiming at ensuring the functioning of the energy market can now be based on the energy competence provided in that Article.20 2.3  Union Competences in the Field of Energy and the Environment Regulatory measures in relation to the energy sector have also been adopted under the Treaty provision on competence in environmental matters. This is the case for the renewable energy directives, which have been partially based on Article 175(1) EC (now 192(1) TFEU).21 The legal foundation of EU environmental action is principally to be found in Articles 191 and 192 TFEU and the general energy Article 194 TFEU with ­reference to

  K. Talus, EU Energy Law and Policy: A Critical Account (OUP 2013).   In some cases legislative acts have been based on both of these Treaty articles. An example of such instruments is Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC (OJ L 140, 5.6.2009, p. 16). Most of the Directive is based on the environmental competence but three Articles are based on the internal market competence. 20  C-490/10, Parliament v Council (ECLI:EU:C:2012:525). 21   Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources, amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC (OJ L 140, 5.6.2009, p. 16) and its predecessors. 18 19

Competences in EU energy policy  21 new and renewable energies, plus the general reference to the environment and sustainable development in Article 11 TFEU. Article 191 TFEU provides that EU policy on the environment is intended to contribute to the pursuit of the following objectives: ●

preserving, protecting, and improving the quality of the environment; protecting human health; ● prudent and rational utilization of natural resources; and ● promoting measures at international level to deal with regional or worldwide ­environmental problems, and in particular combating climate change. ●

The European Parliament and the Council, acting in accordance with the ordinary legislative procedure, decide together what action is to be taken by the EU in order to achieve these objectives. By way of derogation from this decision-making procedure, the Council, acting unanimously in accordance with a special legislative procedure, adopts measures which significantly affect a Member State’s choice between different energy sources and the general structure of its energy supply. In these cases, the European Parliament is merely consulted. Although the requirement for a ‘high level of environmental protection’ in respect of EU action under Article 37 TFEU is a goal, it is a difficult one to achieve, despite the increasing number of directives and regulations to the same effect. This difficulty stems from the use of the principle of subsidiarity, the recognition of national differences and the exercise of governmental discretion in shaping policies based on often uncertain assumptions. Constitutional powers are significant here: a directive which is aimed, at least to a significant extent, at contributing towards the internal market does not require unanimity, but matters of tax, choice between energy sources (renewables are particularly noteworthy in this context) and the general structure of a Member State’s energy supply, do (Articles 192(2) or 194(2) TFEU). Another energy-specific issue under Article 192(2) is that Member States cannot be compelled by a majority to give up energy sources which are seen as environmentally more questionable – for example Polish coal, French nuclear power and so on. Article 194(2) explicitly states that ‘measures [taken under Article 194 TFEU and majority voting] shall not affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply, without prejudice to Article 192(2)(c)’. Article 192(2)(c) TFEU provides that ‘measures significantly affecting a Member State’s choice between different energy sources and the general structure of its energy supply’ are subject to a requirement for unanimity. As such, the new energy title should a priori not restrict Member States’ choices with respect to energy sources. However, the current practice, which pre-dates the TFEU, suggests that the matter might not be so simple. In order to reach the EU-wide target of 20% renewable energy production by 2020, Directive 2009/28/EC on the promotion of the use of energy from renewable sources sets ‘mandatory’ national targets and requires Members States to prepare and establish national action plans to reach their respective targets. The national targets that in principle translate into the overall EU target of 20% of energy production from renewables vary considerably from Member State to Member State. For example, the UK’s target is 15%

22  Research handbook on EU energy law and policy (from a 2005 level of 1.3%) while Latvia has a target of 40% (from a 2005 level of 32.6%) and Sweden has a target of 49% (from a 2005 level of 39.8%). Finland’s target is 38% (from a 2005 level of 28.5%) and the French target is 23% (from a 2005 level of 10.3%). Looking at the above figures, it is clear that the environmental requirements under the EU energy acquis requires that countries achieve what in some cases, like Latvia, Finland and Sweden, are very significant shares of renewable sources in total energy production. In these cases, the renewables targets clearly restrict the right of the Member States to decide on their energy mix. Given that Directive 2009/28/EC was adopted under Article 175(1) EC (now 192(1) TFEU) – except for the biofuels-related requirements which were adopted under the internal market Article 95 EC (now 114 TFEU) – and by a majority vote, it seems that the Directive 2009/28/EC was adopted under the wrong legal basis, and is therefore in conflict with the Treaty, provided of course that a requirement that approximately half the national electricity production be from renewable energy sources instead of nuclear, coal, natural gas or other options is considered to ‘significantly affect’ the right of a Member State to choose between different sources of energy supply. 2.4  Union Competences in the Field of Energy and Security of Supply By introducing a specific legal basis for security of energy supply, related EU-level regulation eliminated one of the peculiarities of the energy acquis. While it is possible to make links between the internal market (objective under Article 114 TFEU) and security of supply,22 the link between some of the security of supply related instruments and their legal basis (Article 95 EC) has not always been evident.23 However, Article 194 TFEU is not the only Treaty Article addressing security of energy supply. A similar reference is also made in Article 122(1) TFEU, which provides that: Without prejudice to any other procedures provided for in the Treaties, the Council, on a proposal from the Commission, may decide, in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy.

The same provision also existed, albeit in a bit more general form and without the solidarity reference, in Article 100 EC. This provision was used as the legal basis for Directive 2004/67/EC concerning measures to safeguard the security of natural gas supply.24 Given that Article 194 TFEU constitutes a lex specialis legal basis for all energy regulation in the EU, save for certain more specific Articles addressing specific situations, it is Article 194 TFEU that today provides the primary legal basis for regulation aiming at 22   For a detailed discussion on this, see H. Bjornebye, Investing in EU Energy Security: Exploring the Regulatory Approach to Tomorrow’s Electricity Production (Kluwer 2010), especially Chapter 8 ‘The Relationship between Security of Supply Objective and the Fundamental Objectives of TFEU’. 23   An example of this is Directive 2005/89/EC of the European Parliament and of the Council of 18 January 2006 concerning measures to safeguard security of electricity supply and infrastructure investment (OJ L 33, 4.2.2006, pp. 22–7), which is based on Article 95 EC. 24   Council Directive 2004/67/EC of 26 April 2004 concerning measures to safeguard security of natural gas supply (OJ L 127, 29.4.2004, pp. 92–6).

Competences in EU energy policy  23 security of supply. Also the legal basis for security of gas supply instruments has moved from Article 122 to 194 TFEU, with the more recent Regulation (EU) No 994/2010 (the ‘Gas Security Regulation’) of 2010 being based on Article 194.25 This is also in line with the case law of the European Court of Justice, which, in case C-490/10, Parliament v Council,26 provided guidance on the relationship between Article 194 and other Treaty Articles: 66 Article 194 TFEU, introduced by the Treaty of Lisbon, therefore inserted into the TFEU an express legal basis for the European Union policy on energy. As is apparent from its wording, in particular that of Article 194(2) TFEU, that provision constitutes the legal basis for European Union acts which are ‘necessary’ to achieve the objectives assigned to that policy by Article 194(1) TFEU. 67 Such a provision constitutes the legal basis intended to apply to all acts adopted by the European Union in the energy sector which are such as to allow the implementation of those objectives, subject to, as can be deduced from the terms ‘[w]ithout prejudice to the application of other provisions of the Treaties’ at the beginning of Article 194(2) TFEU, the more specific provisions laid down by the TFEU on energy. As the Council noted, Articles 122 TFEU and 170 TFEU are inter alia covered, concerning severe difficulties arising in the supply of energy products and trans-European networks respectively, as well as the competences that the European Union has under other provisions of the Treaty, even if the measures at issue also pursue one of the objectives of the energy policy stated in Article 194(1) TFEU.

As such, the role of Article 122 TFEU is to be applied in more restricted and urgent cases than the more general Article 194 TFEU.

3. EXCEPTIONS FROM THE ORDINARY LEGISLATIVE PROCEDURE Article 194 TFEU also includes exceptions to EU competence in energy matters. According to Article 194(2) TFEU, measures adopted under Article 194(1) TFEU are not allowed to ‘affect a Member State’s right to determine the conditions for exploiting its energy resources, its choice between different energy sources and the general structure of its energy supply, without prejudice to Article 192(2)(c)’. This means that despite the competence conferred on the EU in energy matters, Member States retain the competence to determine which energy sources they wish to exploit. They may therefore choose freely between natural gas, nuclear power, coal, or renewable energy sources. However, the meaning and scope of this provision are somewhat unclear. For one, Member State competence is restricted in practice, as was discussed above, due to obligations relating to the promotion of renewable energy. Here the reference to Article 192 TFEU: ‘without prejudice to Article 192(2)(c)’ is of interest as it seems to suggest that if an environmental measure affects the energy rights of Member States, the special legislative procedure under that Article can be employed without Article 194(2) restricting this in any way. It is 25   Regulation (EU) No 994/2010 of the European Parliament and of the Council of 20 October 2010 concerning measures to safeguard security of gas supply and repealing Council Directive 2004/67/EC (OJ L 295, 12.11.2010, p. 1). 26  C-490/10, Parliament v Council (ECLI:EU:C:2012:525).

24  Research handbook on EU energy law and policy necessary to note here that unlike Article 192(2) TFEU, Article 194(2) does not include the possibility of using a special legislative procedure in cases where those areas reserved for Member States are affected. Second, due to the unclear wording of the exception, there is uncertainty as to what Article 194(2) really means.27 For example, what is the threshold for ‘affecting’ Member States rights? This is significant as many EU energy policy measures will affect (directly or indirectly) those areas left to the Member States’ competence under Article 194(2). It is noteworthy that under Article 192(2)(c), the threshold is ‘significantly affecting’, which could explain the legal basis for the Renewable Energy Directive. There is no comparable ­‘significance’ threshold under Article 194(2). It is of course possible that the Article could be interpreted by the Court of Justice of the European Union as to implicitly include some kind of ‘appreciability test’, as suggested by Johnston and van der Marel.28 Third, it is also unclear what the second part of Article 194(2) implies: does it mean that the EU has no competence to legislate in areas where the Member States’ energy rights are affected and every Member State could therefore veto any planned EU energy law that would have this effect or does it simply mean that the Member State can chose not to apply an instrument of EU law with this effect? Johnston and Block are in favor of the latter interpretation and argue that the provision allows a Member State to opt out from national application of this type of EU measure.29 In a similar manner to the energy mix, all matters of a primary fiscal nature are accorded special treatment under the TFEU, and under Article 194(3) in particular. Instead of following the ordinary legislative procedure – which might be described as the ‘default’ legislative procedure – a special legislative procedure is followed in these cases. This means in practice that instead of the majority voting approach used in the ordinary legislative procedure, unanimity is required for all matters of a primarily fiscal nature, and the role of the European Parliament is reduced to that of a consultative body. This is to ensure that fiscal matters remain under the control of Member States. Furthermore, because the decision-making pro­cess is based on unanimity, all Member States must be in agreement before any legislative instruments can be adopted. It is obvious that it is very difficult to achieve unanimity among 28 EU Member States. An illustration is provided by the failed attempt to re-draft the old Directive 2003/96/EC on energy taxation.30

4. THE PRACTICE OF MULTILEVEL ENERGY GOVERNANCE IN THE EU The gradual transfer of competences from the Member States to the EU level and the remaining ambiguities in this division of competences in practice amounts to multilevel 27   A. Johnston and E. van der Marel, ‘Ad Lucem? Interpreting the New EU Energy Provision and in Particular the Meaning of Article 194 (2) TFEU’, 22(5) European Energy and Environmental Law Review (2013), pp. 181–99. 28   Ibid., p. 184. 29   A. Johnston and G. Block, EU Energy Law (Oxford University Press 2012), p. 5. 30   Council Directive 2003/96/EC of 27 October 2003 restructuring the Community framework for the taxation of energy products and electricity (OJ L 283, 31.10.2003, p. 51).

Competences in EU energy policy  25 energy governance in the Union. This multilevel governance is part of a wider structure whereby EU institutions and Member States envision and plan energy policies in interaction with consultancies, local authorities, NGOs and external actors, such as supplier states, while energy companies and infrastructure providers are in charge of the actual implementation. Financial institutions may be involved as investors.31 The currently ongoing transition away from oil and coal in Europe towards local renewable resources highlights the role of electricity, and maintains a role of natural gas as a transition fuel, but it does not lessen the need for governance. The transition requires cross-border trade in low carbon technology, equipment and services, as well as strengthened interconnections, EU-level and multilateral investment, regulation and administrative best practice transfer.32 All of this means multiple groups of affected stakeholders as well as complex bargaining and negotiation between them. For such reasons EU energy policy is likely to continue developing slowly and gradually, as reported above. Most of the time this also means, at best, sub-optimal outcomes.33 We will here limit our attention to the co-governance of the EU and Member States within the scope of their competences. Within the EU, the Commission is the main institution in the practical work for developing markets as this is the policy sector where it enjoys its most powerful competences. The Commission has acted as the driving force for the gradual liberalization of the electricity and natural gas markets within the Union. In this work, it has received support especially from the UK, Denmark and Sweden, which had liberalized their own markets already before the first energy package. Germany and Italy were initially reluctant. Alongside Germany, France also had incumbent state-owned or vertically integrated energy companies to protect. Upon their entry to the EU in 2004, Poland and the Baltic states preferred a transition period to protect their markets and energy companies from uninhibited seizure by Russian companies, given their infrastructural links to Russia dating back to the Soviet era. These links comprise pipeline networks and electricity grids, combined with Russian investors eyeing investments and acquisitions in the EU area.34 While these are but some examples of the wide variety of path dependencies and consequent interests vis-à-vis market development on the part of the 28 Member States as of 2016, the result can be nothing more than differentiated integration including uneven implementation of the EU directives in the Member States. This led the Commission in 2011 to open 38 infringement procedures against 19 Member States; 15 of these were later referred to the Court of Justice, leading most of these 31   See e.g. P. Aalto, ‘Institutions in European and Asian Energy Markets: A Methodological Overview’, 74 Energy Policy (2014), pp. 4–15; P. Aalto and D. Korkmaz Temel, ‘European Energy Security: Natural Gas and the Integration Process’, 52 Journal of Common Market Studies (2014) 4, pp. 758–74; A. Prontera, ‘Energy Policy: Concepts, Actors, Instruments and Recent Developments’, 5(1) World Political Science Review (2009), pp. 1–30. 32   K. Szlulecki, ‘European Energy Governance and Decarbonisation Policy: Learning from the 2020 Strategy’, 16(5) Climate Policy (2016), pp. 543–7, here p. 543. 33   P. Aalto, D. Dusseault, M.D. Kennedy and M. Kivinen, ‘Russia’s Energy Relations in the East and West: Towards a Social Structurationist Approach to Energy Policy Formation’, 17(1) Journal of International Relations and Development (2014), pp. 1–29, here p. 25. 34   F. Proedrou, EU Energy Security in the Gas Sector: Evolving Dynamics, Policy Dilemmas and Prospects (Ashgate 2012), pp. 61–3.

26  Research handbook on EU energy law and policy Member States to adopt the necessary legislative steps to avoid a judgment under Article 260(3) TFEU.35 Although the literature records increasing interventions on the part of the Commission in market development,36 made in support of liberalization and competition, these interventions remain selective, especially when it comes to the natural gas markets. For example, the EU-supported Nabucco natural gas pipeline project received an exemption to the third party access rule, while the competing South Stream pipeline project driven by the Russian Gazprom did not. The Commission favored exemption for Nabucco on the grounds of the security of supplies principle, whereby the pipeline would have enhanced the flow of non-Russian natural gas to the EU markets, sought mostly from Azerbaijan and Central Asia, and crucially, without Russian transit. However, the project dissipated in 2013 as it failed to secure the necessary volumes of gas to make it economically viable. Both projects featured varying coalitions of supporting Member States, some of which supported both projects to maximize their potential benefits and serve the interests of their national champions.37 Security of supply considerations also persuaded the Commission to overlook state aid suspicions in the case of the LNG terminal in Lithuania’s Klaipeda, which, however, introduced more competition for the previously dominant Russian natural gas in the Baltic region. The Gazprom clause in the Commission’s third energy package, for its part, in practice privileges European companies regarding the ownership of transit infrastructure. Non-EU companies such as Gazprom are subject to the same unbundling rules as EU-based companies. This means that Gazprom cannot acquire transit infrastructure assets in Member States where it acts as a supplier. Were it interested in limiting its presence to an infrastructure-owner role, the respective Member State must agree with the Commission on the deal and reserve a right for EU-based companies to make the same acquisition.38 As part of the process of building the Energy Union, the Member States must report to the Commission on their national plans regarding the 2030 targets of the EU for r­enewable energy (27% share) and energy efficiency (27% improvement). The Commission acts as a watchdog and policy coordinator by monitoring progress and reporting further to the other EU institutions. The expectations of the Member States of the Energy Union vary widely. For example, Germany would prefer the Energy Union to support the EU’s 2030 targets or at least not to compromise its own targets for a renewable energy transition by favoring similar policies throughout the EU. Germany supports any actions developing the internal EU energy market as a back-up to its own

35   The European Commission, ‘Enforcement of the Third Internal Energy Market Package’, accompanying the document ‘Progress towards completing the Internal Energy Market’, Brussels, 13.10.2014 SWD(2014) 315 final. Available at: https://ec.europa.eu/energy/sites/ener/ files/documents/2014_iem_communication_annex6_0.pdf (accessed 9.12.2016) pp. 3–4. 36   E.g. K. Talus, EU Energy Law and Policy: A Critical Introduction (Oxford University Press 2013), pp. 173–4. 37   See e.g. A. Goldthau and N. Sitter, A Liberal Actor in a Realist World: The European Union  Regulatory State and the Global Political Economy of Energy (Oxford University Press 2015). 38  Ibid.

Competences in EU energy policy  27 system, in which wind and solar power accounted for a fifth of electricity generation in 2015 but which depends upon ­electricity trade with neighbors when such weatherdependent generation is low. France is also cautious about the Energy Union. This is because it has reservations regarding EU-wide governance on renewable energy until its own domestic energy policy choices vis-à-vis renewables and nuclear power become more settled and French power companies can compete better with an enhanced crossborder inflow of subsidized renewably generated electricity. At the other extreme, Poland initially proposed the Energy Union as an energy security measure, so that it would act as a vehicle for joint natural gas purchases to counter Gazprom’s market power and to remove uneven pricing in the supply contracts concluded by different Member States. Poland furthermore prioritizes a technology-neutral Energy Union owing to its own coal sector, shale gas projects and ambitions in nuclear energy.39 In short, because of their divergent interests regarding the sources of energy, some Member States would prefer the Energy Union to maintain the existing division of competences, while others would support granting new competences to the Union. The division of competences between the EU and Member States also affects regional energy cooperation within the Union. This is evident for example in the North Sea offshore electricity grid project, initiated by Belgium in 2009. Some more technical studies point out how building a super-grid into the North Sea would support the security of supplies principle by helping to fully utilize marine renewables, balance supply and demand between North Sea littoral states and their neighbors, and by means of facilitating experimentation with underwater energy storages. It would also bolster the markets principle by facilitating trade in electricity. However, the national transmission system operators (TSOs) in Denmark, Germany, the Netherlands, Norway and the UK are hesitant to embark on the project. They are reluctant to step beyond their traditional core business of operating profitable cables and connecting offshore wind farms to them. Large energy companies in the involved Member States also point out that, so far, national subsidies for renewable energy cannot be shared, and doubt whether all participants would benefit equally. The EU funds relevant studies in the planning phase while the bulk of the available EU infrastructure financing has gone for individual cable projects. Because eventually the project will need some 30 billion euros for its financing, the Member States and their interests are most consequential for the project, despite its relatively clear European dimension. In brief, the interests of ­incumbent actors in the Member States are not convergent enough, while the division of competences does not fully equip the EU level to decisively push the project forward.40 In the case of the Nordic regional cooperation, we find a similar pattern whereby the direct involvement of the EU is somewhat more decisive in the natural gas segment compared to the electricity segment. The 187.5 million euros funding from the EU’s 39   K. Szulecki, S. Fischer, A.T. Gullberg and O. Sartor, ‘Shaping the “Energy Union”: Between National Positions and Governance Innovation in EU Energy and Climate Policy’, 16(5) Climate Policy (2016), pp. 548–67, here pp. 554–8. 40   B. Flynn, ‘Marine Wind Energy and the North Sea Offshore Grid Initiative: A Multi-level Perspective on a Stalled Technology Transition?’, 22 Energy Research & Social Science (2016), pp. 36–51.

28  Research handbook on EU energy law and policy Connecting Europe Facility was decisive in financing the Balticconnector project which links the natural gas infrastructures of Finland and Estonia. The pipeline can offer a further linkage to Latvia and Lithuania with infrastructure improvements to be finalized by 2019, and may eventually provide a connection on towards central Europe. However, in the electricity segment, the Nord Pool electricity market with Denmark, Finland, Norway and Sweden as its core participants, functions largely independently from the EU. Yet the EU energy market directives, including the Renewable Energy Directive of 2009, shape its development, as do the operations of the ACER and the European-wide ­ENTSO-E, which has dismantled some of the previous Nordic-level cooperation. Nevertheless, projects improving national transmission capacity encounter less local resistance than projects with a clear EU-level dimension.41 In the Nordic context, we find the EU-level 2030 energy transition targets co-existing with joint Nordic 2050 targets for a full decarbonization, and national targets defined in each of the Nordic states for 2020, 2030 or 2040, depending on the case.42 These short examples tell us that some crucial features in the division of competences will likely maintain multilevel governance structures in the EU. Particularly consequential factors in this regard include nationally evolved path dependencies, including historically important infrastructures and preferred sources of energy. Although Member States hold on to the crucial powers over the choice of their favored resources and precise solutions, the long-term trend is that EU-level governance increasingly shapes those choices, also in the context of the energy transition.

5. CONCLUSION The lack of an energy-specific legal basis in the Treaty has never stopped the EU from enacting energy-sector-specific secondary EU law. Despite this, a specific legal basis for the energy sector was established in the Treaty of Lisbon under Article 194 TFEU. Under this provision, the European Parliament and the Council, acting in accordance with the ordinary legislative procedure, can establish the measures necessary to achieve the four objectives of EU energy policy. Since the enactment of the TFEU in 2009, new EU instruments in energy can now be adopted under Article 194. This has also been done and, because of Article 194(1)(b) relating to energy security, it was possible to base Regulation (EU) No 994/2010 on security of gas supply of 2010 on Article 194.43 Similarly, due to Article 194(1)(c) on energy efficiency and energy saving and on new and

41   S. Tenggren, J. Wangel, M. Nilsson and B. Nykvist, ‘Transmission Transitions: Barriers, Drivers, and Institutional Governance Implications of Nordic Transmission Grid Development’, 19 Energy Research & Social Science (2016), pp. 148–57. 42   P. Aalto, I. Jaakkola, P. Järventausta, A.M. Oksa and P. Toivanen, ‘How to De-carbonise the Electric Energy System? A Comparison of Nordic 2030 Policies’, International Conference on Energy, Environment and Climate Change (ICEECC 2017). 43   Regulation (EU) No 994/2010 of the European Parliament and of the Council of 20 October 2010 concerning measures to safeguard security of gas supply and repealing Council Directive 2004/67/EC (OJ L 295, 12.11.2010, p. 1).

Competences in EU energy policy  29 renewable energy, it was possible to base Directive 2012/27/EU on energy efficiency on the same provision.44 In the same vein, all future EU energy-market regulation should now be based on Article 194 TFEU.45

44   Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC (OJ L 315, 14.11.2012, p. 1). 45  C-490/10, Parliament v Council (ECLI:EU:C:2012:525).

3.  External competences in energy and climate change

Ries Kamphof, Thijs Bonenkamp, Joren Selleslaghs and Madeleine O. Hosli

1. INTRODUCTION One of the cornerstones of Europe’s modern society is energy. Without energy the day-to-day needs of lighting, heating and transport would become impossible, leading to the serious malfunctioning of its businesses. The European Union (EU) and its Member States are (partly) dependent on external energy sources. The way that – and the pace at which – the old continent is consuming its energy sources is unsustainable, as is its high level of energy imports. In parallel, the EU and Member States need to keep track of their climate mitigation pledges to make their ‘emission pathways consistent with holding the increase in the global average temperature to well below 2°C above preindustrial levels and pursuing efforts to limit the temperature increase to 1.5°C above preindustrial levels’, as stipulated in the recent Paris Agreement.1 Without proper European regional cooperation and harmonization in the strategic fields of energy and climate change policies, many European households will be left in the dark and cold, and universal climate agreements may be trampled on by the EU and Member States. Energy security and climate change are therefore ‘hot topics’ in the external relations of the EU and its individual Member States. The Paris Climate Change Agreement of 2015 has firmly and urgently established the reduction of greenhouse gas emissions and, hence, the ‘decarbonization’2 of the world economy as a global policy objective to be achieved in the next few decades. The EU has been very active in setting a (global) climate agenda and the Paris Agreement has been hailed as a success of EU climate diplomacy.3 At the same time, the EU is currently to a large degree dependent on (fossil) energy imports and faces related challenges in achieving energy security (security of supply) and ensuring affordability of energy in the shorter and longer term. The EU is the biggest energy customer in the world, depending on ‘a very sparse number of energy suppliers’ who

 1   Paris Agreement [2015], https://unfccc.int/files/meetings/paris_nov_2015/application/pdf/pa​ ris_agreement_english_.pdf (accessed 13 December 2016).  2   While the word ‘decarbonization’ does not feature in the official text of the Paris Agreement, many authors believe this strategy is necessary in view of the implementation of Nationally Determined Contributions (NDCs). See e.g. Jeffrey Sachs, ‘Implementing the Paris Climate Agreement – Achieving Deep Decarbonization in the Next Half Century’ [2016], http:// www.cirsd.org/en/horizons/horizons-winter-2016--issue-no-6/implementing-the-paris-climate-agr​ eement---achieving-deep-decarbonization-in-the-next-half-century (accessed December 2016).  3   Sebastian Oberthür, ‘Where to Go from Paris? The European Union in Climate Geopolitics’ [2016] Global Affairs, pp. 1–12.

30

External competences in energy and climate change  31 could use this situation as a ‘political weapon’.4 Both climate and energy policy are areas of ‘shared competences’ between the EU and its Member States.5 As a result, both the relevant European institutions and the Member States engage in energy diplomacy and policy-making externally, that is, on the international stage. Where the global forum of the United Nations Framework Convention on Climate Change (UNFCCC) and its annual Conference of the Parties (COP) render external multilateral action crucial in the area of climate change, the multilateral forums on energy are much less influential. Energy security is therefore still primarily framed as a topic within the realm of national sovereignty. Many EU Member States conclude their own bilateral deals. Some energy experts, however, favour rendering it a Union task to formulate energy security policy,6 while others emphasize this should be at the discretion of national governments and/or a ‘smaller coalitions’ of Member States.7 Some are even of the opinion that the practice of describing energy as a shared competence under Lisbon Treaty rules in terms of the Community method, contrasting with intergovernmentalist practices, should be abandoned.8 Instead, as suggested by German Chancellor Angela Merkel in 2010, we could explain EU energy policy in terms of a new ‘Union method’, that is, a combination of the Community method and the intergovernmental method. In the words of the Federal Chancellor, this would resemble ‘coordinated action in a spirit of solidarity’.9 These external representation and autonomy questions of the EU and its Member States point to the crucial importance of the institutional context in the EU’s external relations. The link between the division of competences between the EU and its Member States have been part of the (legal) research agenda, especially in the phase of the constitutional review preceding the Lisbon Treaty.10 This research agenda, however, may need to be reviewed after assessing the functioning of the respective provisions of the Lisbon Treaty in the first years after its entry into force, and especially now that the Paris Agreement and energy security considerations in the EU have moved the agenda of climate change and energy security to the forefront. Our chapter is focused on the institutional context of the EU and its Member States and its external functioning and effects for the most important EU priorities in energy and climate policy, namely energy security and climate change mitigation. Conversely,

 4   Rafael Leal-Arcas and Juan Alemany Rios, ‘The Creation of a European Energy Union’ [2015] European Energy Journal 5(3), p. 24.  5   Art 4 TFEU, Consolidated Version of the Treaty on European Union [2010] OJ C 83/01, see also Chapter 2 of this handbook.  6   Rafael Leal-Arcas and Juan Alemany Rios, ‘The Creation of a European Energy Union’ [2015] European Energy Journal 5(3), p. 24.  7   Simone Tagliapietra, ‘Building Tomorrow’s Europe: The Role of an “EU Energy Union”’ [2014] Review of Environment, Energy and Economics (Re3), pp. 1–10.  8   Jan Frederik Braun, ‘EU Energy Policy under the Treaty of Lisbon Rules: Between a New Policy and Business as Usual’ [2011] EPIN Working Paper no. 31, p. 8.  9   Speech by Federal Chancellor Angela Merkel at the opening ceremony of the 61st academic year of the College of Europe in Bruges on 2 November 2010, https://www.coleurope.eu/content/ news/Speeches/Europakolleg%20Brugge%20Mitschrift%20englisch.pdf> (accessed 29 November 2016). 10   Sanam S. Haghighi, ‘Energy Security and the Division of Competences between the European Community and its Member States’ [2008] European Law Journal 14(4), pp. 461–82.

32  Research handbook on EU energy law and policy we do not focus on the technical aspects related to these policies. The chapter starts with the substance of the most important European energy and climate priorities and action plans. This is followed by a section on the shared (external) competences, based on the Treaty and on case-law. Thereafter, the most important institutional actors in EU external action on climate and energy are introduced. This EU institutional and legal context codetermines external action, which is analysed in section 5. Some challenges and opportunities of the practical workings of shared external competences will be dealt with in the following section. In the concluding section, a future research agenda on shared external competences in energy and climate will be sketched.

2. EU PRIORITIES AND ACTION PLANS IN THE AREA OF ENERGY SECURITY AND MITIGATION OF CLIMATE CHANGE Ever since its nascence, European integration has been characterized by continuous efforts among Member States to ensure a secure, stable and affordable supply of energy on the European continent. During the 1950s, the European Atomic Energy Community was created, and since then, various energy-related policies and institutions have followed. Since Spring 2007, when the EU adopted the so-called ‘Energy/Climate package’, European leaders have also committed to common EU energy (supranational) governance.11 In doing so, European leaders have responded to the requests from EU citizens who, as a Eurobarometer Survey (2011) has shown, believe that greater solidarity between EU Member States in an energy crisis and intensified energy policy coordination are needed.12 In 2015, the EU launched the ‘Energy Union’, stating that ‘Our vision is of an Energy Union where Member States see that they depend on each other to deliver secure energy to their citizens, based on true solidarity and trust, and of an Energy Union that speaks with one voice in global affairs’.13 The overall aim of this new ambitious initiative was to create ‘a resilient Energy Union with an ambitious climate policy at its core, to provide EU consumers – households and businesses – with secure, sustainable, competitive and affordable energy’.14 By doing so, the EU has initiated a series of working programmes and policies to address the two most important challenges that its external energy policy faces today: energy security and climate change mitigation.

11   Daan Rutten, ‘CIEP Briefing Paper on the Energy Union’ [2016] Clingendael International Energy Programme, p. 1. 12   European Parliament, ‘The European Union and Energy’ (Eurobarometer, June 2011), http://www.europarl.europa.eu/pdf/eurobarometre/2011/2011_01_74.3/ReportEB743PARLenergy_ EN.pdf (accessed 16 December 2016). 13   Commission, ‘Towards an Energy Union: a Resilient Energy Union with a Forward-looking Climate Change Policy’ COM (2015) 80 final. See also Chapter 5 in this handbook, ‘The European Energy Union’ by Thomas Pellerin-Carlin. 14  Ibid.

External competences in energy and climate change  33 Table 3.1  EU energy imports (2016) Commodity Energy (overall) Natural gas Crude oil Coal and other solid fuels Uranium and other   nuclear fuels

Percentage of total Mostly from energy usage 53% 90% 66% 42% 40%

Russia, Norway, Libya, Qatar, Saudi Arabia Russia, Norway, Algeria, Qatar Saudi Arabia, Norway, Libya, Nigeria Russia, Colombia, US, Australia Kazakhstan, Canada, Russia, Niger

Source:  Authors’ own calculations based on Eurostat data.

2.1  Energy Security In 2016 the EU imported around 50% of its energy needs.15 Whereas oil, natural gas and coal account for 80% of the energy consumed in the EU, the variation in terms of origins and sources is limited. Regarding crude oil, the OPEC countries and Russia, in 2015, accounted together for almost 70% of all EU imports, and Russia was by far the biggest partner for natural gas imports, accounting for no less than one-third of all EU gas imports (see Table 3.1). As has become clear over the last couple of years, various problems arise with such a high dependency on energy imports. In addition to the wellknown supply cut-offs due to geopolitical and geo-economic issues, terrorist groups have also targeted pipelines and production facilities throughout the Middle East and Iran has threatened several times to cut back oil production if forced to abandon its nuclear power programme.16 Importing energy from abroad comes at a high price, as it is estimated that the European states spend over €350 billion every year on importing most notably gas and (crude) oil from different continents.17 Next to uncertainty regarding a stable and assured supply, questions are also raised regarding the future availability of global oil and gas reserves for Europe. According to the International Energy Agency (IEA), global energy demand will rise by more than one-third by 2035, especially in the Middle East, China and India.18 This will have repercussions on the energy availability for Europe, as well as on the price that will be charged.

15   Barring significant changes, the European Commission expects this figure to rise to 65% by 2030. See also http://www.fas.org/sgp/crs/row/RL33636.pdf (accessed 11 December 2016). 16   Paul Belkin and Vince L. Morelli, ‘The European Union’s Energy Security Challenges’ [2007] Congressional Research Service, RL 33636, Washington DC, http://www.dtic.mil/dtic/tr/fulltext/u2/ a473788.pdf (accessed November 2016). 17   ‘Energy Strategy’ (European Commission Energy) https://ec.europa.eu/energy/en/topics/energystrategy (accessed 15 December 2016). 18   ‘World Energy Outlook 2013’ (International Energy Agency, 2013) https://www.iea.org/ Textbase/npsum/WEO2013SUM.pdf (accessed 16 December 2016).

34  Research handbook on EU energy law and policy 2.2  Climate Change Mitigation Another key priority of the EU’s external energy policy is related to the environment and more specifically, focused on limiting climate change. With a current global average temperature that is 0.85 degrees higher than it was in the late 19th century, rising sea-levels, extreme weather patterns, food insecurity and other serious challenges also loom large for Europe in the near future. The recent emissions of greenhouse gases were the largest in history; the atmosphere and oceans have warmed; the amounts of snow and ice have diminished; and the sea level has risen.19 Since CO2 is the greenhouse gas which is most commonly produced by human activities and is responsible for 64% of man-made global warming, the EU – together with other actors – will have to decarbonize its economy and way of living drastically and urgently. As (the use of) energy accounts for almost 80% of all greenhouse gas emissions worldwide,20 ‘The energy sector has a direct link to the climate change challenge’.21 It is a key sector in which climate mitigation efforts are required. As has been demonstrated in more technical contributions, the link between energy security and climate change is ‘rather tenuous’ as there are ‘many trade-offs’ involved.22 Climate change has been regarded as a ‘saviour issue’ for the EU integration project more generally.23 The EU has been able to ‘shape global environmental governance’.24 At the heart of the EU’s internal strategy for limiting climate change – the so-called 20-20-20 strategy and the 2030 and 2050 energy roadmaps – is the objective of reducing greenhouse gas emissions by at least 20% by 2020, 40% by 2030 and 80% by 2050.25 To limit its greenhouse gases, the EU has to use less energy, but also embark on using cleaner energy. The latter involves a shift towards more renewable energies such as wind power, solar and photovoltaic energy, biomass and biofuels, geothermal energy and heat-pump systems. Increasing the amount of renewable energy within the EU, however, not only serves the climate; it also helps the EU to become less dependent on (sometimes unstable) energy imports and reduces the costs associated with it. Nonetheless, as the EU countries together ‘only’ account for 10% of global greenhouse gas emissions, it is also in this area 19   Rajendra K. Pachauri (ed.), Climate Change 2014 Synthesis Report (The Intergovernmental Panel on Climate Change 2014), https://www.ipcc.ch/pdf/assessment-report/ar5/syr/SYR_AR5_ FINAL_full_wcover.pdf (accessed 16 December 2016). 20   ‘CO2 Emissions from Fuel Combustion: Highlights’ (International Energy Agency, 2015), https://www.iea.org/publications/freepublications/publication/CO2EmissionsFromFuelCombus​ tionHighlights2015.pdf (accessed 16 December 2016). 21   Commission, ‘Staff Working Document Accompanying the Communication on Next Steps for a Sustainable European Future: European Union Action for Sustainability’ SWD (2016) 390 final. 22   Gal Luft, Anne Korin and Eshita Gupta, ‘Energy Security and Climate Change: A Tenuous Link’ in Benjamin K. Savocool (ed.), The Routledge Handbook of Energy Security (Routledge 2010). 23   Louise van Schaik and Simon Schunz, ‘Explaining EU Activism and Impact in Global Climate Politics: Is the Union a Norm- or Interest-Driven Actor?’ [2012] Journal of Common Market Studies 50(1), p. 169. 24   Tom Delreux, ‘EU Actorness, Cohesiveness and Effectiveness in Environmental Affairs’ [2014] Journal of European Public Policy 21(7), p. 1017. 25   ‘Energy Strategy’ (European Commission Energy), https://ec.europa.eu/energy/en/topics/ener​ gy-strategy (accessed 15 December 2016).

External competences in energy and climate change  35 that it might be beneficial for them to collectively develop and implement a shared stance on global climate change mitigation initiatives, in order to have a meaningful impact. Action and new stimulus by the EU (in coordination with national, regional and local governments) is therefore needed, be it through public investment, support plans or any other measures. Focusing on the most recent policy strategies and action plans, these two overarching themes have been at the centre of the EU’s energy/climate change response over the last decade. In total, more than 400 legal acts have been signed on a European level regarding energy-related issues.26 With the 2030 Energy and Climate package, targets were created in three key areas in order to realize the above-mentioned ambitions: (1) a 40% cut in greenhouse gas emissions compared to 1990 levels; (2) at least a 27% share of renewable energy consumption; and (3) at least 27% energy savings compared with the business-asusual scenario.27 With the Paris Agreement, the European Commission has upgraded its targets. The recently adopted Energy Winter Package (December 2016) consists of more than 40 legislative proposals, with accompanying documents, aimed at further completing the internal market for electricity and implementing the Energy Union, further reducing the EU’s carbon footprint. The Energy Winter Package complements the Energy Security Package of February 2016 which essentially focused on security of (gas) supply.28 Also in the EU Global Strategy (2016) energy and climate change feature in all kinds of external priorities.29

3. SHARED (EXTERNAL) COMPETENCES ON ENERGY AND CLIMATE CHANGE POLICY While climate does not feature literally as an area of ‘shared competence’ in the Treaty, it is widely considered that the shared competence in ‘environment’ culminates in a shared competence in ‘climate’, seeing the explicit recognition to ‘combat climate change’ in the specific environment Treaty article.30 Even when this is questioned, shared competences 26   According to the EURLEX website (http://eur-lex.europa.eu/nl/index.htm), there are currently five legal acts on statistics, 98 on general principles and programmes, 81 on coal, 23 regarding electricity; no fewer than 187 have nuclear energy as a subject; 14 are on oil and gas and 10 are on other energy sources. 27   European Commission, ‘A policy framework for climate and energy in the period from 2020 to 2030’ (Communication) COM (2014) 15 final. 28   ‘Commission Proposes New Rules for Consumer Centred Clean Energy Transition’ (European Commission Energy), https://ec.europa.eu/energy/en/news/commission-proposes-new-rules-consum​ er-centred-clean-energy-transition (accessed 15 December 2016). ‘Towards Energy Union: The Commission Presents Sustainable Energy Security Package’ (European Commission Press Release Database) http://europa.eu/rapid/press-release_IP-16-307_en.htm (accessed 15 December 2016). 29   ‘Energy’ is mentioned 43 times and ‘climate’ 26 times in the EU Global Strategy. European External Action Service, ‘Shared Vision, Common Action: A Stronger Europe, a Global Strategy on the European Union’s Foreign and Security Policy’ [2016], http://europa.eu/globalstrategy/sites/ globalstrategy/files/pages/files/eugs_review_web_13.pdf (accessed 16 August 2017). 30   ‘Union policy on the environment shall contribute to pursuit of the following objectives [. . .] promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change’, Art 191 TFEU.

36  Research handbook on EU energy law and policy are seen as the ‘default category of competences’ into which climate as a policy area would then automatically fall.31 However, how do these shared competences on energy and climate work externally, both in theory and practice? 3.1  Shared External Competences While the EU internal division of competences is delineated in the Treaty, the external (shared) competences are not clearly demarcated by the Lisbon Treaty. As a consequence, many academics see the external relations arrangements of the Lisbon Treaty as ‘rather unsatisfactory’32 or ‘fuzzy’.33 Accordingly, decades of pre-Lisbon case-law of the Court of Justice of the European Union define whether the competences are ‘pre-empted’ by the Union. The fluidity of competences in external relations has ‘provided a fertile field for ingenious legal argument’ over the interpretation of the Treaties before and after the Lisbon Treaty.34 One of these ingenious legal inventions is the concept of ‘shared external competences’ coined by Van Vooren and Wessel (2014).35 Although this concept is not part of the Treaty, it was already mentioned as applicable to policy domains such as environment in the run-up to the (failed) European Constitution.36 Other terms include, inter alia, ‘joint responsibility’37 or, as used in the area of energy, ‘coordinated action’.38 The arbitrator of the use of competences in the EU is the Court of Justice of the European Union. With an absence of the concept of shared external competences in the Treaty, it is all the more important to see which case-law exists on this topic. The Court has been a significant, but often disregarded, actor in EU external relations. The Court of Justice favours the participation of the EU in international organizations as a way to exercise its competence. Academic authors are even of the opinion that the Court of Justice could ‘accelerate the process’ of the EU becoming a respected actor 31   Paul Craig, ‘EU Competences’ in Dennis Patterson and Anna Södersten (eds), A Companion to European Union Law and International Law (Wiley Blackwell 2015) p. 88. 32   Bart van Vooren and Ramses A. Wessel, EU External Relations Law: Text, Cases and Materials (Cambridge University Press 2014) p. 110. 33   Christophe Hillion and Ramses A. Wessel, ‘Competence Distribution in EU External Relations after ECOWAS: Clarification or Continued Fuzziness?’ [2009] Common Market Law Review 46(2), p. 586. 34   Jan Wouters, Jed Odermatt and Thomas Ramopoulos, ‘The EU in the World of International Organizations: Diplomatic Aspirations, Legal Hurdles and Political Realities’ [2013] Leuven Centre of Global Governance Studies Working Paper no. 121, p. 4. 35   Bart van Vooren and Ramses A. Wessel, EU External Relations Law: Text, Cases and Materials (Cambridge University Press 2014). 36   Angelika Hable, ‘The European Constitution: Changes in the Reform of Competences with a Particular Focus on the External Dimension’ [2005] EI Working Papers/Europainstitut, 67, WU Vienna University of Economics and Business, Vienna. 37   Andre Nollkaemper, ‘Joint Responsibility between the EU and Member States for NonPerformance of Obligations under Multilateral Environmental Agreements. The External Environmental Policy of the European Union’ [2011] Amsterdam Law School Research Paper No. 2011-47, Amsterdam Center for International Law No. 2011-14. 38   Speech by Federal Chancellor Angela Merkel at the opening ceremony of the 61st academic year of the College of Europe in Bruges on 2 November 2010, https://www.coleurope.eu/content/ news/Speeches/Europakolleg%20Brugge%20Mitschrift%20englisch.pdf (accessed 29 November 2016).

External competences in energy and climate change  37 in ­international organizations.39  Especially noteworthy is the ERTA effect of ‘implied powers’: EU external competences exist because there are internal rules which form the basis for implying external competence.40 Therefore, when legislation is internally (within the EU) negotiated, it has external repercussions and the EU can enter into negotiations and agreements. Thus, these implied powers find their sources in the general competences the Union enjoys in the different policy areas, as well as in legislation. Even when Member States are not excluded from acting on their own in international organizations based on ‘implied powers’, they are not entirely free to act, as they still have obligations stemming from EU law, such as the principle of loyal cooperation.41 The Court of Justice seems to see this principle of loyalty as very important, not only in terms of results, but also in terms of the conduct of international negotiations.42 3.2  Application to Energy and Climate External Action How did this shared (external) competence historically grow in external climate and energy action by EU and Member State actors? Environmental policy received a basis in European governance relatively late, with the Single European Act in 1987. It has, however, ‘quickly developed an external dimension’.43 Even stronger, some argue that the EU established itself as an international leader on climate change in the mid-1980s and that it has ‘considerably improved its leadership record’ since then.44 Seeing the nature of shared competences, Member States are represented in the 1992 United Nations Framework Convention on Climate Change (UNFCCC) separately alongside the European Commission, but they ‘largely act jointly’ and are ‘recognized as one unitary actor’.45 This is different in the area of energy. While the EU has its origins in cooperation on energy policies such as those focused on coal, the actual external cooperation of EU institutions and Member States has proven to be weak, partly due to the lack of respective competences. Energy is even considered to perhaps constitute ‘the only field’ in which the EU has shifted its common drive towards a lesser extent of integration, never being able 39   Frank Hoffmeister, ‘Outsider or Frontrunner? Recent Developments under International and European Law on the Status of the European Union in International Organizations and Treaty Bodies’ [2007] Common Market Law Review 44(1), p. 68. 40   See Case 22/70, Commission v. Council [1971] ECR 263 (‘ERTA’) and Bart van Vooren and Ramses A. Wessel, EU External Relations Law: Text, Cases and Materials (Cambridge University Press, 2014), p. 105. Case C-246/07, Commission v. Sweden (PFOS) [2010] ECR 3317. See also Marise Cremona, ‘Case C-246/07, Commission v. Sweden (PFOS), Judgment of the Court of Justice (Grand Chamber) of 20 April 2010’ [2011] Common Market Law Review 48(5), pp. 1639–65. 41   Art 4(3) TEU. 42   Case C-246/07, Commission v. Sweden (PFOS) [2010] ECR 3317. See also Marise Cremona, ‘Case C-246/07, Commission v. Sweden (PFOS), Judgment of the Court of Justice (Grand Chamber) of 20 April 2010’ [2011] Common Market Law Review 48(5), pp. 1639–65. 43   Sandra Lavenex, ‘EU External Governance in “Wider Europe”’ [2004] Journal of European Public Policy, 11(4), p. 691. 44   Sebastian Oberthür and Claire Roche Kelly, ‘EU Leadership in International Climate Policy: Achievements and Challenges’ [2008] The International Spectator 43(3), pp. 35–50. 45  Ibid.

38  Research handbook on EU energy law and policy to regain the shared vision of the 1950s.46 In its 2001 Green Paper on energy security, the Commission therefore regrets that the ‘Union suffers from having no competence and no community cohesion in energy matters’.47 As compared to the more unified EU climate policies, the external energy policies mostly refer to creating more solidarity between the Member States.48 At the external stage, the EU and Member States ‘shall cooperate with third countries and with the competent international organizations’,  ‘within their relative spheres of competence’ on climate change and energy.49 Seeing that the EU is neither a state nor a typical international organization, however, the EU’s role in international affairs has often been seen as ‘confusing’ for third countries, since the Union is not always perceived as a unified actor, even on climate policies.50 The external action of the EU in both climate and energy has historically been Member State-led.51 Therefore, while the initiative has been mainly with the European Commission, national policies also exist and clearly matter. Some argue that the shared energy competences can become exclusive competences at the external stage, as a legal development seen earlier in trade issues.52 This gradual acquisition of competences is a necessity to some authors, because the shared competences are often perceived as an ‘obstacle’ to effective external action.53

4. INSTITUTIONAL ACTORS IN EU ENERGY AND CLIMATE DIPLOMACY AS WELL AS DECISION-MAKING The creation of external EU energy and climate policy is a complex issue involving many actors. In addition to formal EU institutions, a wide variety of other key stakeholders is involved in EU decision-making and external diplomacy. For example, private sector

46   Rafael Leal-Arcas and Juan Alemany Rios, ‘The Creation of a European Energy Union’ [2015] European Energy Journal 5(3), p. 27 and Sami Andoura, Leigh Hancher and Marc Van der Woude, ‘Towards a European Energy Community: A Policy Proposal by Jacques Delors’ [2010] Notre Europe, p. 7. 47   See also Sandra Lavenex, ‘EU External Governance in “Wider Europe”’ [2004] Journal of European Public Policy 11(4), p. 692. 48   European Commission press release – Towards Energy Union: The Commission presents sustainable energy security package, 16 February 2016, http://europa.eu/rapid/press-release_IP-16307_en.htm (accessed 10 December 2016). 49   Art 211 TFEU. 50   Chad Damro, ‘EU-UN Environmental Relations: Shared Competence and Effective Multilateralism’ in Katie Verlin Laatikainen and Karen E. Smith (eds), The European Union at the United Nations: Intersecting Multilateralisms (Palgrave, 2006). 51   Maurizio Carbone, ‘Mission Impossible: The European Union and Policy Coherence for Development’ [2008] European Integration 30(3), p. 328, citing also Christian Egenhofer (ed.), Policy Coherence for Development in the EU Council: Strategies for the Way Forward (Centre for European Policy Studies, Brussels, 2006). 52   Rafael Leal-Arcas and Juan Alemany Rios, ‘The Creation of a European Energy Union’ [2015] European Energy Journal 5(3), pp. 24–60. 53   Chad Damro, ‘EU-UN Environmental Relations: Shared Competence and Effective Multilateralism’ in Katie Verlin Laatikainen and Karen E. Smith (eds), The European Union at the United Nations: Intersecting Multilateralisms (Palgrave, 2006).

External competences in energy and climate change  39 organizations and companies,54 Civil Society Organizations (CSOs), utility providers, consumer (protection) organizations, local authorities,55 academics, other international organizations (e.g. the International Atomic Energy Agency (IAEA)) and third countries (e.g. Russia) influence European policymaking in the domain of energy (security) and climate change. Given the complexity of policymaking in view of the variety of actors involved, the present chapter will constrain itself to an analysis of the role of different EU institutions and of individual Member States. The division of responsibilities between the EU and the Member States is primarily defined by the Treaty of the European Union. Article 17(1) ensures that the European Commission is responsible for external representation, with the exception of Common Foreign and Security Policy (CFSP). As stipulated in this article, the Council of the European Union and the Commission, assisted by the High Representative of the Union for Foreign Affairs and Security Policy ‘shall ensure the consistency’ of the EU’s foreign policies and ‘shall cooperate to that effect’.56 The HR/VP also has the possibility to engage the European External Action Service (EEAS) and its EU delegations.57 Furthermore, the European Council ‘identifies strategic interests and objectives of the Union’, including external policies.58 As regards energy and climate policies, the ‘increased institutional and political stature’ should however not be overestimated as it ‘relies primarily on the “unmatched” expertise within the Commission and Council bureaucracy’.59 Apart from these actors, the European Parliament and the Court of Justice of the European Union play a role as EU institutions in external (climate and energy) policies. Moreover, various EU agencies such as the EURATOM Supply Agency play a role in decision-making on EU external policies. The European Investment Bank may be involved in financing or executing various energy related projects and programmes, for example in developing countries. The Treaty also contains specific titles on shared external action on energy and climate policy. The ‘energy’ article – Article 194 TFEU – primarily has an internal focus, with the main aim to ensure energy policy supports functioning energy markets, promoting energy efficiency and strengthening the interconnection of energy networks. However, ‘ensuring the security of supply’ in the Union clearly is related to EU external affairs. Some hold that Article 194 TFEU provides ‘fertile legal ground’ for the development of a fullyfledged European external energy policy’.60 Nevertheless, the separate energy title since the

54   José Célio Silveira Andrade and José Antônio Puppim de Oliveira, ‘The Role of the Private Sector in Global Climate and Energy Governance’ [2015] Journal of Business Ethics 130(2), pp. 375–87. 55   Kristine Kern and Harriet Bulkeley, ‘Cities, Europeanization and Multi-level Governance: Governing Climate Change through Transnational Municipal Networks’ [2009] Journal of Common Market Studies 47(2), pp. 309–32. 56   Art 21(3) TEU. 57   Art 221 TFEU. 58   Art 15(1) TEU and Art 22(1) TEU. 59   Jan Frederik Braun, ‘EU Energy Policy under the Treaty of Lisbon Rules: Between a New Policy and Business as Usual’ [2011] EPIN Working Paper, no. 31. 60   Rafael Leal-Arcas and Juan Alemany Rios, ‘The Creation of a European Energy Union’ [2015] European Energy Journal 5(3), p. 28. See also Bart van Vooren and Ramses A. Wessel, EU External Relations Law: Text, Cases and Materials (Cambridge University Press, 2014).

40  Research handbook on EU energy law and policy Lisbon Treaty has also been coined a ‘double edged-sword’ by officials of the European Parliament, seeing its respective opportunities and limitations.61 According to the Treaties (Articles 4 and 191 TFEU), the EU and Member States share competences in the environmental (and climate change) fields and therefore also in climate change negotiations. Finally, and not of the least importance, national governments and parliaments continue to play a paramount role as the EU can only act in those areas in which it has received the competence from the Member States; large parts of energy policy are still governed on the basis of coordinated action by the Member States. The EU Member States by themselves have ‘some 124 energy-related intergovernmental agreements’ with other countries of which ‘around one-third’ are not EU-compliant.62 Despite this, the European Commission has contributed to a shift in political norms, successfully framing import dependency as a problem requiring an EU-level solution. Whilst Member States retain a significant extent of sovereignty in this area, since 2006 the Commission has achieved more competences in the internal and, to a lesser extent, external dimensions of EU energy policy.63 Furthermore, while there are specific titles in the Treaty, both energy and climate ‘constitute a horizontal issue’ and are linked with many other external policy areas, such as development cooperation and trade.64 To enable coherent and consistent external action on energy and climate, recent initiatives include the successful Climate Diplomacy Action Plan65 and the Energy Diplomacy Action Plan.66

5. ARE THE EU AND MEMBER STATES SHAPING GLOBAL CLIMATE AND ENERGY GOVERNANCE? The EU has had a major stake in developing ‘effective multilateralism’67 and international commitments, certainly on climate change, and to a lesser extent on energy. With the Paris Agreement, the success of a universal multilateral agreement on climate change mitigation can be claimed. The development of multilateral energy governance, however, has 61   Jan Frederik Braun, ‘EU Energy Policy under the Treaty of Lisbon Rules: Between a New Policy and Business as Usual’ [2011] EPIN Working Paper 31, p. 7. 62   EU Observer (2016) ‘EU Commission to Oversee National Energy Deals’, 8 December 2016, via https://euobserver.com/tickers/136189 (accessed 17 November 2016). 63   Tomas Maltby, ‘European Union Energy Policy Integration: A Case of European Commission Policy Entrepreneurship and Increasing Supranationalism’ [2013] Energy Policy 55, p. 435. 64   Jan Frederik Braun, ‘EU Energy Policy under the Treaty of Lisbon Rules: Between a New Policy and Business as Usual’ [2011] EPIN Working Paper 31, p. 3. See for a critical overview of energy and climate policies compared to other EU policies, Robert Falkner, ‘The Political Economy of “Normative Power” Europe: EU Environmental Leadership in International Biotechnology Regulation’ [2007] Journal of European Public Policy 14(4), pp. 507–26 and Stavros Afionis and Lindsay C. Stringer, ‘European Union Leadership in Biofuels Regulation: Europe as a Normative Power?’ [2012] Journal of Cleaner Production 32, pp. 114–23. 65   ‘Foreign Affairs Council calls for continuing European climate diplomacy following landmark Paris deal’, http://ec.europa.eu/clima/news/articles/news_2016021601_en (accessed December 2016). 66   ‘Energy Diplomacy’, https://eeas.europa.eu/topics/energy-diplomacy_en (accessed December 2016). 67   Edith Drieskens and Louise G. Van Schaik (eds), The EU and Effective Multilateralism: Internal and External Reform Practices (Routledge, 2014).

External competences in energy and climate change  41 been more difficult. Daniel Yergin and others emphasize the fact that energy sectors and markets are posited to closely match the national interests of states, so that energy security becomes part of national security schemes.68 Decreasing GHG emissions globally has become a challenge in a debate where self-interest and collective goods are contradictory in terms of Member States’ goals. The main stumbling block, also in climate negotiations, has been the notion that the richest, most developed economic actors need to bear the heaviest economic burden to reduce GHG emissions, as they (have) contribute(d) the biggest share in worldwide energy consumption and pollution.69 This ‘common but differentiated responsibilities’ approach has, at least until the 2015 Paris Agreement, clashed with the agenda of some economic superpowers, notably the US under the Bush Administration.70 Accordingly, for import-dependent blocs and states such as the EU the objective has long been to prevent energy from endangering national interests and objectives.71 Other notable geopolitical catalysts during the last 30 years have prompted the EU (and the US), as with many other states, to safeguard security of supply for themselves, rather than relying on consultations and international institutions that would determine matters for them. How did the EU and the Member States nevertheless help shape the global energy and climate change agenda? Illustrations on this will be provided in the following sections. 5.1  EU Involvement in Global Climate Frameworks 5.1.1  UNFCCC and the Paris Agreement Since the early 1990s, the EU has been a leading actor in constructing international climate policy frameworks and creating leading discussions.72 In doing so, it has been deeply committed to creating a multilateral response to combat climate change. The 1992 United Nations Framework Convention on Climate Change (UNFCCC), adopted during the 1992 United Nations Conference on Environment and Development (the Rio Conference), can be considered the principal framework instigating the discussion on global climate efforts under the umbrella of the UN. Although non-binding in nature, the Convention listed climate change as a salient matter on the global agenda, while the parties committed to meeting during the yearly Conference of Parties (COP) to discuss, and if possible act upon, climate change challenges. The EU, although having a relatively new institutional structure after the Treaty of Maastricht, was deeply involved

68   Daniel Yergin, The Prize: The Epic Quest for Oil, Money and Power (Free Press, 2008); Robert Gilpin, Global Political Economy – Understanding the International Economic Order (Princeton University Press, 2001), p. 38. 69   Bruce Podobnik, ‘Global Energy Inequalities: Exploring the Long-Term Implications’ [2002] Journal of World-Systems Research, p. 252. 70   Jeffrey McGee and Jens Steffek, ‘The Copenhagen Turn in Global Climate Governance and the Contentious History of Differentiation in International Law’ [2016] Journal of Environmental Law, p. 37; Guri Bang, ‘The United States: Obama’s Push for Climate Policy Change’ in Guri Bang et al. (eds), The Domestic Politics of Climate Change: Key Actors in International Climate Cooperation (Edward Elgar, 2015), pp. 160–81. 71   Daniel Yergin, ‘Energy Security in the 1990s’ [1988] Foreign Affairs, pp. 110–32. 72   Jürgen Lefevere, Artur Runge-Metzger and Jake Werksman, ‘The EU and international climate change policy’ in Jos Delbeke and Peter Vis (eds), EU Climate Policy Explained (Routledge, 2015), p. 109.

42  Research handbook on EU energy law and policy in ­negotiating the basis for the convention that was adopted in the 1992 Earth Summit in Rio.73 COP is the supreme decision-making body of the UNFCCC and all of its 195 members are invited to participate in these meetings. The EU is a Party to the UNFCCC as are all EU Member States in their own right.74 After various rounds of failed negotiations to define a universal climate framework,75 a series of subsequent COPs led to the successful COP21 in Paris in 2015. During this Conference, the European delegation of EU and Member States built a robust coalition of both developed and developing nations, which added to the successful international climate agreement.76 5.2  EU Involvement in Global Energy Frameworks 5.2.1  United Nations 2030 Agenda for Sustainable Development In the absence of a universal binding energy treaty, the UN 2030 Agenda for Sustainable Development, a more action-oriented framework falling under the auspices of the UN, remains the closest thing to a universal energy ‘commitment’ there is.77 As regards the creation of this agenda, the European Commission maintained that [. . .] the EU has played an important role in shaping the 2030 Agenda, through public consultations, dialogue with our partners and in-depth research [. . .] the EU will continue to play a leading role as we move into the implementation of this ambitious, transformative and ­universal Agenda that delivers poverty eradication and sustainable development for all.78

5.2.2  International Energy Agency Various researchers in the energy area consider the International Energy Agency (IEA) to be the core institution in the splintered field of global energy governance.79 The organization was created shortly after the 1973 oil crisis, to form an adequate response to physical 73   Alexandra Lindenthal, Leadership im Klimaschutz: Die Rolle der Europäischen Union in der Internationalen Umweltpolitik (Campus-Verl., 2009), p. 132. 74   https://ec.europa.eu/clima/policies/international/negotiations_en (accessed 8 August 2017). 75   Probably the most outspoken failure in this regard, also for the EU, was the Copenhagen conference in 2009. See, e.g. Stavros Afionis, ‘The European Union as a Negotiator in the International Climate Change Regime’ [2011] International Environmental Agreements: Politics, Law and Economics 11(4), pp. 341–60. 76   Sebastian Oberthür, ‘Where to Go from Paris? The European Union in Climate Geopolitics’ [2016] Global Affairs, pp. 1–12 and ‘How the EU Helped Build the Ambition Coalition’ (EUClimateAction Storify, January 2016), https://storify.com/EUClimateAction/how-the-eu-helpedbuild-the-coalition-ambition (accessed 30 November 2016). 77   United Nations, ‘Transforming Our World: The 2030 Agenda for Sustainable Development’ [2015], https://sustainabledevelopment.un.org/post2015/transformingourworld (accessed November 2016). 78   Commission, ‘The 2030 Agenda for Sustainable Development’, http://ec.europa.eu/euro​ peaid/policies/european-development-policy/2030-agenda-sustainable-development_en (accessed 1 December 2016). 79   See, e.g., Flynt Leverett, ‘Consuming Energy: Rising Powers, the International Energy Agency, and the Global Energy Architecture’ in Alan S. Alexandroff and Andrew F. Cooper (eds), Rising States, Rising Institutions: Challenges for Global Governance (Brookings Institution Press,

External competences in energy and climate change  43 oil supply disruptions, while providing information and data about the international oil market and other energy sectors. The IEA falls within the framework of the Organization for Economic Cooperation and Development (OECD). Membership of the IEA is limited: the mandate of the organization stipulates that only OECD Members are eligible to join the IEA. With 20 out of the total of 29 IEA members, the EU provides the largest number of members of this organization. The EU holds a collective seat in the IEA as well, thereby having its own external representation in the primary organization dealing with international energy matters. The EU has been applauded by the IEA as a global leader considering its ‘unprecedented renewable energy boom, its action on energy efficiency and [. . .] drop in greenhouse gas emissions’, giving it an exemplary role in the IEA.80 5.2.3  The Energy Charter, the Energy Community and IRENA The Energy Charter Treaty is a multilateral energy agreement in which the EU has a separate voice. Thus, the EU, having a membership role, provides it with collective external representation in another main global energy framework.81 The Energy Community, by comparison, is an international organization focusing on international energy policy. The Energy Community’s foremost goal is to enhance energy infrastructure between the EU and South East Europe, and the Black Sea region. Since the Energy Community only operates in Europe, the role of the EU in this framework is important, necessitating the EU to provide its own representation. Effectively, the European Commission represents the EU in this respect. The International Renewable Energy Agency (IRENA) is based in Dubai. This multilateral organization promotes the transition from conventional fossil forms of energy to renewable ones. The Agency has the important function of supporting countries in their transition to renewable forms of energy. The EU (next to its Member States) is also represented in IRENA.

6. EU EXTERNAL ACTION ON CLIMATE AND ENERGY: INSTITUTIONAL CHALLENGES AND OPPORTUNITIES While the EU often proclaims that ‘sustainability is a European brand’,82 a closer look reveals a ‘dual agenda’ of both (normative) climate change mitigation as well as a defensive energy security agenda. The combination of ‘benevolent civilian milieu goals’ and strategic ‘possession goals’ in the EU’s and Member State’s common agenda is certainly not new, but

2010), pp. 240–65. See also Thijs van der Graaf, ‘Obsolete or Resurgent? The International Energy Agency in a Changing Global Landscape’ [2012] Energy Policy, p. 233. 80   International Energy Agency, ‘Energy Policies of IEA Countries’ (2014) European Union 2014 Review, https://www.iea.org/publications/freepublications/publication/energy-policies-of-ieacountries---the-european-union-2014-review.html (accessed 1 December 2016). 81   For more information about the International Energy Charter, see Chapter 10 of this handbook by Sijbren de Jong. 82   Commission, ‘Next Steps for a Sustainable European Future: European Action for Sustainability’ SWD(2016) 390 final, p. 17.

44  Research handbook on EU energy law and policy has become more problematic over time.83 Activities in equally important policy areas where the EU and Member States also share competences, for example development cooperation, seem to be conducted in ‘silos’ and are not coherent.84 In this regard, the somewhat ‘doublestandard action’ by the EU in its external climate and energy policies is not really helpful: while countries such as Colombia work together closely with the EU on climate change affairs, Colombia remains the single largest exporter of coal to the EU as a whole.85 This raises questions as to the EU’s full commitment to being a global leader in climate affairs. Concurrently, the EU may be faced with the problem that it is unable to deliver on the international energy and climate promises it makes. The capabilities-expectations gap, introduced by Christopher Hill in 1993, provides a possible concept to describe this issue.86 Hill’s concept draws on the assumption that the European Communities in 1993 were unable to pursue the actions they promised to deliver due to a lack of capabilities. Similarly, today there are those who claim that in the post-Lisbon era, the EU’s foreign policy is still characterized by a ‘capability-expectations gap’.87 To close its ‘foreign policy gap’, especially in the area of energy, ‘[. . .] the EU’s capabilities would either need to be increased, or expectations decreased’.88 Additionally, among the Member States there is a clear variation in the understanding of how to achieve, for example, a secure energy of supply status.89 This is related to the ‘east vs. west paradox’ of underdeveloped, vulnerable energy markets and developed, less vulnerable ones, as the extent of market ‘maturity’ differs in the East and West. In this respect, Eastern European states seem more willing to integrate the EU internal market and develop the external energy policy, in comparison to the Western, more developed nations, which are less vulnerable to fluctuations in import-fluxes.90 The Energy Union is not always met with similar enthusiasm by the EU Member States that remain keen on deciding energy market-related policies for themselves.91 Tariffs, for example, have remained a strategic domestic affair for some EU energy transit countries.92 Transit tariffs provide the country with revenue and economic gain, making it unattractive to alleviate

83   Karen E. Smith, ‘Still “Civilian Power EU”?’ [2005] European Foreign Policy Unit Working Paper Series, p. 1 84   Maurizio Carbone, ‘Mission Impossible: The European Union and Policy Coherence for Development’ [2008] Journal of European Integration, p. 323. 85   Eva Maas, Louise van Schaik and Ries Kamphof, ‘EU and Colombia: Climate Partnership Beyond Aid and Trade’ [2015] Clingendael Policy Brief, p. 1. 86   Christopher Hill, ‘The Capability-Expectations Gap, or Conceptualizing Europe’s International Role’ [1993] Journal of Common Market Studies 31(3), p. 305. 87   Niklas Helwig, ‘EU Foreign Policy and the High Representative’s Capability-Expectations Gap: A Question of Political Will’ [2013] European Foreign Affairs Review (18), p. 235. 88   Christopher Hill, ‘The Capability-Expectations Gap, or Conceptualizing Europe’s International Role’ [1993] Journal of Common Market Studies 31(3), p. 305. 89   Ole Gunnar Austvik, ‘The Energy-Union and Security-of-gas Supply’ [2016] Energy Policy, p. 372. 90  Ibid. 91   Daan Rutten, ‘CIEP Briefing Paper on the Energy Union’ [2016] Clingendael International Energy Programme, p. 4. 92   Stefan Bouzarovski and Sergio Tirado Herrero, ‘The Energy Divide: Integrating Energy Transitions, Regional Inequalities and Poverty Trends in the European Union’ [2015] European Urban and Regional Studies, p. 8; ‘Bringing Gas to the Market: Gas Transit and Transmission

External competences in energy and climate change  45 them. At the same time, however, tariffs are a key impediment to the development of a single harmonized market. In this way, EU Member States have to choose between a common EU voice on energy (trade) policy and own revenues, which constitutes another trade off. Of course, there also are opportunities for more cohesive external action in the area of energy policy. The EU energy diplomacy action plan ‘needs to be backed by a coherent set of tools to ensure coordination of efforts between EU Member States and European institutions’.93 In this way, the energy diplomacy action plan could benefit from experience based on the more successful examples of climate diplomacy. Nevertheless, common external EU and Member State action on energy security is complicated by the fact that there is a general lack of international fora operating in this domain. This is all the more visible when compared with climate change mitigation, where a general and universal Conference of the Parties (COP) takes place every year. To close the ‘capabilities-expectations gap’, the EU could pursue less ambitious energy goals, that is, lowering the international expectation that it is truly able to speak with one voice in energy-related areas. Alternatively, notably in the energy policy domain, the EU could aim to enhance its ability to agree on external policies, augment the resources it has available for this and aim to establish more adequate instruments to implement its commitments. Hence, there are both institutional challenges and opportunities as regards the development of coherent and cohesive EU external climate and energy policies, but hurdles in view of energy policy seem to be more extensive and would need more efforts and adaptations to close the ‘capabilities-expectations gap’ in this area.

7.  CONCLUSION AND FUTURE RESEARCH AGENDA The lack of a clear guidance in the Treaties on who represents the EU externally in the case of shared competences has caused tensions between EU institutions such as the European Commission, the Council and the European External Action Service. These tensions have become more visible since the entry into force of the Lisbon Treaty, in general terms, but more specifically also in the areas of climate and energy policies. Our chapter shows that the institutional framework, both within the EU and in terms of international institutions, affects the EU’s capacity to act cohesively. As Tom Delreux stated in 2006, the EU’s external actions are to a large extent ‘determined by its internal interactions between the different actors’.94 Accordingly, this chapter can be seen as complementing the preceding one in this book.95

Tariffs in Energy Charter Treaty Countries’, Energy Charter Secretariat [2012], http://www.energycharter.org/fileadmin/DocumentsMedia/Thematic/Gas_Tariffs_2012_en.pdf. 93   Thomas Raines and Shane Tomlinson, ‘Europe’s Energy Union: Foreign Policy Implications for Energy Security, Climate and Competitiveness’ [2016] Chatham House Research Paper, March 2016, p. 24. 94   Tom Delreux, ‘The European Union in International Environmental Negotiations: A Legal Perspective on the Internal Decision-Making Process’ [2006] International Environmental Agreements (6), p. 232. 95   See Chapter 2 by Kim Talus and Pami Aalto, ‘Competences in EU energy policy’.

46  Research handbook on EU energy law and policy The ‘shared (external) competences’ make it difficult for the EU to establish coherent external policies. Climate change and energy security policies are increasingly tied together in the ways they are referred to, creating the impression that there is a direct, inextricable link between the two areas. As Luft et al. (2011) stated, however, this link ‘is more tenuous’ than it seems, as there are ‘many trade-offs’ between the two areas, also in substantive terms.96 Furthermore, in terms of power and competence distribution, ‘energy security’ is a core area of national sovereignty, while to achieve climate change mitigation, there needs to be global partnerships to attain countries’ respective aims, demanding a different strategy related to the provision of ‘global public goods’.97 In this sense, the EU being more eager to ‘speak with one common voice’ in external relations on climate change issues than in those related to energy security makes sense. The absence of clear-cut global multilateral fora on energy makes it even more difficult for the EU to align its own policies and those of its Member States on this issue. A new research agenda could be beneficial in which shared external competences in terms of both energy security and climate change mitigation are being addressed in a combined way. Lessons from the more successful climate diplomacy could then possibly be transferred to the energy diplomacy domain. Future research could also address ways in which challenges to the coordination of EU external policies in the climate and energy areas can be overcome, for example by potential institutional or organizational adaptations, or increased coordination between Member States and EU institutions in such areas. Next to this, a potential focus could be on the extent to which the ‘securitization’ of energy and climate change may have an effect on the ‘pendulum’ swinging either towards the wish to maintain sovereignty or to enhance the EU’s common external representation. Recently there has been increasing attention on the ‘climate security’ agenda where military and climate threats are combined.98 However, this ‘securitization’ of the climate agenda is not automatically linked with energy security. Another issue worth addressing might be the rise of populism, which has fed the ongoing ‘existential crisis’ of the EU, which is characterized by, for example, Brexit. Although little research has been conducted measuring the effect of populism on EU foreign policymaking, a recently published report by the European Policy Centre provides an early comprehensive account of this topic. The findings are relatively moderate, as the report argues that ‘[. . .] contemporary European populists on both the left and right have so far shown limited transformative power in terms of their ability to determine actual policy choices’.99 Nevertheless, a future research agenda on this issue is both meaningful 96   Gal Luft, Anne Korin and Eshita Gupta, ‘Energy Security and Climate Change: A Tenuous Link’ in Benjamin K. Savocool (ed.), The Routledge Handbook of Energy Security (Routledge, 2010). 97   Michèle B. Bättig and Thomas Bernauer, ‘National Institutions and Global Public Goods: Are Democracies More Cooperative in Climate Change Policy?’ [2009] International Organization 63(2), pp. 281–308. 98   See e.g. the ‘Planetary Security Initiative’, https://www.clingendael.nl/sites/default/files/ PSI_flyer_A5_web_0.pdf (accessed 7 December 2016). Climate change is considered a ‘threat multiplier that catalyzes water and food scarcity, pandemics and displacement’ according to the EU Global Strategy. 99   Rosa Balfour et al., ‘Europe’s Troublemakers: The Populist Challenge to Foreign Policy’ [2016] European Policy Centre, p. 49.

External competences in energy and climate change  47 and essential, as the unfolding of [parliamentary] elections across the European continent may provide right-wing parties with more transformative power. Finally, there could be a special focus on how EU populist parties’ support for Russia might affect the EU’s position as Russia’s largest importer of conventional energy sources. Another promising research avenue would be to see how the EU could link agendas and strategic partnerships. More detailed accounts on the intersection between the EU’s climate change policy and development programmes could, for example, offer a more comprehensive understanding of this topic. In what way, for instance, do the negotiations on a ‘post-Cotonou agreement’ with African, Caribbean and Pacific countries work in conjunction with the EU goals in terms of energy security and climate change mitigation? How could this be structured externally to create more efficient, problem-driven diplomacy in this domain? How can researchers, for example with political-institutional background research, help to demonstrate how contradictions in the EU’s external policy could be prevented? Another challenge is the relative strength of the carbon-intensive industry as a major deterrent to the adoption of climate change mitigation policies.100 This nexus could also be addressed. It would also be worthwhile to come up with a research agenda that explicitly incorporates the positions and interests of other global actors, including large energy-producing countries such as Russia, Nigeria and Algeria and explore how the private sector, which is increasingly involved in ‘de-risking’ the political process, and local authorities could play a role in terms of finding innovative climate and energy solutions from which the EU’s external policies could also benefit. Science diplomacy may, especially in the areas of climate and energy, prove effective in depoliticizing issues that are, for example, closely intertwined with national interests. Such knowledge exchange might again decrease the ‘information deficit’ the EU has as compared to the energy security schemes of its Member States, which would probably make it easier to ‘speak with one voice’ externally. More institutional issues could be part of this research agenda. All in all, a clearer description of the role of the competences of the EU and its Member States would not only be ‘highly pertinent towards understanding energy within the EU context’,101 but also in the external institutional context. Studying the activities of EU actors in conjunction with those of external (third) parties is therefore of crucial importance.

100   Franklin Steves and Alexander Teytelboym, ‘Political Economy of Climate Change Policy’ [2013] Smith School Working Paper Series, Working Paper 13/06, p. 25. 101   Rafael Leal-Arcas and Andrew Filis, ‘Conceptualizing EU Energy Security through a Constitutional Law Perspective’ [2013] Fordham International Law Journal (36), p. 1225.

4.  EU energy and competition: analysis of current trends and a first assessment of the new package Leigh Hancher and Francesco Maria Salerno

1. INTRODUCTION Since 1996 the EU has put in place legislation to enable the transition from electricity and gas systems traditionally dominated by vertically integrated national incumbents that owned and operated generation and network assets and were often the only importers and exporters of electricity or gas, to competitive well-functioning and integrated markets. Three packages of legislation were adopted between 1996 and 2009. The 1996–1998 measures1 constituted a first somewhat tentative step towards market liberalization by removing exclusive rights enjoyed by incumbents to produce, supply and transport gas and electricity and requiring them to negotiate with new entrants on the terms of access to their networks. These Directives were subsequently replaced and repealed by the second package in 2003.2 This package required full market opening, national sector regulators, regulated third-party network access, regulated or negotiated access to storage and further unbundling of integrated companies.3 In 2009 the EU adopted what was then called the ‘Third Package’ of energy legislation.4

 1   Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity, OJ 1997, L 27/20. Directive 98/30/ EC of the European Parliament and of the Council of 22 June 1998 concerning common rules for the internal market in natural gas, OJ 1998, L 204/1.  2   Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity, OJ 2003 L 176/37. Directive 2003/55/ EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in natural gas, OJ 2003 L 176/57.  3   The Gas Directive was complemented by the Gas Regulation (Regulation (EC) No 1775/2005 of 28 September 2005 on conditions for access to the natural gas transmission networks (OJ 2005 L 289/1), which expanded on several of the provisions in the Directive. It introduces qualitative obligatory minimum requirements for access to transmission systems (network tariffs, third-party access services, capacity allocation, transparency, balancing and trading of capacity rights).  4   Directive 2009/72/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in electricity (‘Electricity Directive’ or ‘ED’), OJ 2009 L 211/55. Directive 2009/73/EC of the European Parliament and of the Council of 13 July 2009 concerning common rules for the internal market in natural gas (‘Gas Directive’ or ‘GD’), OJ 2009 L 211/94. Regulation (EC) No. 713/2009 of the European Parliament and the Council of July 2009 establishing an Agency for the Cooperation of Energy Regulators (‘ACER Regulation’), OJ 2009 L 211/1. Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for cross-border exchanges in electricity (‘Electricity Regulation’), OJ 2009 L 211/15. Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks (‘Gas Regulation’), OJ 2009 L 211/36.

48

EU energy and competition  49 The Third Package crystallized the following key aspects of energy regulation or Sector Specific Regulation (‘SSR’): (1) unbundling of vertically integrated undertakings; (2) third-party network access; (3) cross-border trade; and (4) a network of regulatory and supervisory institutions. Prior to the launch of the first package of internal energy market measures in 1996– 1998 there was very little competition in either the electricity or the gas markets. National markets were reserved for national vertically integrated incumbents. The application of the Treaty competition rules were therefore of limited relevance before that date. As the General Court held in case T-360/09 Eon Ruhrgas and Eon v Commission, competition could not be affected when the two national operators were granted monopoly in gas supply in their national territories by national law at the relevant time.5 The launch of energy market liberalization, albeit limited in scope, changed this situation rapidly and irreversibly as the Commission began a series of investigations as well as a sector-wide inquiry. In time, the drive to create well-functioning, integrated markets through common legislative rules has been strengthened by a rigorous and systematic enforcement of the Treaty rules on competition and more recently, state aid. Since the adoption of the so-called Third Package in 2009 there has been a move away from conventional generation towards the deployment of capital-intensive low margin cost, variable and often decentralized electricity from renewable energy sources (RES E) that is expected to become more pronounced by 2030 and certainly by 2050 if the EU’s low-carbon ambitions are to be realized. The Renewable Energy Directive 2001/776 as amended by the 2009/28 Directive,7 has established a European framework for the promotion of RES, setting mandatory targets for achieving a 20% EU share of renewable energy in final energy consumption (and a 10%) share in transport) by 2020. In the future, electricity demand will progressively reflect the increasing electrification of transport and heating. At the time the Third Package was launched, this paradigm shift was hardly foreseen and certainly not anticipated. As a consequence, in February 2015 the Commission adopted the Communication on ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change’,8 heralding upcoming changes in the legislation. In the same year the Commission’s Directorate-General in charge of energy (DG ENER) started to engage in an extensive analysis of the policy options for a possible revision of the main framework governing electricity markets and security of electricity  5   T: 2012:332., at para. 155. The General Court went on to partially annul the Commission decision finding that the agreement of 18 July 1975, between GDF and Ruhrgas to construct and operate the gas pipeline MEGAL together was in breach of Article 101 TFEU.  6   OJ 2001. As of 1 January 2012, Directive 2009/28/EC on the promotion of the use of energy from renewable sources (OJ 2009 L 140/16) repealed and replaced the earlier Directive 2001/77/EC (OJ 2001 L283/33) and imposed binding national targets.  7   OJ 2009 L 140/16.  8   The challenges electricity systems face are reflected in the European Commission Communication of February 2015, ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’ COM(2015) 80 final, where the Commission announced a new electricity market design linking wholesale and retail markets. As part of the legislative reform process needed to establish the Energy Union, it also announced new legislation on security of electricity supply.

50  Research handbook on EU energy law and policy supply in Europe.9 On 30 November 2016, the Commission unveiled its proposals for new rules in the Communication ‘Clean Energy for all Europeans’.10 With three waves of legislation already adopted and a fourth just tabled, from an institutional perspective one of the key questions is ‘do we have an institutional structure that can effectively deliver the goals of the EU energy policy?’ The question is salient because the recurrent waves of legislation are partly a response to the paradigm shift discussed above, but it could also be put down to an ineffective institutional structure. To answer this question this chapter uses a method of benchmark comparison, taking competition law as the benchmark of an effectively enforced EU policy, and compares the institutional structure of EU energy regulation with that of EU competition law, to assess the extent to which there is a ‘competition law-ization’ in the latter institutions.11 The use of competition law as a model of effective enforcement is warranted because competition law is commonly regarded as a successfully enforced EU policy. In addition, the import of competition law institutions into fields of EU regulatory policies has been pioneered by telecommunication regulation starting in 2000. Thus, ‘competition law-ization’ is a useful short-hand to review the institutional structure emerging from the Third Package and its effectiveness, and to provide a first assessment of the proposed changes in the new Package. The chapter is structured as follows: section 2 outlines ‘competition law-ization’; section 3 makes an assessment of ‘competition law-ization’ of the energy sector in the period in which the Third Package was in force (2009–2016); section 4 then discusses the new package from the perspective of ‘competition law-ization’; section 5 provides concluding remarks.

2. COMPETITION LAW-IZATION AS A TOOL TO ANALYSE THE EFFECTIVENESS OF INSTITUTIONAL STRUCTURES IN DELIVERING EU POLICIES From a legal-institutional perspective, the ‘classic’ architecture of enforcement in the EU has relied on a system where rules are made in Brussels and enforcement is handed down to the Member States, the chief example of this approach being the Directive. If Member States fail to implement the relevant rules, the Commission can bring legal action before the Court under Article 258 TFEU. Competition law enforcement is premised on a different architecture, which to a large

 9   See European Commission (2015) Consultation on a new Energy Market Design COM(2015) 340 final, available at https://ec.europa.eu/energy/en/consultations/public-consultation-new-ener​ gy-market-design. 10   See Commission press release ‘Commission proposes new rules for consumer centred clean energy transition’, and the links to the various proposals at https://ec.europa.eu/energy/en/news/ commission-proposes-new-rules-consumer-centred-clean-energy-transition. 11   See F.M. Salerno, ‘The Competition Law-ization of Enforcement: The Way Forward for Making the Energy Market Work?’ EUI Working Paper 2008/7, available at http://cadmus.eui.eu/ handle/1814/8108.

EU energy and competition  51 extent explains its effective enforcement. Three features stand out in the institutional design of competition law:12 1.  Direct access to regulatees. First of all, competition law benefits from direct enforcement. The Commission is able to adopt decisions which are directly binding on regulatees. It does not need an intermediation by Member States. 2.  Networked enforcement. Second, as part of the so-called ‘modernization’ of competition law in 2003, the Commission has managed to push a successful decentralization of enforcement, while retaining control of the network of enforcers. The result has been a multiplication of its enforcement reach. 3.  Private enforcement. Third, competition law vests in private entities’ rights (and obligations) that can be enforced in (national) courts. As a consequence, private enforcement complements public enforcement in a common effort to ensure effectiveness. Through the years private enforcement has become more and more prominent (especially as regards Article 101 TFEU). This is a very strong weapon to complete the armoury of enforcement tools which make competition policy an effectively enforced policy. Competition law-ization of the structures of enforcement impacted the telecommunications sector when, in 2002, the Commission adopted the so-called ‘new regulatory framework’,13 which borrows heavily from competition law. This approach has remained unchanged in EU telecommunications regulation throughout the years. When the Third Package of legislation was approved, competition law-ization in the energy sector was scant. The next section sketches an account of competition law-ization in the period 2009–2016.

3. INSTITUTIONAL TRENDS IN THE ENERGY SECTOR 2009–2016 3.1  An Overview of the Legislative Framework 3.1.1  The 2006 Sector Inquiry14 The legislative process was preceded by a sector inquiry. In the Commission’s final report, it reiterated and confirmed the five areas of concern identified in both the EU gas and electricity markets in its interim report: (i) market concentration; (ii) vertical foreclosure; (iii) lack of market integration; (iv) lack of transparency; and (v) price formation.15

12   For an institutional analysis of competition law enforcement, see L. Laudati, ‘The European Commission as a Regulator: The Uncertain Pursuit of the Competitive Market’ in G. Majone (ed.), Regulating Europe (Routledge, 1996). 13   See Directive 2002/21/EC. 14   Commission Communication COM(2006)851 and the more detailed Commission Staff Working Paper (SEC(2006)1724). 15   The Preliminary Report is available on the DG Competition website at http://ec.europa.eu/ competition/sectors/energy/2005_inquiry/index_en.html.

52  Research handbook on EU energy law and policy BOX 4.1  FINDINGS OF THE SECTOR INQUIRY FOR THE GAS SECTOR Incumbents’ long-term supply contracts act as a barrier to entry. Despite the third-party access regime, there is insufficient effective access. The incumbent operators of the pipelines and storage infrastructure may favour their own affiliates and this suggests that current levels of unbundling are not sufficient. Cross-border competition is very limited and new entrants have difficulty securing transit capacity, due, in particular, to legacy contracts and ineffective congestion management mechanisms on transit pipelines. Infrastructure users need more reliable, timely and transparent information on access to networks and to transit and storage capacity so that all users are on an equal footing. Finally, pricing is not market-based as gas wholesale prices are mostly determined by oil prices rather than gas supply/demand dynamics.

BOX 4.2 FINDINGS OF THE SECTOR INQUIRY FOR THE ELECTRICITY SECTOR The generation markets remain national in scope and concentrated. The analysis of trading has suggested that generators have the scope to raise prices and to withdraw available capacity. Thus incumbents still enjoy market power. Despite the requirements of the liberalization directives, new entrants again face problems of access to infrastructure, due to lack of liquidity, arising from the high level of integration of generation and supply, which means incumbents have the incentive and ability to favour their affiliates as opposed to competing suppliers. As in the gas market, the lack of cross-border trade prevents new entrants from challenging the position of the incumbents. Here also, the establishment of an integrated single EU electricity market is being hindered by insufficient interconnector capacity, long-term legacy capacity reservations and lack of incentives for investing in long-term capacities. As for transparency, more than 80% of users are not content with the current level of transparency with respect to information on availability of interconnectors and transmission networks, on generation, on balancing and reserve power and on load. National differences in market conduct regulations and supervision add to users’ difficulties. Price setting is complex. The Commission expressed concern that electricity prices may not be the result of fair competition – although even specialists cannot agree on the extent of the influence of fuel price increases and the EU Emissions Trading Scheme on electricity prices.

The shortcomings identified in these key areas called for urgent action and priority was to be given to four areas: (1) achieving effective unbundling of network and supply activities; (2) removing the regulatory gaps (in particular for cross-border issues); (3) addressing market concentration and barriers to entry; and (4) increasing transparency in market operations.16 The Commission acknowledged that ‘only a strengthened regulatory framework can provide the transparent, stable and non-discriminatory framework that the sector needs for competition to develop and for future investments to be made’.17 16   See also E. Wäktare, K. Kovács and A. Gee, ‘The Energy Sector Inquiry: Conclusions and Way Forward’, Competition Policy Newsletter, Number 1 – Spring 2007. 17   Communication from the Commission, ‘Inquiry pursuant to Article 17 of Regulation 1/2003 into the European gas and electricity sectors’, at p. 13.

EU energy and competition  53 BOX 4.3 ISSUES TO BE ADDRESSED BY PROPOSED REGULATORY MEASURES ●● ●● ●● ●●

Structural conflicts of interest: a systemic conflict of interest caused by insufficient unbundling of networks from the competitive parts of the sector; Gaps in the regulatory environment: a persistent regulatory gap particularly for cross-border issues. The regulatory systems in place have loose ends, which do not meet; A chronic lack of liquidity, both in electricity and gas wholesale markets: the lifeblood of our markets is lacking and the market power of pre-liberalization monopolies persists; A general lack of transparency in market operations in the sector.

The Commission’s intentions concerning regulatory proposals to be made in this regard were set out in its Communication on ‘Prospects for the internal gas and electricity market’, which was presented in parallel to the Final Report.18 The Sector Inquiry had identified four main fundamental deficiencies in the competitive structure of current  electricity and gas markets which would have to be addressed by regulatory measures: 3.1.2  The main objectives of the Third Package The main objectives of the two directives and three regulations that constitute the Third Package adopted in 2009 aimed to deal with the shortcomings identified in the Sector Inquiry and the Commission’s assessment of the First and Second Packages, and can be summarized as follows: ●

Improving competition through better regulation, unbundling and reducing asymmetric information; ● Improving security of supply by strengthening the incentives for sufficient ­investment in transmission and distribution capacities; and ● Improving consumer protection and preventing energy poverty. Importantly for the perspective of this chapter, the Third Energy Package considerably modifies the regulatory landscape as it was the first attempt to coordinate and unify energy regulatory oversight at the European level. It should however be emphasized that although its launch followed closely on the heels of the Commission’s so-called ‘20-20-20 Climate Change’ package in 2007,19 coordination between two policies was far from optimal. The convenient fiction that the three objectives of competition, carbon reductions and security are mutually reinforcing turned out to be just that – a fiction. Nevertheless in 2011, the European Union committed to reducing greenhouse 18   COM(2006) 841, Communication from the Commission, Prospects for the internal gas and electricity market. 19   That is, 20% carbon reduction by 2020; 20% RES E production target by 2020 and an energy efficiency aspiration of 20% by 2020. For a detailed description see, COM(2008) 30 final.

54  Research handbook on EU energy law and policy gas ­emissions to 80–95% below 1990 levels by 2050. For this purpose, the European Commission adopted an Energy Roadmap20 and a roadmap for moving to a competitive low carbon economy.21 The Third Package mainly focused on improving conditions for competition by strengthening the so-called level playing field. The most important root cause for the absence of competition was perceived at that time, and as confirmed by the sector report, to be the existence of Vertically Integrated Undertakings (VIUs), which not only controlled essential facilities (such as electricity transmissions systems) but also enjoyed significant market power in the wholesale and often retail markets. Ex post competition control, although potentially far-reaching, was not considered to be sufficient. As a result, a large number of ex ante regulatory measures adopted under the Third Package sought to directly or indirectly address this issue, for example by strengthening the unbundling regime,22 improving the conditions for cross-border market integration and lowering entry barriers by improving market transparency. Stricter sector-specific regulatory oversight was also considered a prerequisite to enhancing competition. 3.2 An Assessment of the Institutional Structures from the Point of View of Competition Law-ization 3.2.1 Direct access to regulatees: certification procedure and third-party access exemption decisions To address the issue of unbundling, the Third Package created a system of certification of Transmission System Operators (TSOs), which provides the Commission with a form of direct access to regulatees. More specifically: ●

A candidate TSO can start to operate only if it has been approved following the certification procedure (laid down in Article 10 of the Electricity and Gas Directives in combination with the provisions of Article 3 of the Electricity and Gas Regulations). ● A candidate TSO must apply to its National Regulatory Authority (NRA), which is under an obligation to open a certification procedure upon notification by a potential TSO – or upon a reasoned request from the Commission. The Third Package provides that the Commission must provide a prior opinion on the certification and that the NRA, when adopting its final decision on the certification, must take the utmost account of this Commission opinion.23 In practice, the NRAs and TSOs have always conformed to the Commission’s views. When the Commission issues negative comments, TSOs typically adopt the changes requested by the Commission to avoid a refusal of certification, and thus an inability to operate. As a consequence, the certification process has given the Commission a powerful tool to  http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri5CELEX:52011DC0885&from5EN.   COM (2011) 112; http://eur-lex.europa.eu/legal-content/EN/TXT/?uri5CELEX:52011D​ C0112. 22   For a full analysis, see L. Hancher and F.M. Salerno, ‘Energy Policy after Lisbon’ in A. Biondi et al. (eds), EU Law After Lisbon (OUP, 2012). 23   Article 3 of the Electricity Regulation and the Gas Regulation. 20

21

EU energy and competition  55 dictate regulation at the national level, which is the functional equivalent of direct access to regulatees in the area of competition law. Exemption decisions are another example of direct access. ●

As a general rule, energy infrastructures are subject to third-party access. However, major new infrastructure may be exempted in certain circumstances. The exemption provides incentives, for example, for particularly risky investments such as cross-border gas pipelines or liquified natural gas terminals which could not be implemented if the usual rules applied. ● The process for the exemptions is as follows:   ●  Article 17 of the Electricity Regulation and Article 36 of the Third Gas Directive grant NRAs the possibility to exempt new infrastructure from third-party access rules, provided certain conditions are fulfilled.   ● Article 17(7) of the Electricity Regulation and Article 36 of the Gas Directive provide for the Commission to be notified of the decision by the NRA on an exemption request.   ●  Article 17(8) of the Electricity Regulation and Article 36 of the Gas Directive provide for the Commission to approve the exemption or to take a decision requesting the notifying bodies to amend or withdraw the decision to grant an exemption. Exemption decisions are thus another good illustration of a case of direct access to regulatees because the Commission has the power to dictate directly the rules by which ultimately TSOs managing new infrastructures need to abide. 3.2.2  Networked enforcement: ACER, REMIT, ENTSO and competition law A number of developments in the Third Energy Package point towards a significant level of ‘networked enforcement’. ACER    The Third Package requires Member States to set up national regulatory ­authorities that are independent, not only of the target industries but also of the governments.24 This strict requirement is highly unusual and is not replicated in other regulated sectors.25 Nevertheless NRAs remain subject to democratic or judicial control.26 Furthermore their remit is rather restricted. Their primary functions are to regulate access to gas27 and   See Recital 33 of Dir 2009/72.   See further P. Larouoche’s study for CERRE, http://www.cerre.eu/sites/cerre/files/120306_ IndependenceAccountabilityPerceivedQualityofNRAs.pdf. 26   Recital 34 of Dir 2009/72 provides: ‘Energy regulators need to be able to take decisions in relation to all relevant regulatory issues if the internal market in electricity is to function properly, and to be fully independent from any other public or private interests. This precludes neither judicial review nor parliamentary supervision in accordance with the constitutional laws of the Member States. In addition, approval of the budget of the regulator by the national legislator does not constitute an obstacle to budgetary autonomy. The provisions relating to the autonomy in the implementation of the allocated budget of the regulatory authority should be implemented in the framework defined by national budgetary law and rules.’ 27   Article 34 GD on upstream pipelines does not require the involvement of an NRA. 24 25

56  Research handbook on EU energy law and policy electricity networks as further detailed in Article 37 of the Electricity Directive,28 as well as to certify TSOs’ compliance with the relevant set of unbundling rules (see Arts 9–10 in both the ED and GD), and to approve network plans (Art 22). Regulatory supervision of important TSO functions need not be delegated: for example, Article 13(4) of the Third Gas Directives states that: ‘The regulatory authorities where Member States have so provided or Member States may require transmission system operators to comply with minimum standards for the maintenance and development of the transmission system, including interconnection capacity’. The NRAs find in the newly created ACER (Agency for the Cooperation of Energy Regulators) a forum for coordination. ACER29 is a ‘network agency’ which must cooperate with the Commission and the NRAs to further the completion of the internal market.30 ACER’s main mission is to support the NRAs and to coordinate their actions where necessary. ACER is not a regulatory authority as such. ACER has specific competence for interconnections or cross-border issues, it interacts with the NRAs and it cooperates with the already existing European regulatory forums, such as the Council of Energy Regulators (CEER).31 ACER’s most important task is issuing opinions and recommendations which can be addressed to the TSOs, NRAs, European Parliament and the Council or the Commission. A distinction must be made between the advisory and decision-making competencies of ACER. advisory competences    Articles 5 to 11 of the ACER Regulation define the Agency’s tasks.32 According to the ACER Regulation, the tasks of the Agency are to complement and coordinate the work of the NRAs as well as to participate in the c­ reation of the European network rules. Under certain conditions it can take binding individual decisions on the terms and conditions for access and operational security for cross-border infrastructure and give advice on various energy-related issues to the European institutions. It is also entrusted with monitoring and reporting developments in the EU energy markets and has to prepare an annual market monitoring report in cooperation with the European Commission, the NRAs and other relevant organizations. ACER delivered its first market monitoring report in November 2012, covering the year 2011, which was prepared jointly with CEER and in close cooperation with the European   And Art 41 GD.   In fact there are over 40 agencies in the EU that contribute to EU governance by various executive or regulatory tasks. Eleven of these can be seen to be specifically energy-related – see EP study on governance, ‘EU Energy Governance for the Future’, a study by the European Parliament Directorate for Internal Policies (see http://www.europarl.europa.eu/RegData/etudes/ STUD/2015/518776/IPOL_STU(2015)518776_EN.pdf). 30   F. Ermacora, ‘The Agency for the Cooperation of Energy Regulators’ in C. Jones (ed.), EU Energy Law, Volume I: The Internal Energy Market – The Third Liberalisation Package, 3rd edition (Claeys & Casteels, 2010). 31   See S. Lavrijssen and L. Hancher, ‘Networks on Track: From European Regulatory Networks to European Regulatory “Network Agencies”’, 34(1) Legal Issues of Economic Integration (2008), pp. 23–55. 32   Certain tasks are also defined in the Electricity and Gas Regulations. 28 29

EU energy and competition  57 Commission.33 The report includes an assessment of the internal energy market, and successive reports have focused inter alia on retail prices, network access and barriers to the internal energy market. decision-making competences    According to the ACER Regulation, ACER’s decisionmaking powers are very limited. ACER is competent to adopt individual decisions on technical issues where those decisions are stipulated in Directive 2009/72/EC, Directive 2009/73/EC, Regulation 714/2009/EC and Regulation 715/2009/EC. For example, ACER will be able to decide on the terms and conditions for the access to and operational security of a cross-border infrastructure.34 Moreover, ACER may adopt a decision granting exemptions from Third Party Access (TPA) to new major electricity interconnectors or gas infrastructures if the respective infrastructure is located on the territory of at least two Member States. However, such decisions can be taken only as a last resort when the NRAs concerned cannot reach an agreement or they ask the Agency to make a decision.35 It has six months to make the decision. ACER must consult the NRAs and applicants concerned.36 ACER and REMIT    Regulation 1227/2011 on wholesale market integrity and transparency (REMIT) entered into force on 28 December 2011.37 REMIT imported the prohibition against insider trading and market manipulation from the financial regulation into the energy sector. REMIT is relevant from an institutional perspective because of the division of ­competences between ACER and NRAs. ACER has been tasked with the collection and screening of the wholesale market transaction data across the European Union and an initial assessment of anomalous events before notifying suspected cases to the NRAs for investigation. Although the NRAs should carry out their monitoring and enforcement tasks, ACER is expected to play a central role in the REMIT monitoring framework. A consistent European approach to market monitoring should avoid the risk of energy market transactions being relocated to jurisdictions where monitoring is considered to be less effective.38 Figure 4.1 (from ACER’s 2016 REMIT Report) illustrates this approach. Pursuant to Article 16(1) REMIT, ACER should ensure that the NRAs carry out their tasks under REMIT in a coordinated and consistent way. ACER should also coordinate the investigation of suspected cases of market abuse by national competent authorities when they involve more than one jurisdiction.39 Thus, whereas in the financial sector these rules are implemented by NRAs acting

33   ACER/CEER, Annual Report on the Results of the Monitoring the Internal Electricity and Natural Gas Markets in 2011. 34   ACER Regulation, Articles 8 and 9(1). 35   See ACER Regulation, Article 9(1); Electricity Regulation, Article 17; and Gas Directive, Article 36(4). 36   Electricity Regulation, Article 17(5) and Gas Directive, Article 36(5). 37   (REMIT), OJ L 326/1-16. 38   ACER, Work Programme 2012, at p. 3. 39   Article 16(4)(c) REMIT.

58  Research handbook on EU energy law and policy Coordination of NRAs (if needed)

Data Collection Trade Data Fundamental Data

Automatic Screening to identify ‘Anomalous Events’ Monitoring Methodology ‘Anomalous Events’ definition

Notification of ‘Suspicious Events’ to NRA(s)

Preliminary analysis of ‘Anomalous Events’

Source:  ACER, REMIT Annual Report 2016, fig. 6, p. 24.

Figure 4.1  ACER’s market surveillance approach alone, in energy the institutional design is such that national trading platforms collect all the trading data and send it to ACER, the agency of energy regulators. ACER has the capability to analyse and process the trading data and then it alerts a national authority competent for a given trading platform about suspicious patterns of trade, and then that NRA conducts the enforcement process. REMIT enforcement is thus an example of networked enforcement because the enforcement competence is really divided between the supranational level (in this case ACER), and the national one, and this creates a powerful network of enforcers. ENTSOs    As regards ENTSOs, the Electricity Regulation stipulates that ‘to ensure optimal management of the electricity transmission network and to allow trading and supplying electricity across borders in the Community, a European Network of Transmission System Operators for Electricity (the ENTSO for Electricity), should be established’ (Recital 17), in which all TSOs should participate (Article 4). The Gas Regulation has identical provisions on the establishment of an ENTSO for gas TSOs (Recital 16 and Article 4). One of the ENTSO’s key tasks is to develop the network codes (NCs) as provided for in Article 6 Electricity Regulation (with an equivalent in Gas Regulation). These NCs specify technical rules on the operation of EU electricity and gas markets. They are designed to flesh out non-essential and technical rules and can only be adopted in areas listed in the relevant Articles.40

40   NCs should not be confused with the guidelines provided for in Art 18 of Electricity Regulation 712/2009 and Gas Regulation equivalent.

EU energy and competition  59 In order to ensure their cooperation, ACER has to monitor the execution of the ENTSOs’ tasks,41 and provide its opinion on the ENTSOs’ network codes, the annual draft work programme and the 10-year EU network development plan. When giving its opinion, ACER has to keep in mind the principles of non-discrimination, effective competition and the efficient and secure functioning of the European internal energy markets.42 ACER has to ensure that these 10-year plans will bring a sufficient level of cross-border interconnection open to third-party access. If this cannot be ensured, ACER has to prepare a duly reasoned opinion, together with recommendations, and present it to the ENTSOs. It also has to send it to the Commission, the Council and the European Parliament.43 Competition law    Finally, the period 2009–2016 saw unprecedented competition law enforcement in the energy field, especially through the use of commitment decisions.44 This enforcement has been very clearly aimed at supplementing the goals of energy regulation, especially unbundling. Sometimes the enforcement of competition law has gone even beyond supplementing SSR or the traditional ‘can opener’ role for energy market liberalization,45 by elevating regulatory goals to the level of competition law offences. The Swedish interconnectors case is a case in point where the theory of harm was essentially that the use of a redispatching technique which penalized exports was an abuse of dominance.46 The systematic use of competition law to pursue the goals of the Third Package automatically coincides with a high degree of competition law-ization, given that competition law enforcement and SSR enforcement have become almost indistinguishable. 3.2.3 Private enforcement: preliminary rulings on public service obligations, internal market and state aid The significant number of preliminary rulings in the period 2009–2016 is a good indicator of a significant level of private enforcement in the EU energy regulation. In particular, the cases dealing with public service obligation, starting with Federutility,47 show that European regulation has empowered private parties to police 41   See ACER Regulation, Article 6(2); Regulation (EC) No 714/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the network for crossborder exchanges in electricity (‘Electricity Regulation’), OJ L 211/15, Article 9; and Regulation (EC) No 715/2009 of the European Parliament and of the Council of 13 July 2009 on conditions for access to the natural gas transmission networks (‘Gas Regulation’), OJ L 211/36, Article 9. 42   ACER Regulation, Article 6(3) and (4). 43   ACER Regulation, Article 6(4); Electricity Regulation, Article 9(2); and Gas Regulation, Article 9(2). 44   See C. Jones et al., EU Competition Law and Energy Markets (Claeys & Casteels, 2016), ch. 4. 45   P. Lowe et al., ‘Effective Unbundling of Energy Transmission Networks: Lessons from the Energy Sector Inquiry’, Competition Policy Newsletter (2007). 46   See Commission decision of 14 April 2010, relating to a proceeding under Article 102 of the Treaty on the Functioning of the European Union and Article 54 of the EEA Agreement – Case 39351 – Swedish Interconnectors, available at http://ec.europa.eu/competition/antitrust/cases/ dec_docs/39351/39351_1223_2.pdf. 47   See Judgment of 20 April 2010, Federutility and others (C-265/08[2010] ECR I-3377) ECLI:EU:C:2010:205.

60  Research handbook on EU energy law and policy the national legal order for measures which run contrary to EU law. These cases are a strong signal of how much private parties have taken EU law into their hands and use it to counter national rules that they thought were incompatible with the European law. This is very close to an example of what we see as private enforcement in the competition law area. Another string of preliminary rulings in the energy sector concerns the rules on support for renewables. These cases too show that private parties have questioned internal market aspects of national rules. Cases like Essent I,48 Alands49 and Essent II,50 show the extent to which private parties have used European law to question the compartmentalization of the system of support for renewables. A third trend which is still related to renewables but from a state aid perspective is also relevant to gauge private enforcement. In cases like Vent de Colère51 private parties have used European law to challenge aid in respect of which Member States have not notified the Commission for prior approval ex Article 108(3) TFEU. Interestingly, these preliminary rulings are likely only the tip of an iceberg. Potentially there are many more cases of private parties going to national courts using European energy law to keep in check national regulations which they thought actually incompatible with European law. For instance, in 2012 and 2016 the Spanish Tribunal Supremo handed down two important judgments on public service obligations as regards the supply of energy to vulnerable customers by making an admirable analysis of the national provisions in the light of EU law.52 In sum, the string of preliminary rulings in the energy sector in the relevant period is also a powerful signal of how much this field has been ‘competition law-ized’.

4.  A FIRST ASSESSMENT OF THE NEW PACKAGE 4.1  Background to the Proposed Rules Despite the panoply of measures, as well the large number of competition actions brought by the Directorate-General for Competition (DG Comp) against most of the major incumbents, a recent Technical Report by the European Commission on ‘the economic impact of enforcement of competition policies on the function of EU energy markets’, published in late 2015, concluded that between 2005 and 2012 the intensity of competition in both wholesale and retail markets had declined.53 The goal of completing the internal market has also proved elusive. In February 2011 the European Council set the objective of completing the internal energy market ‘by

  See judgment of 11 September 2014, Essent Belgium, C‑204/12 to C‑208/12, EU:C:2014:2192.   See judgment of 1 July 2014, Ålands Vindkraft, C‑573/12, EU:C:2014:2037. 50   See Judgment of 29 September 2016, Essent Belgium, C-492/14, ECLI:EU:C:2016:732. 51   See Judgment of 19 December 2013, Vent De Colère and others, C-262/12, ECLI:EU:C:2013:851. 52   Tribunal Supremo sentencia no. 1425/2012, de 7 de febrero and sentencia no. 2334/2016, de 2 de noviembre. 53   Published on 16 November 2015, at http://ec.europa.eu/competition/publications/reports/ kd0216007e​nn.pdf. 48 49

EU energy and competition  61 2014’ but by June 2016 the European Council called for ‘Single Market strategies including energy, and actions plans to be proposed by the Commission and to be completed by 2018’. Indeed, full and timely transposition of the complex provisions of the Third Package had been a challenge for most Member States, and in fact none of them had achieved full transposition by the deadline of March 2011. This resulted in the Commission opening a large number of EU pilot cases as well as infringement procedures for failure to implement the Directives and/or for contravention of the requirements of these measures.54 Other measures, such as the Security of Supply Directive on electricity, have been fully implemented but are considered inadequate in themselves to deal with security issues.55 The failure of the Third Package to deliver more intensive competition in a fully integrated energy market is to be explained by a number of factors. On closer inspection it is evident that its three objectives are in fact pursued by different actors with different powers and duties, subject to various legal constraints. The mismatch between the internal energy market and 20-20-20 goals only exacerbates this. The Third Package takes the wholesale market as its core vehicle through which competition takes place and where costs and prices are established, whereas the climate change agenda promotes technologies outside the wholesale market (and which are often zero marginal cost). Moreover, the new Article on energy in the TFEU – Article 194 TFEU – added complexity to the issues. According to Article 194, the main aims of the EU’s energy policy are to ensure the functioning of the energy market, ensure security of energy supply in the Union, promote energy efficiency and energy saving and the development of new and renewable forms of energy, and promote the interconnection of energy networks. However, as noted, these goals are sometimes difficult to reconcile. As regards competences, Article 194 states that energy policy is a shared competence between the EU institutions and the Member States, albeit that the Commission enjoys exclusive competence in relation, for example, to the enforcement of the EU state aid rules. At the same time, Member States are entitled to determine their own ‘energy mix’ (Art 194(2)) although the extent of their freedom to do so in derogation from the  Treaty  provisions on free movement, state aid and competition is by no means certain.56 Against this backdrop, in November 2016 the Commission proposed a set of new measures which aim at improving the current framework. The next section attempts a first assessment of the proposed rules from the institutional perspective. In particular, using the competition law-ization tool, the next section discusses the proposed institutional changes and whether they confirm the previous institutional trend or depart from it. This is not just an academic exercise but is important in order 54   See further, http://ec.europa.eu/energy/sites/ener/files/documents/2014_iem_communication_ annex6.pdf. 55   See Report on progress concerning the SoS electricity Directive, COM(2010) 330 final. 56   See further Angus Johnston and Eva van der Marel, ‘Ad Lucem? Interpreting the New EU Energy Provision, and in particular the Meaning of Article 194 (2) TFEU’, 22(5) European Energy and Environmental Law Review (2013), p. 181.

62  Research handbook on EU energy law and policy Table 4.1  Summary of interim conclusion Direct access to regulatees

Networked enforcement

Private enforcement

TSO Certification Decisions on exemption from third-party access

ACER REMIT ENTSO Competition law

Preliminary rulings on public service obligations, internal market and state aid

to ­understand what has to be dealt with and why from an institutional perspective in the context of the Commission’s proposed ‘new market design initiative’.57 4.2  First Assessment of the New Rules from an Institutional Perspective 4.2.1 Overview The previous section showed that in the period between 2009 and 2016, the period in which the Third Package came into force, there was a significant level of competition law-ization. Table 4.1 summarizes this finding. The following sections take stock of the new package, which was unveiled on 30 November 2016, from an institutional perspective. A word of caution is in order both because the new package is new and because it is large, involving several pieces of draft legislation. As a consequence, the assessment below is by necessity tentative. In general, the new package builds on the acquis, aiming at improving rather than eliminating the current framework. From an institutional perspective the question is whether the new package continues the trend of competition law-ization and to what extent. Direct access to regulatees: certification and exemption continued and the new emphasis on competition law    The new package maintains the procedure for certification and exemption from third-party access, which will thus remain a feature of direct access. As regards competition law, the emphasis on state aid as a tool to complement EU energy regulation more than antitrust may have an ambiguous impact on competition law-ization, which deserves to be treated under the heading of direct access (rather than networked enforcement, given that state aid approval is an exclusive competence of the Commission). This is because, in formal terms, state aid is a type of instrument which brings together the Commission and Member States only; private parties are only considered as a source of information. But in practice, state aid is also a powerful tool to address regulatees directly, precisely because, even if the EU state aid rules target, by definition, state measures, the aid measures have a beneficiary and the beneficiary is always a private party. Through state aid the Commission thus may enjoy a form of quasi-direct access to regulatees. 57   International Energy Agency, ‘Re-powering Markets’, suggests: ‘A market design with a high temporal and geographical resolution is therefore needed’ (see https://www.iea.org/publica​tions/ freepublications/publication/REPOWERINGMARKETS.pdf).

EU energy and competition  63 Networked enforcement: new powers and a trend towards regionalization   A few elements confirm a trend towards more networked enforcement: ●

First, ACER will have (i) more responsibility in elaborating and submitting the final proposal for a network code to the Commission (Article 5 of the draft Regulation establishing a European Union Agency for the Cooperation of Energy Regulators (recast) – the ‘Draft ACER Regulation’); (ii) a new role as regards regulatory matters left to a group of regulators only (Article 7 of the Draft ACER Regulation); (iii) a new supervisory role as regards the Regional Operational Centres for electricity– ‘ROCs’ (on which see below) (Article 8 of the Draft ACER Regulation); (iv) a new supervisory power over power exchanges in the context of the market coupling process (Article 9 of the Draft ACER Regulation); and (v) a new power to approve the EU-wide methodology for assessing generation adequacy, which will then unlock Member States’ ability to set up capacity remuneration mechanisms (Article 10 of the Draft ACER Regulation). ● Second, the expanded role of the ENTSOs. In particular, the ENTSO for e ­ lectricity – ENTSO-E – will have new responsibilities in connection with (i) the EU-wide resource adequacy assessment; (ii) technical specifications for cross-border participation in capacity remuneration mechanisms (Article 27(1), lett. c) of the draft Regulation on the internal market for electricity (recast) – the ‘Draft Electricity Regulation’); and (iii) the cooperation within the ROCs (Article 27(1), lett. e) and f) of the Draft Electricity Regulation). ● Third, the addition of a new element in the institutional architecture, that is the creation of the ROCs between TSOs. All TSOs within a region designated by ACER under its new tasks will have to set up a ROC (in the territory of one of the Member States within the region). According to Article 32(3) of the Draft Electricity Regulation: ‘Regional operational centres shall complement the role of transmission system operators by performing functions of regional relevance. They shall establish operational arrangements in order to ensure the efficient, secure and reliable operation of the interconnected transmission system’. A list of the ROCs’ tasks is set out in Article 34 of the Draft Electricity Regulation. These tasks include ‘coordinated capacity calculation’, ‘facilitate the regional procurement of balancing capacity’, ‘regional week ahead to intraday system adequacy forecasts and preparation of risk reducing actions’, and a number of tasks related to coordinated management of crisis situations. ROCs have the power to adopt decisions that are binding on the member TSOs (Article 38 of the Draft Electricity Regulation). ROCs report to ACER as well as to the relevant NRAs. The creation of the ROCs signals a move which is specific to the energy sector. While there are a number of cornerstones which are valid across the EU (e.g., that energy prices should be the product of demand and supply), certain significant aspects of regulation (e.g., the borders of bidding zones) will be left to a new institutional instance that is this regional aggregation of TSOs. This is a new approach and is unique to energy (in telecommunications there is a strong drive towards a single approach across the EU). It shows that EU regulation in the energy sector follows a specific trajectory marked by a mix of ‘single-ness’ of the internal market

64  Research handbook on EU energy law and policy and regionalization that is to have common concepts where possible, but then a number of aspects are at a level – the regional level – which is intermediate between the Union and the single Member State. This development marks a step towards a different sort of competition law-ization. From an institutional perspective, competition law enforcement is highly ‘standardized’, in the sense that the Commission has the power to maintain a consistent approach across the network, steering all NCAs in one direction. By contrast, in the case of energy, the Commission seems ready to relinquish power to a sort of intermediate body which is the aggregation of TSOs. Private enforcement    Perhaps one of the most remarkable features of the new package is the extent to which it re-regulates markets, thus impacting directly on operators’ rights and obligations. First of all, one should consider the rules about market design, for example the principle that prices should be the result of supply and demand. This is a significant novelty. In the past, the use of pool markets or power exchanges was the result of spontaneous convergence but it was not part of EU law. Thus, the institutional landscape of electricity trading was left entirely to national dynamics. EU law colonized this field, initially by introducing rules on market coupling which provide for a number of obligations on power exchanges and subject them to regulatory oversight (Regulation 2015/1222 of 24 July 2015 establishing a guideline on capacity allocation and congestion management). Now the new package sets out provisions on how the market should be designed, which in turn gives operators clear rights and obligations. These operators may thus be able to invoke EU law against national implementing measures which they may deem contrary to EU law – just as was the case in the past with, for example public service obligations. A similar dynamic may impact the new rules on retail tariffs and their progressive abolition. As noted, this is an aspect which enjoyed centre stage in preliminary rulings in the past. The new package lays down clear rules, and operators can be expected to follow up in national fora to enforce their rights. The same applies to the new rules on consumer protection, including the obligation to provide information to customers, the rules that facilitate switching between suppliers, etc. These developments can be seen as part of a trend towards ‘private enforcement’ of EU energy regulation. A tentative conclusion on the institutional direction of the new package    The foregoing suggests a trend towards more competition law-ization. However, this conclusion must be nuanced by taking into account the main aspect of the draft regulation on the Governance of the Energy Union (the ‘Draft Governance Regulation’). At its core, the Draft Governance Regulation has the Integrated National Energy and Climate Plans (Article 3). These plans are the key instrument to ensure that Member States comply with the general direction of EU energy policy. The main enforcement tool in the hands of the Commission is a recommendation (Articles 26 and 28). This calls for two comments: ●

First of all, elevating the plans and the follow-up recommendation to the main institutional tool to elicit compliance is not exactly in line with competition lawization, which is built on the Commission’s ability to steer a policy by directly

EU energy and competition  65 accessing regulatees, without Member State intermediation. As a consequence, a trend towards competition law-ization is married with the introduction of a tool that requires cooperation between the Commission and Member States. ● Second, the choice of a recommendation as the legal instrument begs the question as to its effectiveness. Perhaps, a parallel can be instructive with another field of EU law where recently recommendations have been adopted as a tool to elicit compliance, that is, the Excessive Deficit Procedure (Article 126 TFEU). The Excessive Deficit Procedure operationalizes the limits on the budget deficit and public debt given by the thresholds of 3% of deficit to GDP and 60% of debt to GDP not diminishing at a satisfactory pace. If a Member State is going beyond the 3% threshold, the Commission has the power to issue a recommendation with corrective measures. However the recommendation is only the start of a very elaborate process – also provided in the legislation – to cajole a Member State into complying with its duties, a process which also may involve sanctions. The effectiveness of recommendations in the field of Article 126 TFEU is at best unclear. Often Member States manage to use all possible formal and informal avenues to obtain additional leeway. Thus, the experience of the excess deficit procedure casts a shadow on the proposed use of recommendations to steer EU energy policy, also because – unlike the excessive deficit procedure – the current proposal does not envisage any sanction. Perhaps this negative assessment could be mitigated if one could assume that failure to comply with a recommendation triggered a fast recourse to the infringement procedure. However, even if this assumption proved correct, infringement procedures have limited ability to coerce compliance, not least because of the time-lag between starting and court judgment. All in all, on a preliminary basis, the new package seems to continue the trend towards competition law-ization. However, the use of the Integrated National Energy and Climate Plans as the core vehicle of compliance with EU energy law in the Draft Governance Regulation also shows a powerful trend towards a ‘classic’ model of cooperation with Member States, rather than direct Commission intervention. Only time will tell if these two trends will be mutually reinforcing, for example because the plans concern aspects which are complementary to the areas at the core of the competition law-ization, or whether the effectiveness of competition law-ization will be limited by Member States instrumentalizing the plans.

5.  CONCLUDING REMARKS The Third Package brought about an institutional structure that shares a number of features with competition law. In a number of respects SSR provides for direct access to regulatees and a network of enforcement, as well as empowering private operators to act as SSR enforcers alongside NRAs. This process can be described as a ‘competition lawization’ of the institutional structures of EU energy regulation. The new package unveiled in November 2016 builds on the acquis, reinforcing the network aspects and the role of private operators. However, there is also a shift

66  Research handbook on EU energy law and policy to more Member State involvement through the adoption of Integrated National Energy and Climate Plans and a related Commission Recommendation to Member States as key institutional devices. Competition law-ization and cooperation with Member States  have nonetheless the potential to be complementary – rather than contrasting – trends.

5.  The European Energy Union Thomas Pellerin-Carlin

We have to move away from an economy driven by fossil fuels . . . where energy is based on a centralised, supplied-side approach and . . . relies on old technologies and outdated business models . . . we have to empower consumers . . . we have to move away from a fragmented system characterised by uncoordinated national policies. (European Commission, Energy Union Framework Strategy, 25 February 2015)

The Energy Union is the European Commission’s flagship initiative for Europe’s energy future. Building on an EU energy policy that significantly developed during the decade 2005–2015, Jean-Claude Juncker seized on the slogan of ‘Energy Union’ and made it one of the top 10 priorities1 of his Commission for the years 2014–2019 that he presented has being the European Commission’s ‘last chance’2 to save the European project. The European Commission defined its Energy Union concept in its 25 February 2015 Energy Union Framework Strategy,3 and the bulk of its Energy Union policy proposals were proposed on 30 November 2016. While academic literature on energy is abundant, at the time of writing this chapter, the Energy Union is too young a project to have yet benefited from significant enlightening academic work. This explains why this chapter’s sources are mainly primary sources and grey literature. This chapter is divided into seven sections. The first one puts the Energy Union in its context. The five following ones explore each of the five dimensions of the Energy Union: energy security, solidarity and trust; a fully integrated European energy market; energy efficiency contributing to moderation of demand; decarbonising the economy; and research, innovation and competitiveness. Conclusions are offered in the final section.

1.  THE ENERGY UNION IN CONTEXT Anyone who wishes to change the world needs energy. Each action we undertake requires energy: to grow our food, heat our homes, power our phones and move ourselves. Energy is so omnipresent that we often paradoxically tend to forget its importance in our daily life. The November 2016 European Commission Communication4 is willing to highlight energy’s central role in human activities as it puts it at the centre of the key drivers of what it calls the ‘modernisation of the economy’ (see Figure 5.1).   European Commission, Prioritäten, 2017.   Jean Quatremer, ‘La Commission de la dernière chance’, Coulisses de Bruxelles, October 2014.  3   European Commission, Energy Union Framework Strategy, 25 February 2015.  4   European Commission, Clean Energy for All Europeans, Communication, 30 November 2016, COM(2016) 860 final.  1  2

67

68 Bringing new technologies from research to market

Innovation

Adapting the workforce

Skills Agenda

Empowering citizens and consumers

Digital Single Market

Achieving a resource efficient, low-carbon economy

Circular Economy

Figure 5.1 Role of the Energy Union in the modernisation of the EU economy, according to the European Commission

Source:  European Commission, Clean Energy for All Europeans, Communication, 30 November 2016, COM(2016) 860 final, p. 2.

Triggering sustainable finance for the clean economy

Capital Markets Union

Attracting additional investments

Investment Plan

Energy Union and Climate Action

The European Energy Union  69 Energy also plays a critical political role. Coal miners’ struggles in the 19th and 20th centuries laid the foundation of modern democracy and welfare states.5 In 1944–1945, oil scarcity was a key driver of Nazi defeat.6 In 1950, western-European leaders who looked for an economic sector where European integration would make war between Europeans ‘not merely unthinkable, but materially impossible’7 thus turned to the big energy source and energy use of their time: coal and steel, and built the European Coal and Steel Community, the ancestor of today’s European Union.8 Fifty-five years later, the 2005 Hampton Court European Council set three targets to be reached by 2020: reducing greenhouse emissions by 20%, ensuring that renewables would represent at least 20% of the EU energy mix, and ensuring that energy efficiency would reduce Europe’s energy demand by 20%. Even if the EU energy mix still largely relies on fossil fuels, as they account for 75% of its primary energy mix (see Figure 5.2), the EU reached its first and third targets six years ahead of schedule, while the renewables target is within its grasp (see Table 5.1). 1.1  The Genesis of the Energy Union The Energy Union builds on the existing EU energy policy. Its recent history has seen the addition of three layered objectives: liberalisation and completion of an EU energy market (as of 1996), ensuring energy security (as of 1957 for uranium, 1973 for oil and 2009 for gas), and fighting climate change (following the 1997 Kyoto Protocol). All these three objectives are still key objectives of the Energy Union. As a concept, the ‘Energy Union’ originates from a 2010 proposal put forward by Jacques Delors and Jerzy Buzek9 under the title ‘European Energy Community’ as a ­reference to the 60th anniversary of the Schuman declaration (see Annex). This idea was taken up again under the name ‘Energy Union’ in 2014 by then Polish Prime Minister Donald Tusk, with a strong focus on the energy security dimension of the project. This came at a moment when EU jargon favoured the use of the suffix ‘Union’: after the 1990s’ ‘Economic and Monetary Union’ came the 2012 ‘Banking Union’ and later the ‘Digital Union’, ‘Energy Union’ and now the ‘Security Union’. Given the popularity of the term ‘Energy Union’ ahead of the May 2014 European Parliament Election, the then right-wing candidate for President of the European Commission, Jean-Claude Juncker, made the Energy Union his number 2 priority.10 A priority that is still within the 10 ­priorities of his European Commission mandate that should run until 2019. Once elected, Jean-Claude Juncker had to lay down the kind of Energy Union he had in mind. He largely delegated this task to two of the commissioners he appointed, European Commission Vice-President for the Energy Union and former Slovak diplomat

 5   Timothy Mitchell, Carbon Democracy: Political Power in the Age of Oil. London: Verso, 2013.  6   David Edgerton, Britain’s War Machine. London: Penguin Books, 2011.  7   Robert Schuman, The Schuman Declaration, 9 May 1950.  8   Sami Andoura, Leigh Hancher and Marc Van der Woude, ‘Towards a European Energy Community: A Policy Proposal’, Studies & Research, No. 70, Notre Europe, March 2010.  9   Jerzy Buzek and Jacques Delors, ‘Towards a new European Energy Community’, May 2010. 10   Jean Claude Juncker, My Priorities, 2014.

70  Research handbook on EU energy law and policy EU new renewables consumption 8% EU hydroelectric consumption 5%

EU oil consumption 37%

EU nuclear consumption 12%

EU coal consumption 16%

EU gas consumption 22%

Sources:  Thomas Pellerin-Carlin, Jacques Delors Institute, with data from BP Statistical Review 2016.

Figure 5.2 EU energy mix in % of primary energy consumption by energy sources (excluding biomass) Maroš Šefčovič, and European Commission for Energy and Climate Action member and Spanish national politician Miguel Arias Canete. In the meantime, think tanks, intellectuals and politicians voiced what they thought the Energy Union should be about.11 1.1.1  What is the Energy Union ? On 25 February 2015, the European Commission published the Energy Union Framework Strategy.12 Its objectives show path-dependency with EU objectives laid out in the 1990s and 2000s, such as liberalising the energy sector, building an EU-wide electricity and gas market, ensuring energy security, and making energy ‘competitive’.13 Yet, it also

11   Sami Andoura and Jean-Arnold Vinois, ‘From the European Energy Community to the Energy Union: A Policy Proposal for the Short And The Long Term’, Jacques Delors Institute, Report, January 2015. 12   European Commission, Energy Union Framework Strategy, 25 February 2015. 13   See section 6 for a discussion on the definition of competitiveness in the framework of the energy transition and the energy union.

The European Energy Union  71 Table 5.1  EU 2020 energy-climate targets Targets to be reached by 2020 EU territorial GHG emissions

Renewable energy generation Energy efficiency

Metric

20% reduction EU level: GHGs emitted on  compared to 1990  the EU territory should be levels less than 4588.1 MtCO2eq by 2020 Each Member State has a  legally binding national target to be reached EU-level target is 20% 20% of energy Each Member State has a  consumed from RES in the gross  legally binding national target to be reached final energy consumption EU primary energy Compared to a  baseline scenario,  consumption below 1483 Mtoe and EU final energy saving 20% of consumption below 1086 the EU’s primary Mtoe by 2020 and final energy consumption, by Member States can choose  to set national targets for 2020 themselves

Where are we EU GHG emissions 5  4419.2 MtCO2eq in 2014 (–23% compared to 1990 levels)

16% RES of gross final  energy consumption in 2014 1505 Mtoe of primary  energy consumption in 2014 (–19% compared to baseline scenario) 1061 Mtoe of final energy  consumption in 2014 (–22% compared to baseline scenario)

Sources:  Thomas Pellerin-Carlin, Jacques Delors Institute, data for greenhouse gas emissions from Eurostat (Eurostat data excludes emissions linked to land use, land-use change and forestry. This addition would however not significantly change the figure, http://ec.europa.eu/eurostat/statistics-explained/ index.php/Greenhouse_gas_emission_statistics), data for renewable energy production from Eurostat (http://ec.europa.eu/eurostat/statistics-explained/index.php/Renewable_energy_statistics), data for energy efficiency from JRC 2016 Report on energy consumption in EU-28 (Paolo Bertoldi, Javier Lopez Lorente and Nicola Labanca, Energy Consumption and Energy Efficiency Trends in the EU-28, Joint Research Center, 2016).

shows changes by layering,14 with the addition of new elements. The Energy Union’s ‘big novelty’15 is the wish to put energy consumers (i.e. households and energy-consuming businesses) at the centre. The European Commission has often legitimised its positions by stating that they are in the best interests of consumers; this line of argumentation has been, for instance, a key driver for EU internal market policies. This is, however, new for energy policy, as it goes beyond seeing the consumers as mere passive actors that should be guaranteed low prices: it sees them as active players to whom the EU should provide a ‘New Deal’.16 14   For a definition of change by layering, see Wolfgang Streeck and Kathleen Thelen, Beyond Continuity. Oxford: Oxford University Press, 2005. 15   Thomas Pellerin-Carlin, ‘Putting the Consumer at the Centre of the European Energy System’, Jacques Delors Institute, September 2016. 16   European Commission, Delivering a new deal for energy consumers, 15 July 2015.

72  Research handbook on EU energy law and policy One year after the publication of the Energy Union Framework Strategy, ­Vice-President Šefčovič gave a keynote speech17 for a conference at the Jacques Delors Institute, in which he presented his vision based on his ‘5Ds model’: 1. Decarbonisation of our economies; 2. Democratisation in energy production and consumption; 3. Digitisation to optimise energy use and efficiency; 4. Diversification of our energy supplies and helping our innovators to deliver on new technologies to speed up the process; 5.  Disruption of traditional energy cycles. Those 5Ds were later completed by a 6th one: ‘the decentralisation of our energy generation from large-scale energy generation to small inter-connected generation, with a rising role given to smart cities in the energy transition’.18 Maroš Šefčovič’s vision highlights two objectives: decarbonisation and democratisation, the latter being a new term for EU energy policy. At least for the past decades, demoi have been put aside in terms of energy decisions – with the notable exception of popular expressions regarding nuclear energy in a few EU Member States. It is however worth noting that these objectives are not homogenously shared within the European Commission itself, and even less by the Council or the Parliament. This chapter now turns to analysing the Energy Union according to its five dimensions and looks at the legislative and non-legislative proposals the Juncker European Commission put forward in 2015 and 2016. The Energy Union officially has five dimensions:19 ●

Energy security, solidarity and trust; A fully integrated European energy market; ● Energy efficiency contributing to moderation of demand; ● Decarbonising the economy; ● Research, innovation and competitiveness. ●

17   European Commission, Speech by Vice-President for Energy Union Maroš Šefčovič on ‘Energy Union – 1 Year On’ at the conference organised by the Jacques Delors Institute, February 2016. 18   European Commission, Speech by Vice-President for Energy Union Maroš Šefčovič at the Energy Fest (Start Up Event) in Amsterdam, May 2016. 19   The February 2015 Energy Union Framework Strategy presents them in that specific order, while the November 2015 state of the Energy Union keeps those five dimensions but changes the order: 1. decarbonisation; 2. energy efficiency; 3. energy market; 4. energy security; 5. research, innovation and competitiveness. These five dimensions mix objectives (e.g. energy security, decarbonisation), means (energy efficiency) and notions that are poorly or divergently defined by actors (e.g. competitiveness).

The European Energy Union  73

2.  ENERGY SECURITY, SOLIDARITY AND TRUST Energy security has been a key rationale for state intervention in the energy sector.20 The EU imports around half of the energy it consumes, which is a security concern only to the extent that the exporting country may use its energy exports as a tool to pressure Europeans. After World War II, the issue of energy security rose to the top of the political agenda in 1973 when Arab oil-exporting countries used oil to condemn what they saw as western support for Israel. EU oil cooperation thus began as a sub-set of the wider western-world reaction embodied by the creation of the so-called International Energy Agency that represents developed oil-importing countries. Today, the EU produces around 12% of the oil it consumes, and Norway21 10% (see Figure 5.3). EU dependence on foreign oil is a matter of energy security, but is currently not high on the political agenda for two main reasons: 1. Oil is a fully globalised, easily transported liquid commodity; 2. Europeans free-ride on the US oil security policy, considering that the US has the same interests in this field and has ‘bigger warships than ours’ 22 to implement their policy. Donald Trump’s presidency may challenge this perception. These elements however undermine the fact that continued consumption of oil in Europe fosters the economic and geopolitical power of two powers: Russia and Saudi Arabia, who both use oil money to finance their armies and political/religious anti-EU propaganda.23 The bulk of EU energy security concerns are about gas.24 After the 2004 Ukrainian

20   For an illustration of British oil policy during World War II, see David Edgerton, Britain’s War Machine. London: Penguin Books, 2011, pp. 181–94. 21   When tackling energy security, one may consider Norway as a de facto EU Member State as Norway is a member of both NATO and the European Economic Area. 22   Interview with two top EU officials, Brussels, June 2014. 23   For a recent study on the links between oil, Saudi Arabia and radical Islam, see Pierre Conesa, Dr Saoud and Mr Djihad: La diplomatie religieuse de l’Arabie Saoudite. Robert Laffont, 2016. 24   Energy security also concerns to a much lesser extent other energy sources: coal, uranium, renewables. Coal burnt in the EU is largely imported from third countries, but it is – like oil – a globalised commodity so no foreign power can threaten Europe’s sovereignty through threats of cutting coal supplies. The EU moreover has large coal reserves that it could exploit again if needs be. Security of uranium supply has been a long-term EU policy since the 1957 Euratom Treaty. Uranium is an extremely dense source of energy and can be easily stored. It is moreover also produced by countries that are EU allies, such as Canada or Australia, or countries where the presence of the EU and/or its Member States is strong, such as Niger. Renewables use domestic EU natural resources: sun, wind, waves, rain, mountains, forests, etc. The main energy security concern is about electricity generated from solar PV or wind, as their production varies according to the availability of sun and wind, which can pose a threat to the stability of the power grid – an issue that we will deal with later when talking about the fully integrated European electricity market.

74  Research handbook on EU energy law and policy Angola 2%

Mexico 2%

Others 8%

Algeria 3%

Russia 28% Azerbaijan 4%

Iraq 4% Kazakhstan 5%

Nigeria 7% Libya 7%

EU 12% Saudi Arabia 8%

Norway 10%

Sources:  Thomas Pellerin-Carlin, Jacques Delors Institute, with data from European Commission and BP Statistical Review 2015, for the year 2012.

Figure 5.3  Estimated origin of oil consumed in the EU in 2012 ‘Orange Revolution’ Gazprom opted for sharp price increases and supply cuts during the winter cold snaps of 2006 and 2009 – the latter affected 12 EU Member States and left millions of Europeans without heating in early January 2009. The situation is still controversial today, as, for instance, Gazprom ships gas directly to rebellious zones in Eastern-Ukraine while billing the Ukrainian government for it. When looking at the origin of EU-consumed gas (see Figure 5.4), one notices that the first supplier of gas for EU consumers is the EU itself (32%). In second position comes Russia (27%) then Norway (24%). Moreover, since 2006, energy consumption has been decreasing in Europe. Gas consumption has also been on a downward trend since 2010.25 In 2014, the European Commission adopted the first European Energy Security Strategy26 in the context of rising tensions between Ukraine and Russia. It was ­supported by the European Council meetings of June and October 2014, embedded into the

25   Jonathan Gaventa, Manon Dufour and Luca Bergamaschi, ‘More Security, Lower Cost – a Smarter Approach to Gas Infrastructure in Europe’, Energy Union Insight Series n°1, E3G, March 2016. 26   European Commission, European Energy Security Strategy, Brussels, 28 May 2014, SWD(2014) final.

The European Energy Union  75 LNG Algeria 3%

LNG other 2%

Libya 1.5%

LNG Qatar 5% Algeria 5%

EU 32%

Norway 24%

Russia 27% Sources:  Thomas Pellerin-Carlin, Jacques Delors Institute, with data from BP Statistical Review 2015 for the year 2014.

Figure 5.4  Estimated origin of gas consumed in the EU in 2014 February 2015 Energy Union communication, assessed in November 2015,27 and led to a European Commission proposal in February 2016.28 To achieve energy security, the EU aims at storing oil and gas in quantities significant enough to avoid short-term problems, while developing ways to diminish Europe’s ­reliance on foreign energy imports and strengthening EU cohesion when it comes to energy diplomacy. Short-term security is achieved through storage. Directive 2009/119/EC requires Member States to store quantities of oil/petroleum products equivalent to 90 days of net imports or 61 days of consumption. Similar measures also exist for gas.29 Another way to ensure energy security is to diminish Europe’s reliance on energy

27   European Commission, State of the Energy Union 2015 – Staff Working Document on the European Energy Security Strategy. November 2015. 28   European Commission, Commission proposal on new rules for EU gas supply security COM(2016) 52; European Commission, Commission proposal on new rules for energy agreements between EU and non-EU countries, COM(2016) 53. 29   European Commission, The role of gas storage in internal market and in ensuring security of supply, 2015.

76  Research handbook on EU energy law and policy imports by reducing energy consumption through energy efficiency30 and/or boosting domestic energy production.31 Article 4.3 TEU enshrines the duty of cooperation between the Union and its Members States.32 It can be applied to external relations33 and can thus be a sound legal and political basis to ensure that when it comes to energy, Europe can ‘speak with one voice’ or at least deliver a single message, albeit through multiple voices (e.g. EU and key Member States). Council conclusions on energy diplomacy of July 201534 fall short of making the EU a united entity when it comes to energy diplomacy. So does Decision 994/2012/EU that establishes an information mechanism on energy intergovernmental agreements between Member States and third countries, and Regulation 994/2010 that is being reviewed.35 Currently, EU powers are limited to ensuring that, once the intergovernmental energy deal is signed, it respects EU law (especially elements from the 2009 Third Energy Package).36 Gas security talks should always be approached in their broader context, in which energy is only one segment of a broader EU-third country discussion, for instance within the framework of the European Neighbourhood Policy (ENP)37 or in a bilateral context (see Box 5.1 for the example of Nordstream). A more proactive EU policy would look at ways to ensure long-term partnership with countries that could positively impact the EU energy security. For instance, energy security talks with Algeria could focus on developing energy efficiency and renewable electricity production in Algeria itself, as this would reduce Algerian gas consumption and allow it to export more towards the EU.38 Similarly, 30   European Commission, European Energy Security Strategy, Brussels, 28 May 2014, SWD(2014) final; Ingrid Holmes et al., ‘Energy Efficiency as Europe’s First Response to Energy Security’, E3G Briefing, 2014; Jonathan Gaventa, Manon Dufour and Luca Bergamaschi, ‘More Security, Lower Cost – a Smarter Approach to Gas Infrastructure in Europe’, Energy Union Insight Series n°1, E3G, March 2016. 31   See section 4 for energy efficiency, section 3 for boosting domestic renewable energy production. 32   Rafael Leal-Arcas, The European Energy Union. Leuven: Claeys & Casteels, 2016. 33   Hillion, C, ‘Mixity and coherence in EU external relations: the significance of the duty of cooperation’, CLEER working papers 2009/1, pp. 19–21, 2009. 34   Council conclusions on energy diplomacy of July 2015. 35   Brussels, 16.2.2016 COM(2016) 52 final 2016/0030 (COD) Proposal for a Regulation of the European Parliament and of the Council concerning measures to safeguard the security of gas supply and repealing Regulation (EU) No 994/2010 (Text with EEA relevance) (SWD(2016) 25 final) (SWD(2016) 26 final). 36   Those EU powers are very easy to circumvent for two main reasons: As the assessment is ex-post, it can only work after years of legal procedures that are dependent on the European Commission political willingness to proceed. Taking stock of the political choices made in the past not to enforce Eurozone legislation on powerful Eurozone states and/ or states where such decisions may fuel rising populism/nationalism/Euroscepticism, it remains to be seen whether the European Commission would go far enough to effectively lead to the condemnation of a State that failed to respect EU law regarding energy agreements with third countries. As key elements of those pieces of EU legislation only concern intergovernmental agreements, one can find another legal vehicle. 37   Philipp Offenberg, ‘The European Neighbourhood and the EU’s Security of Supply with Natural Gas’, Jacques Delors Institute, 2016. 38   Jekaterina Grigorjeva, ‘Starting a New Chapter in EU-Algeria Energy Relations’, Jacques Delors Institute, 2016.

The European Energy Union  77 BOX 5.1 EU ENERGY DIPLOMACY AND NORDSTREAM: THE CANARY IN THE COALMINE For EU energy diplomacy, the canary in the coalmine is the project Nordstream 2 (NS2),39 which aims to double the current capacity of 55bcm of Nordstream 1, a pipeline that has been operational since 2011 and ships Russian gas, directly from Russia to Germany, via an offshore route crossing through the Baltic Sea and the Finnish, Danish, Swedish and German Exclusive Economic Zones (EEZs). Legally, this is a purely commercial project. Politically, it is actively supported by Russian President Vladimir Putin and German Vice-Chancellor Sigmar Gabriel. Nordstream’s consortium is chaired by former German Chancellor Gerhard Schröder and Nordstream CEO, Matthias Warnig, a former Stasi agent.40 NS2 timing is moreover dubious as there is little political rationale for the EU to implement its economic sanctions, which target the Russian economy, while launching the €8 billion project that diverts Russian gas transfer through Ukraine, to avoid paying transit fees to Ukraine while enhancing Russian capacity to use gas as a political tool over a country it has partially annexed and continues to destabilise. European Commission Vice-President Maroš Šefčovič criticised Nordstream 2,41 but it is as yet unclear whether EU law can be interpreted as also applying to Nordstream 2. According to the European Commission’s legal service, it does not; according to the European Commission DG Energy, it does.42 The very least the EU could try to achieve is to ensure third party access to the pipeline that is currently planned to be used only to ship Gazprom’s gas. Third party access would allow Gazprom’s Russian competitors, most notably Rosneft and Novatek, to also propose their gas to the German/EU market. In such an instance, Nordstream 2 may become a doubleedged sword. First aimed at dividing Europeans for the benefit of Gazprom and Russia, it may become a way to divide the three Russian gas providers to the benefit of Germany/Europe. In such a sensitive dossier, legal scholars have a key role to play to see to what extent EU law can be interpreted in a way that promotes EU interests while still remaining within the boundaries of the rule of law.43

Ukraine has the potential to become a net exporter of gas, provided it completes massive reforms. As for the US, much has been written about the potential for the US to export oil and gas massively to Europe, within or outside the framework of the Transatlantic Trade and Investment Partnership (TTIP).44 Yet, the US is and will most likely remain a net importer of oil as it produced 567Mto but consumed 851Mto in 2015, making the US the world’s third biggest importer of oil, after the EU and China.45 As for gas, the US was 3940414243

39   Jean-Arnold Vinois, Thomas Pellerin-Carlin, and ‘Nordstream 2: a decisive test for EU energy diplomacy’, Natural Gas World, December 2015. 40  https://www.theguardian.com/world/2014/aug/13/russia-putin-german-right-hand-manmatthias-warnig. 41  http://europa.eu/rapid/press-release_SPEECH-16-1283_en.htm. 42  http://www.politico.eu/pro/nord-stream-gazprom-russia-pipelines-gas/. 43   For more information on NS2, see in particular: Alan Riley, ‘Nordstream 2: a legal and policy analysis’, CEPS, November 2016 and Jean-Arnold Vinois and Thomas Pellerin-Carlin, ‘Nordstream 2: a decisive test for EU energy diplomacy’, Natural Gas World, December 2015. 44   Rafael Leal-Arcas, The European Energy Union. Leuven: Claeys & Casteels, 2016, especially footnotes 116, 125–9, 133–5, 143, 149. 45   According to BP Statistical Review 2016 data, the gap between US production and consumption of oil represents 284Mto while China’s represents around 345Mto.

78  Research handbook on EU energy law and policy still a net importer of gas in 2015 – but having a net import need of only 11bcm, smaller than the gas consumption of Belgium. The US may likely become a gas net exporter in the years to come, but the question is threefold: How much gas will the US be able to export? Especially under President Trump, why would this gas go to Europe while other net importing countries are easier to access (e.g. Mexico) or currently have higher LNG gas prices (e.g. Japan)? And, for how long would the US remain able to increase its gas exporting capacity in the face of a still constantly rising US gas domestic consumption46 and a production that will decline at some point due to economic, political and/or ­geological constrains? In any case, to ensure their energy security, Europeans need to wonder whether they are stronger together. Currently, energy security negotiations happening within the Council tend to suggest that most countries have opted for an approach defending short-sighted interests that chose some companies’ profits over their people’s and businesses’ energy security. In this context, academics may be helpful in allowing a better and more publically visible understanding of the drivers of national choices regarding energy security.47 Shedding light on what is too often the black box of the construction of national interests will be key to helping national elites and peoples define their national interests in a more enlightened way. This would help in preventing Europe from falling back into a past that, as the 1973 Copenhagen Declaration puts it, was characterised by European States ‘selfishly defending misjudged interests’.48 Ensuring energy security in the short and long term also requires fully integrating Europe’s energy market, and boosting energy efficiency. Those two topics constitute the two dimensions we now turn to.

3.  A FULLY INTEGRATED EUROPEAN ENERGY MARKET The rationale for a fully integrated European energy market is simple: fostering economies of scale and helping to provide more sustainable, secure and cheaper energy to all Europeans. When (then) European Commission President Jacques Delors launched the Single Market plan, he put aside the energy market as it was deemed to be too politically sensitive.49 After he left office, the EU agreed in December 1996 on the first liberalisation directive for the electricity sector,50 followed by its gas equivalent in 1998. This started a continuous European Commission push for genuine liberalisation, moderated by

  US gas consumption increased by 37% between 2006 and 2015, according to BP data.   Claire Dupont and Sebastian Oberthür (eds), Decarbonisation in the European Union – Internal Policies and External Strategies. Houndmills: Palgrave Macmillan, 2015. See especially Tom Casier’s Chapter 8 on ‘The Geopolitics of the EU’s Decarbonisation Strategy’. 48   European Summit, Declaration on European Identity, Copenhagen, 14 December 1973. 49   Interview with former top official of Delors’ cabinet, Paris, 15 March 2016. 50   European Union, Directive 96/92/EC. 46 47

The European Energy Union  79 some key Member States that wanted to preserve, to a large extent, their existing energy system.51 Although the 1996 electricity liberalisation directive already embedded some environmental concerns,52 its main rationale mirrored 1980s/1990s’ pro-liberalisation Zeitgeist that was already applied to aviation, rail or telecommunications, with the idea that increased competition would drive prices down. This narrative was later completed with two more components: energy security53 and decarbonisation.54 As other sections of this chapter are dedicated to those two topics, we now cover the dimension of integration of renewables in a cost-effective and secure way. When looking at the best way to integrate massive amounts of variable renewable energy production (VRES) in Europe, the EU’s official moto of ‘united in diversity’ makes specific sense. Integrating VRES at the EU-level, rather than at the national or regional level, is easier and cheaper for three main reasons: 1. On supply, variability of VRES generation in general, and wind power55 in particular, can be managed through the EU-wide transport of electricity. For instance, if there is no wind in a particular region, there may be wind in another one, thus mitigating VRES’s generation variability. As Figure 5.5 shows, wind generation can vary from 0% to 60% of its full capacity when looking at one single region – in this case, Bavaria. When looking at a multinational group like the Pentalateral Forum countries (PLEF) or Europe as a whole, this ranges from 10% to 30%. 2. On demand, VRES integration begs the question of how to ensure that electricity is available when demand peaks and wind/sun is scarce. This concern is much more manageable at the EU-wide level as the more diverse the patterns of the consumption, the less important the electricity peak. To illustrate, Spain’s seasonal electricity peak happens in the summer for cooling purposes, while a daily peak happens when Spaniards cook dinner around 9 or 10 pm; France’s seasonal peak happens in the winter as a result of France’s choice for electric heating, while its daily peak happens when the French cook dinner around 7 or 8 pm. When looking at these countries in isolation, peak demand is higher (in percentage of baseline demand) than when looking at these two countries as if they were a single, fully integrated electricity area. 3. On storage, VRES integration is eased by the ability to store electricity that can be put on the grid when needed, as well as shifting demand through demand-side 51   See for instance the role played by France, Germany and other Member States on the modalities to ensure the unbundling between energy suppliers and Transport System Operators. 52   See in particular art. 8.3 and 11.3 of Directive 96/92/EC. It allowed Member States to require that Transmission System Operators and Distribution System Operators may be obliged to give priority access to renewable energy sources, waste or combined heat and power. 53   D. Buchan, ‘Europe’s Misshapen Market – Why Progress Towards a Single Energy Market is Proving Uneven’, Oxford Institute for Energy Studies, 2014. 54   Claire Dupont and Sebastian Oberthür (eds), Decarbonisation in the European Union – Internal Policies and External Strategies. Houndmills: Palgrave Macmillan, 2015. See especially Radostina Primova’s Chapter 2 on ‘The EU Internal Energy Market and Decarbonization’. 55   The quantity of electricity that a windmill can generate depends mostly on the speed of the wind. The relation between those two elements is a cubic one, meaning that, as an order of magnitude, the wind’s speed is multiplied by 3, the windmill’s generation is multiplied by 27 (533).

% of installed capacity

80  Research handbook on EU energy law and policy 100 80 60 40 20 0 Pixel Bavaria Germany 31 May

PLEF Europe

16 May 1 May

Source:  Fraunhofer IWES 2015.

Figure 5.5  Feed-in of wind power in 2030 in several territorial aggregates ­ anagement (DSM) measures that can increase demand when VRES generation is m massive while decreasing demand when VRES generation is low. Having an EU-wide electricity market allows already existing and future storage and DSM capacities to be used to deal with peaks happening in each EU Member State. In an EU-wide electricity market, dams in the Alps and Scandinavia can act as the cheap green batteries of the entire European continent, and so can specific economic sectors that can heavily curtail their own electricity consumption.56 A fully integrated EU electricity market is thus the conditio sine qua non for achieving an energy transition that provides clean, cheap57, 58 and secure electricity to all Europeans. To achieve such a fully integrated EU electricity market, the EU needs an adequate hardware and software: 56   Such as the aluminium factory of Dunkirk, in northern France, that can stop consuming for two hours an amount of electricity similar to that consumed by a city of roughly 1 million inhabitants. See Thomas Pellerin-Carlin, ‘Putting the Consumer at the Centre of the European Energy System’, Jacques Delors Institute, September 2016. 57   One estimate is that a fully integrated EU energy market might bring about efficiency gains of 250 billion euros a year: Joseph Dunne, ‘Mapping the Costs of non-Europe, 2014–2019’, European Parliament Research Service, Third Edition, April 2015. 58   Smoother integration of VRES should ensure that less public and private money is spent on capacity mechanisms as they would become less necessary – or even useless – with a smart EU-wide integration of VRES. For a discussion on capacity mechanisms, with 11 country case studies, see in particular, Leigh Hancher, Adrien de Hauteclocque and Malgorzata Sadowska  (eds), Capacity Mechanisms in the EU Energy Market. Oxford: Oxford University Press, 2015.

The European Energy Union  81 ●

The hardware are the interconnections that physically allow for electrons and gas to flow all over Europe. While EU policies have focused on inter-state interconnections, through regulatory measures,59 regulatory incentives60 and budgetary incentive,61 intra-state interconnections may be currently lacking.62 Yet, all in all, this hardware issue is currently being dealt with and is likely to be entirely solved in the upcoming 10–20 years. ● The software is the legislative framework ensuring that the hardware is effectively used. The key piece of legislation currently being discussed at the EU level is the European Commission November 2016 proposal for a new electricity market design.63 While there is a rising consensus, repeatedly supported by European Council conclusions, on the idea that a fully-fledged EU single energy market ought to be built, concrete decisions to make it a reality have been lacking. The European Commission is now turning to building several multinational macro-regional markets grouping neighbouring countries, as a first step to allowing countries to interiorise the modern meaning of pooled energy sovereignty.64

4. ENERGY EFFICIENCY CONTRIBUTING TO MODERATION OF DEMAND European energy demand peaked in 2006 (see Figure 5.6), and European electricity demand peaked in 2008 (see Figure 5.7). This is a genuinely historical element that fundamentally changed Europe’s energy landscape. Past business models of energy suppliers were based on the assumption of ever-rising energy demand; this assumption is now dead, and so are their old business models.65

  See for instance the EU’s interconnection targets.   Especially through granting the status of ‘Projects of Common Interest’ (PCIs) to specific interconnection projects. For a policy brief on PCIs, see in particular L. Meeus and N. Kayaerts (2015) ‘First Series of Cross-border Cost Allocation Decisions for Projects of Common Interest: Main Lessons Learned’ (Policy Brief). Florence School of Regulation. 61   See for instance Regulation (EC) No 67/2010 and the EU budget that allocates €5.85 billion to the energy portion of the ‘Connecting Europe Facility’ over seven years (2014–2020). 62   For instance, there is still a lack of electricity connections linking northern to southern Germany, especially at a time when Germany is shutting down (nuclear) power plants in its south while opening (wind) power plants in its north, with this problem creating German loopflows and free-riding on their neighbours’ electricity grids (especially in Poland, the Czech Republic and the Netherlands). So does France lack gas interconnection between its south-western part and the rest of the country, making it difficult for Spanish gas to flow to Europe through France. 63   For an introduction, see the European Commission memo: European Commission, New Electricity Market Design: A Fair Deal For Consumers, Memo, 30 November 2016. 64   Angelique Palle, ‘Regional Dimensions to Europe’s Energy Integration’, The Oxford Institute for Energy Studies, 2013; Jacques De Jong, Thomas Pellerin-Carlin and Jean-Arnold Vinois, ‘Governing The Differences in the European Energy Union – EU, Regional, and National Energy Policies’, Jacques Delors Institute, Policy paper n°144, October 2015. 65   To quote the Energy Union Framework Strategy of February 2015, those are ‘outdated business models’. Some energy suppliers’ boards still fail to adapt, but others have taken drastic 59 60

82  Research handbook on EU energy law and policy 2

Primary Energy Consumption (Gtoe)

1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Sources:  Thomas Pellerin-Carlin and Pierre Serkine, Jacques Delors Institute, with data from BP Statistical Review 2015.

Figure 5.6 Evolution of EU primary energy consumption and its growth rate between 1965 and 2014 This decline in EU energy demand is driven by several factors, such as the ‘natural’ progresses in energy efficiency made by some new technologies and processes that are created, invented and diffused at various times, or the sluggish GDP growth that has affected Europe since 2007 – and may be the beginning of a ‘secular stagnation’ rather than a temporary ‘crisis’.66 Another key factor has been the continuous push for energy efficiency67 in public actors in general and the EU in particular. A key novelty of the energy union is the so-called ‘Energy efficiency first’68 principle. It entails considering energy efficiency as being the first best possible option for any energy

measures such as E.ON. E.ON decided to create two distinct entities to keep only activities related to networks, renewables and customer solutions in the entity E.ON, while the remaining activities (conventional power generation, energy trading, and exploration and production) are in a new entity named Uniper (sometimes informally nicknamed ‘E.OFF’). 66   For a reference on the debate on secular stagnation, see in particular Coen Teulings and Richard Baldwin (eds), Secular Stagnation: Facts, Causes and Cures. London: CEPR Press eBook, 2014. See also Carl Benedikt Frey, ‘How to Prevent the End of Economic Growth: How the Digital Economy Could Lead to Secular Stagnation’, Scientific American, 2015, 312(1). 67   For a definition of energy efficiency, see Thomas Pellerin-Carlin, ‘How Can the Juncker Plan Unlock Energy Efficiency Investment in the Short and Long Term?’, in Eulalia Rubio, David Rinaldi and Thomas Pellerin-Carlin, Investment in Europe: Making the Best of the Juncker Plan, Studies & Reports No. 109, Jacques Delors Institute, March 2016. 68   European Commission, Clean Energy for All Europeans, Communication, 30 November 2016, COM(2016) 860 final.

The European Energy Union  83 3500

Electricity consumption (TWh)

3000 2500 2000 1500 1000 500 0 1990

1995

2000

2005

2010

2015

Sources:  Thomas Pellerin-Carlin and Pierre Serkine, Jacques Delors Institute, with data from Eurostat.

Figure 5.7 Evolution of EU electricity consumption and its growth rate between 1990 and 2013 problem, and then turning to other tools only if an objective cannot be achieved through energy efficiency. In practice, this principle may not be thoroughly applied for the time being. Yet, this principle is meant to enhance the importance of EU energy efficiency regulations that exist and are currently being reviewed69 as part of the European Commission’s clean energy package – which many nicknamed ‘Winter Package’ as it was presented on 30 November 2016. Key regulations concern buildings70 and appliances.71 As for transport, the EU regulation limiting CO2 emissions of passenger cars is, to some extent, a de facto energy efficiency regulation, as it largely promotes the development of more energyefficient cars, since, the more energy-efficient a car is, the less CO2 it emits (ceteris paribus). The Energy Union’s challenge is thus also to ensure that the ‘Energy Efficiency First’ principle is indeed systematically applied, not only when making legislation, but also when making concrete funding decisions on specific projects.72 For instance, should

69   European Commission, proposal for a directive amending directive 2012/27/EU on energy efficiency, 30 November 2016. 70   European Commission, proposal for a directive amending directive 2010/31/EU on the energy performance of buildings, 30 November 2016. 71   The legislation on eco-design as well as eco-labelling. 72   Thomas Pellerin-Carlin, ‘How Can the Juncker Plan Unlock Energy Efficiency Investment in the Short and Long Term?’, in Eulalia Rubio, David Rinaldi and Thomas Pellerin-Carlin, Investment in Europe: Making the Best of the Juncker Plan, Studies & Reports, No. 109, Jacques Delors Institute, March 2016.

84  Research handbook on EU energy law and policy the EU financially support (through the European Investment Bank for instance) the development of an additional gas pipeline able to ship 1bcm of gas every year to Italy, or financially support energy efficiency measures that allow Italy to save 1bcm of gas consumption every year? The ability of EU actors (esp. European Commission, European Investment Bank and Member States) to effectively apply the ‘Energy Efficiency First’ (EE1st) principle will be one of the test cases for understanding to what extent the Energy Union is more than a slogan.

5.  DECARBONISING THE ECONOMY Taking urgent action to combat climate change and its impacts is the 13th of the 17 UN sustainable development goals.73 Climate change is indeed a global catastrophic risk74 that may lead to civilisational collapse.75, 76 While the academic debate, especially in economics, has tackled the issue of finding the right mix between climate change mitigation and climate change adaptation,77 this section only looks at one key segment of the climate change mitigation debate: decarbonisation, i.e. making EU and global energy production CO2-free. This objective is in line with the Paris Agreement,78 signed in December 2015 and entered into force in November 2016, and which requires79 Europe’s energy system to become net-zerocarbon at least, or even to have a negative-emissions energy system80 in this century. Reducing risks arising from climate change is both a global public good, and an ­intergenerational one. As for any public good, the market economy tends to lead to a ­sub-optimal allocation of funds, making public intervention economically rational to address this market failure.

  United Nations, Sustainable Development Goal 13, 2015.   Global Challenges Foundation, Global Catastrophic Risks 2016, 2016. 75   Alexandre Magnan et al., ‘Addressing the Risk of Maladaptation to Climate Change’, Wiley Interdisciplinary Reviews: Climate Change, 2016, 7: 646–65. 76   Cf. Jared Diamond, Collapse: How Societies Choose to Fail or Succeed. London: Penguin, 2005. See in particular the book’s conclusion for the application of Jared Diamond’s study to climate change in the 21st century. For an analysis of successful adaptation to a changing environment, see the book’s sections on 17th-century Japan and Renaissance Netherlands. 77   Despite some economists who, like R.S. Tol, argue that ‘mitigation and adaptation should be kept largely separate’, see: R.S. Tol, ‘Adaptation and Mitigation: Trade-offs in Substance and Methods’, Environmental Science & Policy, 2005, 18: 572–8. And also, W.D. Nordhaus, ‘A Review of the Stern Review on the Economics of Climate Change’, Journal of Economic Literature, 2007, XLV: 686–702. 78   See in particular Article 4 of the Paris Agreement. For an analysis of climate negotiations prior to the Paris Agreement, see: Stefan Aykut and Amy Dahan, ‘Gouverner le climat? 20 ans de négociations internationales’, Presses de Sciences Po, 2015  ; Thomas Pellerin-Carlin and Jean-Arnold Vinois, ‘2015 Climate Negotiations: Speeding Up or Slowing Down the Energy Transition?’, Jacques Delors Institute, September 2015. 79   The Paris Agreement is binding for the EU and each one of its Member States alike, and both are currently discussing concrete legislative, budgetary and non-legislative policies and decisions that can speed up an energy transition compatible with the ambitions of the Paris Agreement. 80   For instance by burning biomass in a carbon capture and storage plant. 73 74

The European Energy Union  85 5.1 The EU-ETS, the Failed Self-proclaimed Cornerstone of the EU Decarbonisation Strategy The EU’s self-proclaimed key policy to decarbonise Europe is the EU’s carbon market: the EU Emissions Trading Scheme (ETS),81 that is currently being reviewed by EU institutions.82 It is probably the most studied piece of EU energy-climate legislation and has inspired other countries’ carbon markets,83 such as China’s.84 The ETS however proved unable to foster radical changes and has little potential currently to significantly impact non-ETS sectors, such as transport or buildings – i.e. two sectors that, together, account for 70% of EU energy consumption.85 The ETS mostly targets electricity generation and industry. For electricity, the ETS price is too low to drive renewable generation that is incentivised by other means, such as feed-in tariffs.86 The ETS failed in increasing the EU’s share of gas power generation in total power generation87 (see Figure 5.8). As for industry, key industries have benefited from amounts of free allowances significant enough to hinder any serious CO2-intensity progress, as the case of clinker can exemplify.88 There is also debate about whether to include currently non-ETS sectors, such as transport, within the ETS. This is already happening de facto with the development of electric vehicles, as these modes of transport replace emissions happening in non-ETS sectors (e.g. purchasing gasoline) by emissions happening in an ETS sector (i.e. power generation). When approaching this debate, it is worth remembering that, as an order

81   Jos Delbeke, EU Environmental Law: The EU Greenhouse Gas Emissions Trading Scheme. Deventer, the Netherlands: Claeys & Casteels, 2006. 82   European Commission, Proposal amending Directive 2003/87/EC to enhance cost-effective emission reductions and low carbon investments, 2015. 83   See for instance A. Denny Ellerman and Paul L. Joskow, ‘The European Union’s Emission Trading System in Perspective’, Massachusetts Institute of Technology, 2008. 84   See for instance, Yingying Zeng, Stefan E. Weishaar and Oscar Couwenberg, ‘Absolute vs. Intensity-based Caps for Carbon Emissions Target Setting: An Obstacle to Linking the EU ETS to a Chinese National ETS?’, CEEPR Working Paper, 2016. 85   According to Eurostat data, EU final energy consumption by sectors in 2012 took place within buildings (39%), for transport (32%), industry (26%), and the remaining 3% in other sectors (including agriculture). 86   For a study on renewables support schemes, see DiaCore, ‘The Impact Of Risks In Renewable Energy Investments And The Role Of Smart Policies’, 2016. 87   The key driver for choosing gas over coal is not the CO2 price, but the price of such commodities on the market. 88   EU cement companies have developed ways to produce cement in a significantly less CO2intensive way (see e.g., MPA Cement, ‘Novel Cements: Low Energy, Low Carbon Cements’, 2013; http://cement.mineralproducts.org/documents/FS_12_Novel_cements_low_energy_low_carbon_ cements.pdf), but no market exists for them as they have a sightly higher incremental cost and are not produced in a volume big enough to provide for economies of scale. To reduce CO2 emissions by the clinker industry, as well as other ETS-covered industries (such as steel), non-ETS tools may prove to be far more efficient and politically more easily adopted by decision makers. One such example would be for regulation of public markets (including the EU State Aid rule) to provide a market for such products, for instance by requiring that highways built with EU money (e.g. cohesion funds) use cement the production of which emits less than a specific level of CO2/tclinker, with such a level being regularly updated by delegated acts so as to remain close to the best tecnologically feasible level.

86  Research handbook on EU energy law and policy 40%

30% Gas 20%

Coal

10%

0%

2000

2005

2010

2015

Sources:  Spencer Thomas et al., ‘State of the Low-carbon Energy Union’, IDDRI Study, November 2016, based on data from Enerdata, Global Energy and CO2 database.

Figure 5.8  Share of coal and gas in gross electricity generation in the EU of magnitude,89 if policy makers wish to compensate for the 2014–2015 decline in oil prices90 by an EU carbon price for oil, they would need to get it at a level of at least €150/ TCO2eq – to be compared to the 2015–2016 ETS price range of €5–7/TCO2. As for the building sector, economic actors deem the current ETS to be so irrelevant as a tool to foster energy efficiency that it was not even included among the 100 drivers for energy efficiency investments studied by the EU-mandated expert group EEFIG.91 5.2  The EU’s Truly Efficient Tools to Decarbonisation There is an apparent paradox here: the EU achieved its 2020 decarbonisation target way ahead of schedule, despite having seen its key decarbonisation policy – the EU-ETS – utterly fail. Non-energy-policy-driven phenomena, such as the tertiarisation of the EU economy and sluggish GDP growth, obviously played a role. As did other policies, especially the ones aiming at developing energy efficiency and the development of renewable energy sources (RES). As section 4 dealt with energy efficiency, we now turn to RES. Renewables are the only energy source that was rising in the EU energy mix from 2006 to 2015.92 This rise was fostered by massive public investments in renewables through

89   More accurate calculations could be made but should be adjusted on a daily basis, especially to take into account the change in the Euro-USD currency exchange rate. 90   A decline that saw prices falling from roughly US$100 in 2012–2014 to less than US$50 in 2015–2016. 91   Energy Efficiency Financial Institutions Group, Final Report, February 2015. 92   Thierry Bross with data from BP Statistical Review 2016, Eurostat, SG Cross Asset.

The European Energy Union  87 GW 40

30 European Union EU-ex DE Solar

20

EU-ex Solar 10

0

2000

2005

2010

2015

Source:  Spencer Thomas et al., ‘State of the Low-carbon Energy Union’, IDDRI Study, November 2016.

Figure 5.9  Annual addition of renewable electricity generation capacity in the EU-28 diverse public support schemes. Thus, RES (especially solar PV and onshore wind) have been growing in Europe. If newly installed capacity has been almost halved since 2012, this evolution is almost entirely explained by the shrinking installation of solar PV (see Figure 5.9). More renewables could have been installed over the past decade in Europe had public support schemes not been rolled back, sometimes even retroactively. Such roll-backs were mostly driven by two reasons: 1. Renewables have sometimes been over-subsidised in the past, especially because of too-high levels of feed-in tariffs. This issue can however be dealt with via the use of other public support schemes, such as auctioning that obliges renewable energy providers to compete on costs. 2. EU Member States reacted to the 2008 economic crisis by cutting public spending, including for renewables support schemes, thus doing the exact opposite of the Chinese and the US in reaction to the crisis.93 While the EU is on track to achieve its own decarbonisation targets, it is worth ­remembering three shortcomings of the EU policy:

93   Under Barack Obama’s administration, the economic crisis was used as an opportunity to provide a stimulus package for the US economy while preparing for a clean energy future. The US thus started to fund ARPA-E, the Advanced Research Projects Agency-Energy, modelled on the US DARPA that financed the creation of the internet, in 2009, when the US public deficit was at 10% of its GDP, amounting to €1.4 trillion (i.e. higher than Russia’s entire GDP). See Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths. London: Anthem Press, 2015, especially Chapter 6.

88  Research handbook on EU energy law and policy 1. EU targets are below what would be needed to limit the rise of the global average temperature to 2°C, and are utterly incoherent with the Paris Agreement objective to pursue efforts to limit the temperature increase to 1.5°C.94 2. The EU targets only the EU’s territorial emissions: i.e. the ones happening on EU soil. It thus fails to take into consideration embedded carbon.95 Even though calculating the quantity of GHG embedded in imported goods is extremely difficult in practice as reliable data are currently hardly available, the Global Carbon Atlas’s methodology suggests that, in 2013, EU territorial emissions had decreased by 18% (compared to 1990 levels), but that when taking embedded carbon into account this reduction is only 13.5%.96 3. EU policy tends to focus on EU GHG emissions, even if they now account for a small and declining portion of global GHG emissions (see Figure 5.10). These shortcomings thus lead to the following questions: 1. How can the EU and European States enhance their level of ambition to ensure that EU targets are at least higher than those that would be reached under a business-asusual scenario? 2. What tools can the EU use to reduce the EU’s imports of embedded carbon? What trade tools in particular could be crafted in a way that would be politically acceptable while being consistent with EU trade policy, WTO rules (especially under Article 20) and EU climate policy? 3. How can the EU re-focus its action on policies that also impact non-EU GHG emissions? A partial answer to the two last questions can be found when looking at the fifth dimension of the EU Energy Union, as boosting research innovation and competitiveness in the EU can positively impact the ability of non-EU countries to reduce GHG emissions.

6.  RESEARCH, INNOVATION AND COMPETITIVENESS Public authorities’ support for research and innovation is critical to achieving the energy transition, just as it has been critical in allowing the digital revolution to emerge.97 The fifth dimension of the Energy Union is ‘research, innovation and c­ ompetitiveness’.98 94   Thomas Spencer, et al., ‘State of the Low-carbon Energy Union’, IDDRI Study, November 2016. 95   Embedded carbon is the notion that accounts for the GHG emissions that are embedded in goods produced in a particular country (e.g. China) and consumed in another (e.g. the UK). 96   The author wishes to underline that the calculation of embedded carbon is extremely difficult and figures can vary drastically depending on the methodology. The reader is thus advised to take such figures with the most extreme caution. 97   Mariana Mazzucato, The Entrepreneurial State: Debunking Public vs. Private Sector Myths. London: Anthem Press, 2015. 98   For a more in-depth discussion on energy research and innovation, see Thomas PellerinCarlin and Pierre Serkine, ‘From Distraction to Action – Towards a Bold Energy Union Innovation Strategy’, Jacques Delors Institute, 2016.

The European Energy Union  89 a) Total GHG emissions including LULUCF (MtCO2e) 50000 45000 RoW

GHG emissions (MtCo2e)

40000

Japan

35000

Russian Federation

30000

India

25000

United States

20000

China 15000

European Union (28)

10000 5000

12

10

20

08

20

20

06

04

20

02

20

00

20

98

20

19

96

94

19

92

19

19

19

90

0

b) Share of GHG emissions 100% 90% 80%

43.4%

45.3%

43.3%

RoW

70%

Japan

60%

Russian Federation India

50% 40% 30% 20% 10% 0%

6.1%

3.6%

4.4%

16.9%

17.1%

9.5%

12.1%

22.4%

12.4%

8.7%

2001

2012

15.1% 1990

12.2%

United States China European Union (28)

Sources:  Thomas Pellerin-Carlin and Pierre Serkine, Jacques Delors Institute, with data from World Resources Institute.

Figure 5.10 Total GHG emissions including LULUCF between 1990 and 2012 and corresponding share of global GHG emissions in 1990, 2001 and 2012 for some major geographical areas

90  Research handbook on EU energy law and policy Those three terms are not clearly defined in the European Commission’s work but could be understood as follows: ●

Research is the process of creating new ideas, processes, technologies, services or techniques. It usually distinguishes between basic research (e.g. discovery or invention99 of a new material/idea) and applied research (e.g. trying to apply this new material/idea to a specific sector).100 ● Innovation is a notion that can be defined in different ways101 by academics.102 In essence, the idea of innovation can be boiled down to something very simple: any introduction of something beneficial and new to an organisation. ● Competitiveness is often ill defined103 as a synonym for cost-minimisation,104 a definition that Paul Krugman assesses to be ‘not only wrong but dangerous’.105 In fact, one may take a more holistic approach and see innovation as the cornerstone of a renewed approach to competitiveness in the energy transition.106  99   We should indeed make a clear distinction between invention and innovation. The former is ‘the generation of newness or novelty, while innovation is the derivation of value from that novelty’, Niek du Preez, Louis Louw and Heinz Essmann, ‘An Innovation Process Model for Improving Innovation Capability’, Journal of High Technology Management Research, 2009, p. 2. 100   According to a 1953 National Science Foundation publication, basic research is the ‘pacemaker of technological progress’ and a researcher in basic research is someone ‘motivated by a driving curiosity about the unknown . . . Discovery of truth and understanding of nature are his objectives. . . . The essential difference between basic and applied research lies in the freedom permitted the scientist. In applied work his problem is defined and he looks for the best possible solution meeting these conditions. In basic research he is released of such restrictions; he is confined only by his own imagination and creative ability’. 101   For a deeper discussion on the definitions of innovation, see Anahita Baregheh, Jennifer Rowley and Sally Sambrook, ‘Towards a Multidisciplinary Definition of Innovation’, Management Decision, 2009, 47(8): 1323–39. 102   ‘Innovation is the process of making changes, large and small, radical and incremental, to products, processes, and services that results in the introduction of something new for the organization that adds value to customers and contributes to the knowledge store of the organization’, David O’Sullivan and Lawrence Dooley, Applying Innovation. Thousand Oaks, CA: Sage 2009, p. 5. ‘[I]nnovation is the multi-stage process whereby organizations transform ideas into new/ improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace’, Anahita Baregheh, Jennifer Rowley and Sally Sambrook, ‘Towards a Multidisciplinary Definition of Innovation’, Management Decision, 2009, 47(8): 1323–39, p. 1334. 103   The concept of ‘competitiveness’ is criticised by academics. For instance, Robert Reich considers competitiveness as one of those ‘few terms in public discourse [to] have gone so directly from obscurity to meaninglessness without any intervening period of coherence’, Robert Reich, ‘American Competitiveness and the President’s New Relationship with American Business’, 21 January 2011. For a critical discussion on the definitions of competitiveness, see Karl Aiginger, Susanne Bärenthaler-Sieber and Johanna Vogel, ‘Competitiveness of EU versus USA’, WWWforEurope Policy Paper, n°29, November 2015. 104   European Commission, Energy Union Framework Strategy, 25 February 2015, p. 10. 105   Paul Krugman, ‘Competitiveness: A Dangerous Obsession’, Foreign Affairs, March/April 1994. 106   i24c, ‘Scaling up Innovation in the Energy Union to Meet New Climate, Competitiveness and Societal Goals’, 2016.

The European Energy Union  91 Evolution of the FPs’ budget

2014–2020

80

In billion

per Framework Programme

70 60

2007–2013

50 40 30 2002–2006

20 1994–1998 10 1984–1987 0

1998–2002

1987–1991 1990–1994

FP1

FP2

FP3

FP4

FP5

FP6

FP7

H2020

R&D expenditure in the EU by source of funds in 2014 (in B€) 2.3

Business

9.3

65.5

Government Higher Education Private Non-profit EU (CSF-RI)

34.4

181.6

Sources:  Thomas Pellerin-Carlin and Pierre Serkine, Jacques Delors Institute, with data from the European Commission and Eurostat.

Figure 5.11 Evolution of the EU budget dedicated to research and innovation (top) and 2014 R&D expenditure in the EU by sources of funds (in € billions) (bottom)

92  Research handbook on EU energy law and policy In the past decades, European investments in energy R&D were not focusing on renew­ ables and energy efficiency, but mostly on nuclear energy. Only in the mid-2000s did European R&D in renewables and energy efficiency combined represent more important amounts than R&D in nuclear energy.107 As for the EU, the EU’s budget for Research and Innovation has risen significantly (see Figure 5.11, graph) but remains a very thin portion of funds invested on R&D in Europe (see Figure 5.11, pie chart). In November 2016, the European Commission adopted its ‘Accelerating Clean Energy Innovation’ communication108 (ACEI). ACEI aims at helping the EU achieve three overarching goals: Energy Efficiency First; Europe as the global leader in renewables; and a fair deal to consumers. In line with non-energy-specific work of the European Commission,109 this communication puts a strong emphasis on open innovation,110 while previous communications of the European Commission mostly focused on combining technology push111 and market pull112 approaches to innovation.113 ACEI moreover has a strong international dimension and wishes to work closely with recent initiatives such as Mission Innovation or the Breakthrough Energy Coalition, while also mentioning, for the first time in an energy policy document, the concept of frugal innovation developed by scholars like Jaideep Prabhu.114 ACEI contains only four technology focus areas – albeit broad ones – decarbonising buildings, renewables, storage and electro-mobility. We can notice here what may be dis-

107   Georg Zachmann, ‘Making Low-carbon Technology Support Smarter’, Bruegel Policy Brief, 2015, based on IEA estimated RD&D budgets by region. 108   European Commission, Accelerating Clean Energy Innovation, Brussels, 30 November 2016, COM(2016) 763 Final. 109   European Commission, Open innovation, open science, open to the world, 2016, ISBN 978-92-79-57346-0. It is worth noting that this communication was first drafted by officials from DG RTD. This may help explain why elements from non-energy specific EU R&I policy have been introduced in this communication. 110   For a definition, see Henry Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston, MA: Harvard Business Press, 2006. 111   The first model is a simple linear technology-push model, created in the 1950s when society bought any available product on the market. According to this linear model, the Research & Development (R&D) department is at the beginning of the innovation process (the idea generation and the conception of the innovative service or product), followed by the production and marketing. 112   As market competition grew, it became more important to consider consumer needs. This led to the market-pull model, which reverses the direction of this still-linear process with the market informing R&D. 113   For further discussion on innovation processes, see Dirk Meissner and Maxim Kotsemir, ‘Conceptualizing the Innovation Process Towards the “Active Innovation Paradigm” – Trends and Outlook’, Journal of Innovation and Entrepreneurship, 2016, 5(1). 114   See for instance, Sourindra Banerjee, Jaideep C. Prabhu and Rajesh K. Chandy, ‘Indirect Learning: how Emerging-market Firms Grow in Developed Markets’, Journal of Marketing, 2016, 79(1): 1–28 (DOI: 10.1509/jm.12.0328); G. George, A.M. McGahan and J. Prabhu, ‘Innovation for Inclusive Growth: Towards a Theoretical Framework and a Research Agenda’,  Journal of Management Studies, 2012, 49(4): 661–83 (DOI: 10.1111/j.1467-6486.2012.01048.x); Navi Radjou, Jaideep Prabhu and Simone Ahuja, Jugaad Innovation: Think Frugal, be Flexible, Generate Breakthrough Growth. San Francisco, CA: Jossey-Bass, 2012.

The European Energy Union  93 placement115 of the EU energy R&I policy that tacitly deprioritises two elements (carbon capture and storage, and nuclear) that still were the focus of the September 2015 SET-Plan communication.116 If this is confirmed in concrete decisions, this would be an interesting example to study how the EU/European Commission can overcome path-dependency and change its policy by abandoning the priority-support to two sectors, even when heavily supported by key Member States (such as Poland and France). With the February 2015 Energy Union Communication and the November 2016 ACEI, the European Commission has now clearly set its policy vision for energy R&I. The European Commission has moreover asked former commissioner Pascal Lamy to head a High-Level group meant to produce a vision for the entire EU R&I.117 Their work, due by June 2017, could make climate change or energy transition one of the key components of such a vision. This may help to ensure that EU R&I policy instruments can be more than ‘just the results of arbitrary lobbying for partial interests’.118 The European energy R&I landscape already has strong assets. Fundamental research is well supported by some national budgets and the European Research Council, and this fundamental research impacts energy, e.g. by developing new solar cells.119 European academic and industrial players are also very well-ranked in many key energy R&I fields (see Figure 5.12). Thus, Europe’s main problem may be not about creating new ideas, but about deploying them on a massive scale.120 In this regard, social sciences, including economics, law, political science, sociology and anthropology can play a key role. Successfully introducing innovations would be eased by a good understanding of the drivers behind individual and collective energy behaviours and choices. Such a comprehensive understanding is currently lacking121 and the European Commission recently decided to invest 10 million euros to finance three research projects to help fill this gap.122 Yet, much more academic research in this area would be needed to feed policy makers with multidisciplinary science-based evidence of the tools that would be the most effective to drive the energy transition forward – keeping in mind that eventual policy choices will be driven mostly by drivers other than the ­willingness to implement the ‘best possible policy’.

115   For a definition of change by displacement, see Wolfgang Streeck and Kathleen Thelen, Beyond Continuity. Oxford: Oxford University Press, 2005. 116   European Commission, Towards an Integrated Strategic Energy Technology (SET) Plan, 2015. 117   European Commission, News Alert, 29 November 2016. 118   Matthias Weber, Dan Andrée and Patrick Llerena, A New Role for EU Research and Innovation in the Benefit of Citizens: Towards an Open and Transformative R&I Policy, European Commission, 2015, p. 7 119   Aswani Yella et al., ‘Porphyrin-sensitized Solar Cells with Cobalt (II/III)-based Redox Electrolyte Exceed 12 Percent Efficiency’, Science, November 2011. 120   Nicholas Ashford and Andrea Renda, Aligning Policies for Low-carbon Systemic Innovation in Europe, CEPS and i24c, 2016. 121   Paul Burger et al., ‘Advances and Understanding Energy Consumption Behaviors and the Governance of its Change: Outline of an Integrated Framework’, Frontiers in Energy Research, June 2015, Vol 3, Article 29. 122   Those projects started in late 2016. The first one to start is titled ENABLE.EU, in which this chapter’s author is taking part. The two others are called ECHOES and ENERGISE.

as G oa l& C le an C

S El ma ec rt tri G c r id St s or & ag e R en e C wa on b ve le rg En en e ce rgy

Sm ar Bu t & ild Ef in fic gs ie nt

En er gy ce an

So la rP Sy ho st tov em o lta ic So la El r T ec he tri rm ci ty al

100%

O

W in d

En er gy

94  Research handbook on EU energy law and policy

75%

50%

25%

0%

US

Europe

South Korea

China

Japan

RoW

Sources:  Thomas Pellerin-Carlin and Pierre Serkine, Jacques Delors Institute, with data from InnoEnergy.

Figure 5.12 Mapping of the geographical frequency of the appearance of industrial and academic players in the top 10 rankings for each thematic field

7. CONCLUSION AND FIELDS FOR FURTHER RESEARCH: IS THE ENERGY UNION MUCH MORE THAN A SLOGAN? For the European Commission, the Energy Union has proven to be more than a slogan. It however remains to be seen whether this will translate into significantly different decisions that will change the EU energy policy for the better, notably by ensuring more horizontal integration (i.e. coherence between the several policies that impact the energy transition, such as the capital markets union, the digital union, energy efficiency legislation, support for research and innovation, ETS reform, etc.), as well as more vertical integration (i.e. coherence with international decisions such as the UNFCCC and the Paris Agreement, as well as with sub-EU decisions such as national, regional or city decisions). As the Energy Union is a very young process, much academic work is required to better understand it, its scope and its limits. In this area, academic work can also attempt to influence decision makers123 to ensure that their decisions are more soundly taken, with a good enough understanding of the dynamics of energy systems. In that regard, this chapter ends by suggesting the following fields for further research: 123   For a point of view on the role of think-tankers within academia, see Sven Biscop, ‘Am I an Academic?’, European Geostrategy, 6 July 2014.

The European Energy Union  95 ● ● ●



● ● ●

● ● ● ●

● ●

● ● ●

How can the Paris Agreement in general, and its Article 4 on carbon-neutrality in particular, impact EU and national law? From a philosophical, legal and political perspective, what can ‘sovereignty’ mean in 21st-century European energy policy making? Can the Energy Union be a fruitful case study for understanding the broader European integration process, for instance as a nascent European Federation of Nation-States124 or a rising demoicracy?125 From a neo-historical institutionalist perspective,126 how can significant/radical changes occur in democratic institutions with multiple veto-players in a sector characterised by long-term investments and policy objectives? To what extent can the Energy Union be analysed through the ‘strategic constructivism’ lens?127 Are we witnessing a rise of energy autonomy/independence attempts from local communities? Would the future of EU electricity networks include a super grid and/or microgrids? What role could Europe’s outermost regions play to develop smart micro-grid and renewable electricity generation? What does ‘Energy Union’ mean for different actors? Is this ambiguity constructive or not? To what extent can legal tools be used for political motives, especially in the case of Nordstream 2? To what extent can sociological background (e.g. economy vs. law studies) explain EU decision makers’ inclination for market-based mechanisms, such as the EU-ETS? From a political science, sociology, economic and legal perspective, what could be the best options to balance energy data protection and energy data use? How can societal appropriation of energy128 occur? How have other appropriations of immaterial notions (such as time) been the subject of societal appropriation in the past? To what extent does gender impact energy choices, especially the choice to become a prosumer? How could such impacts be accounted for in EU energy policy making? How can public actors in general and the EU in particular foster the adoption by private businesses of innovative working practices, such as intrapreneuship? What are the legal vehicles and economic rationales for multinational auctioning for RES production, as opposed to other renewables support schemes, such as national feed-in-premiums?

  Gaëtane Ricard-Nihoul, Pour une fédération européenne d’Etats-nations. Larcier, 2012.   Kalypso Nicolaidis, ‘European Demoicracy and Its Crisis’,  Journal of Common Market Studies, 2013, 51(2): 351–69. 126   James Mahoney and Kathleen Thelen, Explaining Institutional Change: Ambiguity, Agency, and Power. New York: Cambridge University Press, 2010. 127   Nicolas Jabko, Playing the Market: A Political Strategy for Uniting Europe: 1985–2005. Ithaca: Cornell University Press, 2006. 128   For a definition, see Thomas Pellerin-Carlin and Pierre Serkine, ‘From Distraction to Action – Towards a Bold Energy Union Innovation Strategy’, Jacques Delors Institute, 2016. 124 125

96  Research handbook on EU energy law and policy ● ● ● ●

● ● ●

What role do EU State Aid and public markets have in fostering the early adoption of innovative climate-friendly products (e.g. such as lower-carbon cement)? How best can EU State Aid ensure that national capacity mechanisms do not discourage low-carbon securitisation of the electricity system? Building on the existing literature,129 how can we provide for a better measurement of the energy innovation performance of EU countries and regions? What are the EU industries and regions that are the most likely to benefit from the energy transition? Do they manage to impact national interests formation in their home country? How can social sciences better contribute to evidence-based debate over the best policies to foster changes towards ‘greener’ behaviours? Do divestment campaigns have a significant impact on economic choices and political perceptions? What could entail a social dimension to the Energy Union, focusing on promoting quality jobs and ending energy poverty in Europe?

BIBLIOGRAPHY Aiginger, Karl, Bärenthaler-Sieber, Susanne and Vogel, Johanna (2015) ‘Competitiveness of EU versus USA’, WWWforEurope Policy Paper, n°29, November. Andoura, Sami, Hancher, Leigh and Van der Woude, Marc (2010) ‘Towards a European Energy Community: A Policy Proposal’, Studies & Research, No. 70, Notre Europe, March. Andoura, Sami and Vinois, Jean-Arnold (2015) ‘From the European Energy Community to the Energy  Union: A Policy Proposal for the Short and the Long Term’, Jacques Delors Institute, Report, January. Archer, David, et al. (2009) ‘Atmospheric Lifetime of Fossil Fuel Carbon Dioxide’, Annual Review of Earth and Planetary Services. Ashford, Nicholas and Renda, Andrea (2016) Aligning Policies for Low-carbon Systemic Innovation in Europe, CEPS and i24c. Aykut, Stefan and Dahan, Amy (2015) ‘Gouverner le climat? 20 ans de négociations internationales’, Presses de Sciences Po. Baldwin, R., Cave, M. and Lodge, M. (2011) Regulating Prices in Natural Monopolies (2nd edn). Oxford: Oxford University Press. Banerjee, S., Prabhu, J.C. and Chandy, R.K. (2016) ‘Indirect Learning: How Emerging-market Firms Grow in Developed Markets’, Journal of Marketing, 79(1): 1–28 (DOI: 10.1509/jm.12.0328). Baregheh, Anahita, Rowley, Jennifer and Sambrook, Sally (2009) ‘Towards a Multidisciplinary Definition of Innovation’, Management Decision, 47(8): 1323–39. Bertoldi, Paolo, Lopez Lorente, Javier and Labanca, Nicola (2016) ‘Energy Consumption and Energy Efficiency Trends in the EU-28’, Joint Research Center. Biscop, Sven (2014) ‘Am I an Academic?’, European Geostrategy, 6 July, https://www.europeangeostrategy. org/2014/07/academic/. Blumann C. (2009) ‘Les compétences de l’Union Européenne dans le domaine de l’énergie’, Revue des affaires européennes, 4: 737–48. Blunden, J. and Arndt, D.S. (eds.) (2015) ‘State of the Climate in 2014’, Bull. Amer. Meteor. Soc. 96(7). BP (2016) BP Statistical Review of World Energy. BP. Brabandere, Eric and Gazzini, Tarcisio (2014) Foreign Investment in the Energy Sector: Balancing Private and Public Interests. Leiden: Brill/Nijhoff.

129   Charles Edquist and Jon Mikel Zabala-Iturriagagoitia, ‘The Innovation Union Scoreboard is Flawed: The Case of Sweden – Not the Innovation Leader of the EU’, updated version, Papers in Innovation Studies of CIRCLE Lund University, Paper n. 2015/27, 2015.

The European Energy Union  97 Buchan, Daniel (2014) ‘Europe’s Misshapen Market – Why Progress Towards a Single Energy Market is Proving Uneven’, Oxford Institute for Energy Studies. Burger, Paul et al. (2015) ‘Advances in Understanding Energy Consumption Behavior and the Governance of its Change: Outline of an Integrated Framework’, Frontiers in Energy Research, Vol. 3, Article 29, June. Buschle, Dirk (2016) EU Energy Law – Volume IX: European External Energy Law & Policy, Leuven: Claeys & Casteels. Buzek, Jerzy and Delors, Jacques (2010) ‘Towards a New European Energy Community’, May 2010. Canfin, Pascal and Staime Peter (2015) ‘Climat – 30 questions pour comprendre la conférence de Paris’. Carbon Tracker Initiative (2011) ‘Unburnable Carbon – Are The World’s Financial Markets Carrying A Carbon Bubble?’, https://www.carbontracker.org/wp-content/uploads/2014/09/Unburnable-Carbon-Full-rev2-1.pdf. Carney, Mark, ‘Breaking The Tragedy Of The Horizon – Climate Change And Financial Stability’, Speech at Lloyd’s of London, Bank of England, 29 September 2015. Checchi, A., Behrens, A. and Egenhofer, C. (2010) ‘Long-term Energy Security Risks for Europe: A Sectorspecific Approach’, CEPS Working Document 309, May 2010. Chesbrough, Henry (2006) Open Innovation: The New Imperative for Creating and Profiting from Technology. Boston, MA: Harvard Business Press. Citi GPS (2015) ‘Energy Darwinism II: Why a Low Carbon Future Doesn’t Have to Cost the Earth’, 14 August, http://climateobserver.org/reports/energy-darwinism-citi-report/. Conesa, Pierre (2016) Dr. Saoud et Mr. Djihad: La diplomatie religieuse de l’Arabie Saoudite. Paris: Éditions Robert Laffont. Creti, A., Fumagalli, E. and Fumagalli, E. (2010) ‘Integration of Electricity Markets in Europe: Relevant Issues for Italy’, Energy Policy, 38: 6966–76. Curtin, Joseph (Gen Ed.) (2014) EU Energy Law – Volume VII: Energy Efficiency in the European Union. Leuven: Claeys & Casteels. Darson, Alice (2015) ‘Transition énergétique et transition juridique: le développement des énergies de sources renouvelables en’rance’. Thèse Droit. Université de Bordeaux. De Jong, Jacques, Pellerin-Carlin, Thomas and Vinois, Jean-Arnold (2015) ‘Governing The Differences in the European Energy Union – EU, Regional, and National Energy Policies’, Jacques Delors Institute, Policy Paper n°144, October. del Monte, Micaela (2013) The Cost of Non-Europe in the Single Market for Energy, European Added Value Unit, EPRS, September. Delbeke, Jos (2006) EU Environmental Law: The EU Greenhouse Gas Emissions Trading Scheme. Deventer, the Netherlands: Claeys & Casteels. DiaCore (2016) ‘The Impact of Risks in Renewable Energy Investments and the Role of Smart Policies’. Diamond, Jared (2005) Collapse: How Societies Choose to Fail or Succeed. London: Penguin. du Preez, Niek, Louw, Louis and Essmann, Heinz (2009) ‘An Innovation Process Model for Improving Innovation Capability’, Journal of High Technology Management Research. Dunne, Joseph (2015) ‘Mapping the Costs of Non-Europe, 2014–2019’, European Parliament Research Service, Third Edition, April. Dupont, Claire and Oberthür, Sebastian (eds) (2015) Decarbonisation in the European Union – Internal Policies and External Strategies. Houndmills, UK: Palgrave Macmillan. Edgerton, David (2011) Britain’s War Machine. London: Penguin Books. Edquist, Charles and Zabala-Iturriagagoitia, Jon Mikel (2015) ‘The Innovation Union Scoreboard is Flawed: The Case of Sweden – Not the Innovation Leader of the EU’, updated version, Papers in Innovation Studies of CIRCLE Lund University, Paper n. 2015/27. Ellerman, A. Denny and Joskow, Paul L. (2008) ‘The European Union’s Emission Trading System in Perspective’, Massachusetts Institute of Technology. Energy Efficiency Financial Institutions Group, Final Report, February 2015. EU Energy Law – Volume V: The EU Energy Law and Policy Yearbook (2010, 2011, 2012, 2013, 2014). Leuven: Claeys & Casteels. European Commission, Accelerating Clean Energy Innovation, Brussels, 30 November 2016, COM(2016) 763 Final. European Commission, Energy challenges and policy – contribution to the European Council of 22 May 2013. European Commission, Clean Energy for all Europeans, Communication, 30 November 2016, COM(2016) 860 final. European Commission, Commission decision of 24 December 2009 determining, pursuant to Directive 2003/87/ EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, 5 January 2010. European Commission, Commission proposal on new rules for energy agreements between EU and non-EU countries, COM(2016) 53. European Commission, Commission proposal on new rules for EU gas supply security, COM(2016) 52.

98  Research handbook on EU energy law and policy European Commission, Commissioner Miguel Arias Cañete: EU press briefing, 20 August 2015. European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, and the Committee of the Regions, Delivering a new deal for energy consumers, 15 July 2015. European Commission, Communication from the Commission to the European Parliament and the Council, Energy Union Package: The Paris Protocol – A blueprint for tackling global climate change beyond 2020, Brussels, 4 March 2015. European Commission, Communication from the Commission to the European Parliament and the Council, Energy Union Package: The Paris Protocol – A blueprint for tackling global climate change beyond 2020, Brussels, 25 February 2015. European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Energy Roadmap 2050 /* COM/2011/0885 final */, 15 December 2011. European Commission, Delivering a new deal for energy consumers, 15 July 2015. European Commission, Energy Union Framework Strategy, 25 February 2015. European Commission, EU Energy in figures – Statistical Pocketbook, 2016. European Commission, European Energy Security Strategy, Brussels, 28 May 2014, SWD(2014) final. European Commission, Open innovation, open science, open to the world, 2016, ISBN 978-92-79-57346-0. European Commission, Prioritäten, 2017. European Commission, Proposal amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investments, 2015. European Commission, Proposal for a directive amending directive 2012/27/EU on energy efficiency, 30 November 2016. European Commission, Proposal for a directive amending directive 2010/31/EU on the energy performance of buildings, 30 November 2016. European Commission, Regulation (EC) No . . ./2008 of the European Parliament and of the Council amending Regulation (EC) No 1692/2006 establishing the second ‘Marco Polo’ programme for the granting of Community financial assistance to improve the environmental performance of the freight transport system (‘Marco Polo II’), 10 December 2008. European Commission, Speech by Vice-President for Energy Union Maroš Šefčovič on ‘Energy Union – 1 Year On’ at the conference organised by the Jacques Delors Institute, February 2016. European Commission, Speech by Vice-President for Energy Union Maroš Šefčovič at the Energy Fest (Start Up Event) in Amsterdam, May 2016. European Commission, State of the Energy Union 2015 – Staff working document on the European energy security strategy, November 2015. European Commission, The role of gas storage in internal market and in ensuring security of supply. 2015. European Commission, Towards an Integrated Strategic Energy Technology (SET) Plan, 2015. European Summit, Declaration on European Identity, Copenhagen, 14 December 1973. European Union, Directive 96/92/EC. European Union, Regulation (EC) No 67/2010. Eurostat, Comext, Imports Extra-EU of Trade Energy, EU-28 in 2013. Fabius, Laurent (2015), ‘Das Klima der Angst’, Die ZEIT, Nr.19, 7 May. Finon, D. (2013), Le rôle croissant de la main visible dans les marchés électriques européens: l’effet des politiques de décarbonation sur le régime de marché, Working Paper CEEM, n°2013-05. Foy, Henry (2015) ‘Polish Manufacturers Hit By Power Cuts’, The Financial Times, 10 August. Frey, Carl Benedikt (2015) ‘How to Prevent the End of Economic Growth: How the Digital Economy Could Lead to Secular Stagnation’, Scientific American, 312(1). Gaspar, Tamas (2011) ‘Path Dependency and Path Creation in Strategic Perspective’, Journal of Future Studies, 15(4): 93–108. Gaventa, Jonathan, Dufour, Manon and Bergamaschi, Luca (2016) ‘More Security, Lower Cost – a Smarter Approach to Gas Infrastructure in Europe’, Energy Union Insight Series n°1, E3G, March. Georgakakis, Didier (eds) (2012) Le champ de l’Eurocratie. Paris: Economica. George, G., McGahan, A.M. and Prabhu, J. (2012) ‘Innovation for Inclusive Growth: Towards a Theoretical Framework and a Research Agenda’, Journal of Management Studies, 49(4): 661–83 (DOI: 10.1111/ j.1467-6486.2012.01048.x). George, Ross (1995) Jacques Delors and European Integration. Cambridge: Polity Press. Giesbertz, Paul and Mulder, Machiel (2008) ‘Economics of Interconnection: the Case of the Northwest European Electricity Market’, International Association for Energy Economics, Second Quarter 2008, pp. 17–21. Gillis, Justin and Krauss, Clifford (2015) ‘Exxon Mobil Investigated for Possible Climate Change Lies by New York Attorney General’, New York Times, 5 November.

The European Energy Union  99 Glachant, Jean-Michel, et al. (2012) A New Architecture for EU Gas Security of Supply. Brussels: Claeys & Casteels. Glachant, Jean-Michel, et al. (2013) Building Competitive Gas Markets in the EU – Regulation, Supply and Demand, Loyola de Palacio Series on European Energy Policy. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Glachant, J.-M. and Lévêque, F. (eds) (2009) Electricity Reform in Europe, Towards a Single Energy Market. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Global Challenges Foundation (2016), Global Catastrophic Risks. Grand, Emmanuel and Veyrenc, Thomas (2011) L’Europe de l’électricité et du Gaz, Acteurs, marchés, régulations. Economica. Greenhalgh, C. and Rogers, M. (2010) Innovation, Intellectual Property, and Economic Growth. Princeton, NJ: Princeton University Press, Chapter I. Grigorjeva, Jekaterina (2016) Starting a New Chapter in EU-Algeria Energy Relations. Jacques Delors Institute. Hancher, Leigh, de Hauteclocque, Adrien and Sadowska, Malgorzata (eds) (2015) Capacity Mechanisms in the EU Energy Market. Oxford: Oxford University Press. Hare, Bill, Rocha, Marcia, Schaeffer, Michiel, Sferra, Fabio, Baxter, Cindy and Aboumahboub, Tino (2014) ‘China, US And EU Post-2020 Plans Reduce Projected Warming’, Ecofys, 8 December. Harris, C. (2006) Electricity Markets: Pricing, Structures and Economics. Chichester: John Wiley & Sons. Hillion, C. (2009) ‘Mixity and Coherence in EU External Relations: The Significance of the Duty of Cooperation’, CLEER working papers 2009/1, pp. 19–21. Hoerling, Martin, Eischeid, Jon, Perlwitz, Judith, Quan, Xiaowei, Zhang, Tao and Pegion, Philip (2012) ‘On the Increased Frequency of Mediterranean Drought’, Journal of Climate, 25(6): 2146–2161. Holmes, I., Gaventa, J., Mabey, N. and Tomlinson, S. (2012) ‘Financing the Decarbonisation of European Infrastructure’, Report E3G, February. Holmes, Ingrid et al. (2014) ‘Energy Efficiency as Europe’s First Response to Energy Security’, E3G Briefing. i24c (2016) ‘Scaling up Innovation in the Energy Union to Meet New Climate, Competitiveness and Societal Goals’. Intergovernmental Panel on Climate Change (IPCC), Climate Change 2014: Synthesis Report: Summary for Policymakers, Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds)]. IPCC, Geneva, Switzerland, 2014. Intergovernmental Panel on Climate Change (IPCC), Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds)]. IPCC, Geneva, Switzerland, 2014. Intergovernmental Panel on Climate Change (IPCC), Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [T.F. Stocker, D. Qin, G.-K. Plattner, M. Tignor, S.K. Allen, J. Boschung, A. Nauels, Y. Xia, V. Bex and P.M. Midgley (eds)]. Cambridge, UK and New York, USA: Cambridge University Press, 2013. Intergovernmental Panel on Climate Change (IPCC), Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K Pachauri and A. Reisinger (eds)]. IPCC, Geneva, Switzerland, 2007. Intergovernmental Panel on Climate Change (IPCC), Summary for Policymakers. In: Climate Change 2007: The Physical Science Basis. Contribution of Working Group I to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [S. Solomon, D. Qin, M. Manning, Z. Chen, M. Marquis, K.B. Averyt, M. Tignor and H.L. Miller (eds)]. Cambridge, UK and New York, USA: Cambridge University Press, 2007. International Energy Agency (IEA), Climate policy and carbon leakage: Impacts of the European Emissions Trading Scheme on aluminium, IEA Information Paper, October 2008. International Energy Agency (IEA), Energy Technology Perspectives 2015: Mobilising Innovation to Accelerate Climate Action: Executive Summary, 2015. International Energy Agency, World Energy Outlook, 2016. International Maritime Organization (IMO), Third IMO GHG Study 2014; London, UK, April 2015. Interview with former top official of Delors’ cabinet, Paris, 15 March 2016. Interview with two top EU officials, Brussels, June 2014. Jabko, Nicolas (2006), Playing the Market: A Political Strategy for Uniting Europe: 1985–2005. Ithaca: Cornell University Press. Jamasb, T. and Pollit, M. (2005) Electricity Market Reform in the European Union: Review of Progress toward Liberalization & Integration, CEEPR Working Paper 0503. Jancovici, Jean-Marc (2012) ‘Les limites énergétiques de la croissance’, Le Débat, 4/2012, n°71, pp. 80–95. Jaureguy-Naudin, Maïté (2012) The European Power System – Decarbonization and Cost Reduction: Lost in Transmissions? Note de l’IFRI, 01/2012.

100  Research handbook on EU energy law and policy Johnston, Angus and Block, Guy (2012) EU Energy Law. Oxford: Oxford University Press. Jones C. (Gen. Ed.) (2010) EU Energy Law – Volume III. Book Three: The European Renewable Energy Yearbook. Leuven: Claeys & Casteels. Jones, C. (Gen. Ed.) (2016) EU Energy Law – Volume I: The Internal Energy Market (4th edn). Leuven: Claeys & Casteels. Jones C. (Gen. Ed.) (2016) EU Energy Law – Volume II. EU Competition Law and Energy Markets (4th edn). Leuven: Claeys & Casteels. Joskow, P. and Tirole, J. (2005) ‘Merchant Transmission Investment’, The Journal of Industrial Economics, 53(2): 233–264. Joskow, P.L. (2006) ‘Markets for Power in the United States: An Interim Assessment’, The Energy Journal, 27(1). Kaya, Yoichi and Yokobori, Keiichi (1998) ‘Environment, Energy, and Economy Strategies for Sustainability’, United Nations University Press, March. Kelley, Colin P., Mohtadi, Shahrzad, Cane, Mark A., Seager, Richard and Kushnir, Yochanan (2015) ‘Climate Change In The Fertile Crescent And Implications Of The Recent Syrian Drought’, PNAS, 30 January. King, David, Schrag, Daniel, Dadi, Zhou, Ye, Qi and Ghosch, Arunabha (2015) ‘Climate Change: A Risk Assessment’, Centre for Science and Policy, University of Cambridge, 13 July. Kopp, Sandu-Daniel (2014) Politics, Markets and EU Gas Supply Security. Springer VS. Krugman, Paul (1994) ‘Competitiveness: A Dangerous Obsession’, Foreign Affairs, March/April. Küpper, G., et al. (2009) ‘Does More International Transmission Capacity Increase Competition in the Belgian Electricity Market?’, The Electricity Journal, 22(1): 21–36. Lagarde, Christine and Yong Kim, Jim (2015) ‘The Path to Carbon Pricing’, Project Syndicate, 19 October. Leal-Arcas, Rafael (2016) The European Energy Union. Leuven: Claeys & Casteels. Lévêque, François (ed.) (2006) Competitive Electricity Markets and Sustainability. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Ma, Qiancheng (1998) ‘Greenhouse Gases: Refining the Role of Carbon Dioxide’, Science Briefs, NASA. Magnan, Alexandre, et al. (2016) Addressing the Risk of Maladaptation to Climate Change, Wiley Interdisciplinary Reviews: Climate Change. Mahoney, James and Thelen, Kathleen (2010) Explaining Institutional Change: Ambiguity, Agency, and Power. New York: Cambridge University Press. Marx, Eric (2015) ‘New Coal-fired Power Enjoys Support among Bankers in Germany and Asia’, Environment & Energy Publishing, 13 August. Mazzucato, Mariana (2015) The Entrepreneurial State: Debunking Public vs. Private Sector Myths. London: Anthem Press. McGlade, Christophe and Ekins, Paul (2015) ‘The Geographical Distribution of Fossil Fuels Unused when Limiting Global Warming to 2 °C’, Nature, 517, 187–90, 8 January. Meeus, Leonardo (2013) ‘Offshore Grids for Renewables: Do We Need a Particular Regulatory Framework?’, RSCAS 2014/24. Meeus, Leonardo and Hadush, Samson, ‘The Emerging Regulatory Practice for New Businesses Related to Distribution Grids’, FSR Policy Brief, Issue 2016/2, p. 6 Meeus, L. and Kayaerts, N. (2015) ‘First Series of Cross-border Cost Allocation Decisions for Projects of Common Interest: Main Lessons Learned’ (Policy Brief). Florence School of Regulation. Meissner, D. and Kotsemir, M. (2016) ‘Conceptualizing the Innovation Process Towards the “Active Innovation Paradigm” – Trends and Outlook’, Journal of Innovation and Entrepreneurship, 5(1). Mitchell, Timothy (2013) Carbon Democracy: Political Power in the Age of Oil. London: Verso. Nicolaidis, Kalypso (2013) ‘European Demoicracy and its Crisis’, Journal of Common Market Studies, 51(2): 351–69. Nordhaus, W.D. (2007) ‘A Review of the Stern Review on the Economics of Climate Change’, Journal of Economic Literature, XLV: 686–702. OECD & Eurostat (2005) Oslo Manual (3rd edn). Offenberg, Philipp (2016) ‘The European Neighbourhood And The EU’s Security Of Supply With Natural Gas’, Jacques Delors Institute. O’Sullivan, D. and Dooley, L. (2009) Applying Innovation. Thousand Oaks, CA: Sage. Palle, Angelique (2013) ‘Regional Dimensions to Europe’s Energy Integration’, The Oxford Institute for Energy Studies. Patel, Tara (2015) ‘Fossil-fuel Divestment Gains Momentum with Axa Selling Coal’, Bloomberg, 22 May. Pellerin-Carlin, Thomas, Vinois, Jean-Arnold, Rubio, Eulalia, and Fernandes, Sofia (2017) Making the energy transition a European success: tackling the democratic, innovation, financing and social challenges of the Energy Union, Studies & Reports No. 114, Jacques Delors Institute, June. Pellerin-Carlin, Thomas (2016) ‘How Can the Juncker Plan Unlock Energy Efficiency Investment in the Short

The European Energy Union  101 and Long Term?’, in Eulalia Rubio, David Rinaldi and Thomas Pellerin-Carlin, Investment in Europe: Making the Best of the Juncker Plan, Studies & Reports No. 109, Jacques Delors Institute, March. Pellerin-Carlin, Thomas (2016) ‘Putting the Consumer at the Centre of the European Energy System’, Jacques Delors Institute, September. Pellerin-Carlin, Thomas and Serkine, Pierre (2016) ‘From Distraction to Action – Towards a Bold Energy Union Innovation Strategy’, Jacques Delors Institute. Pellerin-Carlin, Thomas and Vinois, Jean-Arnold (2015) ‘2015 Climate Negotiations: Speeding Up or Slowing Down the Energy Transition?’, Jacques Delors Institute, Policy Paper n°142, September. Pellistrandi, Jérôme (2015) ‘COP21: enjeux de défense’, Revue Défense Nationale, n° 783, October. Quatremer, Jean (2014) ‘La Commission de la dernière chance’, Coulisses de Bruxelles, Octobre. Radjou, N., Prabhu, J. and Ahuja, S. (2012) Jugaad Innovation: Think Frugal, Be Flexible, Generate Breakthrough Growth. San Francisco, CA: Jossey-Bass. Ranci, Pippo and Guido, Cervigni (eds) (2013) The Economics of Electricity Markets – Theory and Policy. Cheltenham, UK and Northampton, MA, USA: Edward Elgar. Reich, Robert (2011) ‘American Competitiveness and the President’s New Relationship with American Business’, 21 January, http://robertreich.org/post/2863461038. Reverdy, Thomas (2014) La construction politique du prix de l’énergie. Paris: Presses de Sciences -Po. Ricard-Nihoul, Gaëtane (2012) Pour une fédération européenne d’Etats-nations, Larcier. Riley, Alan (2016) ‘Nordstream 2: A Legal And Policy Analysis’, CEPS, November. Rious, V. (2012), Roques, F. and Perez, Y., ‘Which Electricity Market Design to Encourage the Development of Demand Response?’ EUI Working Paper RSCAS 2012/12. Roggenkamp, Martha M., Barrera-Hernández, Lila, Zillman, Donald N. and del Guayo, Iñigo (2012) Energy Networks and the Law: Innovative Solutions in Changing Markets. Oxford: Oxford University Press. Saurugger, Sabine (2009) Théories et concepts de l’intégration européenne. Paris: Presse de Sciences-Po. Schuman, Robert, The Schuman Declaration, 9 May 1950. Sioshansi, F.P. and Pfaffenberger, W. (eds) (2006) Electricity Market Reform: An International Perspective. Amsterdam: Elsevier. Spencer, Thomas, et al. (2016) ‘State of the Low-carbon Energy Union’, IDDRI Study, November. Stack, Martin and Gartland, Myles, ‘Path Creation, Path Dependency, and Alternative Theories of the Firm’, Journal of Economic Issues, 37(2): 487–94. Stiglitz, Joseph, Sen, Amartya and Fitoussi, Jean-Paul (2010) Report by the Commission on the Measurement of Economic Performance and Social Progress. Streeck, Wolfgang and Thelen, Kathleen, Beyond Continuity. Oxford: Oxford University Press. Teulings, Coen and Baldwin, Richard (eds) (2014) Secular Stagnation: Facts, Causes and Cures. CEPR Press eBook. Tol, R.S. (2005) ‘Adaptation and Mitigation: Trade-offs in Substance and Methods’, Environmental Science & Policy, 18: 572–78. Toumi, Ralf and Restell, Lauren (2014) ‘Catastrophe Modelling and Climate Change’, Lloyds. UNFCCC, Paris Agreement, 2015. United Nations, Sustainable Development Goal 13, 2015. US Energy Information Administration, Short-Term Energy Outlook, December 2016. Vinois, J-A. (ed.) (2012) EU Energy Law – Volume VI: The Security of Supply in the European Union. Leuven: Claeys & Casteels. Vinois, J.-A. (ed.) (2014) EU Energy Law – Volume VIII: The Energy Infrastructure Policy of the European Union. Leuven: Claeys & Casteels. Vinois, Jean-Arnold and Pellerin-Carlin, Thomas (2015) ‘Nordstream 2: A Decisive Test for EU Energy Diplomacy’, Natural Gas World, December. Weber, Matthias, Andrée, Dan and Llerena, Patrick (2015) A New Role for EU Research and Innovation in the Benefit of Citizens: Towards an Open and Transformative R&I Policy, European Commission, p. 7 White House, Fact Sheet: White House Launches American Business Act On Climate Pledge, 27 July 2015. Yafimava, K. (2011) ‘The Transit Dimension of EU Energy Security – Russian Gas Transit Across Ukraine, Belarus and Moldova’, The Oxford Institute for Energy Studies. Yella, Aswani, et al. (2011) ‘Porphyrin-sensitized Solar Cells with Cobalt (II/III)-based Redox Electrolyte Exceed 12 Percent Efficiency’, Science, November. Zachmann, Georg (2015) ‘Making Low-carbon Technology Support Smarter’, Bruegel Policy Brief based on IEA estimated RD&D budgets by region. Zeng, Yingying, Weishaar, Stefan E. and Couwenberg, Oscar (2016) ‘Absolute vs. Intensity-based Caps for Carbon Emissions Target Setting: An Obstacle to Linking the EU ETS to a Chinese National ETS?’, CEEPR Working Paper.

102 • Decentralized energy system (distributed renewable sources) • Bi-directional system management

• Centralized governance on energy-related topics • Limited energy democracy

• Centralized energy system (large-scale power plants) • Top-down system management

Source:  Capgemini Consulting analysis.

To • Increased decentralization of energy-related decision making • Development of a participative democracy

From

LOCAL EMPOWERMENT

• Optimization of resources • Energy efficient services & materials

• Fast growing energy consumption

From

DIGITAL

From • Dominant energy utilities • Streamlined value chains • Standardized products (commodities) • Siloed offerings • Mono-fluid approach

• Customer-centric business models

• Near real-time power flows management • Observed grid behaviors

To

• Enlarged energy ecosystems including start-ups, tech companies, cities, equipment providers... • Disrupted value chains • Customized services (smart home, energy efficiency...) • Integrated multi-service offerings • Integrated multi-fluid strategy

To

INTEGRATED SERVICES

• Limited customer interactions

• Over-the-year energy management • Estimated grid behaviors

To • Prosumers (active) • Collective/ Communities

END-USERS From • Consumers (passive) • Individual

• Clean energy hegemony

To

• Fossil-fuel based economies

From

SUSTAINABILITY (decarbonization + energy efficiency)

Main Megatrends Shaping the Energy Sector

Text: http://www.institutdelors.eu/media/en_buzek-delors_declaration.pdf ?pdf5ok

Buzek-Delors 2010 Declaration

ANNEX

PART II EXTERNAL ASPECTS

6.  The new global landscape and energy politics in the 21st century Klaus Segbers

Both Europe and Asia are deeply affected by major structural changes in the global landscapes. After the end of the East–West Conflict, i.e., after 1990, they were exposed to (but also shaped by) this new configuration. If these major changes will lead to a new structure, or, instead, to more disorder, remains to be seen. This chapter first sketches the main directions of changes in the inter- and transnational structures, and then tries to relate these changes also to current energy issues.

1.  LESS STABILITY Twenty-five years after the end of the East–West conflict, the international landscape has changed almost beyond recognition. Globalization was and is driven mainly by hundreds of millions of agents, looking for their economic and social advantages. The aggregate results of their actions have weakened the state’s role – and not only of particular states, but of the state as an institution. The Cold War system, as it was known between 1948 and 1989, was often, and rightly so, understood as harboring serious risks in the realm of security. The ongoing arms race and the inherent and unsolvable security dilemma created a latent feeling of uncertainty. Since 1989 the level of (real and perceived) stability has decreased, despite the fact that there are more conflicts (at least when we also accept non state-to-state ones). We have less governability. And there are less certainties. Rather, the range and number of more colorful and complex conflicts has increased, including asymmetrical ones between stateand non-state actors. The core reason for the growing volatility is that with end of the Cold War, the underlying bipolar structure has also disappeared. Bipolar systems are notorious for being relatively stable, whereas unipolar systems can be either stable (with a ‘benign hegemony’), or unstable (with a short-sighted hegemony), while multi-polar structures tend to be unstable. The latter situation has been defining the global structure since 1989. This new set-up, no matter if you call it multi- or no-polar, is, if anything, much less stable than anything after the two world wars in the 20th century.

2.  MISSING OR FAILING NARRATIVES Today, many global citizens are no longer able to make sense of what is going on beyond their immediate local context. It seems that there are too many actors (state and nonstate), too many cleavages, and not enough rules and institutions to effectively manage 105

106  Research handbook on EU energy law and policy this kind of post-Cold War (dis)order. Also, this new constellation is difficult to describe, even for specialists, let alone for the men and women on the streets and at home. There is no simple explanatory narrative strong enough to become dominant, and to cover what is happening worldwide. There are plenty of stereotypes and conspiracies, but these tend to have a limited reach. Traces of these new identity-related challenges can also be found on the ground, and in particular in Global City Regions (GCRs). Diasporas and migrant communities are often exposed to cultural debates, and, sometimes, clashes. Recent examples from India, China, Russia, African cities, southern and central France, eastern Germany, and southern Italy point in this direction. Challenged identities are increasingly a problem for political stability – both in terms of individuals, and of collective groups. So-called post-factual discourses and identity politics are on the rise. Whatever happens to those competing discourses, the reliability, predictability and relative stability of the second half of the 20th century is gone for good. The task today is to cope with disorder and fragmentation. One important element emerging from this fractured picture is the category of global city regions. These cities are both the place for competing interests and narrative and identities, and also the site for testing new solutions and coalitions.

3. THE WESTPHALIAN SYSTEM AND ITS GRADUAL EROSION Many of the dominant approaches still focus on ‘international politics’, not on ‘global politics’. Their advocates view the state as the basic political entity. Since 1648, when the Westphalian Peace put an end to the 30 Year War, the macro-configuration of the international system was relatively stable. This configuration rested on the existence of nation states bound to their respective territories. Only these entities were entitled to act as international players. Following a realist frame, the core principles of this system were (internal and external) sovereignty, a monopoly of the power apparatus, and a clear division between domestic and external affairs, indicated by the existence of visibly delineated borders. Survival was the core national interest, superseding all other issues. Domestic configurations, structures and interests were irrelevant. Federal governments were perceived and portrayed as executing interests of black boxes, whose internal organization was irrelevant. This way of thinking was challenged after the Second World War by institutionalists and liberals. The first group argued that cooperation between governments can, and, actually does, happen (see the European Union), and that domestic structures do matter a great deal. Liberals and pluralists analyze domestic interests and structures to figure out how they influence, shape or even capture governments. The advent of constructivist thinking (the spectrum is too broad and diverse to be called a ‘school’) introduced non-positivist assumptions, according to which reality is not exogenously given, but is influenced by actors trying to make sense of it. This means that observers, including researchers, are not neutral bystanders, but that they actively shape what they try to understand. Most of these macro-approaches are in trouble when their main object of research, the

The new global landscape and energy politics in the 21st century  107 state and its behavior, is weakened or becomes less relevant. This is precisely what we are facing right now. In this regard, a disturbing development is the emergence of flows. Flows, by their very nature, are floating. They neither know, nor care about borders. There are more traditional flows, like those of goods and services; but even here, both types are today handled in a completely different way, compared to 100, 50 or 20 years ago – one may think about revolutions in logistics and transport, the emergence of 3D printing, the virtualization of homes, and the increasing flexibility of labor markets. Cities, particularly gateway, border and port cities, play (again) a major role here. The same goes for flows of people, i.e. migration. Here we are observing the merger of old and new types of flows, domestic and transnational. They are today less induced by push and pull factors than by the existence of networks, and by strategic decisions of families and clans (the new economics of migration). Unregulated immigration is currently challenging social cohesion in a number of (not only) European countries, and destabilizing some failing or poor states as well (displaced persons). Worldwide, there are more refugees than ever. Southern Europe is the target area for hundreds of thousands of people coming from Africa. The Mediterranean, as well as the South China Seas, are sites for mass human tragedies organized by human traffickers. And there is labor migration, from permanent to temporary and unskilled to skilled, and also a new type of circular permanent migration. All different categories of migrants are very much moving from and, even more so, toward cities, rather than nations. More often than not, their destination is not a concrete country, but an ­imagined city. The flows that are probably most crucial today are those of capital and of content. There are very different categories of capital flows – credits (state to state, international organizations to state, banks to state and the reverse), portfolio investment, foreign direct investment (FDI), remittances, and others. Important actors in this regard are Global City Regions (GCRs), whose relative standing is very much co-determined by their influence on capital markets. The competition between major exchanges (like in New York, London, Frankfurt, Bombay, Shanghai, etc.) drives part of the flows, and also drives their host locations, GCRs, toward global roles. In Europe, the re-thinking of the value of the UK in the EU is greatly driven by the City of London’s interests. The other form of flows is content-related. Here, we have basically two groups. The first pertains to the provision of information, with the Internet, intranets and databanks as the prime forms of delivery and storage. The size of these flows today is immense. The second group of content flows is related to entertainment – including movies, music and TV productions. These content flows are ever more relevant for transnational politics. They offer images, visions, patterns of life and consumption, relating to brands and ‘cool behavior’. They have a major impact on people. They do not make people’s appearance and behavior uniform, but induce them to digest images against the background of their respective cultural legacies. This process of adaptation, called indigenization, may produce major ruptures of identities. Cities are core sites for originating such flows. Bollywood is a metaphor for generating movies. The Silicon Valley area, stretching from San Francisco to San Jose, is a haven for IT innovation, most of that materializing as flows. Old and new financial

108  Research handbook on EU energy law and policy centers, being transformed in nodes and hubs for capital flows, are located in cities as their material base.

4.  EVER MORE ACTORS The preceding reflections already hint at the fact that many more actors than just states and governments shape global politics today. In an attempt to structure this widened actor spectrum, four groups of actors can be singled out: state-related; market-related; society-related; and international actors. According to another classification, one also can identify supranational, national and sub-national groups of actors. Cities and GCRs belong to the latter grouping. Governments, sub-national administrative entities (states, provinces, regions, districts), cities (both megacities and globalizing city regions), and sovereign wealth funds, to name just the most important entities, belong to the category of state-related actors. Be aware these are not unitary actors either. International organizations (UN, EU, Shanghai Organization, CIS, WTO, World Bank IMF, G8, G20, Iran 6, Korea 6, etc.) constitute their own cluster, with different degrees of effectiveness and legitimacy. In the market-related group, we can locate transnational companies, rating agencies, law firms, media, legal and illegal entrepreneurs, lobby organizations, etc. who are all participating in and co-shaping global politics. They tend to locate themselves in GCRs. GCRs are, by definition, places attracting these other organizations to generate the critical mass for a place functioning as a node or hub for global flows. Then, there are societal actors like NGOs, virtual social networks (like Facebook), terror organizations, churches and religious communities, individuals, the media, and others, who are actively involved in transnational and global games. To some extent, cities in general and GCRs in particular can be considered as political and social units per se – without presenting themselves as unitary actors. They provide both spaces as places and spaces as scapes, thereby connecting not only flows with actors, but also various types of territoriality. The concept of scapes tries to offer a conceptual solution to the fact that multiple places and identities are required for identifying where some individual, group, or event is ‘located’. GCRs are indicative here, in particular in connection with headquarters and representative offices of transnational companies. GCRs offer a mixture of ‘real’ and virtual places, of ruptures and disjunctures, of attraction and rejection, of imagineering and shifting identities. All these actors are permanently trying to influence each other, to build coalitions, to shape rules, and to enlarge and protect their constituencies. Governments remain powerful actors, but they are now far away from effectively dominating the crowded playgrounds of global politics.

5.  MULTILEVEL GAMES AND RULES The term ‘multilevel game’ was coined for describing and understanding the political workings in the EU. Here we can see that governments and other actors pursue their

The new global landscape and energy politics in the 21st century  109 interests simultaneously on at least three different levels: (1) the national level, where the rules of government are set and/or coalitions between parties are formed; (2) the EU level, where the Council of Ministers, the Commission, and the European Parliament convene and take decisions; and (3) the sub-national/domestic level, where consensus has to be built and maintained among domestic actors and (potential) veto players. No energy policy initiative, nor move on subsidies for agriculture, nor changes of oversight over banks, nor new sets of rules on how to address refugees, nor new approaches to Eurozone problems can be imagined and engineered without having some support on the domestic front/s, including, and not least, the media. Politicians have to carefully fine-tune and target their policies to the audiences on each level. They have to calibrate and re-calibrate their messages accordingly. It goes without saying that this produces linkages, side-payments, contradictions and opposition. However, it is unrealistic to assume that voters cast their votes with these policies, layers and dimensions in mind. Rather, voters tend to withdraw from the increasing degrees of complexity. They do not reward candidates with complex agendas, but those who express can-do mentalities, and who frame issues in a black and white way.

6.  AD HOCISM – A NEW POLITICAL STYLE Allegedly, there have been times when politicians enjoyed the luxury of being able to address just one or two problems at a time. Time horizons were relatively long, the number of TV stations to take care of was limited, and the number of political parties and other actors was manageable. But in the last three or so decades, we see significant shifts and problematic moves affecting politics, not only on the state level. There are five interrelated reasons why the traditional, rather sequenced order of doing politics has changed fundamentally: growing complexities; information overload; growing media involvement; more frequent election cycles; and uneven acceleration. Taken together, this produces shorter time horizons and fragmented policy styles. This can be observed at the level of national politics, as well as on the supra- or subnational levels. 6.1  Growing Complexities The number of domestic and international issues to be taken care of in a country like Germany or the US used to be limited. There were one or two ‘big’ issues in a decade to be taken care of, and about one per month of a lesser magnitude. Decision makers could address those and, otherwise, try to keep the boat floating. Today, in a globalizing and, in many regards, already globalized world, there are not just one or two items on the ‘domestic’ and ‘international’ agenda. To start with, these formerly rather separate spheres are increasingly merged. 6.2  Information Overload There never was a time when most people in any given society had such a degree of exposure to a permanent influx of information. Mouth-to-mouth transmissions and printed

110  Research handbook on EU energy law and policy media, then phones, radios and TV, are now embedded into global flows of cell phone networks, e-mails, text messages, breaking news, blogs, advertisements in and on all of the mentioned devices, and all of this in general and customized versions. 6.3  Growing Media Involvement Media are playing an ever more important role in domestic and global politics. Events that fail to fulfill the criteria for relevant news or entertainment value are simply not reported. The so-called ‘CNN effect’ can bloat the importance and the global presence of minor events, or lead to complete ignorance of major events, if they stay unreported. In addition, social media play an ever more and partly detrimental role. People can ‘publish’ all and every concern, without any responsibility, and often anonymously. Traditional criteria for journalism do not apply here. Journalists produce images and put them into frames. Framing, supported by pictures and images, is crucial for producing imaginations, perceptions and stereotypes. The power of the media is hard to overestimate. This is not to say that the media have the power to tell politicians what to do and what decisions to make. The avenue for influence is subtler but no less powerful: the media set decision makers’ agendas. This role of agenda setter puts the media – traditional print, electronic, and new virtual ones – in a decisive role for prioritizing and marginalizing issues and for creating corridors for action by framing techniques. 6.4  Election Cycles and Veto Players All this has to be addressed against the background of a notorious over-exposure to elections, accompanied by increasing election fatigue on the part of the electorate. Especially in Europe, political elites are caught in an almost permanent election treadmill – people are called to give their votes on European, federal/parliament, federal/presidential, regional and municipal levels and issues. Running almost twenty elections (excluding the local level) over the course of four years is not only a democratic luxury but also a curse for a country like Germany. In addition, formal and informal veto players have to be included in policy changes, or neutralized. This also drags on political processes. This has significant effects on the time horizons of politicians and other decision makers. While the problems enumerated above require a rather medium- to long-term perspective, politicians, bowing to elections, are following ever shorter time horizons. This correlates to the dramatic shortening of time spans in the commercial sector, where CEOs and managers have to make ‘positive’ reports to their strategic investors every three months. 6.5 Acceleration In addition, we are experiencing a situation in which different sub-systems of societies transform themselves ever more quickly. This concerns first and foremost capital markets and financial flows, but also content flows (of information and entertainment) and other culture-related spheres, life patterns and life cycles, and, to some extent, politics. However,

The new global landscape and energy politics in the 21st century  111 there is a significant ‘but’: organizing political decisions and outcomes takes a lot of time, at least in representative democracies. Processes have to be organized, actors need to be integrated into processes, compromises negotiated, potential veto players neutralized or overcome, and procedures need to be observed. Furthermore, one may need to overcome legal options and obstacles. In other words: democracies are seemingly too slow to catch up with the problems they face. Summing up, the political sphere is under pressure from different sides. While electorates and constituencies harbor expectations vis-à-vis politicians and endow them with some legitimacy, the political personnel seemingly in charge hunt after ever more complex problems, bargain for solutions, and lose out in terms of speed against the media. Politics in general and global politics in particular, are in the process of losing agency. Politics cannot be masterminded, engineered, implemented, executed, organized and controlled. Politics in the 21st century is the result of thousands of more or less ad hoc moves by a multitude of actors on different levels of action. It looks ever more ad hocistic.

7.  NEW TECHNOLOGIES Sometimes government intervention, but more often, business and civil initiatives result in new technologies (Internet, social networks, GPS, self-driving cars, virtual reality, artificial intelligence, etc.) and new tools for capital markets (like securitization and highfrequency trading). Related phenomena are the commodification of ever more assets, including time and space, accelerated processes and procedures, game-changing financial assessments of private rating agencies, the increasing flexibility of labor markets, shifting demographics, and the shortening of time horizons, leading to ever-more inconsistencies of political actors’ moves. Also, millions of jobs have been transformed or abolished, and identities irritated. At the same time, millions of opportunities have been created, poverty reduced and mobility enhanced. These major shifts of the last 25 years will continue to develop in the foreseeable future. Given the relative weakening of national governments and eroding state sovereignty, it may be wise to invest much more effort in exploring non-global and non-nation-state bound groups of actors, and their interests and game plans. One important feature of this new landscape of global politics is the enhanced role of city regions, particularly of those that actively try to connect with major flows of capital and content, of resources and people. Against the background of these changes, both Europe and China find themselves in new and, partly, dire straits. The EU is experiencing its most serious crisis ever. At least seven partly interrelated challenges have to be addressed, simultaneously: The ongoing, less visible, but not solved Eurocrisis. This comes along with a high diversity in sovereign debt and a broad spread in dynamism and growth. In addition, the viability of some EU banks is questionable. ● For the first time, Europeans have had to learn that terrorist attacks can hit any place and any time. This is the ‘new normal’, and cannot be prevented all the time. ●

112  Research handbook on EU energy law and policy ● ●







The presence of five or six failing or failed states in the Middle East and North Africa (MENA) area (Afghanistan, Iraq, Syria, Libya, Yemen). A still only partially controlled migration into Europe from the MENA area, partly as refugee movement, partly as a (rather hidden) labor immigration. This process is often unregulated; it is not accepted by some EU societies, and has led to a populist surge in others. A newly assertive Russia that by now has established itself firmly as a spoiler in European (Crimea, East Ukraine) and global (Syria) cases. The current leadership of Russia cannot (and should not) be accommodated. A popular Brexit decision that, for the first time, indicates an EU country leaving the community. The consequences are still not quite clear. But there may be other countries following, depending on future election results – even France. After the elections in the United States in November 2016, there is more uncertainty than ever about the future relations between the EU and the US. This may concern first of all trade issues, as well as common security and defense policies.

But the core issue, running across most of the other challenges, is a wave of rising populism. A growing number of movements, parties and individuals suggest simple and simplified answers for complex problems. People who are irritated about economic issues or, probably more relevantly, identity politics, tend to be beguiled by these populist allurements. Populists are cohabitating in a number of EU governments, and their relevance is increasing in Austria, France, the Netherlands and Germany. Populism significantly affects the external room for action by reducing possible win sets for their respective governments. Making compromises is getting more complicated. China has its own challenges: decreasing growth rates, and a shift of sources of growth toward the domestic level. ● Structurally slowing global growth, and demand, leading to the shrinking of a ­formerly impressive source of development. ● Huge overcapacities, particularly in state-owned enterprises, and related unemployment when these factors are addressed decisively. ● Possible bubbles in the stock market and housing sectors, potentially threatening social stability. ● Recurring uncertainties about the future RMB exchange rates and monetary policies. ● Ongoing conflicts in the South China Sea about competing sovereignty claims. ● The current Chinese regime is on its way to losing the support of young generations in Hong Kong and Taiwan, in Tobe and Xinjiang, and also in neighboring countries (Vietnam). ● The unpredictable rogue behavior of the North Korean leadership. ● Significantly

A common denominator, next to rising populism, in both areas is a high level of uncertainties. What, now, are the possible links to the energy questions? Both the EU and Asia have to import significant amounts of their required energy.

The new global landscape and energy politics in the 21st century  113 When there is not a fully secured, guaranteed inflow of energy, this shapes politics in a significant way: securing sufficient energy flows is a dominant topic, and interest, for both regions. But there is also – or should be – an important signpost for external behavior. When you are dependent on energy (in)flows, this means that both regions – China and the EU – are highly interested in maintaining stability, at least in their immediate vicinity. This is crucial. The only alternatives are, or would be, to either reduce consumption, or to shift to alternative energy sources. The first strategy is not realistic and probably not viable, and the second one is not easy to implement. Germany, the biggest EU economy, has decided to realize a major shift in its energy mix, moving away from both coal and nuclear energy, and trying to reduce the consumption of gas and oil. This is a demanding goal, especially when fracking is also regarded with suspicion. Both the EU and China are exposed to energy-related risks – particularly unstable energy supplies and ongoing climate change, due to the excessive consumption of hydrocarbon-based energy sources. In recent years, there has been some detectable, though not sufficient, increase in awareness about the nature of these risks. In China and the EU, investment in green technologies (especially in Germany, due to the energy turn-around) is on the rise. Also, both the EU and China are part of the Paris climate protection accord, signed in the fall of 2015. Both may be interested in putting pressure on the new US administration to stick to the signed agreement. Against this background, energy security and energy cooperation are heavily contextualized and embedded in a whole range of structural changes and current challenges. Actually, there are so many simultaneous issues to be addressed that an effective and coherent energy strategy should not be expected any time soon, either in the EU or in China. Furthermore, the role of non-state actors should and will be stronger than in the past: economic sectors, NGOs and cities will claim more of a voice in future energy decisions.

8. OUTLOOK Certainly, the coming years will show us if, and to what extent, energy (demand and supply, old and, increasingly, new) sources and connections will bring societies closer together, or put more distance between them. At this moment (the last days of 2016), there is not too much evidence for optimism. Looking at Ukraine in particular, and at the strained relations between the EU and Russia, as well as at the tensions in and around the South China Sea or in the MENA area, energy seems rather to fuel competition and rivalry, and not so much cooperation. It does not look like the need for more cooperation between suppliers and consumers of energy can overcome the tensions produced by a vastly under-regulated globalization movement, by growing uncertainties, challenged identities and underperforming national governments. Populism, i.e. the suggestion of simple solutions for complex problems, will not easily give in to the rational demands of cooperation needs.

7.  The role of the ECT in EU–Russia energy relations Andrey Konoplyanik

1. THE ECT’S ROLE IN THE EVOLUTION OF INVESTMENT AND TRADE PROTECTION INSTRUMENTS IN INTERNATIONAL ENERGY 1.1  From Colonies to Legal Protection of Access to Mineral Resources The origination or pre-history of the Energy Charter Treaty (ECT) as a modern investment and trade protection (or energy security) instrument can be traced back to the colonies. Colonies constituted the very first instrument, ensuring not so much energy security as, more widely, raw materials security (protection of their supplies), passing through two major waves. The first (initial) wave of colonies in the Middle Ages, with then poor and rare infrastructure connections between metropolitan states and their overseas territories, referred mostly to supplies of spices for perfumery and food conservation and other luxury goods. The development of railroads, steam navigation and the telegraph made radical changes in the role of colonies, particularly in terms of improvements in transportation connections. In the 19th century, when industrialization began, the industrialized countries began to use this instrument to gain access to the mineral resources of the developing (underdeveloped) states through establishing control over their territories in order to ensure a reliable supply of raw materials to the metropolitan state. However, maintaining colonial troops and extensive colonial authorities in order to exercise administration of the controlled territories became increasingly expensive over the course of time. The next and less expensive instruments used to ensure a reliable supply of the scarce resources included various types of production agreements between foreign firms and the host states. These agreements provided access rights to mineral resources without the establishment of direct control over the territories of the host state. Initially, traditional concessions were designed. According to such concession agreements, the formal control over a territory belonged to a host state (although in practice the actual control frequently belonged to a concessionaire), and the title to develop mineral resources belonged to a foreign company originating in many cases from the former metropolitan state. The first commercially successful oil concession dates back to 1901 (the D’Arcy Concession in then Persia), which produced the first oil in 1908. Three years later, in 1911, Winston Churchill, who was First Lord of the Admiralty of Great Britain at the time, while taking a decision to convert the Royal Navy Fleet from coal (available in abundance in the Foggy Albion) to petroleum products (produced from crude oil, the main deposits of which were located at that time far beyond the metropolitan country, for example, in Russia, the USA and the Middle East), pronounced his famous phrase: ‘Safety and certainty 114

The role of the ECT in EU–Russia energy relations  115 in oil [supply], lie in variety and variety alone’, thus putting the notion of ­‘diversification’ into the basis of the subsequent models of energy security (­ reliable and uninterruptible energy supply), within the conditions of the constantly ­changing modern world. Later, the instruments, which conferred the title to subsoil resources in place to a concessionaire, were replaced by instruments which established only the right of using these resources – to produce and export them (the host state preserving the sovereignty over natural resources in place). They included the modernized concessions (starting from 1948) and production sharing agreements and risk service contracts (starting from the 1960s). The granting of the right to subsoil use on a fixed-term and reimbursable basis currently constitutes the basis for all these systems of subsoil use licensing, which are based on the public or civil law. It is the wide range of production agreements (petroleum arrangements) concluded by companies from energy-import-dependent industrialized countries with (the governments of) energy-resource-owning developing countries that presents one of the aspects of the concept of ‘diversification’ for users (consumers) of energy resources, ensuring the ‘­reliability’ (security) of supplies for them, as it offers the energy-importing states (the companies of these states) various mechanisms of access to the subsoil resources of the foreign countries owning such resources.1 For a host state, as a sovereign owner of nonrenewable natural resources, the diversification of investment modes of subsoil use applied by it (the diversification of subsoil access modes) constitutes an opportunity to maximize the efficiency of the national subsoil resources development, to choose an optimal and project-specific economic model of resources development, which would allow this state to maximize the monetized (marketed) resource rent, and an investor to receive a reasonable rate of return, taking into account the whole range of country-, corporate- and project-related investment risks. Such an approach (a kind of an investment menu consisting, say, of licenses, concessions, product sharing agreements (PSAs), etc.) is especially relevant for a country that has a large territory with diverse natural, climatic, mining and geological conditions, implying a high degree of diversification in respect of investment project economics in the sphere of subsoil management (for example, Russia).2 But independent of the type of energy project and the mechanism for energy investment (type of production agreement with the host state) and/or the mechanism for raising finance for its development (usually debt finance, especially for large projects), such investments seek protection from non-commercial risks in such a foreign state, which is the most critical item for a foreign investor.  1   My vision of the rationale in global distribution and evolution within the timeframe of investor–host country petroleum arrangements can be found in: A. Konoplyanik, Economic Growth and Investment Regimes in Subsoil Use and its Consequences for Russia (Results of Cross-Country Comparison) // Oil, Gas & Energy Law (OGEL), July 2015, vol. 13, issue 4 (www.ogel.org).  2   For more details of my vision on this see: A. Konoplyanik, Multiple Investment Regimes for Russian Subsoil Resources: Work in Progress or Utopia? (Chapter 2, pp. 29–60) in: Foreign Investment in the Energy Sector: Balancing Private and Public Interests. Edited by Eric De Brabandere and Tarcisio Gazzini // Brill-Nijhoff, Nijhoff International Investment Law Series, June 2014; A. Konoplyanik, Alternative Investment Regimes for Direct Foreign and Domestic Investments in Russian Subsoil // Harriman Institute Occasional Paper 2013, The Harriman Review Occasional Paper Jan 2013, vol. 19, no. 1 (2013) (http://www.harrimaninstitute.org/research/harri​ man_review.html).

116  Research handbook on EU energy law and policy This is why key provisions of such agreements were later either incorporated in the internal domestic legislations of the host states as a set of general rules, or such individual agreements were ratified by the parliaments of the host states, thus receiving the status of law. 1.2  Following the Evolution of Energy Markets One of the dominant factors of the development of energy markets is their greater internationality and eventual transformation into global markets as a result of the increasingly cross-border nature of energy value chains and the formation of the energy infrastructure (mostly fixed, immobile infrastructure such as grids, pipelines, terminals). Local markets of individual countries become integrated by the increasingly developed and diversified infrastructure, first into international markets and then into global markets. Nowadays, there is a well-developed and functioning global oil market consisting of two segments: ‘physical’ and ‘paper’ markets.3 The global gas market is still in the making, with regional pipeline gas markets being increasingly connected (integrated) into a single global gas market by the liquefied natural gas (LNG) supply infrastructure. In the long run, formation of a single global energy market can be expected based on the feasible principle of interchangeability (mutual technical substitution) of energy resources in the end-use.4 With globalization of energy trade and investment flows, and energy markets becoming more and more international, investor protection/stimulation mechanisms are evolving, as well being adjusted to the state of development of the energy markets. As a common trend, we can consider the evolution of such instruments from those related to specific projects (investments into individual projects are specifically protected) to nationwide legal instruments (the same equal rules of the game are established for the whole economy), and further to supranational cross-border international legal instruments (the rules of the game are harmonized within a number of countries) – first bilateral, ­afterwards multilateral ones (see Figure 7.1). With a wider variety of energy resources involved in economic circulation, a broader and more sophisticated range of applied technologies, relocation of the main p ­ roduction  3   Whether it is stable and efficient is an entirely different matter. My critical view on the AngloSaxon model for open, competitive, liquid and, therefore, highly speculative markets can be found here, for example: A. Конопляник, Кто определяет цену нефти? Ответ на этот вопрос позволяет прогнозировать будущее рынка «черного золота» // «Нефть России», 2009, № 3, с. 7–12; № 4, с. 7–11; В.В. Бушуев, А.А. Конопляник, Я.М. Миркин, Цены на нефть: анализ, тенденции. Прогноз // M.: Энергия, 2013.  4   My view on the evolution of the international energy markets, their development trends from physical energy to paper energy markets, can be found, for instance, here: А. Конопляник, Мировой рынок нефти: возврат эпохи низких цен? (последствия для России) // ИНП РАН, Открытый семинар «Экономические проблемы энергетического комплекса», второе заседание, 26 мая 1999 // Москва, изд-во ИНП РАН, 2000; А. Конопляник, Россия на формирующемся Евроазиатском энергетическом пространстве: проблемы конкурентоспособности // M.: Нестор Экономик Паблишерз, 2004; В.В. Бушуев, А.А. Конопляник, Я.М. Миркин, Цены на нефть: анализ, тенденции. Прогноз. – M.: Энергия, 2013; А. Конопляник, Эволюция рынков нефти и газа: закономерности движения от рынков физической к рынкам бумажной энергии (с.163–78). – в сб.: Седьмые Мелентьевские чтения. Сборник научных трудов / под ред. А.А. Макарова // М.: ИНЭИ РАН, 2013. – 214 с., and others.

Oil

Global common energy market

World markets of individual energy resources

Globalization

Regional

Internationalization

Local

Energy markets

Energy efficiency Investments + Dispute settlement + Transit

+

+

+

!?

Multilateral

+

Bilateral

[partly]

EU Acquis (28+8)

WTO (159)

2756 BITs 2927 DTTs

01.06.2010:

BITs, DTTs

e.g. EU: derogation from mandatory TPA (2nd Gas Directive: Arts 21–22; 3rd Gas Directive: Arts 35–36)

e.g. RF: Concessions, Free Economic Zones, PSA

Concessions (traditional, modernized), PSA, risk-service contracts, etc.

e.g. RF: Tax Code, subsoil & investment legislation

Trade

ECT (52)

Increase of general level of investment attractiveness of domestic legislation

International law instruments

+

National legislation

Enclaves of stability & investment stimuli in unstable/non-stimulating legal-economic environment

Mechanisms of investment protection / stimulation, incl. enforcement mechanisms

Figure 7.1 Development of international energy markets and mechanisms of investment and trade protection & stimulation

ECT (54) = 1431 BITs

Gas

117

118  Research handbook on EU energy law and policy sites to the regions with less favorable natural, geologic and climatic conditions, and further internationalization of energy value chains, the nature and level of required investment protection and stimulation are also changing. At the previous stages of development of society, within the earlier social and economic formations, the major instrument of such protection (and assuring the security of raw material supplies to mother countries) was the use of pure force, such as the seizure of the colonies to ensure security in terms of their purely raw-exports role, and thus deploying there considerable military forces to protect production facilities and raw materials transportation routes. During the course of time, methods of pure force were succeeded by a combination of power and diplomatic and legal instruments. With the development of the institution of private property, the role of legal protector of investor rights for internal markets has become more important. As the state institutions (and later democratic institutions) have been developing and strengthening, and the rule of law has been acquiring greater importance in daily life, including in the economic area, application of such instruments has become more effective and their role within the above-mentioned combination has been steadily increasing. Numerous legal instruments of investment protection and stimulation are developing in parallel to the evolution of energy markets – from national to international and global ones. All these instruments together are applied to relations between economic entities (market participants), between economic entities and individual states (both mother and host countries), and between individual countries as well. Moreover, every subsequent legal approach usually supplements earlier approaches rather than substitutes them. Thus, broader competitive opportunities are assured for states and investors to achieve their goals – to protect their national and business interests. At some point, host states as resource owners start to develop investment protection and stimulation mechanisms on the national level, first within project-oriented legal structures and, as a rule, on the demand of investors (usually foreign investors). Thus, development of the economic and legal environment to protect justifiable interests of domestic and foreign investors normally begins with the appearance of ‘enclaves of stability’ for individual projects, for example concessions and/or PSAs (production-sharing agreements), which are often given the power of the law. This usually happens in unstable (or in the absence of adequate) legal environments, and is required to minimize non-commercial investment risks. The absence of such an environment may result either from the early stage of development of domestic legislation (for example, in developing/underdeveloped economies), or from a radical change in the political and social development patterns, which predetermines rejection of the previous approach and the need to develop a new legal system (for example, in transitional economies, like former Soviet Union (FSU) and/or former Council for Mutual Economic Assistance (COMECON) states in the 1990s). Although, ‘enclaves of stability’ for individual projects may also be required in the liberalized economies, in the case that liberalization rules tend to increase investment risks by violating the balance between demand for competition and demand for investment protection, by, say, introducing mandatory third party access (MTPA) to energy infrastructure (as in the EU with the development of its sequent Energy Packages, see below). Next steps are usually focused on raising the level of protection of the justified interests of investors by improving the general quality of national legislation. This is achieved by the improvement of the general principles of the investment protection existing in

The role of the ECT in EU–Russia energy relations  119 a country and, further, taking a more balanced approach to particular segments of legislation directly affecting investment activities: relating to subsoil, tax, equity, investment, bankruptcy, and so on. At the same time, project-oriented legislation may also be applied, even on a broader scale, based on the ‘not instead of, but together with’ principle. Furthermore, such project-oriented legislation may cover entire groups of projects (either similar or not), implemented within special ring-fenced territories, within which the projects are given more favorable economic conditions, or ring-fenced group of similar projects of the same type though in different territories (say, projects referring to the development of marginal or depleted fields or those located in severe natural environments, etc.). This approach is generally also the basis for legislation on special (free) economic zones. Otherwise, there may be targeted measures for further stimulation of investments in individual groups of projects of national economic importance located (usually this refer to upstream projects) in natural conditions that put a considerable strain on their economics (e.g., in undeveloped or remote regions that in addition to the project infrastructure require the creation of general economic infrastructure, the cost of which will nevertheless be included, as a general rule, with the project costs). As was mentioned above, the creation of ‘enclaves of stability’ or ‘targeted’ investment stimulation measures can take place not only in developing and/or transitional economies but also in the countries classified as developed market economies. In my opinion, this is the way to interpret, for example, derogations from the Second (Arts 21–22) and the Third (Arts 35–36) EU Gas Directives5 related to protection of economically reasonable (in view of project financing requirements) interests of investors. These derogations offer a procedure for temporary (time-limited) exemption from, say, implementation of MTPA to the infrastructure of new investment gas projects within the EU. As is known, MTPA has been a legislative obligatory rule in EU energy since 2003. But this general rule has been de facto discriminating against new investments in increasing gas supplies to the EU, and especially mega-investments from beyond the EU, since MTPA, inter alia, increases the risk of so-called ‘contractual mismatch’, which questions investment pay-back (see below). For this reason, such derogations were necessary for long-term capital-intensive investments in the creation of the EU gas supply infrastructure within the existing general economic and legal environment of the EU, which is in conflict with the principles of project financing. This is why almost all new major capital-intensive infrastructure projects since 2003 in the EU (when the Second EU Energy Package came into force) – pipelines-interconnectors, LNG terminals, etc., almost 40 in total6 – were developed not based on the core liberalized rules of EU legislation (Directives, etc.), but based on derogation from these rules. This adds further bureaucracy but enables investment stimuli for such projects.

 5   Directive 2003/55/EC of the European Parliament and the Council of 26 June 2003 concerning common rules for the internal market in natural gas and repealing Directive 98/30/EC, OJ 2003, L176/57; Directive 2009/73/EC of the European Parliament and the Council of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/ EC, OJ 2009, L211/94.  6   D. Khandoga, Exemptions for New Infrastructure in the EU Regulation. Presentation at the IX International Conference ‘Energy Dialogue Russia-EU: Gas Aspect’, 14 May 2014, Brussels.

120  Research handbook on EU energy law and policy 1.3  From Bilateral Treaties to Multilateral Agreements Within the globalizing energy world, with the growing interdependence of the market players, their challenges soon become common within the cross-border energy value chains, and, to be addressed, common challenges require common approaches and rules. For this reason, further development of legal instruments of investment protection has inevitably reached the international level. Initially, this took place through advanced expansion of the system of bilateral agreements: Bilateral Investment Treaties (BITs) and Double Taxation Treaties (DTTs).7 Since the trade flows always precede the investment flows, DTTs entered into international practice earlier compared to BITs: the first DTT appeared in the 1920s, while the first BIT only in 1959. At first, BITs were signed between a developed country and a developing country, usually at the initiative of the more developed country. The developed economy (usually a capital exporter) concluded the BIT with a less developed country (usually a capital importer) to ensure additional higher standards of legal protection and guarantees for investments made by the companies of the mother country in comparison to the national legislation of the host country. The developing economy usually entered into the BIT regarding it as one of the elements of a more favorable i­nvestment climate that would attract foreign investors. However, the situation changed in the late 1980s and especially during the 1990s, with an increasing number of BITs signed within the group of developing and transitional economies. The number of the latter has increased due to the dissolution of the USSR and the COMECON system. Thus, the clearly marked dividing line that existed previously between BIT parties (capital exporters and capital importers) no longer exists, since the countries tend to conclude BITs with a dual goal: to protect domestic investors expanding overseas and to attract foreign investments from the BIT partner country. This has dramatically increased the number of BITs concluded since the 1990s and made the BIT practice a ‘two-way street’. As of 1 June 2010, there were already 2,756 BITs and 2,927 DTTs8 (Figure 7.1). However, they were concluded at different times and between different countries, and at first were not very unified. This was emphasized by UNCTAD in one of its annual investment reports.9 Every country, especially the more economically powerful states, tried to sign bilateral legal agreements based on their own models of such documents to gain an advantage in ‘partnership’ with a weaker player. Sometimes such a ‘model’ is approved by the national law. This is the reason why the aggregate body of bilateral agreements is neither highly homogenous nor balanced with regard to their terms and conditions. At a certain stage, this required development of model bilateral agreements, which were offered by national authorities, business associations, and/or international institutions. However, these agreements, even if based on certain model approaches, might not present fully unified (and far less commonly interpreted) and balanced ‘rules of conduct’ within a broader inter-

  For the detailed description, see UNCTAD publications.   World Investment Report 2010. UNCTAD, 2010, p. 82.  9   World Investment Report 2006. UNCTAD, 2006, p. 29.  7  8

The role of the ECT in EU–Russia energy relations  121 national community. Therefore, at a certain stage, this creates an economic need to form the respective multilateral international legal instruments that would, on the one hand, maintain all the advantages of bilateral mechanisms but, on the other hand, possibly be free of their disadvantages. Thus, at certain stages of market development (including energy markets development), generally when a high level of their internationalization is reached, there appears an objective need to unify the ‘rules of the game’. This applies to both unification of economic deals between enterprises (e.g., contractual relationship and types of international contracts) and relations between the host country and investors (both domestic and/or foreign), including investment protection standards. The most widely known multilateral agreements include the international code of trade rules GATT/WTO (1947/1995), the Treaty of Rome (1958), which laid the foundation for the EU, and a number of other multilateral agreements related to investments, such as the North American Free Trade Agreement (NAFTA), a similar organization of Latin America countries (MERCOSUR), the Organisation for Economic Cooperation and Development (OECD), and the Asia-Pacific Economic Cooperation (APEC). The sectoral Energy Charter (that covers the energy sector to a large extent), the legally binding Treaty to the Charter, and other related documents should also be included in the list of such strategic multilateral agreements in the global economy. There are other specialized organizations related to the energy sector: the Organization of Petroleum-Exporting Countries (OPEC), the International Energy Agency (IEA), the International Energy Forum (IEF), the United Nations Economic Commission for Europe (UNECE with a broader mandate than the energy sector only) and the International Atomic Energy Agency (IAEA), plus specialized organizations of regional cooperation (in the Black Sea and Baltic regions), and so on.10 However, the ECT is the only multilateral legally binding agreement addressing the broadest range of issues concerning energy investment activities and covering the full investment cycle, as well as the whole energy value chain in the fuel and energy sector. The chief advantage of multilateral instruments over bilateral instruments is that they unify the rules of the game (leveling out the standard of protection), at a lower cost and in a shorter timeframe. The example of the ECT provides clear evidence of this: its ‘aggregate force’ within the framework of its 54 signatory states is equivalent to 1,431 BITs combined (see Figure 7.1). Moreover, the negotiations before the ECT was signed (1992–1994) took only three years, plus 18 months (July 1990 to December 1991) to negotiate the pre-ECT political declaration known as the European Energy Charter. 10   On the complementarity and actual hierarchy of international energy organizations in the sphere of investments, see: А. Конопляник, Когда один договор стоит тысячи // «Нефть России», 2007, № 4, с. 7–10, № 5, с. 10–13; A. Konoplyanik, T. Waelde, Energy Charter Treaty and its Role in International Energy // Journal of Energy and Natural Resources Law, November 2006, vol. 24, no. 4, pp. 523–58; Т. Вальде, А. Конопляник, Договор к Энергетической Хартии и его роль в мировой энергетике. // «Нефть, газ и право», 2008, № 6, с. 56–61; 2009, № 1, с. 46–50; № 2, с. 44–9; № 3, pp. 48–55; A. Konoplyanik, Multilateral and Bilateral Energy Investment Treaties: Do We Need a Global Solution? The Energy Charter Treaty as an Objective Result of the Evolution of International Energy Markets and Instruments of Investment Protection and Stimulation (Chapter 4, pp. 79–123) in: Research Handbook on International Energy Law. Edited by Kim Talus // Cheltenham, UK & Northampton, MA, USA: Edward Elgar, 2014.

122  Research handbook on EU energy law and policy By contrast, it took the international community over 50 years (1959–2010) to conclude 2,756 BITs – only twice as many as the number of BITs equivalent to the ‘aggregate force’ of the ECT. In other words, it took at least ten times longer, and even more labor, intellectual, financial and other resources to prepare a number of bilateral instruments with the ‘aggregate legal force’ equivalent to a corresponding multilateral tool. I think it is obvious how many years the ECT has ‘saved’ for the international community to create a (minimum standard of a) more favorable investment climate in its member countries and reduce investment risks and costs of borrowed funds (of raising capital),11 notably in the area of investment stimulation and protection for the projects in the most capital-intensive and high-risk industries. Every stage of historical development begins at a historically conditioned time, not earlier and not later. Such a time for the Charter process and the ECT as its major ­instrument came in 1990.12

2.  ENERGY SECURITY AND DIVERSIFICATION Initially, the primary focus in investment and trade protection measures in international energy was on the issue of ‘security of supply’ (SoS), which is only one aspect of the more complex concept of (international) energy security. This is understandable, as the

11   On my vision of major types and conditions of the key mechanisms of financing investment projects in oil and gas, see: А. Конопляник. Основные виды и условия финансирования инвестиционных проектов в нефтегазодобывающей промышленности (учебное пособие по курсу «Эволюция международных рынков нефти и газа»). РГУ нефти и газа им.Губкина, 2011 г., 61 с.; Financing Russian Oil and Gas Sector: The Effects of International Law Instruments // Journal of World Investment, vol. 4, no. 6, December 2003, pp. 941–62. 12   For a detailed description of my vision of the historical development and critical issues of the Energy Charter process and its political and legally binding instruments, see my publications and presentations at www.konoplyanik.ru and in particular: A. Konoplyanik, The Energy Charter Treaty: A Russian Perspective (pp. 156–78) in: Centre for Petroleum & Mineral Law & Policy, University of Dundee. European Energy Charter Treaty: An East-West Gateway for Investment & Trade (International Energy and Resources Law & Policy Series) // London, The Hague, Boston: Kluwer Law International, 1996; А. Конопляник, Foreword, Chapters 4 and 22 in: Договор к Энергетической Хартии – путь к инвестициям и торговле для Востока и Запада (под ред Т.Вальде – англ.изд. и А.Конопляника – рус.изд) // М.: Международные отношения, 2002; А. Конопляник, Энергетическая Хартия и экономика России: роль процесса Энергетической Хартии в повышении конкурентоспособности России на мировых рынках энергии и капитала. ИНП РАН, Постоянно действующий семинар «Экономический рост в России: проблемы и перспективы», Открытый семинар «Экономические проблемы энергетического комплекса», Совместное заседание от 1 октября 2003 г. // М: Изд-во ИНП РАН, 2003, 63 с.; A. Konoplyanik, A Common Russia-EU Energy Space (The New EU-Russia Partnership Agreement, Acquis Communautaire, the Energy Charter and the New Russian initiative) (pp. 45–101) in: EU–Russia Energy Relations, Legal and Political Issues // Euroconfidentiel, Brussels, Belgium, January 2010; A. Konoplyanik, Russia and the Energy Charter: Long, Thorny and Winding Way to Each Other (pp. 185–225) in: German Yearbook of International Law (Jahrbuch Fur Internationales Recht), Volume 56, 2013 // Berlin: Duncker & Humblot, 2014; А. Конопляник, Россия и Энергетическая Хартия (Учебное пособие по курсу «Эволюция международных рынков нефти и газа») // РГУ нефти и газа им.Губкина, 2011 г., 80 с.

The role of the ECT in EU–Russia energy relations  123 very concept emerged in the importer countries (here we should recall the remarks of Churchill). Today in the world of cross-border energy supplies, international ‘energy security’ means a triad consisting of ‘security of supply’ (SoS) for the importer, ‘security of demand’ (SoD) for the exporter, and ‘security of infrastructure’ (SoI) (security of cross-border/transit flows)13 for both. 2.1  Different Aspects of Energy Diversification The term ‘security of supply’, via the term ‘diversification’, is usually interpreted as the multiplicity of (foreign) supply sources, (cross-border) delivery routes and (national and foreign) suppliers on/to the market of a consumer country. The most rigorous interpretation of ‘supply diversity’ means the multiplicity of suppliers on each delivery route from each source of supply. For this very reason (i.e., in virtue of such a rigorous position), the European Union considers, for example, that new gas pipelines coming from Russia to the EU market, allegedly, do not facilitate (do not meet the requirements of such an interpretation of the term) ‘diversification’, as they are related to only one Russian gas exporter – Gazprom, notwithstanding that such a single pipeline-gas export channel is constituted by the law of the resource-owning sovereign state within ‘sovereign–agent’ relations. Energy markets in the course of their development evolve from the stage of intensive growth to the stage of saturation, to mature markets, and therefore they become more competitive (due to evolving oversupply) and volatile (due to development of paper energy markets). Thus the behavior of market prices becomes less predictable. This is why the producers and exporters need to balance the growing uncertainty in the destined market’s behavior, on the one hand, and the growing capital intensity and investment risks related to development of new deposits of conventional energy resources (as the related geological conditions in producer states worsen, transportation volumes to markets and related difficulties increase, etc.), on the other hand. Thus the need for instruments ensuring more reliable demand for energy resources – ‘security of demand’ (SoD) – arises. It is against this background that long-term contracts (LTC) appeared. They contain ‘take-or-pay’ clauses (and are primarily an investment instrument, which provides for debt financing of capital-intensive long-term investment projects), while their pricing formulas are based on the replacement value of competing energy resources,14 which align (a 13   It would be more proper to call it ‘security of deliverability’, but in this case it would be abbreviated in the same way as ‘security of demand’ – both will be abbreviated as ‘SoD’. This is why, to distinguish the two when abbreviated, I use the term ‘security of infrastructure’ (SoI). I decided not to use the term ‘security of transit’ since ‘transit’ means a cross-border flow, but security of deliverability matters not only in the case of cross-border flows, but also in the case of internal energy flows within the unbundled domestic markets (when/where the issue and risk of ‘contractual mismatch’ appears), which also can hamper ‘security of deliverability’. This is why I prefer to use the term ‘security of infrastructure’ which could refer both to domestic supplies within unbundled energy markets and to cross-border energy supplies. 14   In the periods of under-supply this means the competing of alternative fuels, e.g. gas vs. petroleum products, as in the basic ‘Groningen formula’ and in standard Russian supply LTC to the EU; and in the periods of over-supply this means, firstly, competition with alternative suppliers of the very same fuel, e.g. ‘gas-to-gas’ competition in the current EU.

124  Research handbook on EU energy law and policy narrow corridor of) price fluctuations, on the one hand, and prevent price collusions, on the other hand.15 This also implies the diversification of markets as a possibility to choose markets with higher demand and/or prospects for demand growth, and lower price fluctuations; for example, to gain entry into a market, which has not yet reached the saturation stage, where the demand has not started to stagnate, and where an oversupply, which pushes prices down, has not occurred yet. Any state being the owner of subsoil and its state-owned companies, the latter acting as agents of their sovereign in respect of the natural resources development,16 is economically interested and has a legal (sovereign) right to maximize resource rent collection from the development of its nonrenewable natural (energy) resources. Hence, producers of energy resources are interested in entering markets where they would receive the highest possible marketable resource rent monetized in the long run, taking into account the long investment cycles of natural resources development projects.17 This is why Russia (sovereign) and Gazprom (agent), for instance, have been interested in supporting petroleum product indexation formulas in Gazprom’s LTC with Europe for different reasons in different historical periods: at the very beginning of Russian (then Soviet) gas supplies to Europe (since the end of the 1960s) it implemented the LTC model with the ‘Groningen formula’ since gas had been really competing with petroleum products for its competitive niche in the EU economies. Later on, and especially in the 2000s and up to 2014, when oil prices stood high, oil indexation provided Gazprom with the opportunity to earn the highest possible marketable resource rent, notwithstanding that physical competition between gas and petroleum products in terms of end-use (industry, electricity generation, households) had almost come to an end since the consumption of petroleum products in these industries had diminished to a minimum. In the period of gas oversupply in the EU (since 2009), when the role of ‘gas-to-gas’ competition has increased and spot gas prices have fallen below oil-indexed contractual prices, Gazprom has managed to stay competitive by, for instance, implementing retroactive settlement of the price disputes with its EU counterparts. 2.2  Energy Security – a Multilateral Challenge The sovereignty of states over their natural resources is historically protected by such multilateral international legal acts as the UN General Assembly Resolution No.1803 of 1962 15   For more details, see: Putting a Price on Energy: International Pricing Mechanisms for Oil and Gas // Energy Charter Secretariat, Brussels, 2007. 16   Like the Russian Federation and Gazprom which acts as ‘sovereign vs. agent’ in the gas industry, including the external gas trade. 17  See: Putting a Price on Energy: International Pricing Mechanisms for Oil and Gas // Energy Charter Secretariat, Brussels, 2007; А. Конопляник, Российский газ в континентальной Европе и СНГ: эволюция контрактных структур и механизмов ценообразования. ИНП РАН, Открытый семинар «Экономические проблемы энергетического комплекса», 99-е заседание 25 марта 2009 г. // Москва, Изд-во ИНП РАН, 2010 г., 102 с.; А.Конопляник. Экономическая подоплека газовых проблем в треугольнике Россия-ЕС-Украина и возможные пути их решения. ИНП РАН, Открытый семинар «Экономика энергетики (семинар А.С.Некрасова)», 152-е заседание от 21 октября 2014 г. // Москва, Изд-во ИНП РАН, 2014 г., 132 с.

The role of the ECT in EU–Russia energy relations  125 and Article 18 of the Energy Charter Treaty of 1994 (the ECT entered into force in 1998). Therefore, the reliability (security) of demand and supply may be simultaneously ensured only subject to finding an area of coincidence of producers’ and consumers’ interests, within the limits of only partially coinciding interests within this range. This predetermines the inevitability of international cooperation between the parties. Either of them (both exporter and importer) can be interested in diversification, i.e. in greater opportunities for choosing its counterparts. However, if consumers are interested in a greater access to resources, i.e. in a greater range of supply sources and routes of delivery from these sources, a wider number of suppliers and a reduction in import prices, the producers are interested in a greater market access, i.e. in a greater range of markets and routes of delivery to these markets, number of buyers and sustainably high, but competitive prices. In addition, either of them may be interested in ensuring the reliability of energy resources delivery to markets (security of deliverability): the reliability and continuity of long-distance and, as a rule, cross-border (transit) transportation through territories of other sovereign states. This is what ‘security of infrastructure’ (SoI) means. After all, points of production of subsoil resources usually are concentrated/located far from the points of consumption. Therefore, in 2006, on the eve of the Saint Petersburg G8 Summit held under the Presidency of Russia, where for the first time the agenda of G8 included the issue of international energy security, the Energy Charter Secretariat (ECS) put forward an initiative to add this third element – SoI – to the multi-facet concept of ‘international energy security’ and to consider the latter as an inseparable triad: security (reliability) of supply (SoS), demand (SoD), and transit or cross-border transportation (SoI). G8 agreed then with such a proposition. Moreover, many documents of that G8 Summit related to the issue were prepared based on the ECT. Since that time, the elements of the said triad of energy security have been further developed, but they also require solutions on a multilateral basis. For example, the issue of energy transit received a new dimension in connection with the upsurge of piracy in international waters starting from the middle of the last decade, when oil prices skyrocketed, followed by the value of seized cargo. The level of piracy motivated the largest (since the Caribbean crisis) navy operation, with the involvement of the naval forces of different states. Combating piracy in international waters is a task requiring multilateral solutions, as does energy transit.18 It is necessary to understand whether it has specific energy dimensions, which require specialized discussion and respective multilateral solutions from the point of view of energy security. A search for a multilateral optimal solution to ensure international energy security is an objective reality and a necessity at the current stage of energy markets development, especially in Eurasia. Producers, consumers and transit countries are interdependent as they are connected not only by trade and investment relations, but also technologically – via capital-intensive fixed infrastructure, which predetermines long-term relations of the parties.

18   У. Руснак, А. Конопляник, Эволюция модели энергобезопасности. Россия и ДЭХ: не остаться на обочине // «Нефтегазовая Вертикаль», 2015, № 10, с. 4–12.

126  Research handbook on EU energy law and policy Therefore, today it is better to speak not so much about building pair-wise relations between countries and/or groups of countries (e.g., between Russia and EU) or regional relations according to the rule of geographical distribution (e.g., within the geographical Europe), as about the search for a balance of interests within the ‘Broader Energy Europe’, i.e. within the geographical space consolidated by such fixed infrastructure (networks of pipelines, transmission lines, etc.)19 (although one does not cancel the other). The ‘Broader Energy Europe’ encompasses the whole of geographical Europe (including the EU countries), Russia (located in Europe and in Asia), and countries of the Middle East and North Africa, and tends to expand as the common Eurasian (EuroAsian) energy space is created through the development of new capital-intensive fixed immobile infrastructure, which connects the ‘Broader Energy Europe’ with the AsiaPacific and Middle East countries and other parts of Eurasia. Within this space any optimal solution (including that of providing for a multi-vector ‘international energy security’) may be only multilateral, taking into account the justified interests of all participants of the community, which expands as a new capital-intensive, fixed, immobile and long-term infrastructure is being developed. If the task is a multilateral and long-term one, by definition, then the search for mechanisms and instruments for its solution may be also only multilateral and oriented at balancing the long-term interests of the parties. There is only one such instrument in the energy sector of the modern world. It is the legally binding ECT and the related documents signed in 1994, which entered into force in 1998; a total of 52 states, including Russia, have signed them to date.

3. THE EU PERSPECTIVE: WTO, THE EU ACQUIS AND THE ECT Among the above-mentioned multilateral international legal instruments which are (or may be) relevant to the energy sector and can be used to some degree for protecting investments abroad, there are, in my view, only three which are most visible in the public arena, are discussed alongside bilateral instruments, and enjoy the highest public awareness: the WTO, EU legislation (acquis communautaire), and the ECT (Figure 7.1). While these three instruments are different and not interchangeable, they do have areas of mutual 19   My vision of the ‘Broader Energy Europe’ concept is described in more detail in: A. Konoplyanik, A Common Russia–EU Energy Space: The New EU–Russia Partnership Agreement, Acquis Communautaire, the Energy Charter and the New Russian Initiative (pp. 45–101) in: EU–Russia Energy Relations, Legal and Political Issues // Brussels, Belgium: Euroconfidentiel, January 2010; A. Konoplyanik, A Common Russia–EU Energy Space: the New EU–Russia Partnership Agreement, Acquis Communautaire and the Energy Charter // Journal of Energy and Natural Resources Law, vol. 27, no. 2, May 2009, pp. 258–91; А. Конопляник, «Третий путь» для России. Москве предстоит выбрать один из трёх вариантов построения общего энергетического пространства с ЕС // «Нефть России», 2009, № 6, с. 16–21; № 7, с. 14–19; № 8, с. 11–16; № 9, с. 13–18; А. Конопляник, Европа – больше чем Европа. Третий энергетический пакет ЕС будет иметь последствия и за пределами Евросоюза //«Нефть России», 2011, № 4, с. 56–61; № 5, c. 60–67; №7, с. 48–51; №8, с. 79–83.

The role of the ECT in EU–Russia energy relations  127 application and intersection, in which areas they might compete with or complement each other (sometimes just dependent on the time-frame, as between the EU acquis and the ECT). The EU is a full member of the WTO and the ECT (in the latter case in a dual capacity: as a selection of individual EU Member-States and as the EU as a whole). It applies its EU legislation not only within the EU territory, but energy and competition EU acquis is applicable within the Energy Community area. Russia is a full member of the WTO, does not apply EU legislation in its territory, and is not a Contracting Party to the ECT (since it has not ratified the ECT and discontinued its provisional application in 2009), but remains a signatory to the ECT; that is, it has the same status as ECT member states like Norway and Australia.20 This can sometimes create confusions, as happened, say, in 2003–2004 with the socalled ‘Lami package’ to Russia, regarding, in particular, the following debate on the issue: whether it is GATT/WTO Art. 5 ‘Freedom of Transit’ or ECT Art. 7 ‘Transit’ which should dominate in Russia–EU relations in regard to energy transit via immobile crossborder fixed energy infrastructure (which had not physically occurred in 1947 when the GATT was signed).21 3.1  WTO and the ECT The ECT and the WTO have different targeted application areas and geographical coverage. The WTO is broader in its application geography (three times broader: 159 member states compared to 52) and industry coverage (all industries), but far narrower in its targeted coverage area (trade only). The ECT, however, as an industry-specific treaty (only covering energy industries and energy-related equipment), is more multifaceted in its targeted coverage area (see Figure 7.1), covering the full investment reproduction cycle in the most capital-intensive (energy) industries. Moreover, the ECT’s openness to new members gives it scope for further geographical expansion: that is, its potential coverage is as broad as the WTO’s. The ECT’s trade section is based on GATT/WTO provisions. The WTO, however, lacks ECT-equivalent investment provisions and therefore also lacks investment dispute resolution mechanisms. GATT/WTO Article 5 (Freedom of Transit) is far narrower than ECT Article 7 (Transit), since when GATT was signed back in 1947, there was practically no cross-border transportation (transit) of energy sources via pipelines happening anywhere in the world. Hence, ECT Article 7 takes account of stationary cross-border infrastructure transit risks which did not exist when GATT rules were written (and thus were not reflected in GATT/WTO Article 5). Therefore, the WTO and the ECT are not competing or alternative international legal instruments for protecting investments abroad. Moreover, the WTO is not, in my view, an instrument for protecting Russian energy investments abroad (and cannot be regarded

20   Among other signatory states which have not long ratified the ECT, Iceland has recently ratified the ECT and Belarus has been applying the ECT on a provisional basis. 21   А. Конопляник, Саммит Россия – ЕС: энергетические итоги. – «Нефтегазовая вертикаль», 2004, №10, с. 10–12.

128  Research handbook on EU energy law and policy as such an instrument) – this would be an inaccurate and groundless expectation. So, the perceptions, at some time, of Russian authorities that the WTO could substitute for the ECT in addressing the justified concerns of Russia at the international markets, were not substantiated. But the ECT, should it be ratified by Russia (which I do not see happening in the foreseeable future, at least not within the current political cycle, no matter how long it will last), will definitely be such an instrument – protection of foreign investment abroad is one of the main purposes of the ECT, whether it is Western investment in the East, or Eastern investments in the West. 3.2  EU Acquis Communautaire Development Logic To start with, the EU has been, is, and will remain for a very long time to come, Russia’s main energy market. Russian companies will continue entering the EU market more and more intensively, despite the turbulence of current political circumstances. Hence, effective instruments for protecting their operations in this market will be required. So, it is necessary to understand the logic of how instruments of law (including energy law) take shape in the EU. In my view, this logic is rooted in the 1957 Treaty of Rome on the formation of the EU, which proclaimed freedom of movement within the EU for goods, services, people, capital, etc. Freedom of movement is to be based on the liberalized EU legislation where the rules for increasing competition are the key priority. Hence, there are two processes which started developing in different sectors/industries of the EU economy at different times, due to the varying capital intensity of those sectors/industries: a rising level of liberalization within the EU acquis’ application area; and a geographical expansion of the EU acquis application area as such (see Figure 7.2). Energy is one of the most capital intensive industries of the economy. And within the energy sector the gas industry and power generation are much more capital intensive than other energy industries. This would appear to be why the turn of these sectors for liberalization (i.e. starting practical application of instruments ensuring the freedoms proclaimed in the Treaty of Rome) did not arrive until the late 1990s, when the First EU Energy Directives were adopted (in 1996 in electricity and in 1998 in gas), which pushed forward the liberalization process within the EU energy economy. These two processes are implemented by means of instruments of ‘hard’ and ‘soft’ law. The ‘hard’ law instruments in place to ensure higher liberalization levels for EU energy legislation are a consistent series of EU Energy Packages, each one including several Directives and Regulations: the EU First Energy Package (1996/1998); Second Energy Package (2003); and Third Energy Package (2009). The EU’s policy of expanding the application area for EU energy legislation beyond the EU’s borders is aimed at ensuring operational standards and protection for European investments abroad, in line with their operation conditions and protection within the EU. In effect, this means that the international expansion of EU legislation leads to lower transaction costs for European investors abroad and makes them more competitive. The geographical coverage goal for EU legislation’s international expansion is, in my view, all of the ‘Broader Energy Europe’: that is, the territory of all European, Asian and African states linked to the EU market by stationary energy infrastructure. The direction of this expansion runs from the EU (the end consumer market) upstream along the main energy

The role of the ECT in EU–Russia energy relations  129 Treaty of Rome, 1957 Increase of liberalization level within the geographical area of EU acquis application Hard law instruments (domestic)

Expansion of the geographical area of EU acquis application

Hard law instruments (international)

EU = one of ECT Contracti 1. First EU Energy Package Parties ng 0. EU enlargement (6 =>28)

(1996/1998) 2. Second EU Energy Package (2003) 3. Third EU Energy Package (2009) 4. … (???)

Third EU Energy Package (2009) comes from Treaty of Rome (1957)

1. Energy Charter Treaty (ECT) (1994/1998) 2. Energy Community Treaty (ECOMT) (2006) ECOMT = ar ea 3. … (???) of EU

acquis application

Soft law instruments (international)

- Neighborhood Policy (2004) - Eastern Partnership (2006) - … (???)

One of the factual aims of international expansion of EU acquis is to provide standards of work and investment protection for EU businesses abroad adequate to such standards at the internal EU markets(s) => thus diminishment of transaction costs and increased competitiveness of EU businesses abroad

Figure 7.2  EU acquis’ international expansion instruments (energy industry) supply chains, towards the well-heads at the end of each chain in the neighbouring geographical regions. The EU external economic policy which de facto means the policy of ‘export of the acquis’, also includes both instruments of ‘hard’ and ‘soft’ law (Figure 7.2). The ‘soft’ law instruments (various cooperation measures that are not legally binding), may be regarded as preparatory steps (measures) for the application of EU energy legislation on the territory of countries outside the EU. The ‘hard’ law instruments in the EU external energy policy are different international treaties, to which the EU is a member and in which it tends to include its legal norms of the consistently liberalized domestic legislation, thus with the aim of expanding the area of factual application of the EU energy acquis. It is important to realize that each level of EU energy legislation liberalization has its own selection of instruments for expansion abroad. Thus, the ECT may be described as an instrument for exporting the EU energy acquis for the period that the EU First Energy Package is in action. Yet, one can argue the opposite, given the noticeable gap between the ECT being negotiated (1992–94) and signed (1994) and the First Energy Package being adopted (1996/1998): that the ECT was an instrument for ‘evening out’ the level of EU energy legislation liberalization to the lower standard accepted across a broader environment (the 50 states, including Russia, which initially signed the ECT) than the then-EU of 15 member states. That is, standards agreed upon by a broader range of countries were imported by the EU into its First Energy Package. Nevertheless, there is no contradiction between the ECT and the EU energy acquis based on the provisions of the First EU Energy Package.

130  Research handbook on EU energy law and policy In the EU’s Second and Third Energy Packages, however, the logic of expanding the acquis internationally by consistently applying first ‘soft’ then ‘hard’ law instruments is readily apparent. First, ‘soft’ law instruments pull and drag non-EU program participants into the orbit of increasingly close cooperation with the EU. Clearly, even the application of ‘soft’ law instruments for expanding EU legislation abroad requires the consent of potential recipients. The EU has made some gaffes in this area, however, apparently due to its unshakeable faith in the indisputable advantages of the EU’s energy market organization model, based on the Community acquis, for the whole of ‘Broader Energy Europe’. In 2003, for example, when announcing the European Neighborhood Policy program – including gradual unification of legal standards across the program participant states, based on the application of EU legislation everywhere – the European Commission included Russia among the program participants without securing Russia’s consent. Following a note sent out by the Russian Government, the European Commission removed Russia from the list of program participants. A ‘hard’ law instrument for the EU Second and Third Energy Packages (more liberal than the First Energy Package, and thus more liberal than the ECT as well) is the EU’s Energy Community Treaty (ECOMT) with the states of South-Eastern Europe, signed in 2006, and with provisions stating that ECOMT member states must apply EU energy legislation in their territory: initially the standards of the Second Energy Package, and now the Third Energy Package’s standards as well, with all this legislation’s inherent ‘liberalization risks’ for the companies from the countries with different (less liberal) investment regimes than the standards of the current EU legislation. From 2003 onwards, naturally, the ECT could no longer be used as an instrument for the international expansion of EU legislation. Here, in my view, lies the reason for the EU’s loss of interest in the ECT after 2003. Since then, this has made the ECT more interesting for Russia – now not so much from a host country’s standpoint (as an instrument for minimizing non-commercial risks for foreign investment in the Russian Federation), but rather from the standpoint of a parent country whose companies are engaged in increasingly broad and active external expansion (as an ­instrument  for  protecting the investments of Russian energy companies abroad)  – but  only if Russia  were  to  ratify  the ECT. However, it was thought otherwise in Moscow . . . Thus, the EU is actively pursuing a policy of protecting the interests of its companies abroad, using acquis export instruments: that is, by exporting EU companies’ accustomed trade and investment environment to countries outside the EU, along the value-adding chains from the end consumer in the EU upstream to production sites beyond the EU’s borders. And Russia, in my view, has lost a potentially unique opportunity presented to it by the ECT (if ratified) to protect the interests of Russian companies abroad, primarily from the EU’s ‘liberalization risks’. 3.3  The ECT and the EU Acquis Interaction between the ECT and EU legislation is more complicated than the ECT– WTO relationship. There is a long-established difference of opinion between the Russian

The role of the ECT in EU–Russia energy relations  131 and European establishments regarding the ECT’s relationship to European legislation (acquis communautaire); an explanation of this is attempted below. First and foremost, the EU is a Contracting Party (CP) to the ECT in two ways: each EU member state has signed and ratified the ECT, and the EU itself has signed and ratified the ECT as a regional economic integration organization (REIO). By doing so, in my view, European colleagues fell into a trap which they might not have noticed at the time. The ECT, as an instrument of international law, now takes priority over EU legislation (Community acquis), which is part of domestic law for the EU, so its standards take second place in the event of any conflict with the ECT. Thus, for its CPs and investors from those CPs (i.e. ECT member states which have ratified the ECT), the ECT is an instrument of protection from EU ‘liberalization risks’. But no such protection is available for Russian companies (investors) in the EU, because the Russian Federation never ratified the ECT, and when it discontinued its ECT provisional application in 2009, it stated that it had no intention of ratifying the ECT in future. Unfortunately, the Russian leadership’s long-term stance within the Energy Charter process has been as follows: the ECT is something like a bilateral treaty (agreement) between Russia and the EU, to which some other countries have acceded, since most ECT member states are also EU member states (28 out of 52 countries at present). Besides, the EU keeps expanding: from 12 member states to 15, then 25, then 27, and now 28 member states. And there is still a number of non-EU countries willing to join the EU, including among the ECT member states (Turkey, Ukraine, etc.). The latter assertion (regarding EU enlargement) is fair: the number of EU member states is indeed increasing within the community of ECT members. It is also fair to say that the application area of EU legislation (Community acquis) within the ECT community is expanding to include the Energy Community Treaty – another eight countries, which, having signed this treaty with the EU, undertook to apply EU legislation on their territory. The ECT (signed in 1994) was based on principles subsequently included in the EU First Energy Package (signed in 1996–1998); that is, both packages of documents were negotiated practically in parallel. Both sets of legal documents – the EU First Energy Package and the broader (in the quantity of member states) ECT – were non-conflicting in terms of treatment of their key provisions. The general trend since EU adoption of its First Energy Package has been a subsequent rise in the level of liberalization of EU legislation (it went higher/beyond the ECT liberalization level) within the expanding community of European states applying the EU acquis to the energy industry (see Figure 7.3). This increases the gap between the two (ECT and EU Energy acquis) within the broader geographical area and the ECT membership. The chief difference marking a watershed between the ECT and the EU First Energy Package on the one hand, and the EU Second and Third Energy Packages on the other, lies, in my view, in two parameters: MTPA and the unbundling of the energy markets (commodity vs. capacity) and of vertically integrated companies. The ECT and the EU First Energy Package require neither. The EU Second and Third Energy Packages require both (Figure 7.3). Russia’s non ratification of the ECT has made it impossible for Russian companies to apply the Treaty’s protective provisions, which would have protected them on EU territory from Second and Third Energy Package excessive (prohibitive for investments)

132

No

Unbundling

No

No Yes

Yes

ECT observer-states (23+)

ECT enlargement

1st EU Gas Directive (1998) 2nd EU Gas Directive (2003) 3rd EU Gas Directive (2009) Level of ‘liberalization’ of energy markets - general tendency Growing gap between EU acquis & ECT

ECT(*)

EU–25 (after 01.05.2004)

EU–15 (prior to 01.05.2004)

Energy Community Treaty EU+SEE (27+7) (since 01.07.2006)

EFTA = EU-15/25/27+3

EU–27 (after 01.01.2007)

ECT member-states (52 + 2 REIO)

Rest of ECT (beyond EU & ECOMT)

Figure 7.3  ECT & EU acquis in their comparative development

3

2

1

2

(*) ECT = integral part of EU acquis communautaire ECT (ECT = minimum standard through stand-still & rollback mechanisms) 1

3

EU liberalization trend

Level of ‘liberalization’

EU Acquis (2nd & 3rd Gas Directives)

EU enlargement (expansion of EU acquis implementation area)

EU Acquis (1st Gas Directives)

Domestic legislation of ECT member states prior to their participation in ECT

No

Mandatory TPA

Level of ‘liberalization’

ECT

Legal norms (key examples)

Increase of liberalization level of EU acquis

The role of the ECT in EU–Russia energy relations  133 l­iberalization requirements exceeding the ECT framework. But this is not the case for investors from EU member states in cases where they perceive a violation by EU member states of their rights as protected by the provisions of international law, including the ECT (see below). Russia was one of the active participants in the ECT preparatory works in the 1990s and the Charter Process in general until 2003. Up to that point, the ECT provisions coincided with the EU’s energy legislation, based upon the provisions of the EU’s First Energy Package (1996 in electricity and 1998 in gas). However, after 2003 there was no coincidence any more. In 2003, the EU’s Second Energy Package was adopted, which provided for the EU energy markets being divided into commodity (energy resources) markets and capacity markets (transportation capacities), the unbundling of the vertically integrated companies (VICs), and mandatory third party access (MTPA) to the capacities of the gas transportation system (GTS), and which declared the goal of creating the EU common internal market. Since that time the perceptions of Russia and the EU have diverged with regard to the hierarchy of the ECT and its related documents, on the one hand, and the common supranational law of the EU being developed (acquis communautaire), on the other hand. The key point of disagreement though is the fact that for the EU as a whole (and the EU has signed and ratified the ECT in its both capacities – as a set of individual EU member states and as the EU as a whole), the supranational energy acquis becomes a domestic (internal) EU legislation, subordinate to international law such as the ECT. On the one hand, as early as 31 December 2004, in the Repertoire of the Acquis Communautaire: Energy and Transport, the EU recognized the ECT and its related documents as an integral part of the acquis.22 On the other hand, starting from the Second EU Energy Package, and particularly as compared to the Third EU Energy Package, the ECT and the EU’s energy legislation wording of requirements for MTPA, unbundling of VICs, and other key provisions related to energy markets regulation by sovereign member states of the ECT and the EU, basically diverge (Figure 7.3). Indeed, the ECT specifically states that it does not require the provision of third party access or carrying out unbundling of VICs. On the contrary, the EU’s Second (2003) and Third (2009) Energy Packages establish MTPA and functional unbundling of VICs. Therefore, in spite of the above-mentioned 13-year-old statement by the EU that the ECT and the EU’s acquis are compatible and consistent, in my opinion, a year ahead of this statement an objective gap between them emerged within the EU and started widening. The EU’s persistent proposals to the ECT community (firstly to Russia in the course of bilateral consultations on draft Transit Protocol) for how to deal with this increasing legal gap between EU acquis and the ECT, namely, that, in regard to energy transit, the

22   European Commission, DG-TREN, Repertoire of the Acquis Communautaire: Energy and Transport, 31 December 2004 (Analytical examination of the acquis) Chapter 15 – ENERGY. Indicative list of related acquis (no longer available at website of the Commission; cited from the hard copy of Chapter 15 at author’s disposal).

134  Research handbook on EU energy law and policy ECT rules will not act within the enlarging territory of the EU (and the ECOMT member countries as well) – the famous ‘REIO clause’ – were not acceptable for Russia. This is why it is the EU responsibility that Russia’s interest in the ECT began to diminish when it saw that the EU would like to exclude the enlarging EU and ECOMT territory from ECT application. This was the ‘point of departure’ for Russia when its interest in the ECT began to diminish. The ‘Yukos case’ came second, a year later, and it just added (though significantly) to this downward trend. 3.4  The ECT, EU Acquis and the Issue of Transit After the dissolution of the COMECON and the USSR, the traditional contractual structure of Soviet/Russian gas supplies to the EU (based on the long-term supply contracts with oil indexation – a modified Groningen formula – to the delivery points located at the former East–West border, notably at the Western border of the corresponding COMECON states with the EU) has faced a new set of risks, the major one being the transit risk. The technical infrastructure for gas exports from Russia to the EU has stayed the same, but the political map within the export-oriented gas value chain has changed. A number of newly independent sovereign states have appeared on the path of Russian gas to the EU. Thus, contractual structures of gas supplies were to be changed accordingly, as well due to changes of ownership of energy assets in the new independent states.23 The objective character of transit risks has nothing to do with this or that specific country (see Figure 7.4). In 2004, after the accession of the former COMECON countries to the EU, disagreements between Russia and the EU became aggravated, since significant parts of the export routes for the Russian gas to delivery points, located historically at the former Western border of the former COMECON, are now placed deep inside EU territory and thus fall under EU law, creating additional transit risks for suppliers. One such major risk is the problem of ‘contractual mismatch’, which results from the application of MTPA ­requirement within the unbundled gas market (see Figure 7.5). During 2004–2007, Russia and the EU, in the process of informal bilateral consultations of experts from the parties, with the involvement of representatives of the Energy Charter Secretariat (ECS), tried to solve a few outstanding – all transit-related – issues, which concerned only these two parties within the Charter constituency: two issues related to the ECT (both to Art. 7 ‘Transit’) and three issues related to the provisions of the draft 23   The evolution of the contractual structures and pricing mechanisms of Russian gas supplies to the EU has been examined by this author in a number of publications, for instance in: А. Конопляник, Российский газ для Европы: об эволюции контрактных структур (от долгосрочных контрактов, продаж на границе и оговорок о пунктах конечного назначения – к иным формам контрактных отношений?) // «Нефть, газ и право», 2005, № 3, c. 33–44; № 4, с. 3–12; A. Konoplyanik, Russian Gas to Europe: From Long-Term Contracts, On-Border Trade, Destination Clauses and Major Role of Transit to . . .? // Journal of Energy and Natural Resources Law, 2005, vol. 23, no. 3, pp. 282–307; A. Konoplyanik, Gas Transit in Eurasia: Transit Issues between Russia and the European Union and the Role of the Energy Charter // Journal of Energy and Natural Resources Law, vol. 27, no. 3, August 2009, pp. 445–86; A. Konoplyanik, Russian Gas in Europe: Why Adaptation is Inevitable // Energy Strategy Reviews, March 2012, vol. 1, issue 1, pp. 42–56.

The role of the ECT in EU–Russia energy relations  135 Direction of Russian gas flow to Europe Zones of new risks France Switzerland Italy

Germany Austria Greece Turkey

Poland Slovakia Czech R. Hungary Romania Bulgaria

New Risks 2 zone

Belarus Ukraine Moldova

Russia

New Risks 1 zone

A B

EC – 25/27 EC – 15

C

RF

USSR

COMECON

Non-EU countries: italic; New EU accession states: underlined – since 01.05.2004, underlined + italic – since 1.01.2007; FSU states/members of ECOMT: bold; A, B, C – points of change of ownership for Russian gas and/or pipeline on its way to Europe

Figure 7.4 Russian gas supplies to Europe: zones of new risks for existing supplies within Russia’s area of contractual responsibility Duration (D)

CP 1

CP 2

Transit contract: D + V

CP 1

or Transportation contract: D + V

CP 3

Volume (V)

Supply contract: D + V

Contractual mismatch = = ΔD + ΔV

Mismatch between duration/volumes (D/V) of long term supply (delivery) contract & transit/transportation contract as integral to fulfilling delivery contract => risk of non-renewal of transit/transportation contract at existing capacity or non-creation of adequate new capacity => risk of non-delivery for existing/new supply contract (incl. arbitration consequences). Core issue: to guarantee access to/creation of adequate transportation capacity for volume/duration of long-term contracts; shipper’s contracts (booking guarantees) best financial security for debt/project financing Figure 7.5  ‘Contractual mismatch’ problem

136  Research handbook on EU energy law and policy Transit Protocol to the ECT.24 It is worth mentioning that when the Russia–EU bilateral consultations on these five outstanding (all transit-related) issues started in 2002, the Russian authorities repeatedly stated that without their resolution Russia’s ratification of the ECT could not be expected. By 2007, optional technical solutions were found in respect of all these issues, with the exception of one issue (so-called ‘REIO clause’ which constitutes the internal problem of the EU); however, they were not politically approved by the parties. This single outstanding issue (the so-called ‘integration amendment’ or ‘REIO clause’) related to a requirement of the EU for different application of the ECT and the EU’s acquis within the EU after adoption of the Second Energy Package, i.e. under the conditions of the unbundled markets and under the EU’s declared intention to create a single internal market. The EU delegation argued that the term ‘transit’ was no longer applicable to the EU territory, as there was an established goal of creating a single internal EU energy (gas) market, which implied that there may not be such a term as ‘transit’ related to the crossing of several borders within (inside) such a market. However, subsequent events (the creation of a single internal gas market of the EU in practice) showed that earlier intentions as of 2003 (Second Energy Package) resulted in a different effect in 2009 (Third Energy Package). The EU Gas Target Model (GTM in both its versions – that of 2011 and 2014) under the Third Energy Package implies a combination of market zones with the need for cross-border supply to remain unchanged (see Figure 7.6). Therefore, although the term ‘transit’ was abrogated in the EU in 2005, in practice the question of transit within EU continues and the conflict of laws between the ECT and EU acquis, at least in respect of this issue, remains unresolved. So it was this internal EU legal problem – the conflict of applicable laws which were both declared by the EU to be part of the EU acquis: the ECT and related documents and the EU energy acquis per se – which, in my view, has prevented both Russia and the EU from finding an amicable solution for the Russia–EU open issues regarding transit and thus to finish in a timely and effective way their bilateral consultations on the Transit Protocol, which would have paved the way to finalization of this multilateral document. In this way, the EU found itself facing a substantive problem regarding the ECT in the post-2003 period which prevented both parties from moving forward, while Russia has just reacted to the unwillingness of the EU to move forward and has been slowly but steadily losing interest in the bilateral discussion with no practical effect. Russian delegation thus began just to skip appearing at the meetings. Such nonappearances were more visible and thus provided a perception that it was Russia who

24   Detailed description of these Russia–EU outstanding issues and the long, thorny and winding way forward to their solution is presented in a number of this author’s publications. See, in particular: A. Konoplyanik, Russia and the Energy Charter: Long, Thorny and Winding Way to Each Other (pp. 185–225) in: German Yearbook of International Law (Jahrbuch Fur Internationales Recht), Volume 56, 2013 // Berlin: Duncker & Humblot, 2014; A. Konoplyanik, Russian Gas to EU Markets – 1: Thorny Issues Impede Progress Toward Final Transit Protocol // Oil & Gas Journal, October 20, 2003, vol. 101, no. 40, pp. 60–64; Russian Gas to EU Markets – 2: Compromise is Best Course for Russia, EU in Protocol Negotiations // Oil & Gas Journal, October 27, 2003, vol. 101, no. 41, pp. 68–75.

The role of the ECT in EU–Russia energy relations  137 - No single (homogenous) internal EU gas market in the near future even as economic model - All market areas to be organized as entry–exit zones with virtual (aimed to be) liquid hubs => Uniform capacity allocation (‘bundled products’) & gas pricing (‘spot & exchange pricing’) mechanisms

Hub A

Pipelinesinterconnectors between EU zones (covered by Third EU Energy Package)

Hub B

Hub D Hub C

Supplies to the EU from non-EU (not directly covered by Third EU Energy Package)

Source:  17th Madrid Forum (Jan. 2010), Energy Regulators of EU Member States.

Figure 7.6 Organization of (emerging) internal EU gas market according to the Third EU Energy Package was ­responsible for the non-finalization of the Transit Protocol. Although, in my view, both parties were guilty. 3.5  Ukrainian Transit Crises 2006 and 2009, the ECT and the EU In January 2006 and January 2009, the notorious Russian–Ukrainian gas crises took place,25 in which both parties blamed the other for violation of the transit provisions of the ECT; however, they did not take advantage of the transit disputes settlement procedure under Article 7 ‘Transit’ of the ECT, which provided a conciliatory procedure for transit disputes. As a result, at the end of January 2009 the Russian authorities publicly accused the Energy Charter (as an international organization) of inaction, inability

25   For more details of both crises see: J. Stern, The Russian-Ukrainian Gas Crisis of January 2006, OIES, Jan. 2016; A. Konoplyanik, Russian–Ukrainian Gas Dispute: Prices, Pricing and ECT // Russian/CIS Energy & Mining Law Journal, 2006, N1 (Volume IV), pp. 15–19; K. Yafimava, The Transit Dimension of EU Energy Security – Russian Gas Transit Across Ukraine, Belarus and Moldova // Oxford: OUP, 2011; А. Конопляник, Экономическая подоплека газовых проблем в треугольнике Россия-ЕС-Украина и возможные пути их решения. – ИНП РАН, Открытый семинар «Экономика энергетики (семинар А.С.Некрасова)», 152-е заседание от 21 октября 2014 г. – Москва, Изд-во ИНП РАН, 2014 г., 132 с.

138  Research handbook on EU energy law and policy to prevent the transit crisis and unwillingness to punish the ECT Contracting Party (Ukraine) which had violated the transit provisions of the ECT. Nevertheless, Russia has not officially approached the ECS to initiate corresponding procedures. Neither the EU – as a whole or corresponding EU states touched upon by this transit crises – did so, although they have a full legal right to do this since they were directly involved in its consequences. So, this inaction of the official authorities of both parties within the procedural framework provided by the ECT has shown either their lack of trust in the ECT already at that time, or lack of interest to use it in such practical cases due to whatever reasons. However, Russian criticism of the ECT in its inability to prevent transit crises is fair only in part, to the effect that during the ECT negotiations at the beginning of the 1990s none of the more than 50 states could even imagine that transit may be intentionally interrupted. During the previous 25 years, from the moment of starting the supply of Soviet gas to Western Europe (Austria) in 1968, under the conditions of the Cold War, uninterrupted supplies through the Iron Curtain were carried out. When the Cold War was over and the Iron Curtain fell, the related risks disappeared and no participant of the ECT negotiations could expect the worsening of conditions for transit, despite the appearance of a number of new sovereign states in the middle of the energy supply chains from Russia to the EU (see above). Therefore, the respective provisions of the ECT (aimed at the prevention of any transit crisis, the latter expressed as the interruption of transit flows and/or non-sanctioned offtakes from transit flows) were not introduced: there was neither a perceived need, nor expectations with regard to potential need in such provisions. Thus any dispute settlement that might arise in regard to transit were considered by the Contracting Parties to be likely related to potential disagreements between the parties on the value of transit tariffs only, while transit flows would stay uninterrupted. So the aim of the conciliatory procedure designed under ECT Art. 7 ‘Transit’ was to find a quick interim value of transit tariffs while transit flows continued, before a final solution on transit tariffs was found.26 Therefore, following the results of the transit crisis of January 2009, the development of an additional multilateral Protocol to the Energy Charter was proposed to prevent emergency situations related to transit. Instead, Russia and the EU preferred to sign a bilateral Memorandum on an Early Warning Mechanism in the Energy Sector within the Framework of the EU–Russia Energy Dialogue. This case would have been a good opportunity for the EU to (try to) persuade Russia to improve the multilateral solution for transit issues (in which area there were still open issues between the two) and thus to reverse Russia’s interest in the ECT. Instead the EU preferred a bilateral solution, thus demonstrating its low interest in the ECT already at that time. Nevertheless, at the end of November 2014 the Model Energy Charter Early Warning Mechanism was approved by the 25th Session of the Energy Charter Conference held in Astana under the Presidency of Kazakhstan. Unfortunately, the official delegation of the Russian Federation, for the first time in the history of the Energy Charter, did not take

26   One of Russia’s justified concerns on ECT Art. 7 has related to the particular details of the conciliatory mechanism for defining the value of interim transit tariffs.

The role of the ECT in EU–Russia energy relations  139 part in the work of the governing body of this international organization, while the EU delegation did. 3.6  Dispute Settlement: ECT vs. Intra-EU Cases This conflict of law creates an increased number of legal claims from the EU members’ companies against EU states on the ground of violations by these states of the ECT provisions (see Figure 7.7). In April 2015, the International Centre for the Settlement of Investment Disputes (ICSID) revealed that more than two-thirds of investor–state dispute settlement (ISDS) cases in the EU are brought by EU investors against other EU member states. A quarter of these arbitration proceedings are initiated under the ECT.27 Spain was facing at that time around 15 claims for financial compensation by investors after it put an early end to its subsidies for solar power in the wake of its dramatic economic crisis. Italy, until recently not known as a respondent in investor–state cases, was then facing at least three ECT-related disputes. The number of ECT-based cases is rising across the EU, which means that investors of EU member states are filing claims in international arbitration tribunals against EU member states on the basis of the ECT provisions. The European Commission is intensifying efforts to root out intra-EU ISDS cases. It asserts what it considers as the Community’s full competency over investment policy since the Lisbon Treaty came into force in 2009. It regards intra-EU investor–state arbitration as incompatible with the EU legal order. In June 2015 the Commission initiated infringement proceedings for violation of EU law against five EU member states – Austria, the Netherlands, Romania, Slovakia and Sweden. The Commission blamed these countries for keeping their mutual ‘intra-EU’ BITs in place. It has requested these five countries to terminate their mutual intra-EU BITs and has initiated ‘pilot’ proceedings against 21 more.28 Those BITs are the legal basis for arbitration proceedings that have pitted Dutch, Swedish and Austrian companies against Romania and Slovakia and led to controversial, from Commission’s view, arbitral awards in recent years. These BITs, like many other EU BITs between Western European and Eastern European member states, were signed before Romania and Slovakia became EU member states in 2007 and 2004 respectively – and they have remained in force since then. The disputes between the Commission and national governments over whether these BITs should be kept in force were to be resolved by the Court of Justice of the European Union.29 However, the Commission’s move in stepping up its efforts to root out intra-EU

27   Brussels moves against bilateral investment treaties within EU, undermines the Energy Charter // http://www.energypost.eu/brussels-moves-intra-eu-investor-state-arbitration-puts-pres​ sure-energy-charter/. 28   A. Ross, What Lies Behind Italy’s ECT Exit? // Global Arbitration Review, 29 July 2015, vol. 10, issue 3, http://globalarbitrationreview.com/article/1034608/what-lies-behind-italy%E2%80%9​ 9s-ect-exit. 29   Brussels Moves Against Bilateral Investment Treaties within EU, Undermines Energy Charter // http://www.energypost.eu/brussels-moves-intra-eu-investor-state-arbitration-puts-pres​ sure-energy-charter/.

140

01

20

02

20

03

20

04

20

5

0 20

33

06

20

07

20

34

08

20

09

20

10

20

11

20

Internal cases

12 20

External cases

13 20

14 20

15 20

For the period from 2001 (since the first ‘investor–state’ claim based on ECT Art. 26) to 21.04.2015 – a total of 67 such claims, with 33 claims from investors of the EU member states against the EU member states, notably, within the EU (internal cases) – de facto against EU ‘liberalization’ risks

Figure 7.7 Increasing numbers of ‘investor–state’ disputes based on ECT Art. 26 from investors of EU member states against EU member states

Source:  У. Руснак, А. Конопляник. Эволюция модели энергобезопасности. Россия и ДЭХ: не остаться на обочине. // «Нефтегазовая Вертикаль». 2015, №10, с.4–12 (7). Based on: http://www.energycharter.org/what-we-do/dispute-settlement/all-investment-dispute-settlement-cases/.

0

2

4

6

8

10

12

14

16

The role of the ECT in EU–Russia energy relations  141 i­ nvestment arbitration cases is also having effects on the EU’s relationships with the ECT. Brussels feels it should have sole power over EU investment policy. Yet, in this respect, it is also putting pressure on the ECT, on which many of these cases are based. As a result, while the Commission wants the ECT to expand internationally, it is undermining support for it at home. Italy even pulled out of the ECT in 2016. Italy’s decision seems to be less one of defiance than obedience to the European Union, which has long held that treaties governing investment between member states clash with EU law in the wake of the Lisbon Treaty. In its adherence to this view, Italy has been described by the Investment Arbitration Reporter news and analysis service as a ‘model citizen’ of the EU (in recent years, Italy has taken steps to terminate all or almost all its intra-EU bilateral investment treaties).30 Other factors that have been rightly or wrongly mooted as influencing Italy’s decision include: budgetary considerations and the cost of membership of the treaty; the threat of pending ECT claims against the state over renewable energy; the general swing of opinion against investor-protection agreements and arbitration in Europe; and the perception of the weakness and irrelevance of the treaty in light of Russia’s renunciation of it. Of course, all of these factors combined to influence the Italian decision. Cost-cutting was the ‘official’ reason why Italy decided to renounce the treaty: by withdrawing from the ECT it will save around €400,000 in membership fees annually. But, for me, this is not the main reason. Much more important for a number of EU/ECT states has been a ­mounting number of ECT-based claims brought against European states by investors of these states; for instance, in the solar power industry over retroactive cuts in EU government subsidies in response to the 2008 financial crisis. Bearing in mind that all EU renewables have been developed as a result of huge state subsidies, the withdrawal of the latter (especially if in the form of retroactive cuts) will inspire further growth of ‘investor–state’ claims in international arbitration bodies, and the ECT with its Art. 26 in such cases is one of the best (if not the best) investment-protective measures, being least influenced by the investor’s domestic state. In mid-2015, Spain faced some 14 ICSID claims over subsidy cuts worth hundreds of millions of dollars, as well as claims under Stockholm Chamber of Commerce and UNCITRAL rules. The Czech Republic faced at least seven such claims, with others threatened against Bulgaria and Romania. Dozens of claims were threatened against Italy at that time (when a decision on ECT withdrawal was to be taken by this state). Of course, as in Russia’s case (whose decision to withdraw was, in my view, based on or inspired by the ‘Yukos case’), in the case of Italy it also made no rational legal and economic sense to withdraw from the ECT in the face of such threats. That will not solve the issue of investment already made, namely the question of any returns on these investments, which is the main topic of concern for investors due to Government’s (retroactive) actions. The ‘Sunset provisions’ of ECT Art. 47(3) protected the investor even after host state withdraws from the ECT – the state will continue to be bound by the Treaty in respect

30   A. Ross, What Lies Behind Italy’s ECT Exit? // Global Arbitration Review, 29 July 2015, vol. 10, issue 3, http://globalarbitrationreview.com/article/1034608/what-lies-behind-italy%E2%80%9​ 9s-ect-exit.

142  Research handbook on EU energy law and policy of existing investments for 20 years after withdrawal. So maybe this Italian decision, made in 2015 and valid from 2016 (as well as Russia’s in 2009?) can be treated rather as an understandable political reaction by the Government in trying to foresee possible disaffection by the electorate (civil society) in the case that Italy faces a surge of claims from foreign investors, and publicly reacting in advance of this happening. As already mentioned, Brussels does not want the ECT to rule over intra-EU cases. ‘The legal service of the Commission takes the view that if an investor from one member state has a problem with another member state then this cannot be done on the basis of the ECT’, the Commission official added.31 But the Commission as of today cannot stop ISDS cases under the ECT from being initiated. For intra-EU ISDS cases to end, a political agreement among the 28 EU member states would be necessary, for instance under the form of a declaration invalidating ISDS cases between them. But there is no consensus among member states to do so. The Commission is believed to have tried to convince the EU28 to come up with such a declaration ahead of the May 2015 Hague International Energy Charter Conference but was rebuffed. A complicating factor is that other ECT members would need to agree to the EU members’ move, because the deal is multilateral and affects third countries from outside the EU. Such a declaration could lead other ECT members to question their commitment to the ECT’s investment provisions – something Brussels would certainly want to avoid as it tries to promote ECT principles globally. If this mooted intra-EU ISDS declaration were to happen, it would be the second case in which the EU aimed to distinguish between the application of universal ECT rules within EU territory (where intra-EU ISDS will not be applied based on ECT rules) and beyond the EU (where ECT provisions should continue acting in full, including cases of ISDS). This looks similar to the earlier story concerning the ‘REIO clause’ in the draft Transit Protocol, in terms of EU policy on different applications of the transit provisions of the ECT within and beyond the EU, which was the real major reason for Russia and the EU to start losing their interest in the ECT. The Italian story on ECT withdrawal is a reflection of the European Commission’s intensified efforts to root out intra-EU ISDS cases from the competence of the international bodies beyond the jurisdiction of the EU. So it could be considered as a part of the Europe-wide backlash against ISDS procedures if the EU Governments saw it as ‘unfairly’ used in favor of investors against governments. This means that the states consider that the balance between the state and investor in investment-treatment is broken in favor of the investor and, from the state’s view, such ISDS procedures (out of state control) protect ‘unfair’ (unbalanced) situations. But as is well known from economic theory and history, there is a cyclical trend in relations between the state and the investor, which is the case not only in investment area and in natural resource industries. We can see the same cyclical trend, for instance, in the development of taxation systems. This cyclical trend in regard to investments is well described by UNCTAD and shown in its annual ‘World Investment Reports’32 (confirmed by corresponding statistics from its

31   Brussels Moves Against Bilateral Investment Treaties within EU, Undermines Energy Charter // http://www.energypost.eu/brussels-moves-intra-eu-investor-state-arbitration-puts-pres​ sure-energy-charter/. 32   For example, see: World Development Report 2010. UNCTAD, 2010, pp. 76–7.

The role of the ECT in EU–Russia energy relations  143 ‘UNCTAD database and national laws and regulations’). In periods of low markets states usually provide more national regulatory changes aimed at liberalization for/promotion of investment activities, notably more favorable for investors and their investments. Thus the state provides the investors with an opportunity to earn their future profits, stimulate development of their future (not existing at the moment) investment projects, by sharing with them bigger portions of the not yet monetized (not yet collected) marketable resource rent (if energy industries are considered). It is important to clarify: the state is ready to give to investors a bigger portion of the diminishing (in the period of low markets) future rent value. In the period of high markets (which might happen in energy, say, due to growing oil prices, as in the 2000s) the states, on the contrary, usually introduce national regulatory changes which involve more regulation and restrictions aimed at the collection of the extra portion of the resource rent (if natural resource industries are concerned). Some observers (analysts, politicians) call it ‘resource nationalism’ if natural resource industries are concerned and if such states belong to the resource-owning, usually developing, states – not to developed market economies. This cliché is usually used notwithstanding that the host state would like to redistribute in its favor not the portion of the entrepreneurial income, but the portion of the price rent (windfall profits) related to this income (where both ingredients create the value of the resource rent). So if the host state aims to extract, in part or in whole, the windfall profits which happened to occur due to externalities, say, due to an oil price increase, and does not aim to extract part of the entrepreneurial income originated due to the entrepreneurial efforts of the investor, it would be more appropriate to call this ‘rationalization of “resource rent” collection’ rather than ‘resource nationalism’, since the latter has a clear negative connotation. But in the given case the economic facet of the story is different: the state (namely, a developed market economy) demonstrates that it is not ready to follow earlier taken obligations regarding existing investment projects at its territory if state participation (in the form of continued subsidies) became more costly for whatever reasons. This is a clear message that under any developments in the state of the market, incremental non-commercial risks for an investor originated by the host state will be burden on the investor. But this is just the case that the ECT is aimed at – to protect investors from such non-commercial risks. Does this mean that the attitude of the states towards ECT has been changing, depending on the stage of economic cycle and/or the character of the capital flows (whether it is in-coming or out-going)? When the state – the ECT Contracting Party – is a capitalexporter, the ECT is good as an investment-protection instrument since it protects investors of this given state abroad. But when this state becomes a capital-importer (a host state) and it needs to behave according to the ECT rules in its own territory – then the ECT becomes a burden and not an advantage. Or, as in the case of Italy, if there is a threat of withdrawal of state subsidies for solar electricity production, which were required to make this industry profitable, the business will have justified reasons to apply to international arbitration against the state to compensate its losses (since it is illogical to apply against the host state to the arbitration tribunals of the given host state – they are not impartial by definition). Then, does it also sound more logical for the state to withdraw from the ECT based on purely electoral ­reasoning

144  Research handbook on EU energy law and policy rather than to continue applying the ECT, even if in the given case the state might well lose against the investor? This sounds like a ‘double standard’ approach. But it is clear to me that the EU institutions will continue to reassess their (already steadily diminishing) interest in the ECT as an internal EU instrument (a part of the acquis). It seems to me that currently we see the third major clash between the EU and the ECT. The first one relates to the finalization of the Transit Protocol and the Russia–EU debate around the ‘REIO clause’ introduced by the EU (2003–2004). The second one relates to Russia’s withdrawal from its ECT provisional application (2009). The third one relates to the current battle within the EU between the Commission and member states in regard to intra-EU ISDS and Italian withdrawal from the ECT (2016 onwards). Will this be the last conflict between the EU and ECT?

4.  RUSSIA AND THE ECT Since I have published a great deal on Russia–ECT relations,33 in this section only a few new issues concerning these relations will be addressed. 4.1  Missed Opportunities In 2009, from my point of view, the Russian Federation made a major mistake in relation to the ECT based on systemic misperceptions: Russia withdrew from its provisional application to the ECT, which it had maintained since signing the ECT in 1994, and as a consequence deprived itself of many advantages provided by this tool, for example with regard to the protection of Russian companies against the ‘risks of liberalization’ within the increasingly liberalized EU market. As was shown above, the practice of recent years proves that an increasing number of companies of the EU countries, while trying to protect themselves against the after-effects of such risks related to the forced downward liberalization in the EU, are filing claims to international arbitration tribunals against the EU member states under Article 26 of the ECT, which grants such a right to investors. However, Russia has deprived its companies of such an opportunity, in spite of numerous statements concerning such violations made by the EU states. An example of such missed opportunities for Russia is the situation with the troubled OPAL gas pipeline project.34 From my point of view, this falls under Article 13 ‘Expropriation’ of the ECT – when the investments made in the construction of the OPAL and Nordstream-1 gas pipelines have been prevented from being paid back in full by the pure administrative measures of the host country (the EU) which has limited access to the throughput capacity of the already-made pipeline for its inves  See my publications and presentations at: www.konoplyanik.ru.   OPAL is an onshore segment of the alternative transportation system consisting of the offshore Nordstream-1 and onshore OPAL and Gazelle pipelines, bypassing the Ukrainian transit route, which aimed to bring Russian gas supplies to the EU under existing supply contracts to the same delivery points (at Waidhaus) agreed upon in these supply contracts. This alternative system is a solution, inter alia, to an above-mentioned ‘contractual mismatch’ problem that refers to any transit system. 33 34

The role of the ECT in EU–Russia energy relations  145 tor while there is no other applicant(s) for access to the throughput capacity of this pipeline.35 In 2004, the former Yukos shareholders filed their claim against Russia – since then well known internationally as the ‘Yukos case’36 – using the violation of provisions of this very ECT Article 13 as a ground. An award released on 28 July 2014 and handed down 10 days earlier by the Permanent Court of Arbitration Tribunal in The Hague (the Court award) regarding three interrelated suits filed by Yukos company shareholders against the Russian Federation (the Yukos case) was based on Article 26 ‘Settlement of Disputes Between An Investor and a Contracting Party’ of the Energy Charter Treaty. The Court award (unanimously not in favor of Russia) states that ‘measures taken by the Respondent [the Russian Federation] in relation to Yukos . . . had, in the Tribunal’s opinion, an effect equivalent to nationalization or expropriation’ (paragraph 1580 on p. 497 of the Court ruling for each suit).37 The Russian Federation immediately announced its intent to challenge the Court award and file an appeal, even though the ECT has no appeals mechanism, since ‘the awards of arbitration . . . are final and binding upon the parties to the dispute’ (Article 26(8) of the ECT).38 Later, in April 2016, the Yukos award was set aside by The Hague District Court on the basis that the Tribunal lacked jurisdiction.39 Nevertheless, the award issued under this claim in The Hague in July 2014 by the Permanent Court of Arbitration Tribunal constituted under the ECT (decision taken in substance) notably demonstrates the efficiency of international arbitration procedures established in the international law (as reflected in the ECT and its related documents) as

35   The latter was well demonstrated by the comparative results of recent Gazprom export gas auctions (in 2015–16). Gazprom twice tested (in September 2015 and in September 2016) market interest in transit capacities through Germany to the Czech Republic in order to provide argumentation for getting regulatory approval to use 100% of OPAL capacity. The market showed no interest (A. Medvedev, Comparative Results of Three Gazprom Export Gas Auctions, 2015– 2016.  Presentation at the 21th WS2 GAC meeting, Gazprom export, St Petersburg, 21.10.2016; http://www.fief.ru/img/files/161021_WS2_AUCTIONS_Medvedev.pdf, slides 3 & 5). 36   The ‘Yukos case’, or more correctly – three cases known as ‘Yukos case’: (i) Yukos Universal Ltd. (UK – Isle of Man) v. Russian Federation; (ii) Hulley Enterprises Ltd. (Cyprus) v. Russian Federation; and (iii) Veteran Petroleum Trust (Cyprus) v. Russian Federation. The awards can be viewed at the Energy Carter Secretariat website at http://www.energycharter.org/ what-we-do/dispute-settlement/all-investment-dispute-settlement-cases/ under items (6), (7) and (8). 37   http://www.energycharter.org/fileadmin/DocumentsMedia/Disputes/ISDSC-006a.pdf. http://www.energycharter.org/fileadmin/DocumentsMedia/Disputes/ISDSC-007a.pdf. http://www.energycharter.org/fileadmin/DocumentsMedia/Disputes/ISDSC-008a.pdf. 38  http://www.energycharter.org/fileadmin/DocumentsMedia/Legal/ECTC-en.pdf. 39   In its 20 April 2016 judgment, The Hague District Court set aside arbitration awards rendered in favor of three shareholders in OAO Yukos Oil Company against the Russian Federation. The cases had been brought before a Permanent Court of Arbitration Tribunal constituted under the Energy Charter Treaty. As the place of arbitration was The Hague, The Hague District Court was the competent forum for Russia’s setting-aside applications. The Court granted the applications on the basis that the Tribunal lacked jurisdiction. Specifically, the Judgment held that provisional application of the ECT’s investor–state arbitration provision (Article 26) was contrary to Russian law and therefore not allowable pursuant to the ECT’s provisional application provision (Article 45). (Client alert: Yukos Awards Set Aside by Dutch court. Comment by Volterra Fietta, the public international law firm, 29 April 2016, public dissemination.)

146  Research handbook on EU energy law and policy a mechanism of protection of investors’ interests in the energy sector, and not only that Russia initially lost the arbitration case. It is a pity that Russian investors abroad are deprived of such an opportunity. 4.2  Energy Charter Adaptation Process If the sovereign states consider that the time has come to adapt international legal ­documents/instruments to new realities and new stages of the energy market development, there are no means to do it, except for initiating a process of such adaptation and taking an active part in it, and/or possibly trying to lead the process (claiming intellectual leadership and professing the ‘force of an argument’), if this does not cause a rejection reaction on the part of other actors of the international community. Although, it is ­ difficult to reject solid arguments . . . However, when the Russian initiative for the Energy Charter adaptation process was not followed in particular practical steps by the Energy Charter community, the country in fact withdrew from this adaptation process. The country eventually suspended its participation in the process, including participation in the newly organized Strategy Group, which was of key importance since the time when the Yukos award was issued in July 2014 by the Permanent Court of Arbitration Tribunal in The Hague. The situation first came to a head when Russia did not participate in the Energy Charter Conference in Astana (Kazakhstan) in November 2014 (an unprecedented situation). Then the Russian delegation did not participate in signing the updated political declaration, the International Energy Charter, at the Ministerial Conference in May 2015 in The Hague. The non-participation of Russia in The Hague Conference may become the country’s point of no return as far as the Energy Charter Process is concerned. The Energy Charter Process, undoubtedly, will not only survive, but it will develop further without Russia, as it has already received a new impulse to its development; increasingly transformed from the initial Euro-Atlantic initiative of the EU into a Eurasian process, originally dominated by the discussion agenda of Russia and the EU, it has recently turned into a real global process. For Russia non-participation in the activities of the Charter constituency means a gradual shift to the margins with regard to its integration into the global energy sector, together with the loss of its potential competitive advantages in connection with the new stage of the Charter Process development and its geographical dimension. Or, simply the deprivation of opportunities to use protection instruments to improve its own energy security, for example, protection against sanctions. In 2004, the Energy Charter Conference (the supreme authority of the Charter constituency), with the active participation of Russia, made a decision on the continuous adaptation of the Charter Process to new realities in the energy markets. In 2009, withdrawing from the provisional application of the ECT (without providing any grounds for this withdrawal), Russia put forward a proposal on the process reform and suggested developing (instead of the ECT) a Convention on international energy security; i.e. it suggested not improving the existing process and the existing set of legally binding international law documents, but actually the endorsement in advance of some future document, which must replace the ECT and which had yet to be developed.

The role of the ECT in EU–Russia energy relations  147 The Charter constituency, however, did not accept the idea of rewriting the ECT and/or endorsing any future document, which was still unclear. Moreover, such a line of action was considered counter-productive given that 46 states had already ratified the ECT by that time. Therefore, the Russian document was not adopted as a basis for joint work, particularly as it replicated the existing ECT in many aspects. The Energy Charter constituency has chosen a different way of adapting and moving forward the Energy Charter process. At first, the ECT countries focused on the development of a new mutually acceptable set of political principles summarized in the updated political declaration, the International Energy Charter, which complements the European Energy Charter adopted in December 1991 and used as the basis for the ECT. Since 2012, during the negotiation process, the Russian delegation has also taken an active part in it – from the development of a mandate to negotiations in extended format. Based on this updated political declaration (in areas where a multilateral consensus is reached), in future it would be possible to add, extend and adjust the existing set of legally binding instruments – the ECT and its related documents, developed according to a package module principle, which implies that the existing set of documents may and should be added and extended, but not re-written. But Russian authorities decided finally not to sign the new political declaration, and thus the Russian delegation unfortunately did not participate in the International Energy Charter signing ceremony and conference in The Hague in May 2015. Russia thus stays out of the community of 91 signatories40 of the International Energy Charter. 4.3  Russia, Sanctions and the ECT Article 24.3(a)(i) of the ECT allows Contracting Parties to take any measures which they consider necessary in time of war, armed conflict or other emergency in international relations. However, these measures shall not have an effect equivalent to expropriation and shall not affect transit. This understanding was confirmed at the ad hoc meeting of the Legal Group of the Energy Charter further to the Russian delegation’s request during the plenary session of the ECT negotiations in March 1994.41 Eventually, the parties agreed that the sanctions introduced following the decision of the UN Security Council at all times prevail over the ECT provisions, including the provisions on expropriation. Any other sanctions introduced by a Contracting Party to the ECT shall not have an effect equivalent to expropriation (full or partial loss of the market value of investments). In this case, conflicts with the ECT may arise if sanctions are applied to companies or persons being shareholders of such companies and if such measures affect transit. All international cooperation projects of the Russian companies with Western partners, which were wound down because of sanctions, from my point of view, clearly demonstrate the occurrence of such losses. And these losses are not virtual, but quite real.42  http://www.energycharter.org/process/international-energy-charter-2015/overview/.   У. Руснак, А. Конопляник, Эволюция модели энергобезопасности. Россия и ДЭХ: не остаться на обочине. – «Нефтегазовая Вертикаль», 2015, № 10, с. 4–12. 42   In regard to Western sanctions’ effects on Russian Arctic offshore oil and gas development, see: А. Конопляник, В. Бузовский, Ю. Попова, Н. Трошина, Влияние антироссийских 40 41

148  Research handbook on EU energy law and policy In the event the provisions of Article 24.3(a)(i) of the ECT are violated, a party to the ECT affected by sanctions may file a claim to the international arbitration according to the provisions of the ECT Article 27, including a claim against the EU, in the case of sanctions introduced by the EU, which has ratified the ECT. In such a case it will be possible to request that the tribunal apply urgent protection measures, which would terminate sanctions introduced in violation of the ECT. But this implies a requirement to be a Contracting Party to the ECT (a country which signed and ratified the Treaty). However, Russia is not such a country – being a Signatory to the Treaty (especially given the declaration of intent not to ratify the ECT when withdrawing from the provisional application of the ECT) is not enough. Another lost opportunity for Russia from not being an ECT Contracting Party. . .

5.  NEW PROSPECTS FOR THE ECT In my view, new prospects for the ECT are opened within the broadening international campaign against ‘energy poverty’, which could be considered as the fourth element of the ‘international energy security’ concept and act as a trigger for the further expansion of the ECT, especially in the South-South dimension. In 1990, when the EU put forward the idea of the European Energy Space (known also as the ‘Lubbers Plan’), which was subsequently transformed into the European Energy Charter (a political declaration) and the legally binding ECT, this European initiative had a clear Euro-Atlantic dimension similar to the Helsinki Accords of 1975 on security and cooperation in Europe. To date (as of January 2017) the ECT has been signed by 52 countries (48 countries ratified the Treaty), as well as by the EU and Euratom. In addition, there is a marked increase in the number of Observers (currently 28), which are potential candidates for accession to the ECT, represented predominantly by the Asian, African and Latin American states. This means that there is an active transformation of the initial European (Euro-Atlantic) dimension of the Charter into a Euro-Asian (Eurasian) dimension and, more widely, into a global dimension by virtue of the universal nature of its international law protection mechanisms aimed at mitigation of non-commercial risks and uncertainty in the tradeinvestment activity in the energy sector. In the process of geographical expansion and adaptation to the new realities of the energy markets, the ECS put forward a new initiative: to add a new fourth element to the concept of the ‘international energy security’ – the fight against energy poverty. This problem is of primary importance for many participants of the Charter Process and future members of the Charter from Asia, Africa and Latin America, as they are in the early stages of energy market development in their countries. Many of these states will not overcome energy poverty according to the model of the industrialized countries, i.e. not through successive stages of industrialization and postindustrialization, which suggests a model of large-scale energy industry development, concentration of energy production and consumption, and subsequent distribution and

санкций на освоение нефтегазового потенциала российского арктического шельфа – и развилки энергетической политики России // Москва, «Восток Капитал», ноябрь 2015, 106 c.

The role of the ECT in EU–Russia energy relations  149 long-distance transportation of the energy produced. The modern stage of technological development allows these mostly agrarian states, which are predominantly non-urbanized, an opportunity to develop their energy sector on the basis of mostly decentralized energy supplies and based to a greater extent on renewable energy sources (RES). For this reason the increase in energy intensity as the basis for upgrading living standards and the liquidation of energy poverty in these countries requires new approaches in terms of international governance, with increasingly more countries being involved in the process. Moreover, it is technologies that will start playing a more important role in energy sector development, rather than nonrenewable natural resources. Therefore, within the agenda on international energy governance, an increasingly important role is assigned not only to issues of access to natural energy resources (which have dominated in this agenda for many decades) and respective mechanisms for implementation of this access, but also to issues of access to technologies and capital markets, to innovations, the responsibility for ecological damage (‘polluter pays’) and other questions, which are specified in the ECT but require a more detailed elaboration (as previously did the issues of ensuring uninterruptible transit). In staying on the sidelines of these discussions and the practical work within the Charter Process in these areas and sticking to the policy of ‘counteraction through inaction’, Russia may miss potential competitive advantages in these areas and on future markets of the said countries, and repeat the negative experience of interaction with the GATT/WTO. In 1947, when the GATT was established, the USSR was invited to participate in the process. The Government rejected the invitation since its leader at that time understood that the USSR would not be able to dominate in this international process. For this reason, instead of creating a level playing field in international trade, two different mechanisms were developed within two systems: the GATT rules – for the global capitalist system – and the COMECON rules – for the global socialist system. The result is well known. The GATT rules were developed without the participation of the USSR and the socialist countries, and thus not taking their interests into account. In 1993, when Russia applied for accession to the GATT (and its successor, the WTO), it took the country 19 long years to pass the test for compliance with the rules adopted by others. I do hope that in the case of the relationship between Russia and the Energy Charter, the USSR’s experience with GATT/WTO will not be repeated. Regarding the EU, there are two options for the further development of the Energy Charter and the ECT. Either the ECT will die as an intra-EU legal instrument which has lost its role as the bridge for trade and investment between East and West with the Russian withdrawal from its ECT provisional application. Moreover, other ECT states will not agree (as Russia has always disagreed) with the two different modes (double standards) of ECT application – within and beyond the EU – put forward by the EU. This means that the ECT will find its new dimension beyond the EU, this time within the developing countries, and increase its role as a bridge between North and South in the fight/international campaign against ‘energy poverty’. This will be another challenge for Russia, since by not being a Contracting Party to the ECT and staying aside from the International Energy Charter, the country faces a risk of falling outside this international process.

8.  Global energy security and EU energy policy Severin Fischer

Energy issues have been extensively discussed in international security policies for decades. Since the first oil crisis of 1973, researchers have tried to grasp energy security as a field of international relations studies. With the most recent changes in global demand and supply patterns around the two most security-relevant fossil fuels – oil and natural gas – some of the traditional views on challenges and possible policy reactions have shifted. The debate about an international reaction to global warming and the trend towards putting more emphasis on decarbonization policies has also influenced views on global energy security lately. In this chapter, we first take a conceptualizing look at global energy security from a public policy perspective, taking account of Andreas Goldthau’s approach of viewing global energy security challenges mainly as the results of market failure on a transnational scale.1 This is followed by a look at the main trends in global energy security and their effects on the EU as an import-dependent community of industrialized countries. Finally, we analyze the EU’s policies on energy security and identify shifts in perspective during the course of the last decade. We conclude with some aspects that could serve as future fields of research.

1. GLOBAL ENERGY SECURITY CHALLENGES AS MARKET FAILURES Although global energy security has become a common feature in international relations and global governance studies, there has been little work done so far on the conceptualization of the issue at stake. Neither is there a common definition of ‘energy security’ nor a shared view about ‘global energy security’.2 Since we want to connect the issue of international energy security and respective EU policy reactions in this chapter, it seems reasonable to approach the topic from a public policy perspective, as this is regarded as most adequate for analyzing EU policies. So we start with the basic notion that the most important energy carriers by volumes – oil, natural gas and coal  – can be viewed as commercial goods that are traded globally or at least on a regional scale. Since coal is largely abundant and its supply structures have not caused significant security debates so far, we can concentrate on the more politicized goods of oil and natural gas.

 1   Andreas Goldthau, ‘A Public Policy Perspective on Global Energy Security’, International Studies Perspectives (2012) 13, pp. 65–84.  2   Tim Boersma, Energy Security and Natural Gas Markets in Europe: Lessons from the EU and the United States, Routledge Studies in Energy Policy, London/New York, 2015.

150

Global energy security and EU energy policy  151 By looking at the energy resources oil and gas as normal commodities, we start with the basic assumption that demand and supply would regulate prices and would guarantee access for consumers, with a high level of flexibility on both the demand and the supply side. However, as experience of the past has indicated, energy markets do sometimes show difficulties in delivering commodities at the quantity or price that is demanded. Therefore, we will assess these market failures according to Andreas Goldthau’s conceptualization of market failure in global energy.3 He identifies four different characteristics of market failures: imperfect competition; existence of externalities; incomplete information; and public good characteristics. 1.1  Imperfect Competition Imperfect competition can be understood as the concentration of market power on the supply or demand side that influences prices arbitrarily. Reasons can usually be found in the existence of monopolies, monopsonies, oligopolies or cartels. 1.2 Externalities Events that are not necessarily related with the commodity market or the individual market actors, influencing prices, can be regarded as externalities. This implies the overreaction of market players to certain situations, directly impacting prices, but not the fundamental real demand and supply situation. One could also imagine indirect externalities influencing market functioning. This would be the case of a lack of investments, for example due to a non-energy-related economic recession, that would under normal circumstances make sense in a perfect market environment. Externalities can also be seen as infrastructural limitations that result in market failures. 1.3  Public Goods Although commodities are mostly seen as private goods, public actors sometimes introduce public good characteristics in the market and therefore disturb markets by sending out wrong price signals. Examples are strategic stocks on the consumer side or artificially spare capacity on the supplier side. These measures can influence markets and send out misleading messages to market actors. Finally, also safety and security issues around transportation can be regarded as public goods that are usually not covered by all consumers and suppliers but rather by a limited number of actors, with others free-riding. 1.4  Lack of Information Adequate information of supply and demand for all actors is a precondition for an adequate price setting in functioning commodity markets. However, states often tend to keep knowledge about their reserves to themselves, creating speculation about future supply   Cf. Goldthau 2012 (n 1).

 3

152  Research handbook on EU energy law and policy patterns. Also, opaque bilateral deals between states can distort an efficient functioning of the market. Different market failures can be identified in nearly every commodity market, depending on regional conditions and market integration. In the global oil market and in regional natural gas markets, market failures have dominated the debates over the last decades.

2.  ENERGY SECURITY IN OIL For many years, discussions about energy security have been closely connected to developments in the oil sector. With the first oil crisis in 1973/74, the challenges surrounding oil supplies and the role of the oil suppliers’ cartel OPEC became obvious. Due to Western support for Israel’s engagement in the Yom-Kippur war, OPEC artificially reduced oil output, leading to a subsequent massive price increase. The unpreparedness of the Western world was the starting point for several initiatives that were supposed to prevent or ease the economic effects of similar events in the future. Among domestic measures to increase oil production in the West, the establishment of the International Energy Agency (IEA) and the development of its strategic stock-piling mechanism was the most prominent one. The market failure of artificially reducing output by OPEC was answered with another market-distorting measure: the creation of a system of public goods in the form of oil stocks. During the years 2000–2010 discussions about energy security in the oil sector changed. On the one hand, worries about natural limitations of global reserves gained greater attention under the term ‘peak oil’. Especially the growing demand in Asia’s emerging economies and the limitations to the conventional oil reserves underlined fears about strong competition for the last barrels. On the other hand, political turmoil and military conflicts such as the second Iraq war led to price peaks and more volatile prices in general. The $140 price peak in 2008 and the subsequent drop to $50 in the same year created a high level of uncertainty among politicians, consumers and market players in the sector (see Figure 8.1). A lack of information about supply and demand as well as political externalities can be seen as the main causes for these more recent market failures. A new chapter in the debate about energy security in oil was opened around 2014. With the massive increase of oil production in the United States, market fundamentals have changed significantly and put prices under pressure. When the spot market price for crude oil hit the $30 threshold in early 2016, many of the assumptions about market developments of the last decades were proved to be wrong. The main reasons for this price drop can be found on the supply side: with an increase of 10 percent to global oil production, the US shale oil industry had a significant impact on global markets. At the same time, traditional suppliers have increased their output as well, in order to compensate for losses. Both developments taken together are leading to the present oil glut.4 A slow growth on the demand side, mainly due to lower growth expectations in Asia, has added to a general picture of global oversupply. An estimate of 3 billion barrels of

 4   Severin Fischer, ‘An Energy World Order in Flux’ in: Oliver Thränert and Martin Zapfe (eds), Strategic Trends 2016, Center for Security Studies, Zurich, 2016, pp. 83–100.

Global energy security and EU energy policy  153 150 Nominal oil price, monthly 120

Real oil price (in 2014 prices), annually

90 60 30

2015

2010

2005

2000

1995

1990

1985

1980

1975

1970

0

Sources:  EIA, BP Statistical Review, World Bank Strategic Trends 2016 (Centre for Security Studies, ETH Zurich).

Figure 8.1 Evolution of the oil price (in US$ per barrel; 1970–1983 Arabian Light, 1984–2015 Brent) oil stocks supports the assumption that a relatively low price level is to be expected in the years to come. In this new market environment, even political crises like the rivalry between Iran and Saudi Arabia or the ongoing war in Syria are leaving oil prices unimpressed. In the short and medium term, these developments are pushing security risks more and more to the supply side of oil. While in the past, it was mainly a question of physical access to oil supplies by consumers or economically damaging price increases, low prices are right now creating domestic trouble for the producers. Especially those countries with high oil production costs are struggling to keep their state budgets under control. But even a low-cost producer like Saudi Arabia has to start cutting back on public spending. Attempts of producer states in OPEC to exert influence on the price developments have had limited effects so far. OPEC’s function as a producer cartel seems to be tremendously weakened.5 The November 2016 deal between OPEC and some of the non-OPEC producers might have been a last attempt at artificially restraining production. On the one hand, because there is no commonly shared strategy on how to react to the current situation – even if there could be a formal agreement on production cuts, there seems to be no internal control mechanism that would guarantee compliance with any sort of a­ greement – this has the characteristics of a ‘game of chicken’ in which those producers that cut production first lose. On the other hand, with the rise of the US shale oil industry, the cartel is being confronted with a stronger and more flexible market force. If prices are increasing, the production level of US shale oil is likely to increase as well. If prices are falling, US oil output is also likely to fall. This is a new development in a market, where long-term investments have been the dominating theme over decades.  5   Khalid M. Kisswani, ‘Does OPEC Act as a Cartel? Empirical Investigation of Coordination Behavior’, Energy Policy (2016) 97, pp. 171–80.

154  Research handbook on EU energy law and policy While the energy security risks have been shifting more to the supply side recently, in the long run, the present situation also poses risks to consumer countries. In a low price environment, international oil companies are reluctant to invest in expensive long-term projects. This process, called ‘Dutch disease’ could hit the oil market after 2020 again, if the present oversupply situation is ending and additional demand is not met by adequate supply. In a nutshell, the functioning of the oil market has improved over the last years with additional suppliers creating a more liquid and competitive market environment. The influence of imperfect competition has been reduced lately. The effect of externalities on the market seems to be lower than ever before. However, the aspects of missing information and the public good aspects to the oil market seem to be of high relevance – the former, when it comes to the mid-term outlook for supply and investments; the latter, when looking at the United States still securing most of the supply routes with their military presence. Whether other actors, such as the EU, will continue free-riding or whether they have to take up their burden in securing the physical functioning of global oil markets is an issue worth debating in the future. A similar level of uncertainty surrounds the effects of the recent deal between OPEC and some non-OPEC states such as Russia on production cuts in order to stabilize price levels. It is unclear whether this anticompetitive action can have a long-term effect on the price of oil.6

3.  ENERGY SECURITY IN NATURAL GAS While most analysts would agree with the description of the oil market as a global commodity market with some functional deficits, natural gas has always been seen as a regionally traded commodity. In the past, three different regional markets have emerged: a Eurasian market, mainly fed by Russia and Norway; an American market, supplied by US and Canadian production; and a recently developing Asian-Pacific market, with Japan as the largest importer. The reason for this structure can be mainly found in the physics of natural gas as an energy source. In the beginning, natural gas was only seen as a waste by-product of oil recovery and hardly used at all. Later, after understanding its value for energy supply, the issue of transporting natural gas became crucial. Pipelines were seen as the only adequate option for years. This also explains the strong infrastructure dependence of natural gas markets. Only in the 1980s did the first commercial large-scale trade with liquefied natural gas (LNG) start to emerge. The externality of high investment needs for infrastructure and inflexible trade with natural gas can be seen as the most influential market failure that stopped a real global natural gas market from taking shape. During the 1990s, the EU Commission started its first attempt to bring competition to the natural gas markets in Europe. This implied solving two problems: first, the extension of the existing infrastructure, in order to give companies access to different import pipelines; second, breaking up supply monopolies and traditional ties between European energy companies and their suppliers in Russia, Norway or Northern Africa. While the

 6   David Sheppard, ‘Oil Futures Raises Doubts over OPEC Deal Rally’, in Financial Times, 9 December 2016, p. 24.

Global energy security and EU energy policy  155

150

10

100

5

50 2015

15

2014

200

2013

20

2012

250

2011

25

2010

300

2009

30

2008

350

2007

35

2006

400

2005

% 40

Share of LNG import capacity as % of total gas import capacity Share of LNG imports as % of total gas imports LNG import capacity in Europe, in billion cubic metres per year Sources:  European Commission, Eurogas, EON Strategic Trends 2016 (Center for Security Studies, ETH Zurich).

Figure 8.2  LNG in Europe Commission was supported by the more liberal, market-oriented and smaller member states, it met fierce resistance in Germany and France. After several legislative attempts, the EU Commission managed to settle a liberal market order with the Third Internal Market Package from 2009, guaranteeing free choice of supplier, establishing regulatory authorities and strengthening market oversight. Not only were regulatory changes within the several regional markets crucial, but so was the emergence of LNG supply as an alternative to classical deliveries by pipeline. With impressive efficiency gains in the process of liquefaction, transport and regasification, LNG became a competitor to pipeline gas over the last two decades. In 2011, LNG reached a level of more than 20 percent of EU imports. In 2015, LNG terminals already covered a third of EU gas import capacity (see Figure 8.2).7 However, not only the means of importing gas, but also the ways of pricing natural gas and the general structure of markets have changed fundamentally. While for many years, natural gas was traded under opaque long-term contracts between companies in EU member states and their counterparts in producer countries, alternative pricing models and a growing trade on spot markets has emerged. In addition to that, the strong link to oil prices is slowly disappearing. This was another aspect in why natural gas markets

  Cf. Fischer 2016 (n 4).

 7

156  Research handbook on EU energy law and policy were far from functioning, since their price-building did not correspond to the supply and demand of natural gas, but to the supply and demand patterns of oil – a mechanism that had historical reasons in investment security and the desire for price stability, but became largely outdated in the market realities of the 21st century. Beside the changes to pricing mechanisms, also the functioning of gas markets changed fundamentally. More and more gas is traded on spot markets today. Even Russia’s Gazprom has started auctions for gas deliveries. This has created a more liquid and competitive EU gas market over the course of the last couple of years. Overall, market failures in natural gas markets have been reducing over the years. Especially the externality of pipeline infrastructure dependence has become less dominant. Also the supply monopolies – at least on EU markets – have been reduced, since nearly every member state nowadays has access to different supply sources. The market has become much more sensitive to supply and demand changes over the short and medium term. Looking at energy security in the gas sector, parameters have changed significantly over the years, especially in Europe. Today, gas supply relations are more market-oriented than ever. Gas security in general can be regarded as relatively high. However, there are exceptions to this. Among these exceptions is the existence of infrastructural islands, lowconnected regional markets with a single supplier. This used to be the case for the Baltic states and is still the case in large parts of south-east Europe, where Russia is still the single supplier. What has become more problematic in recent years is the role of transit states for pipeline gas. While generally supplier and consumer have a mutual interest in identifying an adequate price level for the delivery of gas, transit countries have a pure rent-seeking interest after a pipeline infrastructure project is finished. Therefore, the use of transit pipelines for political reasons or as a means to earn higher revenues seems to be an issue of growing concern. In this case, transit countries turn out to be an externality that could lead to a market failure. The more regional gas markets become liquid and in that way turn out to be global commodity markets of their own, the more market failures of oil and gas markets are turning out to be similar. Keeping markets open and securing global sea lanes for LNG transports, and developing storage facilities and crisis response mechanisms turn out to be decisive factors for resilient supply structures.

4.  EU POLICY ON ENERGY SECURITY Although energy policy played a crucial role in the beginning of Europe’s post-war integration story with the European Coal and Steel Community (ECSC) and Euratom, real steps towards integration took another 50 years to materialize.8 Not even the oil crisis in the 1970s led to an integration of energy policies, but rather to different domestic adjustments in national policies and an overreliance on transatlantic relations, especially in securing oil supplies. It might also be important to mention that, at least from 2000

 8   David Buchan, Energy and Climate Change: Europe at the Crossroads, Oxford University Press, 2009.

Global energy security and EU energy policy  157 onwards, energy security was more related to the secure supplies of natural gas than the stability of global oil supplies. This turned out to be quite contrary to the US, where energy security was traditionally connected to government policies in the field of oil supply security. One of the major obstacles to the development of a common EU policy on energy policy in general has always been the national prerogative on the structure of the national energy supply and the energy mix, as stated in Art. 194, paragraph 3 of the Treaty on the Functioning of the European Union (TFEU). In the past decades, initiatives were mainly blocked by the more resource-rich states such as the United Kingdom, the Netherlands or Denmark, due to their fear of losing national control over their domestic oil and gas reserves. Consequently, energy security policy on EU level started from the basis of existing EU legal competence, namely from the construction of a common EU energy market. The EU Commission’s approach during the 1990s to develop the two markets, one for natural gas and one for electricity, was also framed as strengthening the EU’s policy on energy security. It comes as no surprise in this context that the EU has viewed energy security issues mainly as a regulatory question of how to fix market failures. In the following two sections, we will first look at EU domestic policies on oil and gas security as well as the impact of the more pronounced decarbonization policies. In the second part, the EU’s emerging external policy on energy security will be analyzed. 4.1  EU Domestic Policy Reactions on Energy Security Challenges While the EU’s external energy policy dimension is a relatively new area of common action, the regulatory approach on developing markets and crisis reaction mechanisms has already been in place for some time. EU policies on natural gas are, however, further developed than those on oil. In addition to fuel specific policies, the EU has connected its climate, renewable energy and energy efficiency closely to its energy security policy. Consequently, substituting oil and gas as well as reducing consumption would deliver on an increase of supply security. Without elaborating in more detail on specific policies in this regard, we will have a closer look at this in the last part. 4.1.1 Oil In 2015, crude oil and petroleum products constituted 34 percent of the EU’s overall energy consumption, while, at the same time, around 90 percent of oil supplies were being imported from abroad.9 For decades, reactions to global challenges to the security of oil supplies were left to the United States and the crisis reaction mechanisms developed by the International Energy Agency (IEA) after the first oil crisis in the 1970s. Since all member states of the European Community were also members of the IEA, this transatlantic system proved to be sufficient to address short-term regional supply cuts and global price peaks over the course of some decades. Although the European Economic Community had already agreed in 1968 on a directive for oil stocks and adapted its policy in 1972, the focus remained on the structure of the   European Commission, EU Energy in Figures, Statistical Pocketbook 2016, Brussels 2016.

 9

158  Research handbook on EU energy law and policy IEA oil stock mechanism. The Commission’s attempt in 2002 to widen the EU’s oil stocks directive to keeping reserves for 120 days failed due to the resistance of member states in the Council. When Central-Eastern European states joined the EU in 2004 and 2007, only 19 out of 27 member states were also members of the IEA. Therefore, another attempt to develop a coherent EU policy on oil stocks, as proposed by the EU Commission in 2008, did turn out to be successful. With the decision on EU Directive 2009/119/EC, the EU developed an individual crisis response mechanism for oil stocks, giving member states the choice between keeping reserves for 90 days of imports or 61 days of average consumption. In addition, the ‘Coordination Group Oil’ was tasked with developing an emergency reaction mechanism and a transparent monthly oversight on the individual oil stocks of member states was introduced. On the domestic level, the EU only reacts to short-term market failures, such as externalities due to regional supply disruptions or short-term price peaks. As discussed later, the external dimension seems to be more crucial for the long-term security of oil supplies, although the EU’s role in this context is also of limited impact. 4.1.2  Natural gas EU policies on energy security in the natural gas market have been more comprehensive and extensive than in the area of oil. Policies on natural gas can be separated into two categories – the market-making policies and the crisis-response policies – with both addressing crucial questions around energy security. The creation of a functioning internal gas market has been the prime instrument on the side of the EU Commission to improve the overall energy security situation in Europe. The idea behind this step was that enlarging the size of the market from individual national to one large EU-wide market would stop single suppliers from blackmailing individual states and setting artificially high prices. This, however, required strong intervention on the side of the Commission. With a first directive passed in 1998, the Commission introduced initial measures to guarantee third-party access (TPA) to the gas infrastructure in Europe, challenging incumbents in the member states.10 After several improvements in the legislation in 2003,11 the Third Internal Market Package from 2009 was the latest and most important step in developing rules for the functioning of the internal gas market.12 With this package, the independence of national regulators was increased, the unbundling of transmission and import was improved, the EU-Agency for the cooperation of national 10   European Parliament and Council of the European Union, Directive 98/30/EC Concerning Common Rules for the Internal Market in Natural Gas, 22 June 1998, Brussels. 11   European Parliament and Council of the European Union, Directive 2003/55/EC Concerning Common Rules for the Internal Market in Natural Gas and Repealing Directive 98/30/EC, 26 June 2003, Brussels. 12   The Third Internal Market package consists of five legislative acts, of which two apply for natural gas only and one for electricity and gas. The respective three are: European Parliament and Council of the European Union, Directive 2009/73/EC Concerning Common Rules for the Internal Market in Natural Gas and Repealing Directive 2003/55/EC, 13 July 2009, Brussels; European Parliament and Council of the European Union, Regulation EC/715/2009 on conditions for access to the natural gas transmission networks and repealing Regulation EC/1775/2005, 13 July 2009, Brussels; European Parliament and the Council of the European Union, Regulation EC/713/2009 on establishing an Agency for the Cooperation of Energy Regulators, 13 July 2009, Brussels.

Global energy security and EU energy policy  159 regulators (ACER) was founded, and the planning of infrastructure development was transferred to ENTSO-G. The development of a specific infrastructure policy for gas was a second important aspect within the market-creation agenda of the Commission. While in the first years of its gas infrastructure policy, the Commission was only able to finance feasibility studies in the range of a couple of million Euros per year, the financial contribution increased massively after the gas crisis in 2009, following a dispute between Russia and the Ukraine on gas deliveries. With the European Economic Recovery Plan (EEPR) and its energy infrastructure program, financial support for gas infrastructure projects increased remarkably to 2.4 billion Euros for electricity and gas combined.13 With the new budget for 2014–2020 the co-financing options for energy infrastructure were massively widened again. With this instrument, the EU is now able to co-finance new LNG-Terminals, reverse-flow options in pipelines and new interconnectors. Overall, the emergence of spot-market trade and the competition between gas from different sources (pipeline vs. LNG; Eastern vs. Southern) cannot be explained without taking the Commission’s infrastructure development efforts into account. While the policy for creating a functioning gas market with sufficient infrastructure mainly addresses issues around imperfect competition and externalities, in 2010 the EU also developed its first legal instrument for crisis reaction and preparation with real impact on gas security. Although, already in 2004, the EU had agreed on a directive establishing the ‘Coordination Group on Gas’ and an information exchange, this can be regarded as a rather informal measure looking at its real effects.14 Regulation 994/2010 however constructs a system of safeguards in the case of national or regional supply disruptions. It asks member states to develop Preventive Crisis Action Plans and forces member states to undertake non-market-driven investments, following the N-1-principle.15 When Russia decided to stop delivering gas to the Ukraine in winter 2014 after a conflict about open debts escalated, the assessment of Europe’s gas supply situation showed that the situation had improved massively compared to the situation of the last gas crisis in 2009. This however, had been the result of both market building and crisis response measures together. 4.1.3  Renewables and energy efficiency Although the primary measures addressing energy security in the natural gas and oil sectors were fuel-specific policies, from 2007 onwards the EU’s decarbonization policies became more and more linked to Europe’s security of supply situation. The idea behind this paradigm shift was that reducing and compensating the use of fossil fuels would increase the resilience of the EU’s energy system against outside shocks. With the European Council’s decision of 2007 on achieving the 20-20-20-strategy by 2020, 13   For an overview of the projects financed by the EEPR see: http://ec.europa.eu/energy/eepr/ projects/ (last accessed 06.01.2017). 14   Council of the European Union: Directive 2004/67/EC concerning measures to safeguard security of natural gas supply, 26 April 2004, Luxemburg. 15   Tim Boersma, Energy Security and Natural Gas Markets in Europe: Lessons from the EU  and the United States, Routledge Studies in Energy Policy, London/New York, 2015, pp. 61–70.

160  Research handbook on EU energy law and policy the guidelines were set to reduce GHG emissions, increase the share of renewables and improve energy efficiency at large.16 The decision on the Renewable Energies Directive 2009/28/EC with binding national targets to achieve the EU-wide 20 percent target by 2020 and a specific target for transportation of 10 percent by 2020 was the EU’s major piece of legislation in this context. It also meant a substitution of natural gas in the overall energy mix and especially of oil in the transport sector. Also, a whole range of energy efficiency measures have been agreed, targeting transport, via emission limits for passenger cars and larger vehicles, buildings or energy efficiency in end-use. 4.2  The EU’s Foreign Policy on Energy Security The development of an explicit external energy policy is one of the most recent developments in the field of energy policy. This late arrival aligns with the relatively weak position the EU had (and partially still has) on foreign and security policy in general. It comes as no surprise therefore that the EU framed its approach over many years as the ‘external dimension’ to its energy policy – a term that seemed to be much more suitable to describe the Commission’s actions in this field than a specific energy foreign policy. The main element of this external dimension approach was the creation of markets along and in accordance with the EU’s internal energy market. With the fall of the Berlin Wall and the transformation in Eastern Europe starting in the years 1989/90, also the conditions for member states in dealing with energy supplies from Eastern Europe were set to change. A new rationale and legal framework had to be developed. European actors put an early emphasis on the development of the Energy Charter Treaty that would guarantee reciprocal investment conditions. It was also supposed to develop rules for the transit of energy sources through the territory of contracting parties. This was mainly directed at creating a common framework for Russia and the former Commonwealth of Independent States (CIS) countries. It was also in accordance with the emerging European domestic market structures. Although Russia signed the treaty, it never ratified it, because of the lack of a Transit Protocol, important for Russia’s exports to Europe. In a similar way, the EU tried to introduce market principles along the evolving structure of its internal market into the bilateral relationships with individual states in its neighborhood. The prime example here is the Strategic Partnership with Russia, under which the Working Group on Energy mainly focused on developing market principles for the Russian domestic market and trade conditions with the EU. Similar approaches were chosen in the context of the EU’s neighborhood policy, under which the development of functioning energy markets always played an important role. The institutional manifestation of the EU’s external energy policy certainly is the creation of the ‘Energy Community’ that was rightly called the ‘Energy Community for South-East Europe’ in the beginning. Although the aim of the Energy Community is stated as the development of common rules for a functioning market, in fact, it is the

16   European Council, Presidency Conclusions of the European Council meeting of 8/9 March 2007, 7224/1/07 Rev 1, Brussels.

Global energy security and EU energy policy  161 enlargement of the EU’s domestic market to neighboring countries with an accession perspective. This strategy has proven successful in many cases, especially in the Western Balkans, where most states have adapted their national legislation to the EU’s Energy Acquis Communautaire. When it comes to issues that go beyond the market enlargement perspective, the EU’s energy foreign policy is showing clear deficits. As Susanne Rompel has shown in her remarkable work on the EU’s energy foreign policy, diverging interests among member states and a lack of the financial and legal means to support EU approaches stand contrary to the often mentioned ambition of developing a coherent energy foreign policy.17 In the case of the Nord Stream pipeline, for example, bilateral arrangements between individual companies managed the realization of the infrastructure project, without asking for the consent of or even financial assistance from the EU as an actor. Financing was secured privately and EU regulation did not apply. Conversely, one of the EU’s most favored infrastructure projects, the Nabucco pipeline, bringing gas from Central Asia and the Caucasus via Turkey to Europe, was planned for more than a decade, and although it was offered financial assistance and political support, it was never realized. Both examples show quite impressively that the EU has not been the central player in the context of ‘pipeline politics’ for some years. It might be asked, however, how far this kind of EU foreign energy policy is needed at all, following the regulatory state approach. The main success of Europe’s natural gas policy so far clearly lies in the creation and stabilization of markets. Although, speaking with a ‘single’ voice in international energy policy was already an objective in the EU’s 2007 energy action plan, little has happened that went beyond informal exchange and partnership agreements with other consumer, producer or transit states. An exception might be the creation of the EU-US energy council, which also started elaborating on including energy issues into the envisioned free trade agreement TTIP.18

5. THE ‘ENERGY UNION’ AND THE ATTEMPT TO ADJUST THE EU’S REACTION TO GLOBAL ENERGY SECURITY CHALLENGES Starting with the gas crisis in winter 2009 and certainly enforced by disputes between Russia and Ukraine on gas deliveries in 2014, a shift in the perception of energy security has appeared on the side of the EU Commission. This strategic shift encompasses a clearer addressing of the single major energy security problem the EU is facing in the view of many stakeholders in Brussels: gas deliveries from Russia. For the first time, the ‘European Energy Security Strategy’ of May 2014 clearly states that Russian gas supply is the single most important energy security challenge for EU ­ ossible member states.19 The central aspect of the strategy paper is a scenario analysis of p 17   Susanne Rompel, Eine Energieaussenpolitik für die Europäische Union. Anspruch und Wirklichkeit, Institut für Europäische Politik, Europäische Schriften 95, Baden-Baden, 2015. 18   Rafael Leal-Arcas, The European Energy Union: The Quest for Secure, Affordable and Sustainable Energy, Claeys & Casteels, Deventer/Leuven, 2016, pp. 35–55. 19   European Commission, Communication from the Commission to the European Parliament and the Council: European Energy Security Strategy, COM(2014) 330, 28 May 2014, Brussels.

162  Research handbook on EU energy law and policy supply disruptions in the context of EU–Russia natural gas trade in the winter of 2014/15. The set of instruments, however, has not changed fundamentally compared to earlier documents: improving the internal market; the use of crisis response mechanisms; and the lowering of domestic demand. Strengthening the domestic production of fossil fuels can be seen as one aspect that received more attention following the experience with the US shale gas revolution and the hope of initiating similar developments in the EU. Under the headline of ‘diversification’, the Commission also emphasizes the potential of growing LNG supply and interestingly mentions possibilities of increasing supplies from the second and third biggest suppliers Norway and Northern Africa, not from Russia however. The clear support for this can also be seen as a deviation from the classical approach of market-driven alternatives. This shift towards a more pronounced mentioning of a perceived energy security challenge cannot be explained without taking into account changing EU politics. From March 2007 onwards, when the European Council endorsed the plan for an ‘integrated energy and climate policy’, a balance between the three strategic aims of sustainability, competitiveness and security of supply was promised by the Commission. In the notion of Central-Eastern European member states, however, EU action in this policy field drifted strongly towards decarbonization and environmental sustainability, while the other two parts of the triangle were not as prominently mentioned as before. Especially Polish resistance against further climate policy measures, as proposed by the Commission and supported by North-Western European member states around Germany, France and the United Kingdom, can be explained by having this in mind. With Jean-Claude Juncker taking office as President of the Commission in late 2014, his project of creating an ‘Energy Union’ was meant to address this issue and create a new narrative around the EU’s energy policy. When the Commission presented its proposal for the ‘Energy Union’, ‘energy security, solidarity and trust’ ranked number one in the listing of the five dimensions to the strategy,20 separate from the chapter on the functioning of the internal energy market. The ‘Energy Union’ strategy was endorsed by the European Council a few weeks later. Having this shift in priorities in mind, the proposed aims and instruments for improving the EU’s energy security policy are also impressive. While they do not break fundamentally with the traditional view of creating a market as the best means to improving energy security, they add a couple of new perspectives to it. The clear message to take political action to diversify away from one single supplier can be read clearly as non-market-driven action to reduce the share of Russian gas imports. This goes hand in hand with the important role that is granted to LNG in this context. Even the European Council took up a Polish proposal to assess whether demand aggregation (in gas) could be an option to move forward for securing supplies.21 This would in fact create an artificial and probably ineffective demand-side cartel among EU gas consumers. 20   European Commission, Communication from the Commission to the European Parliament and the Council: A framework strategy for a resilient Energy Union with a forward-looking climate change policy, COM(2015) 80, 25 February 2015, Brussels. 21   European Council: Conclusions of the European Council on the Energy Union, 19 March 2015, online: http://www.consilium.europa.eu/en/press/press-releases/2015/03/conclusions-energyeuropean-council-march-2015/ (last accessed 06.01.2017).

Global energy security and EU energy policy  163 Another important aspect is the Commission’s plan to improve the Gas Security Regulation, giving Brussels more influence on crisis-response mechanisms and forcing member states to create a common preventive action plan. Finally, the Commission proposed to take a more active role in international energy policies: Energy policy is often used as a foreign policy tool, in particular in major energy producing and transit countries. This reality has to be taken into account when discussing Europe’s external energy policy. Therefore, the European Union has to improve its ability to project its weight on global energy markets. Together with its major partners, the European Union will work towards an improved global governance system for energy, leading to more competitive and transparent global energy markets.22

For the first time, in this document the Commission is clearly trying to form a foreign policy in the field of energy that notably goes beyond pure market enlargement and bilateral cooperation offers. As a consequence, the EU Council of Foreign Ministers adopted a position paper on ‘Energy Diplomacy’ – the first ever comprehensive energy foreign policy paper agreed upon by all EU member states.23 It also focuses on diversification efforts and mentions strong EU involvement in building global governance systems for energy.

6.  CONCLUSION AND RESEARCH AGENDA This chapter started with a view on global energy security challenges from a public policy perspective, identifying different dimensions of market failures. By categorizing market failures into four groups, we looked at cases in the global oil market and changes in the structure of gas markets. It became clear that energy security challenges have changed remarkably over the years in both markets. In the section on EU energy policy reactions, we emphasized the process of market building as the main policy response developed by the EU over recent decades. While infrastructure development and regulation were at the core of this process, the creation of crisis response mechanisms added a non-market perspective to the overall picture. With the Russian–Ukrainian gas crisis in 2009 and political changes on the EU level, the focus of the EU’s energy policy has slightly shifted away from a pure market perspective towards a stronger politicization of energy relationships, especially in the context of EU–Russia relations. The development of the concept for a ‘Energy Union’ in 2014/15 has brought a more political perspective to the question of energy security as well. So far, only a few decisions on additional instruments and measures in the context of the ‘Energy Union’ have been taken. Over the coming years it will become clearer, whether and how the Commission’s strategy is also accepted and implemented by the member states. The relation of global energy security challenges and the EU’s energy (security) policy

  Cf. European Commission 2015, p. 6.   Council of the European Union: Council Conclusions on Energy Diplomacy, 10995/15, 20 July 2015, Brussels. 22 23

164  Research handbook on EU energy law and policy provides a whole set of new questions for scholars, especially in political science. Among these questions, the effects of changing global circumstances, the temporary age of abundance, on EU energy policy could be an interesting topic for research. In this context, the EU’s dealings with big suppliers might be relevant too. How far is the EU’s energy security discourse still dominated by a lack of access to resources? Or are foreign policy and geopolitics more influential than market developments? Finally, the Paris Agreement on climate change from November 2015 might also influence the global economy of fossil fuels. Despite its own transformations strategy, to what extent does the EU deal with the effects of global decarbonization and does it have an understanding and adequate instruments for dealing with transformation processes in resource-rich nations?

9. Rule-maker or rule-taker? The EU and the shifting global political economy of energy Thijs Van de Graaf

1. INTRODUCTION The energy policy of the European Union (EU) does not stand on its own, operating in a political or economic vacuum. Instead, it is heavily influenced by the international political economy (IPE), that is, the shifting balance between states and markets in the world economy. In spite of its strategic character, which makes governments want to vigilantly guard their sovereign prerogatives over energy, the energy sector has not escaped the marked swings in the state–market pendulum that have characterized the global political economy throughout modern history. The shape and substance of energy policy has varied over time in response to price developments, changing perceptions of externalities associated with the energy sector, and shifting ideological preferences about the ­appropriate role for government in the economy.1 In the post-war period, energy policies used to be firmly in state hands, with national monopolies being common, and energy policy strictly subject to industrial planning and central steering. In the 1980s, the specter of deregulation and privatization reigned supreme. The dominant idea was no longer one of central planning, but rather one of competition and market liberalism. Since the turn of the millennium, and particularly since the Great Recession of 2008, a new interventionist period has emerged. It is driven in large part by the rise of new energy-consuming powerhouses such as China, India and Brazil, which have decidedly statist and strategic energy policies. But it also follows from efforts to deal with climate change, which implies a greater role of the state in regulating and governing energy markets. Developments in EU energy policy and law cannot be decoupled from this broader international political economy (IPE). The EU itself was designed in the 1950s to enhance peace, prosperity and democracy in Western Europe through economic integration. Its principal tool was economic regulation, geared towards making and maintaining markets. The ‘1992 project’ of completing the Single European Market (SEM) reinforced this liberal outlook, at a time when the EU also began to make strides on the energy front. The EU’s liberal energy agenda of the 1990s – with its focus on liberalizing electricity and natural gas markets – was supported by an extraordinarily benign environment: the end of

 1   D. Finon, ‘From Energy Security to Environmental Protection: Understanding Swings in the Energy Policy Pendulum’ (1994) 6 Energy Studies Review; F. McGowan, ‘Can the European Union’s Market Liberalism Ensure Energy Security in a Time of “Economic Nationalism”?’ (2008) 4 Journal of Contemporary European Research 90; A. Goldthau, ‘From the State to the Market and Back: Policy Implications of Changing Energy Paradigms’ (2012) 3 Global Policy 198; T. Van de Graaf and others, The Palgrave Handbook of the International Political Economy of Energy (Springer 2016).

165

166  Research handbook on EU energy law and policy the Cold War, the American unipolar moment, the spread of the neo-liberal Washington Consensus, and historically low oil prices.2 The EU’s aim to promote markets and institutions for oil, gas, electricity and carbon has long relied solely on the regulatory tools of the single market, and more specifically the EU’s competences with regard to competition policy. Even at a time when the EU’s internal energy market was hardly completed, the EU sought to export its own acquis communautaire towards neighboring countries. That has worked for candidate member countries, and some smaller countries in the EU’s periphery, but has run into problems as the EU tried to extend its reach farther away from its own borders. Confronted with a resurgent Russia, whose economy and national confidence have thrived in the period 2000–2014 on the back of high oil prices, the EU has gradually adjusted its energy governance strategy. Several rules and principles of the internal energy market have been applied in a more strategic manner, pointing to a possible ‘mercantilist’ turn in the EU’s approach to energy. As Goldthau and Sitter have aptly summarized it, the key challenge for a ‘liberal actor’ such as the EU is to adapt to an increasingly ‘realist’ energy world.3 This chapter begins by summarizing the key historical shifts in the global political economy of energy, which provides the contextual backdrop against which the EU has attempted to develop its own energy policies and regulations. Next it describes the key features of the EU’s traditional liberal approach to energy governance, focusing on the internal energy market, the attempts to export those internal energy market rules to neighboring countries, and the policies to encourage decarbonization. The subsequent section argues that the EU may be shedding some of its liberal attitudes in favor of a more mercantilist energy governance strategy. The final section concludes and raises some suggestions for future research.

2.  KEY ERAS IN THE IPE OF ENERGY The EU faces a set of daunting energy security challenges. The bloc of 28 member states is the world’s largest energy importer, importing 53% of its energy, at an annual cost of around €400 billion (in 2013). As the EU’s indigenous production of oil and gas declines, its import dependency is set to grow.4 This means more reliance on producers in unstable regions (such as the Middle East) or on countries with which the EU has a troubled relationship (such as Russia). This growing import dependence comes at a time when trends such as climate change, the rise of new energy-consuming heavyweights such as China and India, and a return of state-interventionist policies are all reshaping global energy relations. As a large importer of fossil fuels, the EU is very exposed to supply security challenges stemming from market and political shifts in the international oil and gas markets.5 Three major eras are traditionally identified in the IPE of energy, with a fourth currently  2   A. Goldthau and N. Sitter, A Liberal Actor in a Realist World: The European Union Regulatory State and the Global Political Economy of Energy (Oxford University Press 2015).  3  Ibid.  4   European Commission, European Energy Security Strategy, COM (2014) 330 final, May 28, 2014.  5   Goldthau and Sitter, A Liberal Actor in a Realist World (n 2).

Rule-maker or rule-taker?  167 in the making. Each era is characterized by a different power and interest constellation, as well as a different energy policy agenda.6 2.1  The Era of the Seven Sisters In a first phase, from roughly the interwar period to the late 1960s, oil was the only energy commodity traded in large quantities. This international oil trade did not provoke a collaborative regulatory response from the major states, however, because they benefited from the strong position of their domestic oil companies. Indeed, for much of the first decades of the twentieth century, a handful of Western companies dominated international oil trade through formal cartel arrangements. These so-called ‘Seven Sisters’ were vertically integrated companies, implying that they owned, produced and transported the bulk of the oil trade. Linked by a series of formal cartel arrangements they restricted the supply of petroleum and controlled oil prices on world markets. The two cornerstone agreements supporting this cartel were the 1914 Red-Line Agreement and the 1928 Achnacarry Agreement. The former specified that Middle Eastern reserves would be developed through one company, the Turkish Petroleum Company, which was owned by three international oil companies – British Petroleum (BP), Royal Dutch-Shell and the Compagnie Française des Pétroles (CFP). The Achnacarry, or As-Is Agreement, in turn, divided the sale of oil in world markets between BP, Royal Dutch-Shell and Exxon. During the 1930s, other major oil companies such as Mobil, Texaco, Socal and Gulf worked themselves into the agreements.7 Except for petroleum, which was traded internationally in significant quantities, national energy markets were mostly autarkic. There were nationally segregated industries in the coal, electricity and nuclear sectors. The vast majority of the energy consumed in the largest countries was also produced within their borders. This was especially true for coal, which remained the single most important commercial fuel until 1966.8 Since most industrialized countries were endowed with large indigenous coal reserves, there was almost no international trade of coal. 2.2  The OPEC Revolution After World War II, the Seven Sisters cartel began to break down in parallel with the collapse of colonial power. From the late 1940s onward the oil-exporting countries began to negotiate increasingly favorable deals. In their effort to capture a larger share of the oil rents, they forced the oil majors into renegotiations of the royalties, taxation and cost sharing. The host governments began to successfully pressure the Seven Sisters to increase their respective production quotas. Eventually, this trend culminated in a series  6   B. Mommer, ‘The Governance of International Oil: The Changing Rules of the Game’ (Oxford Institute for Energy Studies 2000); Goldthau, ‘From to the State to the Market and Back’ (n 1); R. Dannreuther, ‘Energy Security and Shifting Modes of Governance’ (2015) 52 International Politics 466.  7   A.L. Danielsen, Evolution of OPEC (Harcourt Brace Jovanovich 1982).  8   V. Smil, Energy at the Crossroads: Global Perspectives and Uncertainties (MIT Press 2005).

168  Research handbook on EU energy law and policy of ­nationalizations, so that by the mid-1970s, the Middle Eastern governments had taken control over the oil business within their boundaries. It is in this context that the birth of the Organization of Petroleum-Exporting Countries (OPEC) should be situated. OPEC was founded in 1960 at the initiative of the Venezuelan Oil Minister Pérez Alfonso and the Saudi Oil Minister Abdullah Tariki. OPEC’s five original members were soon joined by other oil-exporting states, mainly from the Middle East and North Africa. By 1973, OPEC had 12 members and was producing 53.9% of total world oil output. More importantly, the oil-exporting countries had succeeded in slowly wresting control of production and prices from the oil majors. The lead was taken by Libya where Colonel Qaddafi, after seizing power in 1969, threatened to expropriate any foreign oil company that did not cut production and pay more taxes. The oil companies reluctantly gave in, and the Libyan example was followed by other oil-producing states, all claiming a larger share of the companies’ profits. After a while, the companies united in a common front and sought to negotiate with OPEC as a bloc. This resulted in the 1971 Tehran and Tripoli Agreements, which increased royalties and prices. Simultaneously, there was a wave of nationalizations in the oil industry, including Libya (1970), Iraq (1972) and Venezuela (1974), which led to the present era in which national oil companies control the majority of the world’s oil reserves. These developments set the stage for OPEC to discover the political utility of its ‘oil weapon’. The trigger to the oil crisis was the Yom Kippur War of October 1973. The pro-Israeli position of the United States and the Netherlands in that conflict prompted some Arab oil-exporters – not OPEC, as is commonly believed – to impose oil embargoes on those two countries. Iraq, Iran, Venezuela, Indonesia and other OPEC members did not participate in the embargo. The export ban was later extended to Portugal, South Africa and Rhodesia. As a result, oil supplies fell about 9% on a global scale between October and December 1973.9 The major oil-consuming countries reacted to this crisis in an uncoordinated and competitive manner. Some pressured their oil companies into giving them a preferential treatment. Others imposed restrictions on the export of petroleum. Larger countries’ companies bid up oil prices on the spot market. European countries sought to distance themselves from the Dutch and appease the Arabs. This scramble for oil supplies actually aggravated the effect of the oil embargo, and thus undermined the energy security of the OECD countries. 2.3  The Neoliberal Era OPEC’s dramatic assertion of market power in the early 1970s would fundamentally alter the rules of the international oil game. After wrenching control over their national oil and gas sectors from the oil majors, the OPEC countries were now able to set world oil prices throughout the 1970s, using Arabian Light as a benchmark and defining reference prices for member states’ oil exports.10 This OPEC-dominated oil order provoked

  D. Yergin, The Prize: The Epic Quest for Oil, Money & Power (Simon and Schuster 2011).   L. Maugeri, The Age of Oil: The Mythology, History, and Future of the World’s Most Controversial Resource (Globe Pequot 2007).  9 10

Rule-maker or rule-taker?  169 opposition from the United States, who had long acquiesced in and benefitted from the ­company-dominated oligopoly. In response, Washington began advocating a set of ground rules for the international oil system that competed with those advanced by OPEC. At the heart of these ground rules, lay the basic principle that the market mechanism should play a dominant role in the oil system.11 The United States pushed through its liberalist oil agenda in two stages. In a first stage, between 1973 and 1980, it embraced a strategy of ‘circumscribed liberalism’.12 Domestically, the United States clung on to strict regulatory policies designed to shield its consumers from rising world-market prices and to protect smaller oil firms. Internationally, the United States emphasized the insurance role of the newly created International Energy Agency (IEA) as opposed to the market interventionist role – that is, the IEA’s emergency system was only to be activated when vital national interests were at stake, not to alleviate prices in an emergency. In a second stage, starting in 1981 when the Reagan administration took office, the United States turned to a strategy of outright ‘laissez-faire liberalism’. That is, government intervention was to be eradicated from the domestic and international oil markets altogether.13 An important step down the road of laissez-faire liberalism was President Carter’s decision, in April 1979, to decontrol domestic oil prices. Following domestic deregulation, successive United States administrations have sought to steer more of the world’s oil trade into spot-market pricing systems, rather than the long-term, bilateral supply contracts favored by OPEC.14 A marginal spot oil market had existed for years, centered mainly in Rotterdam, but by 1978, it only accounted for a meager 3–4% of the total oil trade. Its scope was broadening, though, thanks to the behavior of many producer countries. Eager to exploit the bullish oil market, they began selling oil on the spot markets, which were then more profitable than the traditional long-term contracts that had been the rule for decades. Maugeri duly concludes that, ‘by a fateful irony, it had been OPEC itself that let loose the “monster” – the market – during the 1970s, when it fell victim to its own greed’.15 More than anything else, the launching of the first oil futures contracts – often referred to as ‘paper oil’ – on the New York Mercantile Stock Exchange (Nymex) in 1983 and on London’s International Petroleum Exchange (IPE) in 1988 helped to craft a new oil world no longer depending on bilateral long-term contracts. As the annual volume of contracts increased year after year, these exchanges began to handle an ever-larger portion of the world’s oil trade, and they became the principal arenas for price formation on the international oil markets.16 According to Maugeri, the introduction of futures contracts ‘was a

11   H.J. Bull-Berg, American International Oil Policy: Causal Factors and Effect (St Martin’s Press 1987). 12   Ibid., p. 170. 13   Ibid.; P. Noël, Production d’un ordre pétrolier libéral: une politique normative américaine dans les relations internationales entre 1980 et 2000 (Doctoral dissertation, University of Grenoble 2002). 14   F. Leverett, ‘Consuming Energy: Rising Powers, the International Energy Agency, and the Global Energy Architecture’ in A.S. Alexandroff and A.F. Cooper (eds), Rising States, Rising Institutions: Challenges for Global Governance (Brookings Institution Press 2010), p. 246. 15  Maugeri, The Age of Oil (n 10), pp. 137–8. 16   Leverett (n 14).

170  Research handbook on EU energy law and policy historical turnaround for a sector that for many decades had seen the price of oil governed by more or less successful oligopolies’.17 2.4  The Dawn of State Capitalism In the 1990s, it was believed that oil would be traded on globalized markets, cleansed of its nationality. At present, however, three trends are leading to a new equilibrium. The trends are: the rise of new consumers; new anxieties about energy security; and growing awareness of the realities of climate change. They bring the state ‘back in’ as the central authority and locus of power in international energy relations, at the expense of the unbridled belief in markets and institutions that reigned supreme in the 1990s. The EU’s energy law and policy has not remained unaffected by this increasing politicization and even securitization of energy trade. A first major transition comes from geopolitical change. The two most significant changes are the collapse of the Soviet Union in the early 1990s and the more recent rise of developing countries as energy importers. Non-OECD countries have seen their share in worldwide energy demand rise from less than 30% in 1970 to almost 60% in 2014 (BP, Statistical Review of World Energy, June 2015). Some of the world’s biggest energy importers (e.g., China, India) are outside of any meaningful institutional apparatus for global energy governance.18 A second major transition is the increasing volatility in oil and gas markets, creating new anxieties about energy security. Oil prices have swung markedly over the past few years. The period 2005–2014 witnessed a cycle of high (and volatile) energy prices, after a long cycle of low prices in the period 1985–2005. High oil prices in the 2000s spawned an active debate about ‘peak oil’ and the amount of oil geologically available on the planet. Although the revolution in shale gas and tight oil production in North America has largely stymied this debate, it is clear that the cheapest oil reserves are increasingly being produced from autocratic and sometimes politically unstable regions of the world. Since oil is traded on a globally integrated market, developments anywhere could provoke ripple effects throughout the world market. Arguably the most important transition is linked to the issue of global climate change and the need to decarbonize the global economy. Energy production and consumption is the single largest source of greenhouse gas (GHG) emissions, representing almost 70% of global emissions.19 States and markets have been slow to change, and world carbon emissions continue to rise. Still, to the extent that states take meaningful action to reduce GHG emissions, this is very likely to create incentives for a significant change in fuel choices and energy production patterns. Incentives will shift away from consumption based on heavily emitting sources, such as coal and petroleum, towards low emitting sources such as wind, solar, geothermal and hydroelectric power. At the climate conference in Paris in late 2015, for the first time ever, almost all of the world’s countries committed to reducing or controlling their own greenhouse gas emissions.  Maugeri, The Age of Oil (n 10), p. 137.   T. Van de Graaf, ‘The IEA, the New Energy Order and the Future of Global Energy Governance’ in D. Lesage and T. Van de Graaf (eds), Rising Powers and Multilateral Institutions (Palgrave Macmillan 2015). 19   IEA, Energy and Climate Change: World Energy Outlook Special Report, 2015. 17 18

Rule-maker or rule-taker?  171

3. THE EU’S LIBERAL APPROACH TO ENERGY GOVERNANCE The EU energy policy is thus guided by three objectives, namely energy security, environmental sustainability and economic competitiveness. The preferred way for the EU to reach those goals has always been the completion of the internal energy market and the extension of the EU’s regulatory reach abroad. In parallel to this, the EU has the ambition of establishing itself as the world’s climate champion in international climate talks and the transition towards a decarbonized economy. The next sections take up these three tracks in EU energy policy. 3.1  Making Markets at Home The liberalization of gas and electricity markets has long been the hallmark of the EU’s energy policy. In the absence of a specific legal basis for the EU to develop a genuine energy policy, the completion of the internal energy market represented a sort of ‘energy policy in disguise’. It actually was a classic case of ‘spill-over’ whereby the development of competences for the European Commission in a generic area makes it impinge upon other areas as well. The EU’s energy policy has long derived from the internal market competences, but also competences with regard to transport and environmental policy. While the Treaty of Lisbon has finally provided a legal basis for the EU to develop a proper energy policy, the energy mix remains the exclusive prerogative of the member states. In practice, however, this provision amounts to legal fiction. To be sure, national governments in the EU have vigilantly guarded their sovereignty over energy policy. Yet, successive EU energy and climate regulations (e.g., the 20-20-20 goals) have ensured that the space for each member state to autonomously decide on its energy mix has become smaller over time. The EU’s drive to build a fully-integrated internal energy market has focused primarily on the liberalization of natural gas and electricity markets. The underlying goal was not related to energy security or to climate change, but was to make sure that energy providers operate in a competitive environment that ensures affordable prices for end users (industry, businesses, families). Natural gas and electricity are two network industries characterized by a fixed infrastructure and thus prone to what economists call a ‘natural monopoly’, much like the railroads and telecommunications sectors, other markets which the EU sought to liberalize. Breaking down the old state-led monopolies in these network industries proved a challenge for the EU. For a long time, the European Commission relied on its traditional market-integrating and anti-trust policies to try and create a common energy market. The Commission’s key goal was to make transmission operators independent from supplier interests, with the expectation that this would lead to sufficient cross-border infrastructure and generation capacity. Ownership unbundling was the major focus of the legislative packages of 1996–1998, 2003 and 2009.20 The so-called Third Energy Package of 2009 was the most comprehensive one. The package not only comprised the unbundling provisions, but also the creation of more

20   D. Buchan and M. Keay, Europe’s Long Energy Journey: Towards an Energy Union? (Oxford University Press 2016).

172  Research handbook on EU energy law and policy powerful networks of European regulators (the Agency for the Cooperation of Energy Regulators, or ACER) and of transmission operators (the European Network for Transmission System Operators for electricity and gas, the so-called ENTSO-E and ENTSO-G). This package laid the foundation of further improvements in market integration. Even though this legislation was quite effective and forceful, the Commission soon realized that it needed to intervene more because the imperatives of climate change needed the EU to add infrastructure faster than markets could provide. Moreover, the Russia–Ukrainian gas crisis of January 2009, much more severe than the short blip in gas supplies in 2006, served as a wake-up call for the EU and showed that the Commission had much more work to do in terms of security of supply measures (ensuring bi-directional flow of gas pipelines, regulating energy security policies, coordinating strategic stocks of gas, stress testing the system, etc.). With the February 2015 launch of the Energy Union, energy market integration was back on the table – as though it had ever been away. The Commission had quickly come to realize that insufficient investments were made in infrastructure, and that market concentration and weak competition kept on fragmenting the EU energy landscape. A political boost had to be given in order to complete the internal energy market.21 A specific minimum interconnection target was set for electricity at 10% of installed electricity production capacity of the member states, which should be achieved by 2020 (15% by 2030). Transmission system operation was also to become much more integrated. In short, the Third Energy Package was to be updated and to become more robust for the internal market to be fully realized. 3.2  Exporting Rules to the Near Abroad Just as with the EU’s drive to liberalize gas and electricity markets, the EU’s external energy policy also largely derives from the EU’s competences with regard to the internal energy market. Part of the EU’s external influence in energy markets happens indirectly, as a by-product of domestic regulation. Because of the sheer size of the EU energy market, the EU’s internal rules and regulations have significant effects beyond the EU borders. For example, the EU’s Fuel Quality Directive (Directive 2009/30/EC) or its biofuels sustainable standards and certification systems reverberate well beyond the EU’s borders since they set standards that exporters to the EU market have to follow. Given the huge size of the EU’s internal energy market, these standards have a far-reaching impact, affecting the operations of businesses from Canadian tar sand firms to biodiesel producers in Brazil. The cross-border influence of these domestic regulatory standards derives purely from the size and hence attractiveness of the EU’s market,22 which corresponds to Damro’s concept of ‘market power’.23 Yet, the EU also undertakes active efforts to export its own internal energy market rules abroad. The immediately neighbouring countries are the primary targets for this attempted rule export, but the EU arguably tries to contribute to global regime building 21   EU Commission, Energy Union Package: A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, 25 February 2015, COM(2015) 80 final. 22   A. Goldthau and N. Sitter, ‘Soft Power with a Hard Edge: EU Policy Tools and Energy Security’ (2015) 22 Review of International Political Economy 941. 23   C. Damro, ‘Market Power Europe’ (2012) 19 Journal of European Public Policy 682.

Rule-maker or rule-taker?  173 in the areas of energy and climate change. As Javier Solana wrote in one of the first EU memos on external energy policy, ‘The EU should extend its own energy market to include its neighbours within a common regulatory area with shared trade, transit and environmental rules’.24 It is interesting to note that exporting the internal energy market rules was an active policy goal for the EU even before the international energy market has been completed. A 2014 progress report noted that further steps were needed to complete the internal energy market, both the hardware component (e.g., investments in cross-border electricity connections, especially for linking the grids of the Iberian peninsula, the Baltic region, Ireland and the UK) and the software component (e.g., harmonized rules across Europe for electricity infrastructure).25 One of the primary vehicles to promote regional market integration and rule export in the energy sector is to work through regional agreements and institutions. The prime example is the European Energy Community, established at the initiative of the EU in 2005. It is a binding treaty, supported by a permanent secretariat in Vienna, which basically extends the EU’s internal market regulation for energy to South-Eastern Europe and Ukraine. Signatories commit to transposing the past and future EU directives and regulations into national law, including the comprehensive Third Energy Package from 2009. The Energy Community represents a classic case of neo-functionalist integration, purposefully modelled after the European Coal and Steel Community.26 In other words, the treaty is not just about multilateral cooperation but about sectoral, regional integration. An earlier effort was the Energy Charter Treaty (ECT), created in the early 1990s, the heydays of post-Cold War euphoria. The ECT is a comprehensive treaty covering energy trade, transit, investment and dispute settlement. It was the first pan-European exercise at liberalizing and harmonizing rules for trade and investment in the energy sector. Around 50 states are involved, but the biggest problem is that Russia has never ratified the treaty, and completely withdrew in 2009. Other efforts at rule exporting include the European Economic Area (EEA), the Baku Initiative, the Black Sea Synergy and the Eastern Partnership. Though each focuses on another region, the common thread running through these initiatives is that they seek to integrate neighbouring countries into the EU’s internal energy market, liberalize energy trade, and bring national energy regulations into line with the EU’s rules. The EU has been very successful in exporting its own regulations to the candidate countries and to the countries of the EEA (which, importantly, includes Norway, a key oil and gas supplier of the EU). These countries are now covered by supranational rules. The EU has also made serious headway in extending its ‘regulatory reach’ into the Balkans and Ukraine (through the Energy Community), but it has been less successful in exporting its rules to major oil and gas exporters in Europe’s vicinity, most notably Russia.27

24   J. Solana, ‘Towards an EU External Energy Policy’ (2006), http://www.consilium.europa.eu/ ueDocs/cms_Data/docs/pressdata/EN/discours/91788.pdf. 25   EU Commission, Progress towards completing the Internal Energy Market. COM(2014) 634 final. 26   S. Renner, ‘The Energy Community of Southeast Europe: A Neo-functionalist Project of Regional Integration’ European Integration online Papers (EIoP). 27   H. Prange-Gstöhl, ‘Enlarging the EU’s Internal Energy Market: Why Would Third Countries Accept EU Rule Export?’ (2009) 37 Energy Policy 5296; K. Schulze, ‘Exporting the Energy Acquis:

174  Research handbook on EU energy law and policy 3.3  IPE of EU Climate Policy: Green Power Europe? In February 2015, the EU Commission adopted the ‘Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Policy’ as part of one of the ten policy priorities of the then newly-appointed Juncker Commission.28 As the title suggests, this framework focused strongly on climate action as a fundamental policy commitment of the Juncker Commission – along with the other classic ingredients of securing energy supply and realizing a fully functional internal energy market. Although presented as unique and a novelty by Juncker, questions may be raised about such claims. Is it not just a pathdependent decision to incrementally attempt to ensure that Europe has secure, affordable and climate-friendly energy? In other words, nothing new to report? Among industrialized states, the EU by then already had one of the world’s most ambitious climate and energy policies (the famous 20-20-20 goals of reduction in greenhouse gas emissions by 20%, an increase in energy efficiency by 20%, and an increase in the share of renewables in the final energy mix to 20%, all to be realized by 2020). Furthermore, the EU has long assumed a leadership role in international climate diplomacy and several European companies have been early movers in the development of green industries. However, the EU’s position as a climate frontrunner has received some blows in the past couple of years.29 In addition, the EU operated the very first and most advanced emission trading system in the world, the EU Emissions Trading System (ETS). Building on these prior commitments, the EU member states agreed on a new 2030 Framework for climate and energy in October 2014, targeting a 40% cut in greenhouse gas emissions compared to 1990 levels; as well as renewable energy and energy efficiency targets of at least 27%. However progressive these commitments might seem, there are some significant differences with the previous 2020 strategy. The ‘Renewable Energy Directive’ of 2009 had established mandatory national targets consistent with a 20% share of energy from renewable sources and a 10% share of energy from renewable sources in transport in Community energy consumption by 2020, yet the renewables target of 2030, along with the efficiency ones, will not be translated into nationally binding targets. Individual member states are free to set their own higher national targets.30 The Commission and European Council have been criticized for the apparent letting go of more rigid climate targets, despite the subsequent ambitious pledges made within the framework of the Paris Agreement. Consider first the emission reduction goal (20% by 2020). Here, it is important to make a distinction between those sectors of the economy that fall under the EU’s ETS and those that do not. The ETS system is the CO2 emission cap-and-trade system that the EU set up in 2005. Currently, only certain sectors fall under this system: the power

The External Agenda Shaping Power of the EU’ in J. Tosun, S. Biesenbender and K. Schulze (eds), Energy Policy Making in the EU (Springer 2015). 28   EU Commission, Energy Union Package (n 21). 29   K. Bäckstrand and O Elgström, ‘The EU’s Role in Climate Change Negotiations: From Leader to “Leadiator”’ (2013) 20 Journal of European Public Policy 1369; S. Fischer and O. Geden, ‘The Changing Role of International Negotiations in EU Climate Policy’ (2015) 50 The International Spectator 1. 30   Buchan and Keay (n 20).

Rule-maker or rule-taker?  175 sector, industry, and (since early 2012) the aviation sector. Those sectors have to reduce their emissions by 21% in 2020 compared to 2005 levels and by 43% in 2030. To that end, the EU puts a ceiling (or a ‘cap’) on the total allowed CO2 emissions. Companies can then either try to lower their emissions or they can go to the market to buy CO2 emission permits (called ‘allowances’ in EU parlance). To date, they can also buy limited amounts of international credits from emission-saving projects around the world, and particularly in developing countries, that fall under the Kyoto Protocol’s Clean Development Mechanism (CDM) and Joint Implementation Mechanism (JI). The EU does not envisage continuing the use of international credits after 2020. However, the Paris Agreement lays out provisions and a framework to link carbon markets in the future. Those sectors that do not fall under the ETS system, such as (land) transportation, buildings, agriculture and waste, only have to reduce their emissions by 10% in 2020 compared to 2005, while in the new framework the aim is emission reduction of 30% in 2030. The flagship project in the 2020 and 2030 strategies is clearly the EU’s ETS, the world’s first and still by far the largest cap-and-trade mechanism for CO2, operating in 31 countries (all 28 EU countries plus Iceland, Liechtenstein and Norway). Currently, the system covers in excess of some 11,000 installations, which collectively represent almost half of Europe’s CO2 emitters. As explained previously, this system sets a CO2 emissions ceiling and puts a price on CO2 emissions. The basic idea of the cap-and-trade system is that the ceiling of allowed emissions will be lowered each year, so that the price of carbon goes up, and investments in low-carbon energy are stimulated. This is clearly linked with another goal, that of promoting renewable energy. Moreover, there is also a close connection between the renewables and efficiency targets because the renewable energy target is expressed as a share of final energy demand. Lowering demand through increased efficiency thus helps to achieve the renewables target. The system went through a pilot and second phase and entered its third phase as from January 2013. This phase will finish in 2020. With the crucial last phase, a number of changes occurred in the whole system. The most important changes relate to the way in which the permits are allocated: first, there is now an EU-wide cap rather than national caps; second, permits are sold on the market rather than given for free; and, third, the plan is that, each year, the number of permits will decrease with the intended effect of ramping up the low price of carbon, which has been the Achilles heel of the whole process so far (excess supply tackled through back-loading of auctions in phase 3 and ‘market stability reserve’). As an indicator of just how vulnerable the ETS system has become, in late January 2016, the carbon price fell to under 6 euros per metric ton of carbon. This is still obviously far below the 20 or 30 euro price point that analysts say is needed to spur the type of clean investment needed by industry to cut carbon emissions. The second binding element of the 20-20-20 strategy is the target for renewable energy, as set out in the Renewable Energy Directive of 2009. Surprisingly, this target is no longer binding at the national level in the new 2030 framework. With regards to the third goal, with the adoption of the EU Energy Efficiency Directive in October 2012, which came as a rather belated addition to the EU’s energy and climate package, there are no binding national targets for energy efficiency.

176  Research handbook on EU energy law and policy

4.  A MERCANTILIST TURN IN EU ENERGY POLICY? Even though the EU has traditionally subscribed to the liberal principles of markets and institutions, in recent years it has also shown a growing willingness to use its regulatory tools in a more strategic manner. This shift towards a more ‘mercantilist’ stance in EU energy policy has been most pronounced in the gas sector, and primarily in relations with the EU’s dominant gas supplier, Russia. One of the first exceptions to the liberal rule was the so-called ‘Gazprom clause’, which was included in a weakened form in the Third Energy Package of 2009. The clause goes against the non-discriminatory norm since it places higher constraints on non-EU firms compared with their EU peers. Although this clause deviates somewhat from the EU liberal rules in the internal energy market, it does so in the interests of retaining a competitive market. More radical are the various Commission proposals to establish a kind of blockpurchasing mechanism, which would allow the EU member states to negotiate jointly with major gas suppliers about volumes and prices. This proposal was made for the first time in 2008, when the Commission proposed the creation of the so-called Caspian Development Corporation, which would amount to nothing less than a buyers’ cartel in the gas sector. This proposal was defeated, but in the wake of the Russian–Ukrainian gas war of 2009 and the Crimea crisis, the EU Commission has successfully carved out a role for itself in the bilateral negotiations with major gas suppliers. Intergovernmental agreements in the gas sector now need to be vetted by the European Commission. In another illustration of the mercantilist turn, the EU has become selective in exempting pipeline projects from internal market rules, and the third-party access (TPA) requirement in particular. According to the internal energy market rules, the European Commission has the authority to grant temporary exemptions to specific projects. The EU’s pet project, the Nabucco gas pipeline, was exempted from TPA (for half of its capacity) and the normal tariff rules in 2008, and the exemption was renewed in 2013. The Trans-Adriatic Pipeline (TAP), which replaces part of the trajectory of the failed Nabucco project, got an exemption in 2013. By contrast, Russian-sponsored pipelines like Nord Stream and South Stream did not get such exemptions.31 The EU has also selectively turned a blind eye to state aid, particularly when it comes to projects that are intended to enhance the energy supply security of vulnerable member states. For example, in 2009, the European Commission set aside €200 million from the economic stimulus package for the Nabucco project – a privilege that none of the Russianbacked proposals received. The Commission’s Directorate-General Competition also approved a total of €448 million in state aid for constructing the ‘Independence’ LNG terminal in Lithuania, and it rubberstamped the fact that Lithuanian utilities are obliged to take a certain amount of LNG cargoes. These examples illustrate that the security agenda sometimes trumps the liberal agenda.

  Goldthau and Sitter, ‘Soft Power with a Hard Edge’ (n 22).

31

Rule-maker or rule-taker?  177

5.  CONCLUSIONS AND FUTURE RESEARCH AGENDA EU energy law and policy is riddled with paradoxes and contradictions. First and obviously, there is the paradox of integration.32 The EU’s integration started off in the energy sphere – with the European Coal and Steel Community regulating coal, and Euratom regulating nuclear energy – but afterwards the engine sputtered and it was only with the Treaty of Lisbon that a genuine legal basis was created upon which a European energy policy could be founded. Curiously, the absence of a legal basis to act on energy did not prevent the EU from developing an energy policy ‘through the backdoor’, using its authority on the internal market and competition. Nor did it prevent the EU from exporting its own (unfinished) ‘acquis communautaire’ to neighboring countries. The EU began to export its own internal energy market rules long before those rules were consolidated internally – in fact, one could argue that the internal energy market remains ‘work in progress’ to date. The hesitance of the member states to transfer authority over energy policy to the European level gradually gave way to a second paradox, a paradox of sovereignty.33 Due to the globalization of energy markets and their externalities, the EU member states found themselves with less control over energy policy, though they remained largely unwilling to act jointly until around 2005. On the face of it, the EU member states long kept their sovereign prerogatives over energy policy, but, in practice, this very sovereignty over energy matters was being hollowed out by the vagaries of increasingly global energy markets. The oil and gas markets in particular proved to be very reflexive, and the rise of the BRICs and their interventionist and more mercantilist policies, has influenced the EU’s attitude in this area as well. It has created a tension between the EU’s traditional market-based approach towards energy and a world that seems to become more realist and geopolitically-laden.34 Looking forward, we can identify a number of questions that are relevant for both researchers and policy-makers. A crucial question concerns the EU’s ‘actorness’ in global energy politics, a question that has occupied scholars of EU foreign policy for a long time. To what extent can the EU be considered an actor in the IPE of energy. The question of actorness raises issues of policy coherence, effectiveness, objectives, instruments and capacity. It also relates to concepts that are used to describes the EU’s role and identity in world politics, ranging from a normative power35 over a regulatory power36 to a market power.37 In energy, the key question is whether the EU can maintain its liberal stance or whether it will succumb to the pressures of mercantilism, as the world seems to shift more and more towards economic nationalism. 32   A. Belyi, ‘EU External Energy Policies: A Paradox of Integration’ in J Oorbie (ed.), Europe’s Global Role: External Policies of the European Union (Ashgate 2008). 33   F. McGowan, ‘International Regimes for Energy: Finding the Right Level for Policy’ in I. Scrase and G. MacKerron (eds), Energy for the Future (Springer 2009). 34   Goldthau and Sitter, A Liberal Actor in a Realist World (n 2); F. McGowan, ‘Can the European Union’s Market Liberalism Ensure Energy Security in a Time of “Economic Nationalism”?’ (2008) 4 Journal of Contemporary European Research 90. 35   I. Manners, ‘Normative Power Europe: A Contradiction in Terms?’ 40 Journal of Common Market Studies 235. 36   Goldthau and Sitter, A Liberal Actor in a Realist World (n 2). 37   Damro, ‘Market Power Europe’ (n 23).

178  Research handbook on EU energy law and policy Over the longer term, the decarbonization of the economy has the potential to put the whole EU energy strategy on its head. Although ‘energy independence’ is an aspirational goal only, and autarky in the energy sphere is neither feasible nor desirable, the uptake of energy efficiency measures and the indigenous production of renewable energy can tilt the balance of power in the EU’s relationship with its main oil and gas suppliers.

10.  The International Energy Charter: a new impetus for global energy governance? Sijbren de Jong

1. INTRODUCTION On 21 May 2015 the International Energy Charter (IECT) was signed at a ministerial conference in the Netherlands. The IECT represents a declaration of political intent aimed at strengthening energy cooperation between the signatory states. Through the IECT the signatory parties aim to tackle a broad range of fundamental global energy issues. The Treaty strives to, inter alia, accommodate for: the greater weight of developing countries in global energy security; the tensions and trade-offs between energy security, economic development, and environmental protection; the role of enhanced energy trade in sustainable development; the provision of modern energy services; the reduction of energy poverty; clean technology and capacity building; diversification of energy sources and routes; and the regional integration of energy markets.1 In its set-up the IECT aims at a wider global engagement and to balance out the interests of energy consuming, producing and transit countries, whilst ensuring sovereign equality of states irrespective of their levels of economic development.2 The reasons for the desire to reshape the global institutional energy architecture are manifold. First, the global energy landscape has undergone profound changes since the end of the Cold War. The world’s thirst for energy is no longer dominated by the countries belonging to the Organisation for Economic Co-operation and Development (OECD), as was the case in 1991 when the original European Energy Charter (EEC) was launched. Rather, the bulk of global energy demand nowadays originates from outside the OECD area. Seen from that perspective, the rise of China has been the single most disruptive development in the past thirty years. Whereas economic growth in China now appears to have slowed down, the next big wave in India is only just beginning. With policies in place to modernise the country and develop its manufacturing base, rapid population growth and an additional 315 million people expected to live in India’s cities by 2040, the country is set for a period of rapid and sustained growth in energy demand.3 Second, whereas the United States (US) for years was headed towards a period of sustained energy imports, the application of advanced drilling techniques has allowed the  1   ‘Overview – International Energy Charter’, June 23, 2016, http://www.energycharter.org/ process/international-energy-charter-2015/overview/.  2   Munir Maniruzzaman, ‘International Energy Charter as a Milestone for Global Energy Co-Operation in the 21st Century’, Wolters Kluwer – Law & Business, Kluwer Arbitration Blog (August 2015), http://kluwerarbitrationblog.com/2015/08/30/international-energy-charter-asa-milestone-for-global-energy-co-operation-in-the-21st-century/.  3   ‘World Energy Outlook 2015 Executive Summary’, International Energy Agency (IEA), 2015, 2.

179

180  Research handbook on EU energy law and policy country to explore oil and natural gas trapped in so-called shale formations to ignite a veritable domestic energy revolution. The effects of this ‘shale revolution’ are not limited to the US alone. By 2015, the US was the world’s largest oil producing country worldwide, surpassing both Saudi Arabia and Russia.4 Third, changes in energy demand aside, the biggest difference compared to 1991 and arguably the most pertinent challenge to the global energy landscape today is climate change. A major milestone in confronting this challenge has been the signing of the Paris Agreement in December 2015. This accord signifies the world’s first universal, legally binding global climate deal. Under the terms set out in the agreement, countries commit themselves to a global action plan that aims to keep global warming to well below 2°C and to limit the increase to 1.5°C, as doing so would significantly reduce the risks and impacts of climate change. After 55 countries, representing 55% of global emissions, had ratified the agreement, it entered into force on 4 November 2016.5 In a further positive sign, the growth in energy-related CO2 emissions stalled in 2015, mainly due to a 1.8% reduction in the energy intensity of the global economy. This trend in itself was fed primarily by gains in energy efficiency, as well as the expanded use of cleaner energy sources worldwide, mostly renewables. What is more, a growing portion of the approximately US$1.8 trillion of energy-related investment each year is being poured into the clean energy sector at a time when investment in fossil fuels, chiefly due to the current low pricing environment, has fallen sharply. At the same time fossil fuel subsidies dropped from approximately US$500 billion in 2014 to around US$325 billion in 2015.6 Amidst all these shifts, the IECT aims to add an additional layer of governance to the global energy landscape as, in institutional terms, the Treaty was born out of the idea that international energy markets suffer from a lack of appropriate governance.7 Institutions such as the International Energy Agency (IEA), the World Bank, the G7, G20, the Organization of the Petroleum Exporting Countries (OPEC), the International Energy Forum (IEF) and also the original Energy Charter Treaty (ECT) – to name but a few – were all designed to deal with subsets of the global energy market. An encompassing treaty or institution that is able to cover the whole spectrum of energy issues and give a voice to all relevant stakeholders does not exist, as such. The question of whether the IECT is able to fill this void is the focus of this chapter. The chapter consists of five sections. Section 2 briefly outlines the various topics that the IECT intends to cover. Section 3 looks at the degree to which IECT membership covers the most important actors worldwide. Section 4 takes a critical look at whether the IECT’s institutional set-up represents a genuine step forward in the realm of global energy governance. Section 5 finally consists of a few brief concluding remarks.

 4   ‘International Energy Statistics. Total Petroleum and Other Liquids Production 2014’. US Energy Information Administration (EIA), 2015, http://www.eia.gov/beta/international/rank​ ings/#?prodact553-1&cy52014.  5   Ariel Alexovich, ‘Paris Climate Agreement to Enter into Force on 4 November’, United Nations Sustainable Development, October 5, 2016, http://www.un.org/sustainabledevelopment/ blog/2016/10/paris-climate-agreement-to-enter-into-force-on-4-november/.  6   ‘World Energy Outlook 2016’, International Energy Agency (IEA), 2016, 21.  7   Ann Florini and Benjamin K. Sovacool, ‘Who Governs Energy? The Challenges Facing Global Energy Governance’, Energy Policy, no. 37 (2009): 5239.

The International Energy Charter  181

2.  THE IECT’S THEMATIC SCOPE The IECT sets out a number of key objectives. It aims to support the Charter’s consolidation, expansion and outreach with the goal of expanding its geographic scope, to modernise the EEC and to support active observership within the EEC in order to achieve close political cooperation and early accession of observer countries to the Energy Charter Treaty.8 In addition to these broad objectives, the IECT sets out specific action points in a wide range of issue areas pertaining to global energy governance. The first of such points is the promotion of access to and development of energy sources. The desire to reduce energy poverty and facilitate access to national, regional and international markets plays a key role here.9 Strongly related to these objectives, the IECT aims to reduce barriers to energy trade and investment, facilitate infrastructure interconnections to connect nearby markets, further develop market-oriented energy prices, and ensure adequate dispute settlement mechanisms, including national and international arbitration.10 Other specific areas of action include cooperation on technological development and innovation on energy production, conversion, transport, distribution and the efficient and clean use of energy, in a manner consistent with nuclear non-proliferation and cooperation on the implementation of safety principles and standards.11 The mentioning of non-proliferation and safety standards is an obvious reference to the resurgence of nuclear energy around the world. With nuclear power plants currently under construction in several countries and growing concerns over North Korea’s nuclear capabilities, this emphasis on safety standards and non-proliferation cannot be overstated. With respect to energy transition, the IECT seeks to stimulate cooperation in the fields of energy efficiency, and sustainable and clean energy. Important in this regard is the promotion of access to sustainable, modern, affordable and cleaner energy in developing countries12 – a reference to the fact that many developing nations still rely on biomass for their primary energy supply, a source of fuel that carries many health hazards. Finally, the signatory parties commit themselves to the promotion of vocational education and training in the energy field and the diversification of energy sources and supply routes for the benefit of energy security.13

3.  THE IECT’S GLOBAL REACH One of the first things that spring to mind when assessing the ability of an international agreement to adequately cover the issue areas it intends to look after is the extent to

 8   ‘International Energy Charter Agreed Text for Adoption in The Hague at the Ministerial Conference on the International Energy Charter on 20 May 2015’ (Energy Charter Secretariat, May 20, 2015), 2.  9   Ibid., 9. 10   Ibid., 9–10. 11   Ibid., 11. 12   Ibid., 11–12. 13  Ibid.

182  Research handbook on EU energy law and policy which the agreement has the world’s most relevant stakeholders on board. The IECT has 72 countries plus the European Union (EU), the European Atomic Energy Community (EURATOM) and the Economic Community of West African States (ECOWAS) as its signatory parties, thus spanning industrialised and emerging, as well as developing countries.14 The core, as with the ECT before it, is formed by the EU and its member states and countries belonging to the European Economic Area (Norway) and the European Free Trade Area (Switzerland). In addition, Energy Community members Albania, Macedonia, Moldova, Serbia and Ukraine signed up. Energy Community candidate state Georgia and observer states Armenia and Turkey also joined. Other members, linked up through the EU’s neighbourhood policies, are Jordan, Morocco and Palestine. As with the ECT, many countries in the former Soviet space are also signatory parties. Arguably the most prominent state absent from the ECT, but a signatory party to the IECT is China. The fact that the US, a major energy producer in its own right since the shale revolution, has signed the agreement should also be seen as an important addition and a commitment to multilateral governance.15 However, what is immediately clear when looking at the IECT member base is that many of the world’s major fossil-fuel-producing countries are absent. Notable absentees include Russia, Australia, Canada, Mexico, Brazil, Argentina, Myanmar, Malaysia, Brunei, Vietnam and every OPEC member apart from Nigeria and Iran. Notwithstanding the fact that it is a hopeful sign that Nigeria and Iran have signed up, it is concerning that so many other producers from OPEC chose not to do so. The absence of these producer nations is reflected in the IECT’s reach when measured in terms of the extent to which the IECT covers the world’s share of fossil fuel production (see Source: BP Statistical Review of World Energy 2015 Figure 10.1) In 2014 a mere 24% of the world’s oil production was produced in countries that are a signatory party to the IECT. For natural gas this share stood slightly higher, at 39%. When looking at consumption statistics, the inverse picture emerges (see Source: BP Statistical Review of World Energy 2015 Figure 10.2). In 2014 IECT signatory parties were responsible for 57% of the world’s oil consumption and 51% of global natural gas consumption. The big difference in footprint between production and consumption statistics of the world’s prime fossil fuels renders the IECT – much like the ECT and organisations such as the IEA – chiefly a ‘consumers’ club’ that is not representative of the world’s major energy players. Fossil fuel production and consumption aside, it is important to also assess the extent to which the IECT houses the world’s prime stakeholders in the renewable energy field (see Figures 10.3 and 10.4). In 2014 IECT signatory parties collectively covered as much as 89% of globally installed photovoltaic capacity and 85% of total installed wind turbine capacity. The vast majority of the world’s leading players in the field of solar and wind power are thus signatory parties to the IECT in one way or another. Finally, looking at geothermal energy, 43% of the world’s installed capacity in 2014 was

14   ‘The International Energy Charter’, International Energy Charter, June 23, 2016, http:// www.energycharter.org/process/international-energy-charter-2015/overview/. 15   Pami Aalto, ‘The New International Energy Charter: Instrumental or Incremental Progress in Governance?’, Energy Research and Social Science 11 (2016): 94.

The International Energy Charter  183 Oil Production in 2014 (as % share of total)

24%

Gas Production in 2014 (as % share of total)

38%

IEC NON-IEC

76%

IEC NON-IEC

62%

Source:  BP Statistical Review of World Energy 2015.

Figure 10.1 The share of global oil and natural gas production covered by IECT member states (2014 data) Oil Consumption in 2014 (as % share of total)

Gas Consumption in 2014 (as % share of total)

IEC

43% 57%

NON-IEC

IEC

49%

51%

NON-IEC

Source:  BP Statistical Review of World Energy 2015.

Figure 10.2 The share of global oil and natural gas consumption covered by IECT member states (2014 data) Cumulative Installed Photovoltaic Power (Solar Capacity) in 2014 (% of total)

Cumulative Installed Wind Turbine Capacity (as % share of total) 15%

11% IEC

IEC

NON-IEC 89%

NON-IEC 85%

Source:  BP Statistical Review of World Energy 2015.

Figure 10.3 The share of global photovoltaic and wind turbine capacity covered by IECT member states (2014 data)

184  Research handbook on EU energy law and policy Cumulative Installed Geothermal Power Capacity in 2014 (as % share of total)

43% 57%

IEC NON-IEC

Source:  BP Statistical Review of World Energy 2015.

Figure 10.4 The share of global installed geothermal power capacity covered by IECT member states (2014 data) covered by IECT signatory parties. This means that more than half of globally installed capacity is based in countries currently not a signatory party to the IECT. Overall, judging from the IECT member base, it is clear that the Treaty falls notably short in the realm of oil and natural gas production. Its ability to have an impact in this particular area of global energy governance therefore remains an open question. More positive is the fact that in terms of renewable energy generation an overwhelming majority share of the world’s solar and wind power capacity is hosted by IECT signatory parties, thus giving the Treaty a firm footing in fostering the further growth of wind and solar power. That said, it should be pointed out that – in geographical terms – the IECT remains, despite the signing up of several countries from Latin America, Africa and Asia, a Europe/Eurasian-centric agreement, much like the ECT before it. In addition to this geographical blind spot, the Treaty fails to make adequate mention of actors beyond states. Over the years, organisations such as NGOs, companies and (global) ­financial ­institutions have begun to play a much more prominent role in global energy governance.16 The limited references made to these actors should be seen as a notable omission in the ability of the IECT to tackle the manifold issues it aspires to address. 3.1  Inclusion vs. Enforceability Notwithstanding the reservations in the previous paragraph, the IECT’s institutional set-up is clearly geared towards generating the greatest level of country participation possible. The principal thought behind this is that the more countries are on board, especially those that are particularly relevant for the energy domain such as the US and China, the greater the chance that the IECT delivers a meaningful contribution to global energy 16   Morgan Bazilian, Smita Nakhooda and Thijs Van de Graaf, ‘Energy Governance and Poverty’, Energy Research & Social Science 1 (2014): 218, doi:http://dx.doi.org/10.1016/j.erss.2014.03.006; Aalto, ‘The New International Energy Charter: Instrumental or Incremental Progress in Governance?’, 94.

The International Energy Charter  185 governance. In support of this aim, and in a clear departure from its ‘predecessor’, the Energy Charter, the IECT does not lay down explicit legal rules on trade in energy materials, transit flows, investment protection and the international settlement of disputes. In other words, contrary to the ECT, the IECT is not a legally binding document. Doing away with the legally binding nature of the agreement lowers the bar, thereby potentially luring countries into signing up that otherwise would have had reservations against entering into a legally binding agreement. An approach whereby the organisation in question somehow aims at wider engagement is in itself not new. In an attempt to bridge the divide between exclusive consumer clubs such as the IEA on the one hand, and producer collectives such as OPEC on the other, increase transparency, reduce transaction costs between producers and consumers and dampen volatility in the oil market, the International Energy Forum (IEF) was created in 1991.17 A permanent secretariat notwithstanding, the IEF is a rather loosely operating forum where discussions take place in a less formalised setting outside an institutionalised operating structure. As a result, the IEF lacks binding decision-making authority.18 The most tangible product to have come out of the IEF is the Joint Oil Data Initiative (JODI); a data sharing initiative launched in 2001 whereby six different organisations share data on oil stocks with the IEF.19 Although a welcome initiative when launched, given that governments are the main ­providers of the data, concerns exist with respect to its reliability.20 What is more, countries at times withhold the full set of information out of geopolitical considerations. Chinese national oil companies for example report on their activities within China, but the activities of their foreign subsidiaries are not always well documented and in some cases the oil produced makes its way back to China, which is then subsequently not always adequately included in JODI.21 In the absence of a formal compliance mechanism, the organisation does not have any ways to enforce decisions or recommendations.22 Although the IEF brings together the most important producer and consumer

17   Andreas Goldthau and Jan Martin Witte, ‘The Role of Rules and Institutions in Global Energy: An Introduction’, in Global Energy Governance: The New Rules of the Game, edited by Andreas Goldthau and Jan Martin Witte (Global Public Policy Institute/Brookings Institution, 2010), 8. 18   Enno Harks, ‘The International Energy Forum and the Mitigation of Oil Market Risks’, in Global Energy Governance: The New Rules of the Game, edited by Andreas Goldthau and Jan Martin Witte (Global Public Policy Institute/Brookings Institution, 2010), 260; Sijbren de Jong, ‘Towards Global Energy Governance: How to Patch the Patchwork’, in Energy and Development, edited by Gilles Carbonnier, International Development Policy (Basingstoke/ Geneva: Palgrave Macmillan/Graduate Institute Geneva, 2011), 38; Andreas Goldthau and Jan Martin Witte, ‘Assessing OPEC’s Performance in Global Energy’, Global Policy 2 (2011): 37, doi:10.1111/j.1758-5899.2011.00122.x. 19   The organisations involved are the IEA, the United Nations Statistics Division (UNSD), the Statistical Office of the European Communities (Eurostat), Asia-Pacific Economic Cooperation (APEC), OPEC and the Latin American Energy Organization (OLADE). 20   Ann Florini and Saleena Saleem, ‘Information Disclosure in Global Energy Governance’, Global Policy 2 (2011): 147, doi:10.1111/j.1758-5899.2011.00135.x. 21   Ibid., 148. 22   Sijbren de Jong, ‘Towards Global Energy Governance: How to Patch the Patchwork’, 38; Gilles Carbonnier and Sijbren de Jong, ‘The Global Governance of Energy and Development’, in

186  Research handbook on EU energy law and policy nations in global energy, it did not succeed in moving beyond being a mere consultative forum.23 In light of the non-binding nature of the IECT, it is therefore a legitimate question to ask what it could bring to global energy governance that other fora before it such as the IEF could not.

4.  ONE STEP FORWARD, TWO STEPS BACK? As noted when discussing the IECT’s thematic scope, one of the areas that the Treaty focuses on is to ensure adequate dispute settlement mechanisms, including national and international arbitration.24 The fact that this is listed in the Treaty as a goal in itself is somewhat remarkable. After all, the ECT that preceded the IECT was precisely designed as a treaty that would act as an investment protection treaty in the field of energy. In other words, why insert a reference to investor protection into a treaty that is  not legally binding while its predecessor does the same, and carries greater legal weight? The reasons for adopting the IECT in its non-binding form on the one hand stem from the changing global energy landscape, as noted in the introduction, and the need to get more countries on board. Another important reason however has to do with the role played by the Russian federation under the ECT. Russia was one of the signatory parties to the Energy Charter. After signing, the Russian government chose to apply the Treaty provisionally, linking ratification to negotiations on the ECT’s transit protocol. On 20 August 2009, the Russian government officially stated that it intended to terminate its provisional application. One reason for Russia’s refusal to ratify and terminate its provisional application stems from its opposition to opening up its network to lower-cost gas from Central Asian countries and the fact that the ECT’s transit protocol would not apply between individual European countries (the EU being defined as a single economic space), something to which Russia objected.25 Other factors that played a role in Russia’s decision to terminate its provisional application had much to do with changing geopolitical circumstances. In January 2006, as well as in January 2009, Ukraine and the Russian state-owned gas company Gazprom failed to agree on the terms for transit arrangements, ultimately leading to a cut-off in the gas supply. Under Article 7(5) of the ECT, both producing and transit states are under an obligation to allow for the uninterrupted flow of natural gas from producer to consumer and to prevent non-transit-related issues (i.e. commercial issues) from having a negative

The Global Community Yearbook of International Law & Jurisprudence 2011, edited by Giuliana Ziccardi Capaldo, vol. 1 (Oxford: Oxford University Press, 2012), 47. 23   Sijbren de Jong and Jan Wouters, ‘Institutional Actors in International Energy Law’, in Research Handbook on International Energy Law, edited by Kim Talus (Cheltenham, UK; Northampton, MA, USA: Edward Elgar Publishing, 2014), 40. 24   ‘IEC 2015’, 9–10. 25   Richard Youngs, Energy Security: Europe’s New Foreign Policy Challenge (Taylor & Francis, 2009), 80–81; Sanam S. Haghighi, Energy Security: The External Legal Relations of the European Union with Major Oil and Gas Supplying Countries, vol. 16, Modern Studies in European Law (Oxford and Portland, OR: Hart Publishing, 2007), 348.

The International Energy Charter  187 impact on transit volumes.26 Based on this provision and the fact that the termination of the provisional application happened some seven months after the January 2009 crisis, a case could be made that Gazprom and Ukraine failed to live up to their Treaty obligations when gas supplies were interrupted. This reading of the January 2006 and January 2009 incidents is strengthened by Article 45(1) of the ECT, which states that even without ratification, the Treaty is provisionally applicable, provided that it does not contradict existing domestic legislation, as well as the fact that upon signing the Treaty, the Russian government chose not to opt out of the mechanism of provisional application, as made possible by Article 45(2) of the ECT.27 That said, arguably the biggest liability for Russia in remaining committed to the ECT should not be sought in its tense relation with Ukraine, but rather in the decision to expropriate the Russian oil company Yukos in 2003. The Yukos oil company was one of Russia’s largest and most successful companies until, in October 2003, it was accused of tax evasion, bankrupted and broken up. Many doubt the Kremlin’s official reading of the events and suspect Yukos was forcibly broken up with the aim of bringing its assets under state control. After Yukos was dissolved, its shareholders sued the Russian government. In July 2014, the Permanent Court of Arbitration (PCA) ruled that Russia had to compensate the (former) Yukos shareholders, as represented by GML,28 and awarded damages of approximately US$50.2 billion. The basis of the Court’s decision was Russia’s breach of the ECT.29 In that same month, the European Court of Human Rights (ECHR) ruled that the Kremlin had imposed excessive fees on Yukos and awarded the Yukos shareholders €1.9 billion in damages.30 Following the PCA’s ruling, Yukos shareholders launched a series of legal proceedings to seize Russian state assets in several countries, including France, Germany, Belgium, the UK and the US. Russia, in turn, announced that any such action against the Russian state assets would lead to retaliatory measures.31 In France, Russia requested a suspension of seized state assets, but the Paris Court of Appeal denied the request. In Belgium, the national government ultimately intervened in the Belgian courts’ proceedings owing to diplomatic concerns about a Russian retaliation.32 As only non-diplomatic assets can 26   Sijbren de Jong, ‘The EU’s External Natural Gas Policy – Caught Between National Priorities and Supranationalism’, April 16, 2013, 35, https://lirias.kuleuven.be/handle/123456789/393181. 27   See Art 45(1) and (2) ECT. 28   GML is a company that controlled most of Yukos shares. It includes the subsidiaries Hulley Enterprises Limited and Yukos Universal Limited, as well as its associated company the Veteran Petroleum Limited. 29   Jake Rudnitsky and Ilya Arkhipov, ‘Russia Wins $50 Billion Ruling in Decade-Old Fight With Yukos’, Bloomberg.com, April 20, 2016, https://www.bloomberg.com/news/articles/2016-04-20/ dutch-court-overturns-50-billion-yukos-ruling-on-jurisdiction. 30   Megan Davies, Vladimir Soldatkin and Gilbert Reilhac, ‘European Court Rules Russia Must Pay Yukos Shareholders 1.9 Billion Euros | Reuters’, Reuters, July 31, 2014, http://uk.reuters.com/ article/uk-russia-yukos-echr-idUKKBN0G00QO20140731. 31   ‘Russia Warns It Will Retaliate after Assets Seized in Yukos Case’, Agence France Presse, June 19, 2015, https://www.theguardian.com/business/2015/jun/19/russia-warns-it-will-retaliateafter-assets-se​ized-in-yukos-case. 32   Mark Hanrahan, ‘Belgium Unfreezes Russian Assets Seized in Yukos Legal Fight’, International Business Times, June 21, 2015, http://www.ibtimes.com/belgium-unfreezes-rus​sianassets-seized-yukos-legal-fight-1976386; Elizabeth Piper et al., ‘Russia Examines Brussels’ Legal

188  Research handbook on EU energy law and policy be seized, one strategy of the Russian state has been to retroactively declare seized assets diplomatic in order to claim them back.33 In a setback to GML, the July 2014 ruling was overturned by a District Court in The Hague on 20 April 2016. The Court ruled that the PCA had no jurisdiction to argue that ‘the ECT can apply provisionally to a signatory state but only in respect of those provisions that do not violate the laws of that signatory’. It was thus a question of whether Article 26 of the ECT on the settlement of disputes between an investor and a contracting party is compatible with Russian law. The court found that it is not; under Russian law, public law matters cannot be referred to international arbitration.34 In a further setback, in January 2017 the Russian Constitutional Court declared that Moscow is under no obligation to comply with the ruling by the ECHR that it should pay €1.9 billion in damages to Yukos’ former shareholders. According to the Constitutional Court, the rulings by the ECHR cannot overrule the Russian constitution’s priority in the Russian judicial system. In response, a spokesperson for the Council of Europe reminded Russia that the Council’s member states, which include Russia, are bound by the European Convention on Human Rights to implement decisions by the Strasbourg Court.35 In response to the decision by the District Court in The Hague, GML has lodged an appeal.36 GML disagrees with the Court’s reading of the case that this dispute is in fact a matter of public law. Moreover, the former Yukos shareholders contend that the burden of proof in determining whether Russia could be bound by Article 26 ECT should in fact be on Russia, rather than for GML to prove that Russia was indeed bound by the said article. The case will be dealt with by the Court of Appeal in The Hague. The appeal proceedings could drag on for several years however, as the ruling by the Court of Appeal can be contested in the Dutch Supreme Court.37 Following GML’s decision to appeal, damaging reports have emerged on how the Russian state has sought to manipulate the courts’ decisions in the Yukos case. An indepth investigation led by Dutch daily newspaper NRC Handelsblad uncovered that the Russian state-owned oil company Rosneft, the company that acquired the bankrupted Yukos, manipulated a number of court rulings in Armenia in order to strengthen its case in the West to seize the hundreds of millions of dollars in assets belonging to Yukos.38 Move to Seize State Assets’, Reuters, June 18, 2015, http://www.reuters.com/article/us-russia-yu​ kos-idUSKBN0OY1FS20150618. 33   The Economist, ‘The Yukos Affair: Baiting the Bear’, April 16, 2016, http://www.econo​ mist.com/news/business/21696960-russia-trying-impede-enforcement-massive-damages-award-ba​ iting-bear. 34   DLA Piper, ‘A Case of Winning the Battle and Losing the War: Yukos v Russian Federation’, June 9, 2016, 2, https://www.dlapiper.com/~/media/Files/Insights/Publications/2016/06/Yukos_vs_ Russian_Federation.ashx. 35   ‘Russian Court Says No Need to Comply With $2 Billion Yukos Ruling’, RadioFreeEurope/ RadioLiberty, January 19, 2017, http://www.rferl.org/a/russia-court-rejects-yukos-ruling/28243329. html. 36   Neil Buckley, ‘Russia Wins Legal Victory over Yukos Damages’, April 20, 2016, https://www. ft.com/content/2a23a352-06ce-11e6-a70d-4e39ac32c284. 37   DLA Piper, ‘A Case of Winning the Battle and Losing the War: Yukos v Russian Federation’, 2–3. 38   Renée Postma and Joep Dohmen, ‘Rosneft Manipuleerde de Rechtsgang in Nederland  – NRC’, November 24, 2016, https://www.nrc.nl/nieuws/2016/11/24/rosneft-manipuleerde-de-rechts​

The International Energy Charter  189 The investigative reports by NRC are likely to strengthen the claim by GML that the Russian government has sought to pervert justice in the Yukos case. Moreover, and far more worrying in light of the troublesome relations between Russia and the West, this is indicative of the lengths to which the Kremlin is willing to go to avoid being held accountable to international law.

5.  CONCLUDING REMARKS The analysis in this chapter has provided an overview of what the IECT stands for and hopes to achieve. It has also highlighted the numerous deficiencies that the Treaty suffers from when it comes to its global reach. Although it is highly encouraging that the bulk of the world’s installed solar and wind capacity is covered by the IECT, much remains to be done on the side of fossil fuel production as most of the key-players have not signed up. This also warrants additional research into the institutional architecture underpinning global energy governance in order to come up with innovative ways to strike a balance between producer- and consumer-country concerns and priorities, without duplicating existing organisations or coming up with ‘talking shops’ that only produce limited results. It should be stated however that, in doing so, it is tempting to employ a ‘the more the merrier’ approach, whereby the strategy is simply to lower entry barriers with the aim of incorporating a greater number of countries in order to arrive at a more adequate representation of key stakeholders at the international level. As the Yukos case demonstrates, not all dossiers of global energy governance are equally suited for this purposes. The analysis shows that the IECT’s departure from the legally binding nature of its predecessor runs the risk of tacitly rewarding those actors that have violated the rules of the game in the past. Although a less formalised setting can generate positive results on combating climate change, as demonstrated in the past by the G7 and G20 in cooperation with institutions such as the World Bank and the IEA, it is far less suitable for dealing with issues of investor protection. Doing so risks opening the door to a looser interpretation of the sort of rules investors sorely need when investing in such capital-intensive industries as energy. The experience in the Yukos case should continue to act as a case in point in this regard.

BIBLIOGRAPHY Aalto, Pami. ‘The New International Energy Charter: Instrumental or Incremental Progress in Governance?’, Energy Research & Social Science 11 (2016): 92–6. Alexovich, Ariel. ‘Paris Climate Agreement to Enter into Force on 4 November’, United Nations Sustainable Development, October 5, 2016. http://www.un.org/sustainabledevelopment/blog/2016/10/paris-climate-agree​ ment-to-enter-into-force-on-4-november/.

gang-in-nederland-5470557-a1533486; Renée Postma and Joep Dohmen, ‘Russisch Staatsoliebedrijf Kocht Curator Om in Yukos-Faillissement’, Nrc.nl, November 28, 2016, https://www.nrc.nl/ nieuws/2016/11/28/russisch-staatsoliebedrijf-kocht-curator-om-in-yukos-faillissement-5555073-a1​ 533961; Renée Postma and Joep Dohmen, ‘Hoe Rosneft de Rechtspraak Naar Zijn Hand Zette’, Nrc.nl, November 24, 2016, https://www.nrc.nl/nieuws/2016/11/24/rosneft-liet-het-vonnis-aanreik​ en-op-een-usb-stick-5470460-a1533485.

190  Research handbook on EU energy law and policy Bazilian, Morgan, Smita Nakhooda and Thijs Van de Graaf. ‘Energy Governance and Poverty’, Energy Research & Social Science 1 (2014): 217–25. doi:http://dx.doi.org/10.1016/j.erss.2014.03.006. Buckley, Neil. ‘Russia Wins Legal Victory over Yukos Damages’, April 20, 2016. https://www.ft.com/content/2a​ 23a352-06ce-11e6-a70d-4e39ac32c284. Carbonnier, Gilles and Sijbren de Jong. ‘The Global Governance of Energy and Development’. In The Global Community Yearbook of International Law & Jurisprudence 2011, edited by Giuliana Ziccardi Capaldo, 1: 41–68. Oxford: Oxford University Press, 2012. Davies, Megan, Vladimir Soldatkin and Gilbert Reilhac. ‘European Court Rules Russia Must Pay Yukos Shareholders 1.9 Billion Euros | Reuters’, Reuters, July 31, 2014. http://uk.reuters.com/article/uk-russia-yukos-ec​ hr-idUKKBN0G00QO20140731. DLA Piper. ‘A Case of Winning the Battle and Losing the War: Yukos v Russian Federation’, June 9, 2016. https://www.dlapiper.com/~/media/Files/Insights/Publications/2016/06/Yukos_vs_Russian_Federation.ashx. Florini, Ann and Saleena Saleem. ‘Information Disclosure in Global Energy Governance’, Global Policy 2 (2011): 144–54. doi:10.1111/j.1758-5899.2011.00135.x. Florini, Ann and Benjamin K. Sovacool. ‘Who Governs Energy? The Challenges Facing Global Energy Governance’, Energy Policy, no. 37 (2009): 5239–48. Goldthau, Andreas and Jan Martin Witte. ‘Assessing OPEC’s Performance in Global Energy’, Global Policy 2 (2011): 31–9. doi:10.1111/j.1758-5899.2011.00122.x. Goldthau, Andreas and Jan Martin Witte. ‘The Role of Rules and Institutions in Global Energy: An Introduction’. In Global Energy Governance: The New Rules of the Game, edited by Andreas Goldthau and Jan Martin Witte, 1–25. Global Public Policy Institute/Brookings Institution, 2010. Haghighi, Sanam S. Energy Security: The External Legal Relations of the European Union with Major Oil and Gas Supplying Countries. Vol. 16. Modern Studies in European Law. Oxford and Portland, OR: Hart Publishing, 2007. Hanrahan, Mark. ‘Belgium Unfreezes Russian Assets Seized in Yukos Legal Fight’, International Business Times,  June 21, 2015. http://www.ibtimes.com/belgium-unfreezes-russian-assets-seized-yukos-legalfight-197​6386. Harks, Enno. ‘The International Energy Forum and the Mitigation of Oil Market Risks’. In Global Energy Governance: The New Rules of the Game, edited by Andreas Goldthau and Jan Martin Witte, 247–67. Brookings Institution Press, 2010. ‘International Energy Charter Agreed Text for Adoption in The Hague at the Ministerial Conference on the International Energy Charter on 20 May 2015’. Energy Charter Secretariat, May 20, 2015. ‘International Energy Statistics. Total Petroleum and Other Liquids Production 2014’. US Energy Information Administration (EIA), 2015. http://www.eia.gov/beta/international/rankings/#?prodact553-1&cy52014. Jong, Sijbren de. ‘The EU’s External Natural Gas Policy – Caught Between National Priorities and Supranationalism’, April 16, 2013. https://lirias.kuleuven.be/handle/123456789/393181. Jong, Sijbren de. ‘Towards Global Energy Governance: How to Patch the Patchwork’. In Energy and Development, edited by Gilles Carbonnier, 21–43. International Development Policy. Basingstoke/Geneva: Palgrave Macmillan/Graduate Institute Geneva, 2011. Jong, Sijbren de and Jan Wouters. ‘Institutional Actors in International Energy Law’. In Research Handbook on International Energy Law, edited by Kim Talus, 18–43. Cheltenham, UK; Northampton, MA, USA: Edward Elgar Publishing, 2014. Maniruzzaman, Munir. ‘International Energy Charter as a Milestone for Global Energy Co-Operation in the 21st Century’, Wolters Kluwer – Law & Business. Kluwer Arbitration Blog, August 2015. http://kluw​ erarbi​trationblog.com/2015/08/30/international-energy-charter-as-a-milestone-for-global-energy-co-opera​ tion-in-the-21st-century/. ‘Overview – International Energy Charter’, June 23, 2016. http://www.energycharter.org/process/internationalenergy-char​ter-2015/overview/. Piper, Elizabeth, Denis Dyomkin, Darya Korsunskaya, Gabriela Baczynska, Katya Golubkova and Alexander Saeedy. ‘Russia Examines Brussels’ Legal Move to Seize State Assets’, Reuters, June 18, 2015. http://www. reuters.com/article/us-russia-yukos-idUSKBN0OY1FS20150618. Postma, Renée and Joep Dohmen. ‘Hoe Rosneft de Rechtspraak Naar Zijn Hand Zette’, Nrc.nl, November 24, 2016. https://www.nrc.nl/nieuws/2016/11/24/rosneft-liet-het-vonnis-aanreiken-op-een-usb-stick-5470460-a1​ 533485. Postma, Renée and Joep Dohmen. ‘Rosneft Manipuleerde de Rechtsgang in Nederland –NRC’, November 24, 2016. https://www.nrc.nl/nieuws/2016/11/24/rosneft-manipuleerde-de-rechtsgang-in-nederland-5470557-a1​ 533486. Postma, Renée and Joep Dohmen. ‘Russisch Staatsoliebedrijf Kocht Curator Om in Yukos-Faillissement’, Nrc. nl, November 28, 2016. https://www.nrc.nl/nieuws/2016/11/28/russisch-staatsoliebedrijf-kocht-curator-om-inyukos-faill​issement-5555073-a1533961. Rudnitsky, Jake and Ilya Arkhipov. ‘Russia Wins $50 Billion Ruling in Decade-Old Fight With Yukos’, Bloomberg.

The International Energy Charter  191 com, April 20, 2016. https://www.bloomberg.com/news/articles/2016-04-20/dutch-court-overturns-50-billionyukos-ru​ling-on-jurisdiction. ‘Russia Warns It Will Retaliate after Assets Seized in Yukos Case’, Agence France Presse, June 19, 2015. https:// www.theguardian.com/business/2015/jun/19/russia-warns-it-will-retaliate-after-assets-seized-in-yukos-case. ‘Russian Court Says No Need to Comply With $2 Billion Yukos Ruling’, RadioFreeEurope/RadioLiberty, January 19, 2017. http://www.rferl.org/a/russia-court-rejects-yukos-ruling/28243329.html. The Economist. ‘The Yukos Affair: Baiting the Bear’, April 16, 2016. http://www.economist.com/news/ business/21696960-russia-trying-impede-enforcement-massive-damages-award-baiting-bear. ‘The International Energy Charter’, International Energy Charter, June 23, 2016. http://www.energycharter.org/ process/international-energy-charter-2015/overview/. ‘World Energy Outlook 2015 Executive Summary’, International Energy Agency (IEA), 2015. ‘World Energy Outlook 2016’, International Energy Agency (IEA), 2016. Youngs, Richard. Energy Security: Europe’s New Foreign Policy Challenge. Taylor & Francis, 2009.

11.  The EU energy security strategy in the Caspian Sea region: addressing the bear in the room Stratos Pourzitakis

1. INTRODUCTION Energy security has been high on the agenda of the European Union (EU) especially vis-à-vis security of gas supply and its relations with Russia. The common denominator in a set of diverse approaches to energy security among EU agencies is the need to address the dominant role of Russian gas in the EU energy mix. Hence, the EU energy security strategy has been focusing on risks due to the EU overdependence on Russian gas as well as on how to mitigate them. Sitting on vast oil and gas energy resources, the Caspian Sea region plays a detrimental role in the calculations of the EU and it serves as one of the basic pillars of the EU energy security strategy because of its potential to provide a sustainable alternative source of energy supply but also a reliable energy transportation route. The purpose of this chapter is to examine the energy security strategy of the EU towards the Caspian Sea region. Given the emphasis on the security of gas supply which built into the EU energy security strategy, the chapter will focus on the EU-Caspian Sea states’ energy relations with respect to the supply of gas, looking in particular at Russia, Azerbaijan and Turkmenistan. After providing an overview of the notion of energy security the chapter will analyze how the EU understands this multifaceted concept and what are the dimensions of the EU energy security. Next it will examine how its energy relations with Russia shape the EU’s energy security perceptions. As different EU member states and agencies face different energy realities and have different understandings around energy security, it should come as no surprise that they approach EU-Russia energy relations and the subsequent strategy towards the Caspian Sea from a different perspective. Furthermore, the chapter will study how the status of EU-Russia energy security relations determines the dynamics of the energy dialogue between Brussels and the other Caspian states. The last part of the chapter will examine the evolution of the relations between the EU and Azerbaijan and Turkmenistan, paying special attention to the establishment and the prospects of the South Gas Corridor. It will be argued that Brussels engages with Turkmenistan and Azerbaijan keeping an eye towards Moscow, and that the overall EU approach is a combination of strategic and market-based considerations.

2.  THE CONCEPT OF ENERGY SECURITY Energy security has become a buzzword, topping the agenda of politicians, policy-makers and scholars. According to the traditional definition, energy security is the uninterrupted 192

The EU energy security strategy in the Caspian Sea region  193 availability of energy sources at an affordable price.1 This definition, albeit correct, fails to depict the complexity of international relations. Therefore, energy security has the ­following dimensions: 1. Energy security as part of the domestic policy of a country, which establishes its energy strategy. 2. The economic dimension of energy security, which deals with energy markets and their interaction with countries and institutions. 3. The geopolitical dimension of energy security, which refers to the competition for energy resources among countries. 4. Energy security as a security issue, with regard to threats posed by states and nonstate actors to energy transportation.2 By and large, how an actor pursues its energy security interests depends on the overall approach of an actor vis-à-vis the notion of energy security and how this can be better served. Strategically based perspectives adopt a zero sum game approach on energy security. Under this narrative, energy security falls within the scope of national security and the need for independence from energy imports is stressed, emphasizing the importance of an adequate and secure supply of oil. Institutions and energy markets can play an important role, yet primacy is given to the role of state as well as to the establishment of bilateral energy partnerships. Actors that subscribe to the realist school of thought and adopt a strategic approach in terms of energy security view these risks as a zero-sum game within the framework of an international ­anarchical ­environment. They focus on relative gains and do not deem cooperation as a highly viable option. Liberals, on the other hand, prefer to tackle energy security risks and threats through cooperation and institutes, while they emphasize absolute gains.3 At the other extreme of this axis we find market-based approaches which can be better explained by liberalism and liberal economics. Market-based approaches highlight the importance of cooperation in energy security. Due to increasing interdependence, absolute energy independence is impossible and not necessarily desirable. Inspired by the values of liberalism, market-based approaches recognize multiple actors in energy security while they ascribe a primary role to global energy markets and institutions. One of the most prominent representatives of this specific approach is the EU, which places emphasis on cooperation among its member states and the integration of the EU energy market, as well as on the institutionalization of energy security. Černoch and Jirušek provide a comprehensive overview of energy security from a strategic and a market based perspective, shown in Table 11.1.

  Daniel Yergin, ‘Ensuring Energy Security – Old Questions, New Answers’ (2006) 85(2) FA

 1

70.

  Florian Bauman, ‘Energy Security as a Multidimensional Concept’ (2008) 1 CAP 4.   Andre Månsson, Bengt Johansson and Lars J Nilsson, ‘Assessing Energy Security: An Overview of Commonly Used Methodologies’ (2014) 73 Energy 4.  2  3

194  Research handbook on EU energy law and policy Table 11.1  Approaches to energy security Issues

The strategic approach

The market-based approach

Theoretical basis

The realist tradition in IR, classic geopolitics

General approach to energy  policy in international relations Management of energy  resources Role of energy policy in   international relations

The need for independence from external supplies of energy Resource nationalism derived from resource scarcity Used to influence international relations

Definition of energy policy

Focus on securing adequate and secure supply, especially for oil and natural gas

Nature of international  relations and distribution of resources Regime of international  relations

Zero sum game, focus on relative gains

The liberal tradition in IR, neoclassical and neoinstitutional economics Energy independence is impossible – attempts to achieve it disrupt inter-state relations Market ensures efficient allocation Politicization of energy affairs leads to poor allocation and a less effective system Complex view, looking at all resources, and looking at the functioning and influence of markets and infrastructure Non-zero sum game, focus on absolute gains

Positioning of actors in the   international system

States as the main and only relevant actors

International relations are founded on bilateral relations

Cooperation with international organizations, multilateral relations Multiple influential actors (including firms, international organizations, interest groups)

Source:  F Černoch and M Jirušek, ‘Strategic and Market-oriented Approaches in the Energy Policy of the European Union’ (2014) ECPR 9.

3. DIMENSIONS AND AGENTS OF ENERGY SECURITY IN THE EU Energy has been a founding pillar of the EU integration process since the European Coal and Steel Community and the European Atomic Energy Community were established in 1952 and 1957 respectively. Examining energy security in a European context is of particular interest due to the dual dimension and the different approaches to the specific concept, the multiple issues at play, and the large number of engaged actors with diverse agendas. Hence, EU energy security touches upon the different segments of EU political and economic life, including EU Common Foreign and Security Policy (EU CFSP), development and cooperation, competition, industrial policy, environmental policy, etc. Discussions about the formation of a common energy policy among Western European states date back to the period prior to the two oil crises. However, in the aftermath of the two oil shocks, these plans were shelved and energy policy remained an issue of national sovereignty. During that period, security of oil supply was a primary concern and, moving

The EU energy security strategy in the Caspian Sea region  195 towards this, the security of oil supplies and diversification of energy sources have also been basic concerns of the European Community. Yet, structural differences between European countries have led to a limited interest in a more institutional and common energy policy.4 The demise of the Soviet Union and the triumph of Western liberal democracy encouraged optimism and confidence among EU member states and institutions, which was reflected in a series of initiatives that can be labeled as the beginning of the EU energy policy. In the early 1990s, the initiative of the Dutch Prime Minister Ruud Lubbers led to the establishment of the Energy Charter Treaty (ECT) on the basis of the European Energy Charter. The ECT provides a framework for energy cooperation and energy trade among its signatory member, and in the EU calculations it served as an excellent platform for mutual cooperation between East and West that would help Europe to provide the former Socialist countries with assistance towards their transition to market economies – something that was in Europe’s best political, economic and security interests.5 The ECT provided Europe with useful supply diversification options as it brought the abundant energy resources of the East closer with Western energy needs. However, volatility of oil prices, along with instability in the Middle East and the coming double EU integration, raised concerns on EU security of supply, with most attention paid to gas as the high fungibility of oil provided a sufficient safety net for Europe. These concerns were first depicted in the 1996 EU White Paper for Energy Policy and the 2000 Green Paper for the Security of Energy Supply, which stressed the increasing dependence on energy imports coming largely from Russia, and underscored the need to mitigate risks that stem from that dependence. Although both documents highlighted the importance of market mechanisms and demand-side measures they also incorporated the geopolitical dimension of energy security in tandem with the importance of the diversification of energy supply sources and transportation routes.6,7 The 2006 and the 2009 gas crises between Russia and Ukraine marked a turning point for EU perceptions on energy security and for EU energy security strategies, and revealed the EU vulnerability to short-term gas supply shocks, leading to a series of Brussels-led initiatives. In 2006 the joint paper ‘An External Policy to Serve Europe’s Energy Interests’ published by the Commission and the European Council integrated market-based as well as geopolitical considerations, recognizing the link between energy security, market sustainability, and also risks stemming from unstable energy suppliers. The paper highlighted the need for functioning energy markets but also for a more coherent external energy policy that would seek diversification of energy supplies and transportation risks.8 The basic principle of the external energy security strategy was that while EU member states retain their sovereignty

 4   Andrei Belyi, ‘New Dimensions of Energy Security of the Enlarging EU and their Impact on Relations with Russia’ (2003) 25(4) JEI 355.  5   Andrey Konoplyanik and Thomas Wälde, ‘Energy Charter Treaty and its Role in International Energy’ (2006) 24(4) JENRL 524.  6   European Commission, ‘Green Paper – Towards a European Strategy for the Security of Energy Supply’ COM (2000) 769 final.  7   Commission of the European Communities, ‘An Energy Policy for the European Union’ COM(95) 682 final 12–37.  8   Council of the European Union, ‘An External Policy to Serve Europe’s Energy Interests: Paper from Commission/SG/HR for the European Council’ (2006) 9971/06.

196  Research handbook on EU energy law and policy on their basic energy policy choices, EU agencies are mandated to extend the European liberal values and the principle for a market-governed energy landscape to the neighboring energy partners such as Russia, Central Asia, South Mediterranean and North Africa through a series of technical programs. Traditionally, the EU has been deemed as an actor that approaches energy security through the market-based approach. In their paper ‘Energy Supply Security and Geopolitics: A European Perspective’ Correljé and Van der Linde (2006) approach energy security from both a geopolitical and a market-based perspective, and they categorize the EU as a market-based actor, suggesting that Brussels should move closer to the geopolitical approaches of major energy players such as Russia and China.9 To a large extent this is true as the backbone of EU energy security has been the establishment of an integrated energy market that would operate under the rules of the free market. Brussels has initiated numerous legal and policy programs in this direction, focusing largely on establishing an open and integrated electricity and gas market in Europe and its periphery. The logic behind this approach rests on the dual dimension of energy security in the EU, namely the internal and the external dimension; according to the dominant narrative in Brussels, ensuring energy security in the internal energy market of the EU will also boost the external dimension of EU energy security through a spill-over process.10 However, a closer look at the EU energy security strategy will reveal both geopolitical and economic concerns in the EU energy calculations. Especially after the 2006 and the 2009 Russia-Ukraine gas crises, the EU official documents have been paying increasing attention to the strategic dimension of energy security. In this context, the biggest energy security challenges for the EU are the dangers emanating from its high energy dependence on Russian gas imports, an issue which is closely linked to political and security considerations such as the crisis in the relations between Moscow and Kiev. In 2006, Javier Solana put EU energy security in the context of the EU CFSP, stating that ‘The time has come to forge European energy diplomacy based on common interests and shared principles’.11 Similarly, according to the EU Institute of Security Studies, which is an EU agency, the question of energy security had to be put in the framework of geopolitical tensions and instability in resource-rich areas including the Middle East, Russia, Central Asia, etc., while challenges such as China’s growing appetite for energy had to be met through a combination of external instruments and CFSP policies.12 More recently in 2015, the Energy Union energy package underscored the necessity for putting foreign policy tools, diplomacy and trade agreements in the service of energy security in order to meet the

 9   Aad Correljé and Coby van der Linde, ‘Energy Supply Security and Geopolitics: A European Perspective’ (2006) 34(5) EP 532. 10   Richard Youngs, ‘Europe’s External Energy Policy: Between Geopolitics and the Market’ (2007) 278 CEPS 2. 11   Javier Solana, ‘Why Europe Must Act Collectively on Energy’ Financial Times (8 March 2006), https://www.ft.com/content/76e72606-aed1-11da-b04a-0000779e2340 (accessed 25 October 2016). 12   Giovanni Grevi, ‘CFSP and Energy Security’ (EU Institute for Security Studies, Paris, 23 October 2006), http://www.iss.europa.eu/uploads/media/rep06-12.pdf (accessed 29 October 2016).

The EU energy security strategy in the Caspian Sea region  197 political challenges that undermine energy security, in an implicit reference to the RussiaUkraine gas crises.13 In parallel, as in most of the aspects of the EU political and economic life, a wide spectrum of actors are engaged, with the most important being the Directorate General (DG) of Energy, the European Commission, the European Council, the European External Action Service, and the office of the High Representative (HR) for the EU CFSP. In parallel, the EU member states retain their sovereign rights to energy decision-making while the European Parliament often plays a detrimental role in the policy-making process. Although there is a clear distinction of mandates among EU agencies, the questions of who has the final say or who leads negotiations with third countries are often more blurred. At the same time, the 2009 Lisbon Treaty stipulates that the European Commission is responsible for EU external representation, attributing important roles to the Council as well as to the European Parliament, especially regarding issues relevant to the EU CFSP or with respect to big projects such as pipeline networks. Hence, during a 2010 EU-US Energy Council the EU was represented by the High Representative of the Union for Foreign Affairs and Security Policy Catherine Ashton, with the European Commissioner for Energy Günther Oettinger playing a secondary role. The debate as to who is in charge in EU external energy relations can be described as a power game between the Commission and the Council of Ministers.14 What is more there is a distinct gap between key players with respect to EU approaches to energy security. For example, the majority of the European Commission DG Energy attribute little if any importance to the role of geopolitics in EU energy security, while geopolitics plays a very influential if not dominant role in the energy calculations of the European External Action Service (EEAS).15 What is more, tensions between different compartments of the EU structure regarding working routine and professional practices on transparency and flow of information hinder the effectiveness of the EU energy ­security strategy.16

4. THE X FACTOR IN THE EU ENERGY SECURITY STRATEGY OR ELSE DEPENDENCE ON RUSSIAN GAS Undoubtedly, the biggest energy security challenge for Europe has been the high dependence on Russian gas imports, and this has also largely been the driving force behind the EU energy security strategy towards other Caspian Sea states. For Brussels, diversifying away from Russia has been at the top of the agenda when it comes to both the supply and

13   European Commission, ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’ COM(2015) 80 final, 3–7. 14   Jan Frederik Braun, ‘EU Energy Policy under the Treaty of Lisbon Rules Between a New Policy and Business as Usual’ (2011) EPIN Working Paper 31, 4–8, https://www.ceps.eu/system/ files/book/2011/02/EPIN%20WP31%20Braun%20on%20EU%20Energy%20Policy%20under%2​ 0Lisbon.pdf (accessed 25 October 2016). 15   Interviews with senior officials from the DG Energy of the European Commission and the EEAS Brussels, October 2016. 16   Braun (n 14) 4–6.

198  Research handbook on EU energy law and policy transportation of gas. Again, however, the lack of consensus among EU member states as well as different opinions among EU agencies reflects on the EU strategy. Energy relations between Europe and Russia date back to the 1960s when Russian (then USSR) gas was transported to Austria by pipeline in 1968. From the first shipment of gas to Austria, energy flows between the two sides remained steady, even during the most difficult moments of the Cold War, while, starting from 2000, Brussels and the EU have been developing a formal energy dialogue which covers a wide array of topics including not only energy trade but also transportation and environmental issues. For many years the EU strategy was to bring Russia closer by promoting the EU principles on energy policy. In this context, Brussels tried unsuccessfully to encourage Moscow to join the ECT. After 2006, however, it became apparent in Brussels that the growing energy dependence on Russia entailed serious supply disruption risks. Later, in 2009, the Russia-Ukraine gas crisis was a watershed for Brussels, as Moscow cut off supplies to Southeastern Europe for 13 days. On the eve of the Crimea crisis in 2014, fears that Russia might use energy as a political weapon soared once again as Russia and Ukraine engaged in a further gas dispute. Against this backdrop, the EU response entails balancing engagement with Russia as well as taking a stand against Russia. To begin with, starting from the early 2000s, Brussels recognized the need to decrease dependence on Russian gas, while the 2006 Green Paper on energy security outlined the political and economic dangers that emanate from the large share of Russian gas in the EU energy mix. The common denominator, however, in the EU positions was the recognition that interdependence will remain strong in the foreseeable future,17 while the 2000 Green Paper on energy policy identified Moscow as a reliable energy partner.18 Since the 2009 gas crisis, however, there has been increasing awareness regarding the need to mitigate short-term supply risks stemming from Russia. Under the principle of diversification Brussels has developed a multifaceted strategy that aims at decreasing the dependence on Russian gas without openly undermining their energy partnership with Moscow. On the one hand, the EU has recognized the need to further promote cooperation with Russia, and the bilateral energy dialogue which was initiated in 2001 has been fostered with the two sides negotiating the New EU-Russia Agreement that will replace the existing 1997 Partnership and Cooperation Agreement (PCA). Another important segment of their bilateral cooperation has been the establishment of the EU-Russia Early Warning Mechanism in 2007 which was activated in 2009 offering valuable information amidst the gas crisis. Most important, during the 2014 Russia-Ukraine gas disputes, the EU, through the Energy Commissioner Guenther Oettinger, launched trilateral talks in order to ease the tensions and eventually it was able to broker a deal between Moscow and Kiev.19 The energy dialogue between the two sides remained intact despite the downturn in EU-Russia relations in the aftermath of the Russian invasion of Crimea, with the European Commission envisioning a strategic

  Council of the European Union (n 8).   European Commission (n 6). 19   Geir Moulson, ‘EU Proposes Deal to Ensure Ukraine Gas Supplies’, http://www.deseret​ news.com/article/765660254/EU-proposes-deal-to-ensure-Ukraine-gas-supplies.html?nm51. 17 18

The EU energy security strategy in the Caspian Sea region  199 ­ artnership between the two sides, within a single energy market.20 These initiatives depict p the interest of the EU agencies to engage and integrate Russia via bilateral initiatives in order to reduce the possibilities of future energy trade frictions, tackle technical inefficiencies and improve predictability in their relations. In parallel, a stated goal of the EU is to diversify its gas suppliers as well as the respective gas transportation routes. This is a strategic choice that targets Moscow as an energy supplier. In this context, one can identify two kinds of measures, those which are applied in the internal EU energy market and those which focus on the external dimension of EU energy security. With respect to the former, EU strategy aims at what can be considered as internal balancing as they aim at building up the EU capabilities vis-à-vis Russia and possible supply disruption shocks. On the other hand, when assessing the EU gas diversification strategy one needs to keep in mind that the EU-Russia gas trade is based on long-term contracts between Gazprom and EU companies with a duration ranging between 10 and 35 years and take-or-pay clauses at the level of 85% until 2008, thereafter reduced to 70%. Therefore, European companies are already committed to purchasing more than 120bcm of gas in 2020 and approximately 70bcm in 2030, and if they fail to meet their commitments they will face grave economic consequences as they would be subject to arbitration claims that would be equal to tens of billions of euros.21 Therefore, the EU strategy of diversification of energy supplies refers to the 15–30% of the gas purchases from Russia and consequently it can hardly be considered as a game changer in the gas market. All in all, it is safe to say that Russia will remain dominant in the EU gas market, something which is also recognized by the respective EU documents. Furthermore, a major impediment for EU energy security strategy is the lack of consensus between all EU agencies regarding the credibility of Russia as an energy supplier. At the one extreme of this wide spectrum of EU perceptions on Russia stands Germany, which historically has maintained a privileged relationship with Russia. Berlin believes that despite geopolitical challenges, Russia will remain a credible energy supplier. This belief is reflected in the German decision to engage in a close energy dialogue with Moscow and promote the Nord Stream 1 & 2 pipelines. Historically, Germany has not deemed Russia a geopolitical problem in terms of energy security, while in the past Russian energy was considered a valuable alternative to oil and gas from the volatile Middle East.22 In a similar vein, the European Commission appears to be largely indifferent to the risks that stem from high dependence on Russian gas, with its officials largely rejecting any geopolitical dimension in the EU strategy and approaching the EU gas diversification strategy as a choice influenced by economic motivations.23 20   European Commission, ‘Roadmap EU-Russia Energy Cooperation until 2050’ (March 2013), https://ec.europa.eu/energy/sites/ener/files/documents/2013_03_eu_russia_roadmap_2050_ signed.pdf (accessed 26 October 2016). 21   Ralf Dickel et al., ‘Reducing European Dependence of Russian Gas: Distinguishing Natural Gas Security from Geopolitics’ (OIES, Oxford, October 2014), https://www.oxfordenergy.org/ wpcms/wp-content/uploads/2014/10/NG-92.pdf (accessed 20 October 2016) 10, 71. 22   Kirsten Westphal, ‘Germany and the EU-Russia Energy Dialogue’ in Pami Aalto (ed.), The EU-Russian Energy Dialogue: Europe’s Future Energy Security (Aldershot: Ashgate 2008) 93. 23   Interviews with senior officials from the DG Energy and DG DEVCO of the European Commission (Brussels, October 2016).

200  Research handbook on EU energy law and policy On the other hand, a number of EU member states have been highly sensitive on the role of Russia in the EU energy security landscape. Current members of the EU but formerly part of the Warsaw Pact countries such as Poland and Hungary are highly dependent on Russian gas and approach the role of Moscow from a largely geopolitical perspective. This, for example, has been reflected in the response to the construction of Nord Stream 1 & 2, with the Polish defense minister Radek Sikorski characterizing the former as similar to the Soviet-Nazi Molotov-Ribbentrop Pact while the latter has been met with criticism by the government of Poland and Hungary.24 According to the so-called Visegrad group of countries, Moscow is an energy partner that should not be trusted because it has used energy as a political weapon and could be expected to adopt this strategy again; hence, the EU should focus on minimizing its exposure in relation to Russian gas. What is more, other EU institutes such as the EEAS, albeit not so bold, share some of the concerns of the Eastern European countries; they recognize the geopolitical dimension in energy security and underscore the necessity for a concrete EU energy security strategy vis-à-vis the elephant in the room, which is the European overdependence on Russian gas.25

5. THE EU ENERGY DIVERSIFICATION STRATEGY IN THE CASPIAN SEA REGION Sitting on vast natural resources, the Caspian Sea region plays a key role in the EU’s energy calculations, with Brussels seeking to access the gas deposits of Azerbaijan and Turkmenistan.26 The situation, however, has been far from rosy and, as a newcomer, the EU has been facing considerable challenges in accessing the region’s gas deposits. Diversification and closer energy ties with Azerbaijan and Turkmenistan have been high on the EU agenda and, most recently, in February 2015, the European Commission published a Communication that calls for increased diversification away from Russian gas through the promotion of energy ties with Central Asia.27 5.1  The Framework of the EU Policy towards the Caspian Sea Region Using its soft power as the spearhead for its energy diplomacy the EU has launched a number of initiatives with neighboring energy-rich countries such as the European Neighbourhood Policy (ENP) and the Technical Assistance to Commonwealth States (TACIS), including a set of comprehensive policies which provide technical and policy support and financial assistance, and which bring the partner countries closer to the EU. Such measures seek to address, among other issues, fostering closer energy ties with the beneficiary countries, including Azerbaijan in the case of ENP and both Turkmenistan 24   William Powell, ‘Weekly Overview: Nord Stream 2 Strikes Back’ (Natural Gas World, 25 March 2016), http://www.naturalgasworld.com/weekly-overview-nord-stream-2-strikes-back-287​ 98 (accessed 18 October 2016). 25   Interviews with senior officials from EEAS (Brussels, October 2016). 26   European Commission, ‘Energy EU Crude Oil Imports and Supply Cost’, https://ec.europa. eu/energy/en/statistics/eu-crude-oil-imports (accessed 20 October 2016). 27   European Commission (n 6).

The EU energy security strategy in the Caspian Sea region  201 and Azerbaijan for TACIS. Undoubtedly such initiatives are aimed towards ensuring security of energy supply based not merely on market-based calculations but also on strategic considerations. The color revolution, as well as the limits of the EU foreign and security policy vis-à-vis the rise of new geopolitical challenges, made it imperative that the EU will use its soft power in order to ensure, among other goals, access to the energy resources of the Caspian Sea.28 In parallel, Brussels has established more targeted programs that aim at closer energy cooperation with partner countries, such as INOGATE and the Baku Initiative. These initiatives, while seeking to promote the declared liberal market-based approach on energy security of the EU, had a distinct strategic dimension as they were designed based on calculations about the EU capabilities and structural parameters in the European periphery.29 INOGATE, originally standing for Interstate  Oil and  Gas  Transportation to Europe, was operated from 1996 until 2016, and aimed at enhancing energy security for both the EU and the partner countries by providing technical cooperation and bringing the energy markets of non-EU states closer to the principles and operational standards of the EU energy market. Similarly, in 2004 the Baku Initiative was announced as a platform for energy cooperation between the EU and the Black Sea and Caspian Sea countries. The long-term strategy of the Baku Initiative was to establish an integrated regional energy market that will, in turn, be integrated with the EU energy market. Unsurprisingly, the impact of these programs has been debated among scholars and policy-makers. According to Raszewski (2016) INOGATE and the Baku Initiative played a facilitating role in the internal and the external EU energy market, yet on the other hand it has been unsuccessful as they have partially at least failed to provide sustainable energy supply diversification options.30 In parallel, Urdze claims that EU officials recognize, off the record, that INOGATE cannot be considered a success story.31 Based, however, on semi-structured interviews with EU senior officials, some EU agencies question the results achieved by INOGATE and the Baku Initiative, while officials from the DG Energy of the European Commission state their satisfaction with the specific programs, suggesting that their success largely depends on the level of cooperation of the partner countries.32 Furthermore, the complexity and the lack of coordination in the EU energy policymaking process have been illustrated in the European energy diplomacy towards Azerbaijan and Turkmenistan. Having been used to dealing with states such as Russia and China, which share the premise of traditional sovereign state cooperating, the Caspian Sea states face difficulties in understanding how a post-modern structure like the EU 28   Roland Dannreuther, ‘Developing the Alternative to Enlargement: The European Neighbour­ hood Policy’ (2006) 11(2) EFAR 183. 29   Elsa Tulmets, ‘Can the Discourse on “Soft Power” Help the EU to Bridge its CapabilityExpectations Gap?’ (2007) 7 EPER 199. 30   Slawomir Raszewski, ‘The EU’s External Policy of Energy Diversification in the Wider Black (and Caspian) Sea Region: Regional Security of Security Community? in Karen Henderson and Carol Weaver (eds), The Black Sea Region and EU Policy The Challenge of Divergent Agendas (Ashgate 2010) 143–7. 31   Sigita Urdze, ‘The Tool-kit of EU-Central Asian Cooperation’ in Alexander Warkotsch (eds), The European Union and Central Asia (Routledge 2011) 26. 32   Interviews with senior officials from the DG Energy and DG DEVCO of the European Commission (Brussels, October 2016).

202  Research handbook on EU energy law and policy operates. This lack of compatibility is often reflected in the exchanges between EU officials and their counterparts from the Caspian states, despite the declared willingness of all sides to cooperate.33 Furthermore, the polyphony among EU agencies impedes the articulation of a coherent EU strategy in the Caspian Sea region. The Lisbon Treaty tried to address these deficiencies, albeit not without problems. During the establishment of the EEAS and the HR of the CFSP there was a leadership gap that offered an opportunity to the DG Energy to take the lead in the policy-making process in terms of the Caspian Sea states. Hence the DG Energy replaced the HR of CFSP or the Directorate General (DG) External Relations (RELEX) from the European Commission, not only as the key counterpart of Azerbaijan in their negotiations, but also as the key mediator in the 2010 Azerbaijan-Turkmenistan mediation on the Caspian Sea borders.34 While the involvement of the DG Energy might have brought positive results, this institutional turmoil undermined the credibility of Brussels as a coherent actor. 5.2  The Strategic Importance of the Southern Gas Corridor The most important project towards diversification of gas supply routes has been the Southern Corridor project which sought to bring gas from the Caspian Sea and the Middle East to Europe, bypassing Russia. The first plans for this vast pipeline network were initiated in November 2008 and the European Commission has been a very active supporter of the project. The European Commission President Barroso characterized the Southern Corridor as a key priority for the EU, and in the same year Southern Corridor EU Energy Commissioner Günther Oettinger stressed the importance of establishing a direct link with the Caspian and Middle East region (Euractiv, 2010). Stretching over 3,500 kilometers and crossing seven countries, the Southern Gas Corridor includes a series of smaller projects, such as the South Caucasus Pipeline, the Trans-Anatolian Pipeline (TANAP), the Trans-Adriatic Pipeline (TAP), and a number of vertical pipelines that will bring the imported gas to Central and Eastern Europe, such as Trans Austria Gas (TAG) pipeline, the Transitgas pipeline, etc. The annual capacity of the network is 20bcm and initially the Southern Gas Corridor will bring 10bcm of Shah Deniz II gas (the offshore gas field in the Caspian Sea from where the gas originates) per year to Europe, while there are projections for the construction of a Trans-Caspian Pipeline (TCP) that will potentially bring gas from Turkmenistan to Europe through the Southern Corridor. Up to 2013, three projects had been competing for the EU branch of the project, the Nabucco pipeline that envisaged bringing gas to Central and Eastern Europe, the TransAdriatic Pipeline (TAP) that would connect TANAP with Italy, and the Interconnector Turkey-Greece-Italy (ITGI) pipeline. Interestingly, although the EU clearly backed Nabucco, it was TAP that was eventually preferred for a series of political, technical and 33   Interviews with senior officials from the DG Energy of the European Commission, the EEAS, the Mission  of the Republic  of Azerbaijan to the European Union, Embassy of  the Republic of Azerbaijan to the Hellenic Republic (Brussels, Athens, October 2016). 34   Samuel Lussac, ‘EU-Azerbaijan Association Agreement: A New Framework for Updated Cooperation?’ (CACI Analyst, 22 July 2010), http://www.cacianalyst.org/publications/analyticalarticles/item/12104-analytical-articles-caci-analyst-2010-7-22-art-12104.html (accessed 22 October 2016).

The EU energy security strategy in the Caspian Sea region  203 economic reasons. Brussels’ unambiguous support of Nabucco was illustrated in Barroso’s statement during the 2009 signature of the Nabucco Intergovernmental Agreement (IGA), according to which ‘Nabucco is thus a truly European project . . . the European Commission is very proud of the contribution [it] made to this agreement’.35 In parallel, the EU’s reception of both TAP and ITGI was rather tepid.36 The reasoning behind the strong EU support was not just based on economic considerations but also drew on strategic calculations about the need to mitigate gas supply risks related to Gazprom, given that Nabucco would deliver gas to the areas with the highest dependence on Russian gas. However, events did not unfold according to Brussels’ expectations, as the Shah Deniz II consortium, involving BP and Azerbaijan’s public company SOCAR, opted out of TAP. Officially, the selection was based on eight technical, economic criteria, namely commerciality, project deliverability, financial deliverability, engineering design, alignment and transparency, safe and efficient operability, scalability, and public policy considerations, as well as political criteria which reflect Azerbaijan’s strategic aims, the EU strategic goal for diversification of gas supplies, and the consortium’s interests. However, the rationale behind the choice of TAP had to do with commercial aspects such as the transportation costs for the gas, projected gas demand, expected prices in the respective markets, differences in the organizational and decision-making mechanisms of the projects, as well as the Third Party Access (TPA) exemption that was granted to TAP.37 In parallel, one needs to keep in mind the growing interest of Azerbaijan in the Greek energy market and the subsequent lobbying on behalf of the Greek Prime Minister Samaras in favor of TAP. The choice of TAP came at a time when SOCAR had reached an agreement with the Hellenic Republic Assets Development Fund (HRADF/ TAIPED) for the acquisition of a 66% stake in the Greek natural gas grid operator DESFA, while it had expressed its interest in purchasing Greek gas trading company DEPA, although later SOCAR had to withdraw its bid, reportedly amidst pressure from the European Commission.38 Prime Minister Samaras’ active support of TAP was recognized by representatives of Azerbaijan as an important input vis-à-vis the ­implementation of TAP.39 Despite the signs that all sides, including the EU, Azerbaijan and the Greek government, had adopted a strategy that was based not entirely on commercial criteria, today they identify TAP as a purely commercial project, claiming that commercial interests

35   José Manuel Durão Barroso, President of the European Commission, ‘Remarks by Commission President José Manuel Barroso upon the signature of the Nabucco intergovernmental agreement’, SPEECH/09/339, Ankara, 13 July 2009, 2. 36   Nicolò Sartori, ‘Energy and Politics: Behind the Scenes of the Nabucco-TAP Competition’ (2013) IAI Working Papers 1327, 2–3, http://www.iai.it/sites/default/files/iaiwp1327.pdf (accessed 19 October 2016). 37   Nicolò Sartori, ‘Energy and Politics: Behind the Scenes of the Nabucco-TAP Competition’ (2013) IAI Working Papers 1327, 4–5, http://www.iai.it/sites/default/files/iaiwp1327.pdf (accessed 19 October 2016). 38   Dimitar Bechev, ‘Sofia View: Southern Gas Corridor Goes TAP’ (2013) ECFREU, http:// www.ecfr.eu/blog/entry/sofia_view_southern_gas_corridor_goes_tap (accessed 12 September 2016). 39   Interviews with senior officials from the Mission  of the Republic  of Azerbaijan to the European Union and the Embassy of the Republic of Azerbaijan to the Hellenic Republic (Brussels, Athens, October 2016).

204  Research handbook on EU energy law and policy have been the only driving force behind the decision.40 All in all, however, the choice of TAP over Nabucco was considered a defeat for EU interests as well as for the Central and Eastern EU member states. By extension it was a victory for Greece and Italy as well as for Russia, given that TAP was smaller than Nabucco and it did not compete directly with the Russian pipelines. What is more, analysts were initially skeptical about the choice of TAP over Nabucco for a number of reasons, the most important being the limited size of the former compared to the latter (20bcm/year as opposed to 30bcm/year), as well as the fact that apart from Bulgaria and Greece no other South-Eastern European country would have access to the gas as there have been no related contracts.41 However, given the expanding interconnectedness of the EU internal energy market, the gas transported via the Southern Gas Corridor can eventually be brought to the EU areas which are more dependent on Russia.42 This stands as one additional example of how measures such as vertical pipelines and reverse flow capabilities can foster EU energy security. Part of the Southern Corridor is also the Trans-Caspian Pipeline (TCP), which would bring gas from Turkmenistan to Europe through the Southern Corridor. In 2011 the EU opened talks with Azerbaijan and Turkmenistan to facilitate the implementation of the project. However, negotiations resulted in a stalemate as Azerbaijan and Turkmenistan could not resolve their bilateral disputes, while the EU was unable to provide the necessary funding for the project.43 The legal status of the Caspian Sea however remains unclear and despite good intentions from Azerbaijan and Turkmenistan, the Russian determination to block possible solutions undermines the efforts of Ashgabat to connect with the Southern Gas Corridor.44 Again, the EU remains inactive, with the position of the EU officials in charge suggesting that they are unable to interfere with the specific issue.45 5.3  EU-Azerbaijan Energy Security Relations Starting from 2007 Azerbaijan became a gas exporter based on three main sources of gas: (1) the Shah Deniz field, which is the country’s largest gas deposit; (2) associated gas from the Azeri-Chirag-Guneshli oil field; and (3) volumes produced by SOCAR from the Shallow Water Guneshli field and other smaller fields. In 2015 the country’s gas production reached 18.9bcm with 8.3bcm being exported. The energy consulting company Wood

40   Interviews with senior officials from the DG Energy of the European Commission, the EEAS, the Mission  of the Republic  of Azerbaijan to the European Union, Embassy of  the Republic of  Azerbaijan  to the Hellenic Republic, the Hellenic Republic Ministry of Finance (Brussels, Athens, October 2016). 41   Dickel et al. (n 21) 40. 42   Manfred Hafner, ‘The Southern Gas Corridor and the EU Gas Security of Supply: What’s Next?’ (Natural Gas World, 28 March 2015), http://www.naturalgasworld.com/southern-gas-corri​ dor-and-eu-gas-security-of-supply-22688 (accessed 17 October 2016). 43   Catherine A Fitzpatrick, ‘Is the Trans-Caspian Pipeline Feasible Again?’ (Natural Gas World, 14 November 2014) http://www.naturalgaseurope.com/trans-caspian-pipeline-feasibility (accessed 22 October 2016). 44   Luke Coffey, ‘Who Owns the Caspian?’ Al Jazeera (7 September 2015), http://www.alja​zeera. com/indepth/opinion/2015/09/owns-caspian-150906054015762.html (accessed 19 October 2016). 45   Interviews with senior officials from the DG Energy of the European Commission and the EEAS (Brussels, October 2016).

The EU energy security strategy in the Caspian Sea region  205 Mackenzie and the International Energy Agency estimate that after Shah Deniz II is put into operation by 2020 the annual gas production of Azerbaijan will reach 25–30bcm.46 EU-Azerbaijan relations date back to the demise of the Soviet Union. However, the two sides became closer with the launch of regional programs such as INOGATE, the 1999 Partnership and Cooperation Agreement (PCA), and the establishment of the 2004 ENP. Until the middle of the 2000s the EU-Azerbaijan dialogue did not bring concrete results, at least not in the energy sector, with Brussels being rather reluctant to further penetrate the region due to rising geopolitical competition between Russia and the US on the Baku-Tbilisi-Ceyhan oil pipeline, while EU efforts to mediate the Nagorno-Karabakh conflict were fruitless.47 However, the situation started to improve after the launch of the Baku Initiative and, principally, the wake-up call of the 2006 Russia-Ukraine gas crisis. In 2006, a joint EU-Azerbaijan Action Plan in the framework of their PCA was signed by the EU-Azerbaijan Cooperation Council, while since then bilateral dialogue has been fostered through numerous instruments, such as the Eastern Partnership and the European Neighbourhood Instrument (ENI). Although the Southern Gas Corridor has been the backbone of EU-Azerbaijan energy relations, Baku has been able to sell gas to Europe for a number of years via the BakuTbilisi-Erzurum (BTE) pipeline and the Turkish-Greek pipeline that brings Azeri gas to Turkey and from there to Europe. However, the Southern Gas Corridor, in tandem with the development of Shah Deniz II, could be a game changer in the energy relations between the two sides. When the final investment decision (FID) on extracting gas from the Shah Deniz II gas field in Azerbaijan was taken by the Shah-Deniz-II-Consortium in 2013, European Commissioner Barroso welcomed the signing of the agreement, characterizing it as a ‘a strategic door opener for stronger European energy security’ and ‘a major milestone for the diversification of our energy supplies, to the benefit of European consumers and businesses’.48 Based on this agreement as well as on a series of sales agreements that were inked in 2013 and the decision of the Shah-Deniz-II-Consortium to proceed with the TAP, by 2019 Baku will be selling 10bcm annually to nine companies in Italy, Greece and Bulgaria via the South Gas Corridor. A thorny issue however, is the performance of Azerbaijan in terms of human rights and democracy. In many cases EU member states and EU agencies are largely divided with respect to the energy–human rights nexus in Azerbaijan; Nordic countries, for example, have very often criticized the suppression of civil liberties by Aliev’s government, while at the other end of this spectrum the Prime Minister of Hungary Viktor Orban, following the signing of a Joint Declaration on Strategic Partnership between the two countries, characterized Azerbaijan as a ‘model country’. In the same vein, while the European Commission and other EU agencies which are involved in energy negotiations such as

46   Simon Pirani, ‘Azerbaijan’s Gas Supply Squeeze and the Consequences for the Southern Corridor’ (OIES, Oxford, July 2016), https://www.oxfordenergy.org/wpcms/wp-content/uploads/​ 2016/07/Azerbaijans-gas-supply-squeeze-and-the-conse​quences-for-the-Southern-Corridor-NG-1​ 10.​pdf (accessed 20 October 2016). 47   Lussac (n 34). 48   European Commission, ‘Gas from Azerbaijan: Commission welcomes final investment decision to extract gas pledged for Europe’ (17 December 2013), http://europa.eu/rapid/pressrelease_IP-13-1271_en.htm (accessed 15 October 2016).

206  Research handbook on EU energy law and policy the EEAS have kept a balance between the need to secure access to gas supplies and the promotion of certain principles and norms via EU energy diplomacy, the European Parliament has been very critical of the government of Azerbaijan, and in September 2015 the European Parliament issued a resolution criticizing the deteriorating human rights situation in Azerbaijan.49 Baku condemned the ‘biased’ approach of the European Parliament and responded with a series of measures, including the decision to withdraw from the Euronest Parliamentary Assembly.50 In turn, the reaction from other EU agencies was rather moderate, with senior officials recognizing the problems that stem from the polyphony in the EU diplomacy, while on the other hand they stressed that the EU should neither give up its values nor stop applying the power which constitutes the European comparative advantage, in the name of security of gas supply.51 The confidence of the EU officials stems from, among other factors, the deepening of the EU internal gas market and the gloomy projections for gas demand that make the need for Azeri gas less pressing. All in all, it is important to stress that both sides kept energy outside the human rights issue, expressing their certainty that their energy trade will not be hampered.52 The reason behind this is not that their energy relationship entails merely corporate projects with no geopolitical dimension, as all sides claim, but rather the willingness of both sides to safeguard their energy partnership. On the other hand, the lack of coherence between EU member states and agencies clearly does not bring added value to the EU diplomacy towards Azerbaijan. 5.4  Prospects for EU-Turkmenistan Energy Relations Following the demise of the Soviet Union, Turkmenistan has gradually emerged as a new energy hotspot, eager to sell its hydrocarbon reserves on the global market. According to the 2014 BP Statistical Review of World Energy, gas reserves in Turkmenistan are calculated at 17.5 trillion cubic meters of gas.53 For many years, and even after the disintegration of the Soviet Union, Russia monopolized Turkmenistan’s gas market; against this backdrop, Ashgabat, seeking to diversify its energy clientele, has turned towards the energy-hungry Beijing, with the two sides establishing a vast pipeline network, the Central 49   European Parliament, ‘European Parliament resolution of 10 September 2015 on Azerbaijan (2015/2840(RSP))’ (10 September 2015), http://www.europarl.europa.eu/sides/getDoc.do?pubRef5-// EP//NONSGML+TA+P8-TA-2015-0316+0+DOC+PDF+V0//EN (accessed 23 October 2016). 50   Eastern Partnership Civil Society Forum, ‘Parliament of Azerbaijan Reacts to the EP Resolution and Decides to Withdraw from the Euronest Parliamentary Assembly’ (23 September 2015), http://eap-csf.eu/en/news-events/articles-analytics/parliament-of-azerbaijan-reacts-to-theep-resolution-and-decides-to-withdraw-from-the-euronest-parliamentary-assembly/ (accessed 24 October 2016). 51   Interviews with senior officials from the DG Energy of the European Commission, the EEAS (Brussels, Athens, October, 2016). 52   Interviews with senior officials from the DG Energy of the European Commission, the EEAS, the Mission  of the Republic  of Azerbaijan to the European Union, Embassy of  the Republic of  Azerbaijan  to the Hellenic Republic, the Hellenic Republic Ministry of Finance (Brussels, Athens, October 2016). 53   Abdelghani Henni, ‘Gas for Cash: The Future of Turkmenistan’ (Society of Petroleum Engineers, 11 November 2014), http://www.spe.org/news/article/Turkmenistan-Gas-for-Cash (accessed 19 October 2016).

The EU energy security strategy in the Caspian Sea region  207 Asia-China gas pipeline, which can transport annually up to 55bcm of gas. However, following the rising Chinese demand for Turkmen gas deals and a series of energy trade, infrastructure and finance agreements that made Ashgabat highly dependent on China, the Turkmen leadership has been interested in selling gas to Europe in order to decrease its dependence on China.54 In April 2008, the Turkmen government signed a Memorandum of Understanding on a strategic energy partnership with the European Commission which indicated a willingness to reserve 10bcm/y of gas for Europe, which is merely a fraction of what Turkmenistan exports to China.55 The most likely transportation route of the Turkmen gas will be through the Trans-Caspian Pipeline (TCP) that will connect Turkmenistan with the Southern Gas Corridor in Azerbaijan. Amidst growing fears for the reliability of Russia as an energy partner, the EU has stepped up its diplomatic contacts with Ashgabat during recent years and recently EU officials stated that the TCP could be built by 2019.56 Similarly, Turkmen officials have been expressing their certainty that  until 2020 Turkmenistan will be selling large amounts of gas to the European Union.57 However, the prospects for an EU-Turkmen energy partnership are far from rosy as the two sides need to overcome a series of legal, political and technical hurdles. Apart from territorial disputes among the Caspian littoral states, additional issues need to be dealt with concerning gas pricing and tariffs, while it is questionable whether Brussels will conform to Ashgabat’s requirement that its clients must purchase its gas on its border, thus taking all the transit risks – a demand which has already been met by Beijing. An additional problem with the EU is that it is a latecomer in the Turkmen energy market and there is clearly a lack of compatibility between the energy security approaches of the two actors. Obviously, the EU cannot compete with the clout of Beijing, which brings on board diplomatic leverage, vast foreign exchange reserves, and an energy security approach that is closer to Ashgabat’s perceived needs. As a result, while China has already consolidated a strong foothold in Turkmenistan, Brussels has been struggling to establish channels of communications and mutual trust. The EU has been unable to put into force the 2010 Partnership and Cooperation Agreement (PCA) with Turkmenistan, which is still pending ratification by the EU countries and the European Parliament, due to human rights concerns. The lack of steam in the EU-Turkmenistan relationship was also evident in September 2012 when President Berdimuhamedow snubbed the EU Energy Commissioner Günther Oettinger, who was visiting Turkmenistan. In Turkmen officials’ eyes the EU is a reluctant actor which remains ambivalent

54   Abdujalil Abdurasulov, ‘China’s Growing Demand for Turkmenistan’s Gas’ BBC (20 November 2014), http://www.bbc.com/news/business-30131418 (accessed 25 October 2016). 55   Jos Boonstra, ‘The EU-Turkmenistan Energy Relationship: Difficulty or Opportunity?’ (2010) 5 EDC2020 2. 56   Daryna Tabatska, ‘Turkmenistan: The Diversification of Gas Export Market’ (Natural Gas Europe, 16 December 2015), http://www.naturalgaseurope.com/turkmenistan-the-diversificationof-gas-export-market-27160 (accessed 18 October 2016). 57   Interview with the Ambassador of Turkmenistan H.E. Tajievna Rustamova (Beijing, July 2016).

208  Research handbook on EU energy law and policy vis-à-vis Russia and which, as opposed to China, cannot ‘make things happen’.58 This mismatch became apparent when the then European Commission President José Manuel Barroso visited Turkmenistan in 2011, with Turkmen diplomatic sources appearing uneasy over the visit as Barroso had no concrete plans that would advance an energy deal.59 While Ashgabat expects EU officials to be able to put energy deals into motion, EU officials approach their energy dialogue with Ashgabat from another perspective, leaving such issues to energy companies.60 This might be the way the EU conducts its business, yet it has been a distinct disadvantage in an environment where more state leaders can take decisions on and sign energy agreements. On the other hand, it needs to be stressed that gradually EU officials appear more confident, if not indifferent regarding the future of EU-Turkmenistan energy trade, given the success of the ­internal energy market measures and the pessimistic projections for gas demand in Europe.61 Furthermore, adding the European interest into Turkmenistan’s energy equation has led to questions about Turkmenistan’s capacity to supply enough gas to China, the EU and possibly Russia. According to the 2015 BP Statistical Review of World Energy, Turkmenistan produced 69.3bcm of gas in 2014, of which 27.7bcm were consumed, 25.5bcm were exported to China, and the remaining quantity was exported to Iran and former Soviet Union states. If the EU is to purchase 10bcm of gas from Turkmenistan, Ashgabat will have to boost its gas production, otherwise it will find itself stretched thin trying to satisfy all its supply obligations.62 The situation will become even more demanding for Ashgabat given that it has contracts to ship 80bcm of gas to China once Line D of the China-Turkmenistan pipeline is completed. Again, however, Turkmen officials appear confident that their gas deposits will fully satisfy both domestic and external demand. An issue of key importance will be the ongoing development of the Galkynysh gas field, which can boost the country’s gas production to 95bcm per year. In line with this, President Gurbanguly Berdymuhamedov had announced that Turkmenistan would ramp up gas production to 83.8bcm in 2015.63 Even under this scenario, however, the situation will remain strained for Turkmenistan, which will have to step up its efforts and meet the stated goal of 100–120bcm annually in order to provide all its clients simultaneously with ample gas.

58   Catherine A Fitzpatrick, ‘TCP Shelved,  TAPI Stalled;  Shake-up in Turkmenistan’s Oil and Gas Ministries’ (Natural Gas Europe, 24 January 2013), http://www.naturalgaseurope.com/ turkmenistans-oil-gas-ministry-shakeup (accessed 13 October 2016). 59   Andrew Rettman, ‘Turkmenistan: We’re Not Sure Why Barroso is Coming’ (euobserver, 10 January 2011), https://euobserver.com/foreign/31616 (accessed 17 October 2016). 60   Interviews with senior officials from the DG Energy of the European Commission (Brussels, October, 2016). 61   Nick Butler, ‘Has Gas Demand in Europe Peaked?’ Financial Times (23 May 2016). 62   BP Statistical Review of World Energy (London 2015) 22–3, 28. 63   ‘Turkmenistan to Increase Gas Production to 84 bcm in 2015’ (The Times of Central Asia, 13 January 2015) https://www.timesca.com/index.php/news/14863-turkmenistan-to-increase-gasproduction-to-84-bcm-in-2015 (accessed 13 October 2016).

The EU energy security strategy in the Caspian Sea region  209

6.  KNOWLEDGE GAP FOR FUTURE RESEARCH Not so long ago, oil prices were soaring above $100 per barrel, Hu Jintao was arguing that ‘certain powers have all along encroached on and tried to control navigation through the [Malacca] Strait’,64 and 11 people in Central and Eastern Europe had died as a result of the Russia-Ukraine gas stand-off. Until recently, the traditional notion of energy security was garnering the lion’s share of attention from academics and policy-makers as well as corporate leaders. However, the situation has changed dramatically during recent years, with mounting environmental concerns, the oversupply of fossil fuels following the Chinese shale gas revolution and the slowing of the Chinese economy in tandem with major changes in the country’s energy policy, as well as the sharp decline in the price of oil. Gradually, the center of attention has shifted towards energy-demand policies. The promotion of renewable energy resources has been drawing attention away from oil and gas supply, while the ongoing fourth industrial revolution and new challenges such as cyber energy security have been shaping a new energy security landscape. Against this backdrop, the existing research on energy geopolitics has been rather limited, with the majority of researchers focusing on the allocation of fossil fuels and thus barely scratching the surface with respect to the geopolitical dimensions in some crucial aspects of the new global energy reality. As a result, there is a great deal of uncertainty regarding not only the economic but also the political and security implications of the emergence of renewable energy systems, the integration of the modernization of the energy markets with higher interconnectivity, smart-grids and the cross-border flow of renewable energy.65 Consequently, it will be of profound interest to explore what this new energy reality might imply for international relations, and particularly what the impact will be on patterns and perceptions of cooperation or potential competition between energy suppliers and consumers. Currently, we have a very limited volume of research on the security and political impact of issues such as the decentralized generation of electric energy, the transportation and storage of energy security, cyber threats to smart grids and green energy technology transfers. However, the above-mentioned issues have the potential to create new dimensions in the energy relations between the EU and the Caspian Sea states which are worth exploring. For one thing, Central Asia has tremendous potential for the development of renewable energy and energy efficiency; Kazakhstan is already the regional leader in this respect, with the country’s potential production of wind energy alone exceeding by 10 times the country’s projected electricity needs by 2030. Similarly, four-fifths of Turkmenistan’s land is covered by the Karakum desert, which provides enormous potential for the development of solar and wind power.66 Azerbaijan, in turn, has

64   Ian Storey, ‘China’s “Malacca Dilemma”’, China Brief 6, No. 8 (2006), http://www.james​ town.org/single/?no_cache51&tx_ttnews%5Btt_news%5D531575 (accessed 28 September 2016). 65   Daniel Scholten and Rick Bosman, ‘The Geopolitics of Renewables; Exploring the Political Implications of Renewable Energy Systems’ (2016) 103 (C) JTFSC 273. 66   Komila Nobiyeva, ‘Renewable Energy and Energy Efficiency in Central Asia: Prospects for German Engagement’ (2015) Marion Dönhoff Working Paper, 1–9, http://succow-stiftung. de/tl_files/pdfs_downloads/MDF%20Working%20Paper/MDF%20Paper_RE%20and%20EE%20 in%20Central%20Asia_Kominla%20Nabiyeva_2015.pdf (accessed 29 October 2016).

210  Research handbook on EU energy law and policy been paying growing attention to the development of green energy. According to Jamil Melikov, deputy head of the Agency for Alternative and Renewable Energy (AFARE) of Azerbaijan, Baku hopes to beef up its renewable energy capacity from 830MW in 2015 to 2,500MW by 2020.67 This will allow Azerbaijan not only to deal with climate issues but also to export more oil and gas to its energy importers, and, towards this end, Baku has identified the EU as a key partner.68 These developments can create new realities not only in the relations between the EU and the Caspian states but also between major energy players in the region, including China. Inevitably, the EU or just EU member states may emerge as key providers of trade, technology, and know-how in the region, and, through potential spill-overs, cooperation in renewable energy and energy demand measures might impact the broader energy security landscape in the region. For example, China is confident about its consolidated presence in the Caspian Sea and as a result of this position, currently Beijing appears to be neutral about the role of the EU in the Caspian Sea. A closer cooperation between the EU, Turkmenistan and Kazakhstan might foster the EU’s profile in the region, creating new opportunities, and hence it will be interesting to see how this will impact their triangular relations. These dynamics constitute unchartered waters for energy security studies and can attract the attention of future research. To put it more simply, as we are heading towards a new global energy landscape in the framework of the 2015 Paris Agreement, future researchers should study international relations and geopolitics within a new green and integrated energy system, an integral part of which will be the EU and the Caspian states.

7. CONCLUSIONS EU energy security strategy has recently found itself at a crossroads, with a set of counterforces shaping its future direction. On one level, memories of people dying as a result of the 2009 Russia-Ukraine gas dispute and the Russian invasion of Crimea have been a watershed for the EU, casting doubt on the reliability of Moscow as an energy partner. At the same time, it needs to be stressed that even during the most critical times of the Cold War, Moscow met its own obligations in the gas agreements with Europe. In parallel, we should not neglect the ongoing paradigm shift that has been taking place globally, with states’ attention moving from the traditional notion of energy security as the need to access oil and gas towards a more comprehensive approach that understands energy security as the resilience of energy systems and pays much attention to environmental sustainability and climate change. The tectonic shifts in the global energy markets have resulted in an excessive availability of fossil fuels, more than we can actually consume, 67   Amina Nazarli, ‘Azerbaijan Seeking Much Alternative Energy in Total Energy Balance’ (Azernews, 21 October 2016), http://www.azernews.az/nation/103870.html (accessed 28 October 2016). 68   VladislavVorotnikov, ‘Azerbaijan Focuses on Alternative Energy Development to Increase Fossil Fuel Exports’ (Renewable Energy World, 21 April 2015), http://www.renewableenergy​ world.com/arti​cles/2015/04/azerbaijan-focuses-on-alternative-energy-development-to-increase-fos​ sil-fuel-exports.html (accessed 31 October 2016).

The EU energy security strategy in the Caspian Sea region  211 making energy importing states, including the EU, more confident with respect to the security of gas supplies. At the center of the energy security strategy of the EU towards the Caspian Sea rests the energy trade between Europe and Russia, and the risks that emanate from over­ dependence on Russian gas. As in many EU policy fields, a chronic problem for the European energy security strategy is the deep divisions among the EU member states, and in the case of energy security the key issue is whether Russia constitutes a threat to EU energy security; as long as EU member states have different energy mixes and consequently different priorities, as well as different understandings and memories about the relationship between Moscow and the West, it is hard to imagine how Brussels will articulate a single policy towards Russia and by extension to other Caspian Sea states. To make matters worse, internal competition between different EU agencies further undermines the implementation of a coherent and concrete strategy towards Russia. Moreover, it is important to note that if the EU is to remain loyal to its stated adherence to a market-based approach on energy security, then energy relations with Russia should be seen from an economic perspective and not as a chess-game that includes power politics, pipeline diplomacy and zero sum calculations. From this perspective, measures such as energy market liberalization, reverse flow capabilities and closer interconnection between EU member states have boosted the resilience of the EU’s energy system against gas supply disruption shocks. Brussels might have been criticized for not standing up against Moscow or for not pursuing an aggressive strategy, similar to the Chinese energy diplomacy, that will give them access to gas deposits of other countries, yet the EU choice to mitigate supply disruption risks via market-based approaches has been a successful one, not only because it has mitigated energy insecurities but also because it tends to desecuritize energy relations with Moscow.69 In parallel, the declared priority for energy diversification has been on the top of the EU agenda, regardless of its standpoint on Russian reliability. After all, maintaining a diverse portfolio of energy sources is in principle an optimum policy, while the lack of recent Russian investments in the oil and gas sector underscores the economic rationale behind an energy diversification strategy. As a result, the EU effort to penetrate the energy markets of Azerbaijan and Turkmenistan has been unambiguously correct, despite the flaws in its articulation. Over recent years Brussels has articulated a strategy that has already borne fruit with the establishment of the Southern Gas Corridor, which will serve as an alternative to Gazprom. Although the 10bcm that has already been agreed so far is just a fraction of what Moscow exports to Europe, this is an important first step, and, again, how one evaluates its prospects largely depends on the narrative under which it is framed; on the one hand it will not be a game changer regarding the importance of Russia, yet, on the other, if considered in tandem with other internal energy market measures, it brings considerable added value to the overall EU strategy.

69   Tim Boersma and Michael E. O’Hanlon, ‘Why Europe’s Energy Policy has been a Strategic Success Story’, (Brookings Institution, 2 May 2016), https://www.brookings.edu/blog/orderfrom-chaos/2016/05/02/why-europes-energy-policy-has-been-a-strategic-success-story/ (accessed 29 Octo­ber 2016).

212  Research handbook on EU energy law and policy

BIBLIOGRAPHY Abdurasulov A, ‘China’s Growing Demand for Turkmenistan’s Gas’ BBC (20 November 2014), http://www.bbc. com/news/business-30131418 (accessed 25 October 2016). Bauman F, ‘Energy Security as a Multidimensional Concept’ (2008) 1 CAP 4. Bechev D, ‘Sofia View: Southern Gas Corridor Goes TAP’ (2013) ECFREU. Belyi A, ‘New Dimensions of Energy Security of the Enlarging EU and their Impact on Relations with Russia’ (2003) 25(4) JEI 355. Boersma T and O’Hanlon, ME, ‘Why Europe’s Energy Policy has been a Strategic Success Story’ (Brookings Institution, 2 May 2016), https://www.brookings.edu/blog/order-from-chaos/2016/05/02/why-europes-energypolicy-has-been-a-strategic-success-story/ (accessed 29 October 2016). Boonstra J, ‘The EU-Turkmenistan Energy Relationship: Difficulty or Opportunity?’ (2010) 5 EDC2020 2. BP Statistical Review of World Energy (London 2015). Braun JF, ‘EU Energy Policy under the Treaty of Lisbon Rules: Between a new policy and business as usual’ (2011) EPIN Working Paper 31, 4–8, https://www.ceps.eu/system/files/book/2011/02/EPIN%20WP31%20Braun%20 on%20EU%20Energy%20Policy%20under%20Lisbon.pdf (accessed 25 October 2016). Butler N, ‘Has Gas Demand in Europe Peaked?’ Financial Times (23 May 2016). Černoch F and Jirušek M, ‘Strategic and Market-oriented Approaches in the Energy Policy of the European Union’ (2014) ECPR 9. Coffey L, ‘Who Owns the Caspian?’ Al Jazeera (7 September 2015), http://www.aljazeera.com/indepth/ opinion/2015/09/owns-caspian-150906054015762.html (accessed 19 October 2016). Commission Decision 1229/2003/EC of 26 June 2003 laying down a series of guidelines for trans-European energy networks and repealing Decision 1254/96/EC [2003] OJ L176/11. Commission of the European Communities, ‘An Energy Policy for the European Union’ COM(95) 682 final 12–37. Correljé A and van der Linde C, ‘Energy Supply Security and Geopolitics: A European Perspective’ (2006) 34 EP 532. Council of the European Union, ‘An External Policy to Serve Europe’s Energy Interests: Paper from Commission/SG/HR for the European Council’ (2006) 9971/06. Dannreuther R, ‘Developing the Alternative to Enlargement: The European Neighbourhood Policy’ (2006) 11(2) EFAR 183. Dickel R, Hassanzadeh E, Henderson J, Honoré A, El-Katiri L, Pirani S, Rogers H, Stern J and Yafimava K, ‘Reducing European Dependence on Russian Gas: Distinguishing Natural Gas Security from Geopolitics’ (OIES, Oxford, October 2014), https://www.oxfordenergy.org/wpcms/wp-content/uploads/2014/10/NG-92. pdf (accessed 20 October 2016). Eastern Partnership Civil Society Forum, ‘Parliament of Azerbaijan Reacts to the EP Resolution and Decides to Withdraw from the Euronest Parliamentary Assembly’ (23 September 2015), http://archive.eap-csf.eu/ en/working-groups/wg1-democracy-human-rights/azerbaijan-watch/parliament-of-azerbaijan-reacts-to-theep-resolution-and-decides-to-withdraw-from-the-euronest-parliamentary-assembly/ (accessed 24 October 2016). Euractiv, ‘Europe’s Southern Gas Corridor: The Great Pipeline Race’ (11 October 2010 updated: 29 May 2012), http://www.euractiv.com/energy/europe-s-southern-gas-corridor-great-pipeline-race-linksdossier-49​ 8558 (accessed 18 October 2016). European Commission, ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’ COM(2015) 80 final. European Commission, ‘Energy EU Crude Oil Imports and Supply Cost’, https://ec.europa.eu/energy/en/statis​ tics/eu-crude-oil-imports (accessed 20 October 2016). European Commission, ‘Gas from Azerbaijan: Commission welcomes final investment decision to extract gas pledged for Europe’ (17 December 2013) http://europa.eu/rapid/press-release_IP-13-1271_en.htm (accessed 15 October 2016). European Commission, ‘Green Paper – Towards a European strategy for the security of energy supply’ COM(2000) 769 final. European Commission, ‘Roadmap EU-Russia Energy Cooperation until 2050’ (March 2013), https://ec.europa.eu/ energy/sites/ener/files/documents/2013_03_eu_russia_roadmap_2050_signed.pdf (accessed 26 October 2016). European Parliament, ‘European Parliament resolution of 10 September 2015 on Azerbaijan (2015/2840(RSP))’ (10 September 2015), http://www.europarl.europa.eu/sides/getDoc.do?pubRef5-//EP//NONSGML+TA+P8TA-2015-0316+0+DOC+PDF+V0//EN (accessed 23 October 2016). Fitzpatrick CA, ‘TCP Shelved,  TAPI Stalled;  Shake-up in Turkmenistan’s Oil and Gas Ministries’ (Natural Gas Europe, 24 January 2013), http://www.naturalgaseurope.com/turkmenistans-oil-gas-ministry-shakeup (accessed 13 October 2016).

The EU energy security strategy in the Caspian Sea region  213 Fitzpatrick CA, ‘Is the Trans-Caspian Pipeline Feasible Again?’ (Natural Gas World, 14 November 2014), http:// www.naturalgaseurope.com/trans-caspian-pipeline-feasibility (accessed 22 October 2016). Grevi G, ‘CFSP and Energy Security’ (EU Institute for Security Studies, Paris, 23 October 2006), http://www. iss.europa.eu/uploads/media/rep06-12.pdf (accessed 29 October 2016). Gültekin-Punsmann B, ‘Black Sea Regional Policy Approach: A Potential Contributor to European Energy Security’ (2008) 6 ICBSS 9. Hafner M, ‘The Southern Gas Corridor and the EU Gas Security of Supply: What’s Next?’ (Natural Gas World, 28 March 2015), http://www.naturalgasworld.com/southern-gas-corridor-and-eu-gas-security-of-sup​ ply-22688 (accessed 17 October 2016). Henni A, ‘Gas for Cash: The Future of Turkmenistan’ (Society of Petroleum Engineers, 11 November 2014), http://www.spe.org/news/article/Turkmenistan-Gas-for-Cash (accessed 19 October 2016). Jarosiewicz A and Lang J, ‘Turkmenistan Looks to the West’ (OSW, 1 April 2015), https://www.osw.waw.pl/en/ publikacje/analyses/2015-04-01/turkmenistan-looks-to-west (accessed 14 October 2016). Konoplyanik A and Wälde T, ‘Energy Charter Treaty and its Role in International Energy’ (2006) 24(4) JENRL 524. Lubell A, ‘Why China Should Encourage a Pipeline from Turkmenistan to Europe’ (Global Risks Insights, 28 May 2015), http://globalriskinsights.com/2015/05/why-china-should-encourage-a-pipeline-from-turkmen​ istan-to-europe/ (accessed 15 October 2016). Lussac S, ‘EU-Azerbaijan Association Agreement:  A New Framework for Updated Cooperation?’ (CACI Analyst, 22 July 2010), http://www.cacianalyst.org/publications/analytical-articles/item/12104-analytical-arti​ cles-caci-analyst-2010-7-22-art-12104.html (accessed 22 October 2016). Månsson A, Johansson B and Nilsson JL, ‘Assessing Energy Security: An Overview of Commonly Used Methodologies’ (2014) 73 Energy 4. Merabishvili G, ‘The EU and Azerbaijan: Game On for a More Normative Policy?’ (2015) 329 CEPS 2. Moulson G, ‘EU Proposes Deal to Ensure Ukraine Gas Supplies’ Washington Examiner (26 September 2014), http://www.washingtonexaminer.com/eu-proposes-deal-to-ensure-ukraine-gas-supplies/article/feed/2168028 (accessed 24 October 2016). Nazarli A, ‘Azerbaijan Seeking Much Alternative Energy in Total Energy Balance’ (Azernews, 21 October 2016), http://www.azernews.az/nation/103870.html (accessed 28 October 2016). Nobiyeva K, ‘Renewable Energy and Energy Efficiency in Central Asia: Prospects for German Engagement’ (2015) Marion Dönhoff Working Paper, 1–9, http://succow-stiftung.de/tl_files/pdfs_downloads/MDF%20 Working%20Paper/MDF%20Paper_RE%20and%20EE%20in%20Central%20Asia_Kominla%20Nabiye​ va_2015.pdf (accessed 29 October 2016). Pirani S, ‘Azerbaijan’s Gas Supply Squeeze and the Consequences for the Southern Corridor’ (OIES, Oxford, July 2016), https://www.oxfordenergy.org/wpcms/wp-content/uploads/2016/07/Azerbaijans-gas-supply-sq​ ueeze-and-the-consequences-for-the-Southern-Corridor-NG-110.pdf (accessed 20 October 2016). Powell W, ‘Weekly Overview: Nord Stream 2 Strikes Back’ (Natural Gas World, 25 March 2016), http://www. naturalgasworld.com/weekly-overview-nord-stream-2-strikes-back-28798 (accessed 18 October 2016). Raszewski S, ‘The EU’s External Policy of Energy Diversification in the Wider Black (and Caspian) Sea Region: Regional Security of Security Community?’ in Karen Henderson and Carol Weaver (eds), The Black Sea Region and EU Policy: The Challenge of Divergent Agendas (Ashgate 2010) 143. Rettman A, ‘Turkmenistan: We’re Not Sure Why Barroso is Coming’ (euobserver, 10 January 2011), https:// euobserver.com/foreign/31616 (accessed 17 October 2016). Sartori N, ‘Energy and Politics: Behind the Scenes of the Nabucco-TAP Competition’ (2013) IAI Working Papers 1327, http://www.iai.it/sites/default/files/iaiwp1327.pdf (accessed 19 October 2016). Scholten D and Bosman R, ‘The Geopolitics of Renewables; Exploring the Political Implications of Renewable Energy Systems’ (2016) 103(C) JTFSC 273. Solana J, ‘Why Europe Must Act Collectively on Energy’ Financial Times (8 March 2006) 1–7. Tabatska D, ‘Turkmenistan: The Diversification of Gas Export Market’ (Natural Gas Europe, 16 December 2015), http://www.naturalgaseurope.com/turkmenistan-the-diversification-of-gas-export-market-27160 (accessed 18 October 2016). Tulmets E, ‘Can the Discourse on “Soft Power” Help the EU to Bridge its Capability-Expectations Gap?’ (2007) 7 EPER 199. ‘Turkmenistan to Increase Gas Production to 84 bcm in 2015’ (The Times of Central Asia, 13 January 2015), https://www.timesca.com/index.php/news/14863-turkmenistan-to-increase-gas-production-to-84-bcmin-2015 (accessed 13 October 2016). Urdze S, ‘The Tool-kit of EU-Central Asian Cooperation’ in Alexander Warkotsch (eds), The European Union and Central Asia (Routledge 2011) 26. Vorotnikov V, ‘Azerbaijan Focuses on Alternative Energy Development to Increase Fossil Fuel Exports’ (Renewable Energy World, 21 April 2015), http://www.renewableenergyworld.com/articles/2015/04/azer​ baijan-focuses-on-alternative-energy-development-to-increase-fossil-fuel-exports.html (accessed 31 October 2016).

214  Research handbook on EU energy law and policy Westphal K, ‘Germany and the EU-Russia Energy Dialogue’ in Pami Aalto (ed), The EU-Russian Energy Dialogue: Europe’s Future Energy Security (Aldershot: Ashgate 2008) 93. Yergin D, ‘Ensuring Energy Security – Old Questions, New Answers’ (2006) 85(2) FA 70. Youngs R, ‘Europe’s External Energy Policy: Between Geopolitics and the Market’ (2007) 278 CEPS 2.

12. Russian energy projects and the global climate, geopolitics and development conundrum Slawomir Raszewski

1. INTRODUCTION Russian energy resources play an important role in European Union (EU) energy supply security, side by side with the Community’s decarbonisation efforts and the power of its internal energy market. Yet, despite ‘conventional’ narratives premised on energy dependence understood as the ration of imports to consumption,1 it is not so much the Russian energy resources per se that constitute the challenge concerning EU-Russia energy relations. The essence of the relations is the way these energy resources are traded and the manner in which the transit of these resources is governed. In respect to the current energy trade between the EU and Russia, oil and gas represent two different dynamics. Crude oil is a globally traded commodity and it is governed through what is effectively a globalising international market characterised by its own oil-specific trade and transit challenges.2 As for natural gas, it still largely remains a regional, yet increasingly internationalising, commodity led by ever increasing gas-to-gas competition in a form of liquefied natural gas (LNG). As for natural (pipeline) gas, owing to structures governing its trade and transit – long-term contracts and multi-stakeholder pipelines – natural gas supply security has become one of the most politicised of all matters in EU-Russia energy relations for over a decade now. Governance of the energy trade relationship between Russia and the EU is intertwined with geopolitics involving existing and would-be transit countries and jurisdictions. The issue of transit of natural gas has been a matter of particular concern within the trilateral energy security relationship involving the EU, Russia and Ukraine, as evidenced by recurring gas supply disruptions in 2006 and 2009.3 Russia’s ability to export natural gas to Europe hinges on the geopolitics of transit via Ukraine. Russia’s total gas export capacity to Europe amounts to around 240 bcm with 120 bcm passing through Ukraine. With Gazprom exports to Europe averaging 150–160 bcm, at least 30–40 bcm of the amount must be shipped via the Ukrainian system.4

 1   Catherine Locatelli, ‘Europe’s Gas Supplies: Diversification with Caspian Gas and the “Russian Risk”’ (2010) Cahier de Recherche LEPII n 29.  2   For a detailed analysis of sea-borne energy transit and choke points in global oil trade see: Caroline Kuzemko, Michael Keating and Andreas Goldthau, The Global Energy Challenge: Environment, Development and Security (Palgrave Macmillan 2016) 171–4.  3   Jonathan Stern (2006) ‘The Russian-Ukrainian Gas Crisis of January 2006’, OIES; Jonathan Stern, Simon Pirani and Katja Yafimava (2009) ‘The Russo-Ukrainian Gas Dispute of January 2009: A Comprehensive Assessment’, OIES NG27.  4   James Henderson, ‘Unclogging the Issues Blocking Russia’s Nord Stream 2 Pipeline’, Russia Direct (8 July 2016) http://www.russia-direct.org/opinion/unclogging-political-issues-blocking-rus​ sias-nord-stream-2-pipeline (accessed 12 October 2016).

215

216  Research handbook on EU energy law and policy The geopolitical situation was further complicated following the crisis in Ukraine – the key transit country for Russia’s gas exports to Europe – involving civil conflict within the country’s eastern regions, as well as annexation of the state’s territory, the Crimean Peninsula in 2014. The geopolitics of gas transit, insecurity on the EU’s doorstep and the politics of alternative supply routes and projects forged at the time of writing this chapter demonstrate the intertwined nature of energy in Europe due to the ongoing insecurity in Ukraine. At the same time, though, the changing geopolitics in the region are arguably enhancing Russia’s energy strategy towards Europe.5 With respect to natural gas, the essence of the energy relations between energy consumers in Europe and energy producers in Russia has been the issue of transit. The transit of natural gas – which has reverberated over agreeing on a mutually acceptable energy trade governance structure – has been addressed through a number of institutional and diplomatic formats in the past two decades or so, evolving to effectively become the ‘external dimension’ of the EU’s energy security. The external dimension of the EU’s energy security had at most times been difficult to put into practice, largely due to issues with compliance externally. In the absence of immediate remedies to address the transit dilemma externally, the EU has revived arguably its strongest political tool – that of integration from within. Since the late 2000s the integration tool has been applied in the domain of energy in a bid to create fully-fledged internal energy market regulation. The idea of internal energy market integration rested on market logic. The EU region as a whole is one of the main energy demand centres and one the largest importers of energy in the world. The integration of markets and policies have held a promise that a concerted policy towards suppliers of natural gas would not only be an important step forward but would also allow capturing a value in an attempt to ensure more competitive terms on access to the lucrative market for external gas suppliers. The market approach has been supported on a legal basis by means of the so-called Third Energy Package (TEP). In July 2009 the Third Gas Directive and Regulation 715 (repealing the Second Gas Directive and Regulation 1775) had been adopted by the EU, and, together with a wider set of internal energy market Directives and Regulations, became known as the ‘Third Energy Package for Gas’ or simply the ‘Third Package’.6 The TEP aims at liberalising the EU gas market while building a pan-European public policy with the financial tools available to streamline a functional makeover of the Community’s energy markets, including natural gas – for example, the financial tools available at the EU’s disposal to enable funding feasibility studies for the construction of physical interconnections between regional markets (‘projects of common interest’). The ‘markets and laws’ approach to alleviate negative consequences of geopolitics in EU energy relations, not only with Russia but also other existing and future suppliers, has been tightly coupled with the bold decarbonisation agenda that Brussels had embraced (a pledge to decrease carbon emissions by set deadlines and by a specific amount). These actions, taken at the level of the Community, have allowed for an unprecedented degree of functional integration,

 5   Andrey A Konoplyanik, Ekaterina Orlova, Maria Larionova (2014) ‘What is the Future of Russian Gas Strategy for Europe after the Crimea?’ 4 OGEL.  6   Katja Yafimava (2013) ‘The EU Third Package for Gas and the Gas Target Model: Major Contentious Issues Inside and Outside the EU’, OIES NG 75.

Russian energy projects, global climate, geopolitics and development  217 transforming the EU’s energy market, with the rule of law allowing further scrutiny to strengthen the global climate objectives.7 As an addition to addressing natural gas imports from Russia, EU energy policies have also contributed to an emerging debate on the future of fossil fuels, following the COP21 summit and choices to be made in the coming decades regarding the types of energy sources and technologies to be used to meet EU energy demand while protecting the ecosystem. Departing from there in the next section, this chapter will proceed with an overview of the key transit projects designed to carry natural gas from Russia – projects the chapter then draws on in conceptual debates demonstrating the policy and legal challenges and opportunities facing the Russian natural gas projects, and in sketching a critical analysis of existing conceptual debates concerning the natural gas trade in Europe. Bearing in mind the changing global energy and environment policy landscape, the chapter first discusses the issue of climate to explain how the bigger picture of environmental concerns is shaping energy policy narratives in Europe, with possible implications for the future of Russian gas projects and imports.

2. GLOBAL PUBLIC POLICY AND THE ENERGY– ENVIRONMENT NEXUS Energy policy has traditionally reverberated around security of supply – broadly understood as ‘insurance against supply risks’8 – and market competitiveness to keep the volatile energy markets stable while leaving environmental preoccupations broadly aside. Climate change science has been gradually altering the energy policy objectives, adding the sustainability and energy dimensions as inseparable aspects. In the face of maninduced climate change, attempts have been made to deliver a collective response to the ‘non-traditional’ dilemma by means of international law. The United Nations Framework Convention on Climate Change (UNFCCC), which entered into force on 21 March 1994, opened up the process. The UNFCCC’s milestones – including the 1997 Kyoto Protocol, the 2010 Cancun Agreement and the 2012 Doha Conference – resulted in the adoption of the legally binding Paris Agreement in 2015, which, at the time of writing this chapter, has been adopted by 87 countries around the world. With a ‘top-down’ approach to deliverables at the level of cities and regions, the emerging global public policy on climate is bringing a new dynamic into the energy policy dimension, with a possible long-term transition away from hydrocarbons. Resting on the assumption that the use of hydrocarbons will be restricted due to the public policy objectives, it can be anticipated that alternative sources of supply should become available to substitute for a partial phase-out of the fossil fuels way forward.9 With the global public policy on climate driving the transition towards less  7   Rüdiger KW Wurzel, James Connelly (eds), The European Union as a Leader in International Climate Change Politics (Routledge 2011).  8   Christian Egenhofer, Thomas Legge, ‘Security of Energy Supply: A Question for Policy or the Markets’ (2001) CEPS Task Force Reports, https://www.ceps.eu/system/files/book/37.pdf (accessed 13 October 2016).  9   Nick Butler, ‘Climate Change and the Myth of Stranded Assets’, Financial Times (London, 28 September 2015).

218  Research handbook on EU energy law and policy carbon-intensive practices and technologies, if the COP21 is successfully internalised by the contracting parties, some assets are expected to become ‘stranded’, that is, suffering ‘from unanticipated or premature write-downs, devaluations or conversion to liabilities’.10 The challenge of stranded assets and divestment movement have become salient across the oil and gas industry – including oil and gas exploration companies in the upstream to mid- and downstream utilities and power plants – calling for a review of existing measures to address potential issues, including liability and ethics as well as physical and transition risks in the way the transition affects the existing business model by which the fossil fuel world is governed.11 The phenomenon of stranded assets can be evidenced by ongoing developments in Europe. The undesired consequence of the energy–environment nexus and the transition of major EU utility companies has been that of mothballing or prematurely closing recently built high-efficiency combined-cycle gas turbine (CCGT) power plants. As a result of disincentivised capacity investment – contradictory to the objectives of the global public policy on climate – some CCGTs have been rendered stranded, with coal generation paradoxically gaining market share.12 With the rise of global public policy on climate, the process of divestment involving selling off business interests or investments motivated by climate-change-related risks has gained prominence and become the fastest growing social movement in history.13 These unexpected consequences, which stem from the energy–environment objectives, underscore potential transition risks and the challenge of integrating climate and energy policies with the value of EU utility companies, which have been facing profitability downturns as a result of the changing policy environment.14 The business–policy angle, or more broadly governance of the energy–environment nexus, has been paramount in the presence of a top-down, UNFCCC-led global climate policy, which is now being implemented. Embracing the global public policy on climate by business actors in Europe will mean that the existing business model of the natural gas industry is likely to be affected in a number of ways. In the natural gas sector investment certainty means that periods of 20 and more years are assured to ensure completion of the EU’s projects of common interest, which had been designed to liberalise and promote the common energy market. Uncertainty over the future internalisation of the climate policy package may bear reputational risks to the natural gas industry due to the decarbonisation agenda and the possible unsettled role the industry is set to play in the coming decades.15 10   Ben Caldecott, Jeremy McDaniels, ‘Stranded Generation Assets: Implications for European Capacity Mechanisms, Energy Markets and Climate Policy’ (2014) Working Paper 1/2014, http:// www.smithschool.ox.ac.uk/research-programmes/stranded-assets/Stranded%20Ge​neration%20 Assets%20-%20Working%20Paper%20-%20Final%20Version.pdf (accessed 10 December 2016). 11   Richard Baron, David Fischer, ‘Divestment and Stranded Assets in the Low-carbon Transition’ (2015) OECD, 4, https://www.oecd.org/sd-roundtable/papersandpublications/Divestment%20and%​ 20Stranded%20Assets%20in%20the%20Low-carbon%20Economy%2032​nd%20OECD%20RTSD. pdf (accessed 10 December 2016). 12   Ibid, 6. 13  Ibid. 14  Ibid. 15   Wolfgang Peters, ‘The Case for Gas Post COP21: Natural Gas is the “Low Hanging Fruit” for Material and Immediate Reduction of Greenhouse Gases’ (The Gas Value Chain Company GmbH,

Russian energy projects, global climate, geopolitics and development  219 From the governance standpoint, if thoroughly embraced by the international community, the global public policy on climate is likely to substantially alter the ‘balance of power’ in energy geopolitics. It has been observed that due to changes in international markets, European policy frameworks, and EU decarbonisation targets – including changes in the incumbent market structure and pressure on the gas sector to change its traditional business models – natural gas markets in Europe are in flux.16 As mentioned above, the EU did make considerable efforts to build political and legal tools to address the external dimension of energy supply. The Community’s capacity to act as a unified actor to sanction and enforce the activities of energy majors in their upstream activities has played a role in promoting alternatives, including the EU’s embrace of renewables and efficiency measures.17 It should be noted that the EU’s uneasy energy relationship with Russia, coupled with the dilemma of the environment–energy nexus and its impact on climate, have all informed the EU’s search for alternative policy options. The environment–policy nexus is a matter of concern. The EU, together with China and the United States, are the highest consumers of energy. In 2013 the total primary energy supply (TPES)18 of the EU-28 equalled 1666.6 million tonnes of oil equivalent (toe), constituting over 12 per cent of the global TPES (roughly comparing to China’s over 22 per cent and the US’s 16 per cent share of global TPES).19 The EU is the world’s largest importer of energy at a staggering 1441.8 million toe – or nearly 28 per cent of global energy imports – with natural gas constituting nearly 24 per cent of the energy imported by the EU-28.20 The EU-28’s natural gas consumption rose to reach 445 bcm in 2015, with much of its gas demand met by indigenous supply (31 per cent of EU-28 demand in 2015) and external supplies from the Russian Federation (28 per cent of the EU-28 demand in 2015) as well as LNG imports.21 The energy relationship between Europe and Russia is mature and mutually interdependent. Europe is the key consumer of energy from Russia. Over 70 per cent of Russia’s crude oil and nearly 90 per cent

September 2016) http://www.energystreamcmg.com/media/293037/CaseForGasPostCOP21-_WP​ eters_09-2016.pdf (accessed 10 October 2016). 16   Andreas Goldthau, ‘Assessing Nord Stream 2: Regulation, Geopolitics & Energy Security in the EU, Central Eastern Europe & the UK’ (2016) EUCERS Strategy Paper 10, 11, http:// www.europeangashub.com/custom/domain_1/extra_files/attach_685.pdf (accessed 10 December 2016) 17   Harald Hecking and others, ‘Options for Gas Supply Diversification for the EU and Germany in the next Two Decades’ (2016) EWI & the EUCERS, 49, http://www.ewi.research-sce​ narios.de/cms/wp-content/uploads/2016/10/Options-for-Gas-Supply-Diversification.pdf (accessed 10 November 2016). 18   Total primary energy supply (or gross inland consumption) is comprised of coal & ignite, oil, gas, nuclear energy, renewables & waste, and electricity & heat. 19   Eurostat, ‘The EU in the World. 2016 Edition’ (2016, 173) http://ec.europa.eu/eurostat/ documents/3217494/7589036/KS-EX-16-001-EN-N.pdf/bcacb30c-0be9-4c2e-a06d-4b1daead493e (accessed 16 December 2016). 20  Ibid. 21   UK Government, ‘Physical Gas Flows across Europe and Diversity of Gas Supply in 2015: Special Feature – European Gas Flows’ (2016) https://www.gov.uk/government/uploads/system/ uploads/attachment_data/file/579632/Physical_gas_flows_across_Europe_in_2015.pdf (accessed 16 December 2016).

220  Research handbook on EU energy law and policy of Russia’s natural gas exports go to Europe.22 In 2015 Russia’s natural gas exports to Western European countries reached 158.6 bcm, constituting 82 per cent of the country’s exports. Russia’s fuel and energy complex ‘accounts for over a quarter of GDP, almost 30% of the national budget, more than two-thirds of export revenue, and a quarter of total investments’.23 The European Commission’s energy trends until 2050 project a slight decrease in natural gas demand until 2030 and a constant demand of circa 435 bcm from 2030 onwards.24 Major projects that are aimed at delivering gas from Russia to the EU have received a mixed welcome due to the sensitivity of EU-Russia energy relations. The EU and Russia remain at odds, sharing a ‘different understanding of energy security and types of energy governance’ which is a major obstacle to ‘decarbonisation cooperation and trade’.25 The EU’s success on its climate policy hinges on the Community’s ability to keep the position of global climate policy leader, which inevitably requires addressing its energy consumption, while at the same time producing tangible results at the bloc level concerning the way its energy demand portfolio undergoes diversification.

3.  THE GEOPOLITICS OF RUSSIAN OIL AND GAS The resource credentials of Russia as a petro-state are impressive.26 After Saudi Arabia, Russia is both the world’s second largest oil producer (12.6 per cent of total production) and its second-largest exporter of oil. As for natural gas, Russia is the second-largest producer after the US, and the leading exporter of natural gas.27 According to the European Commission’s data, in 2013 39 per cent of total EU gas imports came from Russia.28 While the resource base fundamentals position Russian energy in the global first league, a number of political issues hinge upon the status the country enjoys. The country’s resources, its vast geography and the political role the country’s leaders play in the management of its resources have all elevated geopolitics as a key lens through which to contextualise Russia’s oil and gas. It should be noted, however, that while a geopolitical narrative has been prevalent in addressing the Russian energy sector and its interaction with the EU (and beyond), alternative, critical perspectives have been ­presented that emphasise the importance of law, among other factors.29 Since early 2000s the geopolitical dimension of Russian energy has grown to be widely discussed from a number of angles. The idiosyncratic model – focusing on a unique feature ascribed to an individual, often his ability to exercise power over an issue area – has 22   Michael Bradshaw, Richard Connolly, ‘Barrels and Bullets: The Geostrategic Significance of Russia’s Oil and Gas Exports’ (2016) 72(3) Bulletin of the Atomic Scientists, 157. 23   Ibid, 158. 24   Harald Hecking and others (n 17), 13. 25   Olga Khrushcheva, Tomas Maltby, ‘The Future of EU-Russia Energy Relations in the Context of Decarbonisation’ (2016) 21(4) Geopolitics, 799. 26   Bradshaw and Connolly (n 22), 157. 27   Ibid, 157. 28   Ibid, 158. 29   Tatiana Romanova, ‘Is Russian Energy Policy towards the EU only about Geopolitics? The Case of the Third Liberalisation Package’ (2016) 21(4) Geopolitics.

Russian energy projects, global climate, geopolitics and development  221 become known as a useful analytical tool to explain the phenomenon of the geopolitics of Russian energy and the influence Russia’s leadership wields across the broad postSoviet space and Europe.30 The rise of Vladimir Putin to power in Russia – first as the President, then Prime Minister and again as the President of the Russian Federation – has often been analysed as a shift in the way the Russian leadership has sought to utilise the resource factor in the formulation of its energy policy.31 This shift has also been linked and correlated with the security domain, describing Russia’s energy policy ambitions as a new projection of its foreign policy and strategy.32 Such narratives of Russia’s energy policy objectives in the post-Cold-War period have inevitably led the Euro-Atlantic community to believe the energy trade to be about more than just economics. As the backdrop to these narratives, Europe has come be viewed as a particularly vulnerable region due to its dependence on Russian energy. Dependence on imports from the Russian Federation has become unacceptable geopolitically, and both the EU countries who felt compelled to rectify this state of affairs and the EU alike have engaged in a process of amending their policies.33 The early conceptualisation of the term geopolitics links it to the Eurasian l­ andmass – which was originally the referent of Halford Mackinder’s geopolitics, epitomised by the ‘pivot area’ and the World’s ‘heartland’34 – which has been essential in ensuring access to and the production of fossil fuels, including oil and gas, in Russia. While the early concept of geopolitics has evolved, leaving much of its colonial clout behind, new dynamics and policy prerogatives now reinforce the geopolitical importance of the vast landmass that Russia exercises control over. In the context of energy it has been noted that ‘geopolitics is perhaps another word defining the circumstances under which a nation will always act to protect its national interest, whatever those interests may be’, with Russia doing just that.35 The geopolitical importance of Siberia is linked to its remoteness, which, from the industry point of view presents both a challenge and an opportunity at the same time. With one of world’s lowest population densities, Siberia represents 10 per cent of the Earth’s land surface, and, in the present, as it has in the past, it continues to play a vital strategic role for the Russian state.36 Russia is the holder of the world’s largest reserves of natural gas – standing at about 45 trillion cubic meters or a quarter of the global reserves of natural gas – with the majority of the reserves located in Siberia and in the high north. The Yamburg, Urgengoy and Medvezhye fields alone

  Peter Rutland, ‘Putin’s Path to Power’ (2000) 16(4) Journal of Post-Soviet Affairs.   Harley Balzer, ‘The Putin Thesis and Russian Energy Policy’ 21(3) Journal of Post-Soviet Affairs. 32   Pavel K Baev, Russian Energy Policy and Military Power: Putin’s Quest for Greatness (Routledge 2008). 33   Jonathan Stern, ‘In Search of “Good” Energy Policy’, Cambridge University (20 October 2015) http://sms.cam.ac.uk/media/2101937 (accessed 15 December 2016). 34   Halford J Mackinder, ‘The Geographical Pivot of History’ (1904) 23(4) The Geographical Journal, 312. 35   Robert E Ebel, ‘The Geopolitics of Russian Energy: Looking Back, Looking Forward’, CSIS Energy and National Security Program (July 2009) https://csis-prod.s3.amazonaws.com/s3fs-public/ legacy_files/files/publication/090708_Ebel_RussianEnergy_Web.pdf (accessed 11 November 2016). 36   Stratfor, ‘The Changing Geopolitical Importance of Siberia’ (6 April 2012) https://www.strat​ for.com/sample/analysis/changing-geopolitical-importance-siberia (accessed 10 November 2016). 30 31

222  Research handbook on EU energy law and policy account for about 45 per cent of Russia’s total reserves and are all licensed to Gazprom; 95 per cent of Russia’s gas production is carried out in Siberia.37 The east of Siberia and the far east of Russia hold a total of proved reserves of 5 trillion cubic meters (tcm) of natural gas, while its prospective resources could be as large as 65 tcm.38 In addition, the far north is a source of another geopolitical phenomenon – alternative maritime transit routes. In the energy–environment domain, the changing climate inevitably opens up the Arctic to shipping, resurrecting the Northern Sea Route (NSR)39 between Asia and Europe, as well as a focus on infrastructure, a move often seen in the West as likely to come at a high price.40

4. RUSSIA’S GAS PIVOT TO ASIA AND THE EASTERN GAS STRATEGY In the domain of international oil and gas trade, Russia has entered a new stage, seeking to increase its oil demand security as well as decreasing its reliance on oil trade traditionally oriented towards European markets. Starting from the first Putin Administration, Russia’s foreign trade policy focus had been reoriented, with the country starting to regard Asia as a market worthy of significant investment.41 The reorientation of Russia’s policy had been facilitated to some extent by the Western policy on the Middle East in the wake of the deterioration of international security post-September 11. In the domain of crude oil, the decreasing role of Asian markets coupled with the Western consuming nations’ attempts to diversify away from Middle Eastern oil meant that Saudi Arabia sought to reorient its oil export strategy towards Europe, threatening the market traditionally dominated by Russian exports. As a result of Saudi Arabia turning to Europe for the sale of its oil, Russia sought to diversify its oil demand by looking to the East. Russia acted on this new oil trade opportunity, moving on to develop the transportation facilities for its Siberian resources. This development triggered the stated objective of Russia’s new ‘pivot to Asia’ policy under Putin, with vital infrastructure unlocking the country’s oil reserves which otherwise would have been classified as stranded or uneconomical to explore.42 Russia’s policy towards the East has rested on exports through the East Siberia–Pacific Ocean

 Ibid.   James Henderson and Jonathan Stern, ‘The Potential Impact on Asia Gas Markets of Russia’s Eastern Gas Strategy’, OIES Comment (February 2014) https://www.oxfordenergy.org/ wpcms/wp-content/uploads/2014/02/The-Potential-Impact-on-Asia-Gas-Markets-of-Russias-EasternGas-Strategy-GPC2-.pdf (accessed 1 November 2016). 39   Tina Hunter, ‘The New Prize? The Impact of Petroleum Innovation and Technology on the Global Energy Security Paradigm’ (2015) 1 Reflections Working Paper Series, 30. 40   ‘Russia’s Arctic Obsession’, Financial Times (London, 21 October 2016) https://ig.ft.com/ russian-arctic/ (accessed 20 October 2016). 41   James Henderson and Tatiana Mitrova, ‘Energy Relations between Russia and China: Playing Chess with the Dragon’, OIES WPM67 (August 2016) https://www.oxfordenergy.org/ wpcms/wp-content/uploads/2016/08/Energy-Relations-between-Russia-and-China-Playing-Chesswith-the-Dragon-WPM-67.pdf 42   Ibid, 26. 37 38

Russian energy projects, global climate, geopolitics and development  223 (ESPO) oil ­pipeline, which is aimed at Asian buyers.43 Commissioned in two stages in 2009 and 2012, the ESPO pipeline started flowing crude oil in December 2009. The project’s transport capacity was 600,000 barrels of oil per day at the outset, increasing to 1,000,000 in 2013 and with an expected 1,600,000 capacity to be reached at a later date.44 ESPO is a geopolitical project regarded by President Putin as one that will break open the window to the East.45 The oil dimension of Russia’s ‘pivot to Asia’ policy unlocked other opportunities, including the geopolitical strategy of a pipeline gas supply aimed at meeting China’s demand. Historically, the record of cooperation between Russian and China in the energy field has been an uneasy one. Since the collapse of the Soviet Union numerous discussions concerning gas pricing had been carried out, producing no conclusive results. However, Chinese-Russian energy relations have been gradually changing following the accession of Vladimir Putin to power. A number of energy projects in the east of Russia have been facilitated as a part of the so-called Eastern Gas Programme launched in September 2007. Russia’s Eastern Gas Programme had been initiated by the Industry and Energy Ministry of the Russian Federation, with an aim of integrating gas production, transportation and a supply system in eastern Siberia and the country’s far east, taking into account the potential of natural gas imports to China and other Asia-Pacific countries, and with the Russia’s state-owned Gazprom appointed as the Programme’s executive coordinator.46 At the time of writing this chapter, Russia’s natural gas exports to Asia are facilitated only in terms of LNG through the huge multibillion-dollar Sakhalin-2 project in the country’s far east.47 To offset energy demand dependence on European gas markets, Asia has become an important part of Russia’s gas strategy. While there is no immediate connection between the European and Asian gas markets that would allow price arbitrage and reduce contractual dependence on gas supplies to the West, the gas strategy is likely to strengthen in the coming decades – should the actual physical infrastructure connecting Siberian sources with the Asian markets be built. Such a strategy entails mega projects (supported by conducive policies and politics) that would have to be pursued in the coming decades along with continued demand for natural gas by the World’s largest energy demand centres in the region, Europe and China. Provided that both the energy policies and gas demand are in place, Russia’s gas pivot to Asia is destined to transform the geopolitics of Eurasia. Russia’s ‘traditional’ energy export market in Europe is mature and, in the presence of tensions between Moscow and Washington over the former’s foreign policy in its ‘near 43   Irina Mironova, Aaron Wood, ‘Russia and the Geopolitics of Oil’, Russia Direct (22 October 2015) http://www.russia-direct.org/opinion/russia-and-new-geopolitics-oil (accessed 1 November 2016). 44   Platts, ‘Russian Crude Oil Exports to the Pacific Basin – ESPO Starts Flowing’, Platts Special Report (May 2010), 3, http://www.platts.com/im.platts.content/insightanalysis/industryso​ lutionpapers/espoupdate0510.pdf (accessed 1 November 2016). 45   Henderson and Mitrova (n 41), 26. 46   Mike Bradshaw, ‘Russia’s Eastern Gas Strategy’, University of Leicester, 2010, 5, http://www. biee.org/wpcms/wp-content/uploads/Russias-Eastern-Gas-Strategy-2010-Compatibility-Mode.pdf (accessed 2 November 2016). 47   Bradshaw and Connolly (n 22), 157.

224  Research handbook on EU energy law and policy abroad’ (that is, post-Soviet space), in particular in the aftermath of the Crimean annexation in 2014, Russia is seeking to look eastwards, to expand new market opportunities. In addition to the foreign trade policy, Russia’s ‘pivot to Asia’ is inevitably designed to develop the country’s eastern regions, which have been neglected for a long time following the collapse of the USSR.48 After more than a decade of negotiations, on 21 May 2014 Russia and China signed the Power of Siberia contract. Hailed as a historic deal, the US$400 billion Power of Siberia contract envisages the construction of a 38 bcm per annum pipeline that would supply natural gas from Russia’s East Siberia to China’s northern (Bohai Bay) gas market, based on a 30-year supply agreement.49 Following the Power of Siberia contract, a memorandum of understanding on the second gas deal, the West Siberia/Altai, was signed on 9 November 2014. Once implemented, the West Siberia/Altai agreement is expected to have an even greater impact than the Power of Siberia pipeline, allowing Russia to become a swing supplier to Asia and Europe and shoring itself against the impact of globalising LNG supply competition.50 At the time of writing, the Ukraine and Russia Sanctions,51 imposed by the US Government and the EU over the annexation of Crimea and the instigation of conflict in eastern Ukraine, have meant that Russia has been economically pressurised due to the imposition of sanctions. Considerable damage has been inflicted on Russia’s economy, primarily due to the country’s isolation from global capital markets, which, as a result, has been impacting its energy industry, which is seeking to finance its high-expenditure projects.52 The geopolitics of Russian oil and gas has been traditionally westward-oriented, a trend which has been changing since 2000s. With the major centres of energy demand in the Asia-Pacific region, where the world’s most urban and urbanising populations live, the energy policy of Russia continues to underscore this change. While no immediate shift due to the change in energy trade orientation is likely to take place anytime soon (not least because of the scale of infrastructure waiting to be developed), should the strategy continue then Russia is likely to position itself at the centre of the global energy market, between the world’s major energy demand centres – the mature markets in Europe and the emerging energy markets of Asia and the Pacific. The agreement and memorandum of understanding between Russia’s Gazprom and China’s National Petroleum Corporation (CNPC) can be seen as a breakthrough in Moscow’s policy in its far east and eastern Siberia. If materialised, the agreement over the price benchmark for the future pipeline gas trade with China will open the way for the development of the very significant Siberian resources, allowing for future interconnection with the rest of the transmission infrastructure.

  Henderson and Mitrova (n 41), 5.   Keun-Wook Paik, ‘Sino-Russian Gas and Oil Cooperation: Entering into a New Era of Strategic Partnership?’, OIES WPM 59 (April 2015), 1, https://www.oxfordenergy.org/wpcms/wpcontent/uploads/2015/04/WPM-59.pdf (accessed 28 October 2016). 50  Ibid. 51   US Department of State, ‘Ukraine and Russia Sanctions’ (6 March 2014) https://www.state. gov/e/eb/tfs/spi/ukrainerussia/ (accessed 3 November 2016). 52   Bradshaw and Connolly (n 22), 156. 48 49

Russian energy projects, global climate, geopolitics and development  225

5.  NATURAL GAS PROJECTS: RUSSIA Russia’s key energy projects can be found in the entire energy value chain and across the Eurasian continent. As outlined above, at the Asian end two natural gas pipeline ­projects – the Power of Siberia and the Altai gas pipeline – feature prominently in Russia’s energy strategy, underpinning Russia’s ‘pivot to Asia’. As explained above, the Asian strategy addresses broadly internal and external dimensions of Russia’s energy policy. Internally, the strategy is oriented towards economic development of the vast Siberian reserves by means of connecting the remote region with the European gas infrastructure. Externally, the strategy addresses future gas demand in China, while engaging the country and its finances in energy partnerships in Russia. Russia’s ‘pivot to Asia’ strategy is intertwined with Russia’s Gazprom’s projects at the European end of Eurasia, where gas transit projects have been planned for construction at the time of writing this chapter. The following section focuses on the midstream gas projects, featuring a selection of the key pipelines projects which are of key importance for, and have an impact on the EU. To this end the following sections discuss the Nord Stream project on the European side and the Turkish Stream project on the south European side. Both projects are planned to connect Russia with its key European export markets, Germany and Turkey, respectively. 5.1  Turkish Stream After Germany, Turkey is the biggest European demand centre for Russia’s exports. Nearly 99 per cent of the natural gas Turkey consumes comes from imports. In 2015, Turkey imported around 48.4 bcm of natural gas with around 55 per cent of the natural gas imported from Russia, 16 per cent from Iran and 13 per cent from Azerbaijan, followed by 8 per cent from Algeria and 3 per cent from Nigeria.53 The Russian–Turkish natural gas trade dates back to the 1980s when Ankara signed an inter-governmental agreement with Moscow on deliveries through the trans-Balkan gas pipeline, transiting Romania and Bulgaria, which first materialised in 1987.54 Turkey’s rapidly growing natural gas market means that there is a strong business case for gas exporters such as Russia’s Gazprom forging links there. Turkey’s gas market structure, with the national supplier BOTAŞ being responsible for roughly 80 per cent of natural gas imports, facilitates pipeline gas supplies into Turkey. The country’s strong natural gas market has reassured Ankara’s active energy diplomacy in the region. In addition, Turkey seeks to use energy to strengthen its national role in the region while addressing its energy security needs. To address the objective of performing a key regional trade and security role, Ankara has been forging energy relations within its energy-rich neighbourhood. Iran and Azerbaijan remain important import sources of fossil fuels, with the former being the second biggest source of natural gas imports for Turkey, and the latter becoming a key foreign investor 53   The percentages share of imports rounded to one decimal point by the author based on Turkey’s Energy Profile and Strategy of the Ministry of Energy and Natural Resources, http:// www.mfa.gov.tr/turkeys-energy-strategy.en.mfa (accessed 10 December 2016). 54   GazpromExport, Turkey, http://www.gazpromexport.ru/en/partners/turkey/ (accessed 10 December 2016).

226  Research handbook on EU energy law and policy in the energy domain within Turkey at the time of writing this chapter. Natural gas from Russia has been critical to Turkey’s energy diplomacy, with the two countries’ gas relationship being strengthened due to the planned infrastructure project, the Turkish Stream gas pipeline, also known in Turkey as ‘TürkStream’. Turkish Stream is an offshore natural gas project designed to link Russia’s gas grid with that of Turkey through pipelines laid under the Black Sea. The Agreement on the Turkish Stream project between Turkey and Russia was signed on 10 October 2016 in Istanbul.55 The Grand National Assembly of Turkey ratified the Intergovernmental Agreement in December 2016, opening the way for construction to commence in 2017, with an expected completion date by the end of 2019,56 subject to counter-ratification by the Russian side. At the time of writing, a bill to ratify the Turkish Stream has been passed by the Russian Government and sent to the Russian Parliament, the Duma.57 Politically, the agreement concerning the Turkish Stream project has had a healing effect on the relations between Ankara and Moscow.58 Conceived in December 2014, the Turkish Stream succeeded the so-called South Stream project. Inception of the Turkish Stream project followed the cancellation of the predecessor project, the South Stream. The South Stream project, officially announced on 23 June 2007, was originally envisaged as connecting the Russian gas system with that of an EU member state, Bulgaria, avoiding transit via Ukraine. Following EU law compliance issues voiced by European Commission representatives, the South Stream project was abruptly cancelled in an announcement delivered by Russia’s President Vladimir Putin while in Turkey.59 The cancellation of the South Stream project instantly opened discussion on an alternative project – the Turkish Stream – which was expected to solve the problem of the EU energy law compliance. Rather than landing in an EU country, the Turkish Stream trading structure has rested on the sale of gas at the Greek-Turkish border rather than in the European downstream market.60 There are a few important notes – legal, economic and political – that need to be made regarding the South Stream–Turkish Stream remake. The South Stream–Turkish Stream remake has had important implications. Legally, Russia’s decision to cancel the South Stream project reduced Bulgaria’s role as a would55   Murat Yetkin, ‘Rhetoric Changes, Pipelines Remain’, Hurriyet Daily News (17 October 2016) http://www.hurriyetdailynews.com/rhetoric-changes-pipelines-remain.aspx?pageID5449&n ID5104821&NewsCatID5409 (accessed 18 October 2016). 56   ‘Turkey’s Parliament Ratifies Agreement with Russia on “Turkish Stream” Gas Pipeline’, RT (2 December 2016) https://www.rt.com/news/368953-turkey-deal-russia-stream/ (accessed 2 December 2016). 57   ‘Russia Ratifies Bill on Turkish Stream Gas Pipeline’, Hürriyet Daily News (19 December 2016) (accessed 20 December 2016). 17   Carbon Market Watch, ‘Industry Windfall Profits from Europe’s Carbon Market. How Energy-intensive Companies Cashed in on Their Pollution at Taxpayers’ Expense’ (2016) Carbon

422  Research handbook on EU energy law and policy 2.3  Current Measures to Prevent Carbon Leakage in the EU ETS The main measure to prevent carbon leakage under the EU ETS is the free allocation of emission allowances to such sectors of the manufacturing industry that have been found to be exposed to carbon leakage. In accordance with the ETS Directive, the Commission regularly draws up a list of sectors exposed to carbon leakage. The current list is valid for 2015–2019 and covers around 170 sectors and around 97% of the EU’s manufacturing emissions.18 Thus, most of Europe’s manufacturing industry currently benefits from free allocation of EUAs as a result of the carbon leakage rules. The question can be raised whether this conflicts with the objective of the ETS to drive low-carbon innovation and investment; and whether the carbon leakage list should be made more selective in the future. As mentioned above, harmonised EU rules have been applied to the free allocation of emission allowances since 2013. The free allocation system relies on ex ante benchmarks defined for individual sectors or sub-sectors based on their emissions performance, or on the so-called fall-back approaches where optimum levels of efficiency have been determined for heat or fuel used.19 The objective of the benchmarking system is to allocate free allowances ‘in a manner that provides incentives for reductions in greenhouse gas emissions and energy efficient techniques’.20 The benchmarks were calculated for industrial products and intermediate products traded between installations.21 This ambitious exercise of defining the benchmarks entailed a calculation of a value reflecting the average greenhouse gas emission performance of the 10% best performing installations in the EU in 2007–2008. The benchmark could therefore initially be seen as an incentive for installations to emit only a certain amount of carbon dioxide relative to production. However, as the benchmarks have not been updated since 2008 their force in driving new investments and innovations is now less certain in light of annual efficiency improvements by the operators. In practice, the benchmarking system operates as follows. Taking steel production as an example, the benchmark for hot metal is 1.328.22 For producing 100,000 tons of steel, an installation would, in principle, receive 132,800 free allowances under the EU Emissions Trading Scheme. However, in practice, the amount of free allowances during the ongoing third trading period in 2013–2020 has been adjusted based on a cross-sectoral correction factor that varies every year.23

Market Watch Policy Brief, http://carbonmarketwatch.org/wp-content/uploads/2016/03/Policybrief_Industry-windfall-profits-from-Europe%E2%80%99s_web_final-1.pdf (accessed 20 December 2016). 18   Commission Decision of 27 October 2014 determining, pursuant to Directive 2003/87/EC of the European Parliament and of the Council, a list of sectors and subsectors which are deemed to be exposed to a significant risk of carbon leakage, for the period 2015 to 2019 [2014] OJ L308/114.  19   Commission Decision of 27 April 2011 determining transitional Union-wide rules for harmonized free allocation of emission allowances pursuant to Article 10a of Directive 2003/87/EC of the European Parliament and of the Council [2011] OJ L130/1. 20  Ibid., preamble, recital 1. 21   Ibid., preamble, recital 4. 22   Ibid., Annex I: Product Benchmarks. 23   Commission Decision of 5 September 2013 concerning national implementation measures for the transitional free allocation of greenhouse gas emission allowances in accordance with

EU Emissions Trading Scheme  423 The cross-sectoral correction factor essentially ‘calibrates’ the annual free allocation with the pre-determined decreasing emissions cap, implying an across-the-board reduction for all operators. The cross-sectoral correction factor was challenged by several companies, claiming they had received fewer EUAs than their entitlement. Their challenge was successful in that in its preliminary ruling, the EU Court of Justice agreed that the maximum amount of free allowances for 2013–2020 determined by the Commission was invalid.24 One of the key reasons was that in calculating the cross-sectoral correction factor, the Commission took account, at least in part, of the emissions of installations covered by the allowance trading scheme before 2013 in determining the maximum annual amount of allowances.25 As a result, the Court found that the amount does not meet the requirements of subparagraph (b) of Article 10a(5) of the ETS Directive in that it is too high.26 The Court gave the Commission a ten-month period to adopt the necessary measures to correct the factor.27 The current system of protecting European manufacturing industries through free allocation of EUAs can also be criticised on the basis that certain companies have benefitted from excess allowances and windfall profits. This has happened due to the fact that free allocation is based on previous activity levels of an installation and not adjusted to match the real production levels. Similarly, those installations that receive free allocation based on the heat fall-back benchmark and that have converted from fossil fuels to biomass as their source of energy have very low actual emissions but very generous free allocation levels.

3.  FUTURE CARBON LEAKAGE MEASURES IN THE EU ETS? 3.1  Debate on Border Carbon Adjustments in the EU Even if there is no evidence of carbon leakage having taken place as a result of the ETS, there have been some proposals over the years to strengthen the carbon leakage measures in place under the ETS. Such proposals relate closely to one of the hot topics in the debate on trade and climate change, namely the idea of border carbon adjustments (BCAs). The basic idea underlying BCAs is to introduce a border tax on greenhouse gas emissions or require importers to surrender a quantity of carbon permits. There is a lively debate among scholars on whether BCAs could be designed in such a way that is compatible Article 11(3) of Directive 2003/87/EC of the European Parliament and of the Council (2013/448/ EU) [2013] OJ L240/27. 24   Joined Cases C-191/14 and C-192/14 Borealis Polyolefine GmbH and OMV Refining & Marketing GmbH v Bundesministerfür Land-, under Forstwirtschaf, Umwelt und Wasserwirtschaft, Case C-295/14 DOW Benelux BV and Others v Staatssecretaris van Infrastructur en Milieu and Others, and Joined Cases C-389/14, C-391/14 to C-393/14 Esso Italiana Srl and Others, Api Raffineria di Ancona SpA, Lucchini in Amministrazione Straordinaria SpA and Dalmine SpA v Comitato nazionale per la gestione della direttiva 2003/87/CE e per il supporto nella gestione delle attività di progetto del protocollo di Kyoto and Others [2016] ECR. 25   Ibid., para. 95. 26   Ibid., para. 111. 27  Ibid.

424  Research handbook on EU energy law and policy with World Trade Organization (WTO) law.28 I have highlighted elsewhere that the lively academic debate on BCAs remains highly abstract in the absence of concrete examples; against this background the ample attention given to BCAs seems disproportionate and risks distracting attention from real-world conflicts between international trade and climate policies.29 Nevertheless, the idea of introducing BCAs continues to surface from time to time, including in the EU. For example, as this chapter was being finalised in late 2016, the former French President Nicolas Sarkozy made a proposal to introduce a carbon tax against US imports amid fears that the President-elect Donald Trump will pull the US from the Paris Agreement.30 In addition, in December 2016, the environmental committee of the European Parliament proposed to introduce BCAs in the clinker/cement sector in the EU (see below). However, thus far, BCAs have not been implemented in practice and despite proposals to introduce them, they also face a lot of opposition in the EU. Here, I will focus on providing an overview of the main elements of the debate on BCAs in the EU over the past fifteen years. The idea of BCAs first gained traction in Europe in the early 2000s as the US announced it would not be ratifying the Kyoto Protocol. The EU chose a different path, stepping up its climate policy efforts and launching the ETS. Given concerns over carbon leakage, the idea surfaced that the EU should target imports from the US to compensate for what it saw as the US free-rider climate policy and to try to exert economic and diplomatic pressure on the US to join international climate change efforts.31 The proposal of targeting imports from the US never gained serious political backing in the EU. Instead, from 2007 onwards the focus shifted towards negotiations for a new global climate treaty and it was hoped that a new Democratic administration in the US would also join the new treaty. The possibility of including energy-intensive imports in the EU Emissions Trading Scheme was, however, still mentioned in the context of the European Commission’s 2008 proposal to amend the ETS Directive as part of the 2009 Climate and Energy package.32 The Commission’s proposal alluded to the possibility of establishing ‘an effective carbon equalisation system’ with the view of putting EU installations on a comparable footing 28   See, for example, Tracey Epps and Andrew Green, Reconciling Trade and Climate: How the WTO Can Help Address Climate Change (Edward Elgar 2010) 56 and 122; L Tamiotti, ‘The Legal Interface Between Carbon Border Measures and Trade Rules’ (2011) Climate Policy 1202; S Monjon and P Quirion, ‘A Border Adjustment for the EU ETS: Reconciling WTO Rules and Capacity to Tackle Carbon Leakage’ (2011) Climate Policy 1212; R Leal-Arcas, ‘Unilateral Traderelated Climate Change Measures’ (2012) Journal of World Investment & Trade 888. 29   Kulovesi, note 1 above. 30   Ben Kentish, ‘Nicolas Sarkozy Promises to Hit America with a Carbon Tax if Donald Trump Rips up Landmark Paris Climate Deal’, Independent (London, 15 November 2016), http:// www.independent.co.uk/news/world/europe/donald-trump-us-carbon-tax-nicolas-sarkozy-globalwarming-paris-climate-deal-a7418301.html (accessed 15 December 2016). 31   F Biermann and R Brohm, ‘Implementing the Kyoto Protocol Without the United States: The Strategic Role of Energy Tax Adjustments at the Border’ (2005) Climate Policy 289. They suggest that the EU should adjust energy taxes at the border, targeting non-European industrialised countries, or, alternatively, that the ‘Kyoto coalition’ should target such countries that will not ratify the Protocol. 32   For a comprehensive overview of the 2009 climate and energy package, see Kulovesi, Morgera and Muñoz, note 1 above.

EU Emissions Trading Scheme  425 with those from third countries.33 The system would have essentially meant requiring those importing energy-intensive products to the EU to purchase allowances corresponding to their greenhouse gas emissions during the manufacturing of the product. A final decision on possible further measures to address carbon leakage was postponed pending the outcome of the UN Climate Change Conference in Copenhagen in December 2009.34 The Commission was requested to review the situation in light of the outcome of the international negotiations, prepare a report by June 2010 and make ‘appropriate proposals’.35 In May 2010, the Commission provided the required report.36 The outcome of the Copenhagen Conference had been largely a disappointment and a new global climate treaty failed to materialise. The Commission’s report thus noted that given the uncertainties surrounding international climate policy, the measures already in place to address carbon leakage – free allowances and access to international offsets – remained ­justified.37 The Commission also discussed the idea of including imports into the ETS, noting that similar proposals had been discussed in the US and that ‘obviously it would be desirable for such initiatives to be taken together with such partners’.38 Indeed, around the same time, the idea of including imports in a planned federal capand-trade scheme for greenhouse gas emissions received ample attention in the US. Barack Obama had been elected as President at the end of 2008, re-engaging the US in global climate change cooperation and making attempts to step up US federal climate policy efforts. For a short while, between 2009 and 2011, it seemed conceivable that both the EU and US would have strong greenhouse gas emissions trading schemes, requiring importers from countries lacking equivalent climate policies to purchase emission allowances on the basis of greenhouse gas emissions associated with imported goods and/or their production. However, neither the EU nor the US scheme saw the light of the day. The Obama Administration abandoned the plan for a federal cap-and-trade scheme relatively quickly, in the face of strong national opposition. The EU Commission did not further develop its proposal on including imports in the EU Emissions Trading Scheme. Its 2010 communication emphasised that climate policies targeting imports raise ‘broader issues about the EU’s trade policy and its overall interest in an open trade system’ and the measure would ‘need to be very carefully designed to ensure that it is fully compatible with WTO requirements’.39 Importantly, from the climate policy perspective, the Commission also highlighted the considerable technical difficulties in defining ‘in detail the carbon content of each individual category of goods’.40 Indeed, to implement a scheme targeting carbon intensive imports in a non-­ discriminatory manner as required by WTO law, information would be needed on 33   Commission, ‘Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the greenhouse gas emission allowance trading system of the Community’ COM(2008)16 final. 34   Preambular paragraph 26 and Art. 10(b) of Directive 2009/29/EC, note 5 above, indicating that the Commission should review the situation with respect to carbon leakage by 30 June 2010. 35   Ibid., Art. 10(b). 36   COM(2010)265, note 8 above, p. 11. 37   Ibid., pp. 11–12. 38   Ibid., p. 12. 39  Ibid. 40  Ibid.

426  Research handbook on EU energy law and policy g­ reenhouse gas emissions and other production data in order to calculate the carbon content of the covered imports credibly. It is likely that such data would need to be collected relying on monitoring and reporting by companies located in third countries. It would clearly be challenging for the EU to implement such a scheme outside its jurisdiction. In comparison, European installations included in the ETS are obligated to monitor and report their greenhouse gas emissions to the competent authorities each year, and the reports are verified by independent third parties. The European Commission ensures the final consistency of such reports. The violation of these reporting obligations results in sanctions. A similar reporting scheme for foreign producers would be far more difficult to implement from a technical, legal and diplomatic point of view. Such difficulties have been apparent in the context of the EU Emissions Trading Scheme for aviation emissions. Opposing their inclusion in the EU Emissions Trading Scheme, Chinese and Indian airlines systematically violated European legislation requiring them to provide annual greenhouse gas emissions data to the European Commission.41 In addition to the technical difficulty of complying with the non-discrimination requirement under WTO law, BCAs are politically highly controversial under the WTO and in international climate change negotiations under the United Nations Framework Convention on Climate Change (UNFCCC). In light of such difficulties, the idea of BCAs has mostly remained off the table in the EU in recent years. The most practicable option for introducing BCAs under the EU ETS would seem to be a limited scheme targeting goods or industry sectors where carbon content can be reasonably assessed and technical difficulties could be overcome.42As the European Commission noted in 2010, a system for including imports in the ETS ‘could at best only be envisaged for a limited number of standardized commodities, such as steel or white clinker used to make cement’.43 Indeed, the European cement industry has proposed a BCA scheme targeting cement imports to the EU.44 Clinker is a product with a relatively uniform production method. This makes it different in comparison with manufactured goods where the energy intensity and other characteristics of products and their production varies considerably, making greenhouse gas emissions difficult to estimate. A BCA scheme covering clinker imports would therefore be technically very straightforward to calculate and more feasible from the perspective of greenhouse gas emissions accounting. At the time of finalising this chapter in December 2016, the environmental committee of the European Parliament proposed to implement BCAs with respect to cement when making a recommendation concerning ETS reform. The idea of introducing BCAs to prevent carbon leakage thus continues to float around and surface from time to time in the EU. A large-scale BCA scheme applicable to manufactured products remains, however, an

41   James Kanter, ‘EU Considers Emission Fines on Chinese and Indian Airlines’, New York Times (New York, 16 May 2013), http://www.nytimes.com/2013/05/17/business/global/17ihtemit17.html?pagewanted5all (accessed 20 December 2016). 42   Kulovesi, note 1 above. 43   COM(2010)265, note 8 above, p. 12. 44   The European Cement Association, ‘The Cement Industry Is Exposed to Carbon Leakage Regardless of the Assessment Method Used and the Relevant Product Level’, 27 November 2013, http://www.cembureau.eu/sites/default/files/documents/Doc%203023_2013-11-27_CEMBUREAU_ Carbon%20Leakage%20Position%20Paper%202.1.pdf (accessed 20 December 2016).

EU Emissions Trading Scheme  427 unlikely prospect. Even the proposed limited BCA scheme for cement would need to clear several political and technical hurdles in order to materialise in practice. 3.2  Impact of the Paris Agreement on the Carbon Leakage Debate in Europe As seen above, one of the key motivations for the debate on carbon leakage in Europe was the fact that the US never ratified the Kyoto Protocol and emerging economies were not subject to emission reduction targets under the Kyoto regime. For many years, it was hoped that a new global climate treaty would improve the situation and level the global playing field with respect to climate change mitigation. This section analyses the Paris Agreement, which was adopted in 2015 and entered into force in November 2016, focusing on those elements that are relevant for carbon leakage. One of the groundbreaking features of the Paris Agreement is that it relies much less on the distinction between developed and developing countries than the UNFCCC and its Kyoto Protocol. In addition, the Paris Agreement includes a new formulation of the CBDR-RC principle. Article 4.3 of the Paris Agreement refers to CBDR-RC ‘in the light of different national circumstances’. In other words, it can be argued that the Paris Agreement places more emphasis on each country’s individual circumstances instead of drawing a rather generic distinction between developed and developing countries even if recognising their ‘respective capabilities’. Compared to the Kyoto Protocol, the Paris Agreement is very different in that its mitigation regime is largely the same for both developed and developing countries. The Paris Agreement engages all Parties in climate change mitigation efforts through nationally determined contributions (NDCs). It adopts a cyclical, long-term approach whereby NDCs are regularly updated and made more ambitious at five-year intervals.45 The Agreement provides, however, that developed countries should continue to undertake economy-wide absolute emission reduction targets, while developing countries have more flexibility in designing their NDCs.46 Given that it engages all Parties and lays more emphasis on countries’ individual circumstances, the Paris Agreement can be seen as levelling the playing field with respect to climate change mitigation. All Parties to the Paris Agreement are also required to regularly step up their climate policy efforts. According to Article 4.3, each successive NDC must represent progression beyond the existing one, reflecting the Party’s ‘highest possible ambition’ and the CBDR-RC in light of different national circumstances. The requirement for each country to regularly enhance the ambitiousness of its climate policy means that it will become increasingly difficult for industries to escape climate policies by relocating production elsewhere. Some also hope that Article 6.2 of the Paris Agreement will provide a foundation for stepping up global cooperation on carbon pricing.47 Article 6.2 provides that Parties to the Agreement may engage, on a voluntary basis, ‘in cooperative approaches that   Articles 4.3 and 4.9 of the Paris Agreement.   Article 4.4 of the Paris Agreement. 47   See, for example, International Emissions Trading Association, ‘A Vision for the Market Provision of the Paris Agreement’ (2016), http://www.ieta.org/resources/Resources/Position_Pap​ ers/2016/IETA_Article_6_Implementation_Paper_May2016.pd (accessed 20 December 2016). 45 46

428  Research handbook on EU energy law and policy involve the use of internationally transferred mitigation outcomes towards nationally determined contributions’. Countries with planned or existing emissions trading schemes are seen as prime candidates for using this provision.48 In other words, international transfer of mitigation outcomes could take the form of transfers between two interlinked emissions trading schemes.49 In this sense, the Paris Agreement can be seen as facilitating links between emissions trading schemes and expanding the carbon price signal to new jurisdictions. This is also a positive development from the point of view of carbon leakage. It is further useful to note that Article 6.4 of the Paris Agreement ­envisages the establishment of a mechanism to contribute to the mitigation of greenhouse gas emissions. However, the scope of this new mechanism is yet to be determined.50 Despite its many positive elements, the Paris Agreement does not signify the end of the debate on carbon leakage in Europe. For one thing, Parties to the Paris Agreement play a key role in determining how ambitious their contribution to the Agreement is. Some NDCs are more ambitious than others. This means that in some countries, industries will be subject to more stringent climate policies than in others. The Agreement also retains a degree of differentiation between developed and developing countries. While it includes a provision in Article 6 for strengthening global cooperation around carbon markets, this is not the same as establishing a global carbon price. The recent US election result has also cast a doubt over the global reach of the Paris Agreement. President-elect Donald Trump pledged during his campaign to withdraw the US from the Paris Agreement. While there are some legal complications,51 this unfortunate scenario is a realistic possibility during Trump’s term of office. 3.3  Ongoing Reform of the EU ETS and Proposed Measures on Carbon Leakage In January 2014, the Commission published a proposal on future EU climate policies for the 2021–2030 period.52 The aim of the proposed measures is to implement the EU’s intended NDC under the Paris Agreement to reduce greenhouse gas emissions by at least 40% from the 1990 levels by 2030. Relevant for the current focus on carbon leakage, the Commission suggested that protection measures against carbon leakage should remain in place.53

48   Anna Laine, Tommi Ekholm, Tomi Lindroos, Hanna-Mari Ahonen, Roland Magnusson and Kati Kulovesi, ‘Implementation of the Paris Agreement, Part I (mitigation, transparency and cooperative approaches)’, Report Prepared for the Finnish Prime Minister’s Office, 25 August 2016, p. 45, http://www.ym.fi/pariisi2015 (accessed 20 December 2016). 49   IETA, note 47 above, p. 7. 50   Ibid., p. 8. 51   Kate Birmingham Bontekoe, ‘What Will a Trump Administration Mean for International Agreements with the United States’, EJIL: Talk Blog Post (13 December 2016), http://www.ejiltalk. org/what-will-a-trump-administration-mean-for-international-agreements-with-the-united-states/ (accessed 16 December 2016). 52   Commission, ‘Communication to the European Parliament, to the Council, the European Economic and Social Committee and the Committee of the Regions: A policy framework for climate and energy in the period from 2020 to 2030’ COM(2014)15 final. 53  Ibid.

EU Emissions Trading Scheme  429 However, the question of carbon leakage measures was left to be addressed in more detail at a later stage of the legislative process.54 In July 2015, the Commission published a proposal to review the ETS for the period 2021–2030.55 Overall, the Commission proposed that the ETS sector should reduce its greenhouse gas emissions by 43% compared to 2005 by 2030.56 The reform proposal included new rules for addressing problems with the emissions cap. The Commission proposed to increase the linear reduction factor to 2.2% per year from 2021 onwards as compared to the current 1.74% annual reduction.57 This would correspond to an additional reduction of 556 million tonnes of carbon dioxide between 2021 and 2030 – roughly equivalent to the annual emissions of the UK.58 As seen above (section 2.1), previous problems with the cap were also addressed by creating a market stability reserve that will automatically address extremes in the demand and supply of EUAs on the European carbon market. Concerning carbon leakage, the Commission identifies the need to continue safeguarding the international competitiveness of the EU energy-intensive industries.59 First, the Commission proposes to update the benchmarks to reflect technological progress and capacities since the benchmarks were first calculated in 2008.60 As discussed above, energy efficiency improvements and some innovations since the benchmarks were calculated mean that they no longer serve as an incentive for industries to step up their performance. Second, the Commission is proposing to align free allocation more frequently with production data in order to increase the dynamic aspects of the free allocation.61 Third, the Commission proposes to focus the system of free allocation of EUAs on those sectors most at risk of relocating outside Europe. 62 The Commission’s proposal would also effectively remove the cross-sectoral correction factor, which has been applied to the free allocation of EUAs during the ongoing third trading period. As seen above, the Court of Justice found that the  Commission’s calculation of the cross-sectoral correction factor was invalid and the Commission had to adjust its calculations. Abolishing the cross-sectoral correction factor would ­arguably mean taking a more straightforward approach to the free allocation of EUAs. The Commission’s proposal also discusses compensation for indirect carbon costs (i.e. costs related to greenhouse gas emissions passed on in electricity prices) in line with state aid rules.63 Accordingly, Member States should partially compensate certain installations in high-risk carbon leakage sectors or sub-sectors ‘where such support is proportionate  Ibid.   Commission ‘Proposal for a Directive of the European Parliament and of the Council amending Directive 2003/87/EC to enhance cost-effective emission reductions and low-carbon investment’ COM(2015)337 (final). 56   Ibid., p. 2. 57  Ibid. 58  Ibid. 59  Ibid. 60  Ibid. 61  Ibid. 62  Ibid. 63   Ibid., pp. 2–3. 54 55

430  Research handbook on EU energy law and policy and necessary’ and the incentive to save energy is maintained.64 Thus far, such support has been in the competence of the Member States, some of which have been more eager than others to support their industries, leading to potential distortions in the single market. The Commission’s proposal also includes new support mechanisms to help the industry and power sectors to meet the innovation and investment challenges resulting from the transition to a low-carbon economy in Europe. This would see the establishment of two new funds to support European industry.65 These include an ETS innovation fund set up through earmarking EUAs to support innovation and an ETS modernisation fund with a view to facilitating investment for modernising the power sector and wider energy systems as well as boosting energy efficiency in the ten Member States with lower incomes. At the time of finalising this chapter, the ETS reform process was still ongoing. The reform proposals are being debated both in the Council and in the Parliament. In mid-December 2016 the environmental committee of the Parliament voted in favour of backing a more ambitious reform of the ETS than that proposed by the Commission.66 The committee agreed to increase the linear reduction factor from the 2.2% proposed by the Commission to 2.4%.67 The committee also agreed to create a ‘just transition fund’ to help minimise the social costs associated with the transition to a green economy.68 The committee also wishes to strengthen the market stability reserve by permanently cancelling 800 billion EUAs from the reserve.69 However, the Parliament as a whole is yet to approve these ideas. Moreover, in the Council, some Member States have been far less ambitious about the ETS reform than the Commission, meaning that negotiations will need to continue in 2017 and outlines of the compromise remain difficult to predict.

4. CONCLUSIONS This chapter concludes that the question of carbon leakage remains relevant in the context of the EU ETS even after the entry into force of the Paris Agreement. While the Agreement lays down the basic legal structures needed to step up global climate policy efforts, it is far from establishing a global carbon price and levelling the playing field for the manufacturing industry. It is important to bear in mind, however, that there is currently no evidence of carbon   Ibid., p. 3.  Ibid. 66   Aleksandra Eriksson and Peter Teffer, ‘MEPs Agree on Future of Emissions Trading’, EUObserver (Strasbourg/Brussels 15 December 2016), https://euobserver.com/environment/136291 (accessed 22 December 2016). 67  Ibid. 68  Ibid. 69   ‘MEPs Scale Up ETS Reform above Commission Proposal but Avoid Aligning It with Paris Agreement’, Blue & Green Tomorrow (15 December 2016), http://blueandgreentomorrow.com/news/ meps-scale-ets-reform-commission-proposal-avoid-aligning-paris-agreement/ (accessed 22 December 2016). 64 65

EU Emissions Trading Scheme  431 leakage having taken place as a result of the EU ETS. This chapter is therefore critical of proposals to strengthen carbon leakage protection under the ETS, especially by introducing BCAs. BCAs are not necessary from the climate policy perspective. In addition, especially large-scale BCA schemes targeting the manufacturing industry would be problematic for Europe’s trade relations, and potentially lead to legal challenges under World Trade Organization (WTO) law.

23.  Energy and environment

József Feiler and Peter Vajda*

1. THE ENERGY TRILEMMA AND ITS RELATION TO EXTERNAL COSTS Environmental sustainability represents the third pillar of the so-called ‘energy trilemma’, completing the triangle made up with energy security and energy equity.1 There is a broad scientific consensus, however, that our current ways of generating and using energy are not on a sustainable pathway and should the current trends in changes to the global climate system continue (to which the energy sector is a very important contributor),2 the consequences will be felt by everyone already in the very short term.3 In order to avoid a scenario in the 21st century that would have devastating consequences for the entire planet, its inhabitants as well as the global economy, it is thus imperative to strengthen the sustainability pillar of the triangle, thereby promoting the efficient generation and use of any form of energy – heat, power, or any form of fuels. At the same time, it would be unrealistic not to count on energy consumers expecting a stable and secure supply of energy at affordable prices. All around the world, including in EU Member States, energy poverty inevitably leads to solutions that are not environmentally sustainable.4 We shall therefore point out that the real price of energy goes well beyond the pure material costs of the fuel, the infrastructure necessary for turning it into

 *  The views expressed in this chapter are those of the authors and do not necessarily represent the views of either the European Climate Foundation or the Energy Community Secretariat.   1  World Energy Council (2016), p. 6; Kuzemko et al. (2016), p. 1.   2  According to the IPCC, electricity and heat production is responsible for one quarter of the global emissions of greenhouse gases, while the category ‘other energy’ is responsible for an additional 10 per cent.   3  There is scientific consensus on the fact that while extremely important, the current international legal framework is not sufficient to provide effective solutions to avoid devastating consequences of changes to the global climate. As the International Energy Agency concludes in its 2016 Outlook, while countries are generally on track to achieve, and even exceed in some instances, many of the targets set in their Paris Agreement pledges, this is only sufficient to slow the projected rise in global energy-related CO2 emissions, but not nearly enough to limit warming to less than 2°C (IEA, 2016a, p. 2). In fact, it is foreseen that the path set by the initial round of nationally determined contributions (NDCs) is consistent with an average global temperature increase of around 2.7°C by 2100 and above 3°C thereafter (IEA, 2016a, p. 11).   4  The most important source of emissions in this segment is the household fuel combustion sector, which often comprises any material with a calorific value, including (agricultural or ­municipal) waste. According to the European Environmental Agency’s 2016 air quality report, the four main reasons for the relatively high air pollutant emissions from residential wood combustion are: the use of non-regulated stoves; combustion under non-optimal conditions (for example improper burning/loading practices); inadequate maintenance of old or new stoves installed in homes; and the use of non-standardised biomass and other materials as a fuel (EEA, 2016, p. 25).

432

Energy and environment  433 heat and/or power and its transmission to the end consumer. The bare economic logic of external costs needs to be engraved in the mind of the energy consumer in order to be able to make a responsible decision. In many countries around the globe, domestic reserves in fossil fuels are abundant and therefore seemingly provide a cheap and easily accessible option for energy production. At the same time, emission reduction comes at a price and therefore the discussion on security of supply often focuses on fossil-fuel based energy generation by thermal power plants. An argument that is often raised in the debate is that energy security based on locally available resources shall be the primary concern of any policymaker, which would also allow preserving or creating new jobs in the energy sector. In a democratic setting, affordability also cannot be ignored and therefore sustainability is usually considered only as a distant third. This approach, however, is very short-sighted and it is important that other cost elements are brought into the discussion, namely the issue of external costs. These are costs that are directly linked to the economic activity but are realised outside the scope of the energy sector and are consequently not reflected in the energy price.5 Non-market costs (also referred to as welfare costs) are those associated with increased mortality and morbidity (illness causing, for example, pain and suffering), degradation of air and water quality and consequently ecosystems health, as well as climate change. The external costs of unabated or not properly controlled emissions are tremendous and these costs are borne by society as a whole – via health implications, premature deaths, reduced crop yields, damage to buildings, forests, agricultural land and so on (market costs).6 A prominent example of this bare economic logic is contemporary China, where people in heavily polluted cities literally pay for clean air by buying canisters of imported ‘mountain breeze’ from the rural parts of the country as well as from abroad.7 People unable to pay for the canisters are left to bear the external costs of pollution via impacts on their own health. In Europe, air pollution is the single largest environmental health risk. While air pollution is harmful to all populations, some people suffer more because they live in polluted   5  The economic concept of externalities (external costs) was developed by the British economist Arthur C. Pigou in his work The Economics of Welfare. In his words, ‘[I]t might happen, for example, [. . .] that costs are thrown upon people not directly concerned, through, say, uncompensated damage done to surrounding woods by sparks from railway engines. All such effects must be included – some of them will be positive, others negative elements – in reckoning up the social net product of the marginal increment of any volume of resources turned into any use or place’ (Pigou, 1920, Chapter II, paragraph 5, p. 108). Pigou justified government intervention via taxation with the aim of internalising the external costs and thereby providing a price that reflects not only the marginal private costs, but also the marginal social costs. This type of taxation is known as ‘the Pigovian tax’ and is widely used in current taxation models mainly via excise duties. To that end, it shall be noted that while excise duties are used on fossil fuels in all European countries, the amount levied on coal, the most polluting source, is close to zero in all Member States with the exception of Denmark, Finland and Sweden (European Commission, 2016, pp. 60–61).   6  According to estimates of the European Environmental Agency, the health impacts attributable to exposure to air pollution were responsible for more than half a million premature deaths in the EU-28, with PM2.5 (fine particulate matter) being by far the most important risk factor (EEA, 2016, p. 9).   7  See, for instance, http://edition.cnn.com/2015/12/15/asia/china-canadian-company-sellingclean-air/index.html.

434  Research handbook on EU energy law and policy areas and are exposed to higher levels of air pollution, or they are more vulnerable to the health problems caused by air pollution.8 This holds especially true for populations living in the vicinity of large combustion plants (thermal power plants), which operate without effective measures to reduce their emissions of sulphur dioxide (SO2), nitrogen oxides (NOx) and particulate matter (PM or dust, which is sub-classified into PM10 also known as coarse particulates and PM2.5 or fine particulates). The International Agency for Research on Cancer has classified outdoor air pollution in general, as well as particulate matter as a separate component of air pollution mixtures, as carcinogenic in relation to lung cancer.9 Coal-fired utilities remain one of the largest anthropogenic sources of both SO2 and NOx, both of which lead to the formation of acids in the atmosphere.10 The physical indicators of impact (premature deaths) as well as their economic equivalents, accounting for healthcare costs, lost productivity and amenity losses, are not accounted for when generating energy and thereby the external costs are ultimately born by society as a whole. Furthermore, air pollution has several important environmental impacts and may directly affect vegetation, as well as the quality of water and soil and the ecosystem services they support. SO2, NOx and ammonia (NH3) contribute to the acidification of soil, lakes and rivers, causing biodiversity loss. In addition to causing acidification, NH3 and NOx emissions also disrupt terrestrial and aquatic ecosystems by introducing excessive amounts of nutrient nitrogen. This leads to eutrophication, which is an oversupply of nutrients that can lead to changes in biodiversity and to the appearance of new, invasive species. Other important factors when addressing the issue of external costs are those induced by changes to the local and global climate. There is no challenge in pointing to the role of the energy sector’s contribution to the anthropogenic impact on our global climate system – despite recent policy developments, global energy-related CO2 emissions are likely to increase from 32.3 billion11 metric tons in 2012 to 35.6 billion metric tons in 2020 and, according to a business as usual scenario, to 43.2 billion metric tons in 2040.12 In 2014, electricity and heat production accounted for one quarter of global greenhouse gas emissions and other energy-related emissions for an additional 10 per cent. Having thus covered roughly one-third of the global greenhouse gas emissions one can feel that there is an excessive focus on the energy sector – an imperative is there to make it carbon neutral in developed countries if we aim for keeping global surface temperature change below the 2°C threshold. If we aim for a slightly more manageable future with a 1.5°C threshold (as targeted also by the Paris Agreement), much more needs to be done. In a world of growing global population, greenhouse emissions from other sectors (such as agriculture) are more difficult to curtail, thus there is a common sense of having the

  8  EEA (2016), p. 11.   9  IARC (2013b). Both factors are classified as Group 1 carcinogenicity. The Group 1 classification is used where it is considered that the evidence of causality between an agent and an effect is clear. The report also notes a positive association with an increased risk of bladder cancer. 10   IARC (2013a), p. 43. 11   This term is consistently used throughout in this chapter as defined on the short scale, i.e., one thousand million, or 109. 12   United States Energy Information Administration (2016), pp. 5–6.

Energy and environment  435 energy sector make the most aggressive change. The 450 ppm13 scenario of the IEA foresees a nearly full decarbonisation of the power sector by 2040.14 Further research would be very much necessary, with the aim of exploring the legal means to provide incentives and catalysts for such a change and how to mitigate the social impacts of this transition. In the following, we start with a brief assessment of the impacts and the real costs of emissions from the energy sector and outline the legislative responses provided thus far by EU environmental and climate law. We illustrate via a regional example, the Energy Community, how this has a spill-over effect to EU neighbourhood policy and we raise some questions about the technical and economic feasibility of the energy transition. Finally, we outline certain proposals for future research, with particular regard to the much needed interdisciplinary scientific approaches which are key to provide feasible responses to the highly challenging environmental and climate-related problems that are likely be the most difficult issues of the 21st century.

2.  THE IMPACTS AND THE REAL COSTS OF EMISSIONS The European Commission estimates that total health-related external costs of air pollution (from the ‘traditional pollutants’ of SO2, NOx, particulate matter and heavy metals) in 2010 were in the range of €330–940 billion, including direct economic damages of €15 billion from lost work days, €4 billion from healthcare costs, €3 billion from crop yield loss and €1 billion from damage to buildings.15 If we look at the costs of adapting to the changes in the global and local climate, we can also see very prominent examples. If we take one of the most pressing climate-changerelated issues, namely sea-level rise, into account, we can see that average global flood losses are projected to increase to US$52 billion by 2050, for projected socio-economic change alone. With climate change and subsidence, present protection will need to be upgraded to avoid unacceptable losses of US$1 trillion16 or more per year. Even if adaptation investments maintain constant flood probability, subsidence and sea-level rise will increase global flood losses to US$60–63 billion per year in 2050.17 The impacts of greenhouse gas emissions are with us already. We can witness a one-way shift of trends in global temperature beyond natural oscillations, as well as high altitudes and polar regions where temperature anomalies are becoming the new normal in a faster manner than predicted by global circulation models and increases in the temperature of oceans. Social costs of carbon estimates are available and provide values with different discount rates as far as the mid-century (see Table 23.1).

13   Parts per million. In 2013, the global concentration of carbon dioxide in the atmosphere reached 400 ppm for the first time in recorded history, according to data from the Mauna Loa Observatory in Hawaii (https://www.esrl.noaa.gov/gmd/ccgg/trends/full.html). Current atmospheric CO2 values are more than 100 ppm higher than at any time in the last one million years. 14   IEA (2016b), p. 46. 15   European Commission (2013), pp. 18–19. 16   This term in consistently used throughout this chapter as defined on the short scale, i.e., one million million, or 1012. 17   Hallegatte et al. (2013).

436  Research handbook on EU energy law and policy Table 23.1 Revised social costs of CO2, 2010–2050 (in 2007 US$ per metric ton of CO2) Discount Rate

5.0%

3.0%

2.5%

3.0%

Year

Avg

Avg

Avg

95th

2010 2015 2020 2025 2030 2035 2040 2045 2050

10 11 12 14 16 18 21 23 26

31 36 42 46 50 55 60 64 69

50 56 62 68 73 78 84 89 95

86 105 123 138 152 168 183 197 212

Note:  There is extensive evidence in the scientific and economic literature on the potential for lowerprobability, but higher-impact outcomes from climate change, which would be particularly harmful to society and thus relevant to the public and policymakers. The fourth column of values (under the 95th heading) is thus included to represent the marginal damages associated with these lower-probability, higher-impact outcomes. Accordingly, these values are selected from further out in the tail of the distribution of social cost of CO2 estimates; specifically, these values correspond to the 95th percentile of the frequency distribution of SC-CO2 estimates based on a 3 per cent discount rate. See https://www.epa.gov/sites/production/files/201612/ documents/sc_co2_tsd_august_2016.pdf, p. 3. Source:  Interagency Working Group on Social Cost of Carbon (2013).

The numbers seem to be in line with the anticipated carbon price in the planning of the EU emission-trading regime.18 However, the expenses of climate change are more fundamental than the plain social costs in US dollars. Climate change is capable of triggering positive feedback loops in nature, which are tripped at various stages of warming with fast to slow onset. One common feature of these is that they are capable of magnifying the humaninduced impacts of the trends from the accustomed linear or nearly linear line. The melting of permafrost in the Siberian tundra can, in itself, release methane into the atmosphere which is comparable to all anthropogenic greenhouse gas emissions since the beginning of the first industrial revolution (that is, in the last slightly more than 200 years). Several of such feedback loops interacting and reinforcing each other make the entire externality issue look qualitatively different. Having feedback loops reinforcing each other can increase the price of climate change beyond the limits of what can be ‘bought’ by economic tools. 18   According to the European Commission’s Impact Assessment on the EU ETS Directive, ‘[t]he price to be determined in the market is estimated to fall in a range of EUR 20 [. . .] to EUR 33 [. . .] per allowance (tonne of carbon dioxide equivalent). Those prices have to be situated at the upper end of the likely price range, as the political agreement reached at the Sixth Conference of the Parties in Bonn in July 2001 made a number of decisions that are likely to bring [. . .] prices down. The allowance price that will arise on implementation of the Directive is obviously dependent on the allocation decisions taken at Member State level and changes in other external variables’ (European Commission (2001), point [26]). Experience of the past fifteen years clearly confirms these findings, with the carbon price being steadily below €10 since mid-2011.

Energy and environment  437 Full decarbonisation of the energy sector is something which seems remote to many, while we are living under an imperative to achieve it. But what is the timeframe for making the shift? This question is essential for choosing the best available transition pathways, and future research will explore this area with the aim of providing a business case for the most rapid transition possible. One way of finding the timeline is by looking into the global carbon budget and its availability – which indicates that emissions related to the global energy sector have to fall to zero level between 2040 and 2060 if we are to limit climate change to 1.5°C. This figure also includes carbon removal technologies and does not guarantee that we will meet those targets. The Intergovernmental Panel on Climate Change (IPCC) in its recent synthesis report estimates carbon budgets for 1.5°C, 2°C and 3°C – which means variations and trends in the perturbation of CO2 in the atmosphere, referenced to the beginning of the industrial era. For each temperature limit, there are three budgets, according to probability. The first budget provides a 66 per cent probability of staying below the given temperature, the second a 50 per cent chance, and the third a 33 per cent chance.19 The IPCC’s synthesis report presented the total carbon budget from the beginning of the industrial revolution and said what was remaining, as of the beginning of 2011. As of the beginning of 2011, the carbon budget for a 66 per cent chance of staying below 1.5°C was 400 billion tonnes of CO2. Emissions between 2011 and 2015 mean this has almost halved to 205 billion tonnes. The result is that, as of the beginning of 2016, five years and two months of current CO2 emissions would use up the 1.5°C budget. The combined components of the global carbon budget, illustrated in Figure 23.1 as a function of time, for emissions from fossil fuels and industry and emissions from land-use change, as well as their partitioning among the atmosphere, land and oceans, provide a good picture of where action should be taken.20 Another indicator which gives us the time framework for action – on the level of ­perception – is the climate departure index (also known as the point of no return of climate as we know it), which already provides us with the time when it is too late to live as before. This is an index that provides a sophisticated calculation of the year after which the climate will become fundamentally different from historic climate variability in the past 150 years. Under the business-as-usual scenario, this year is calculated to be 2047, with large variations across the world, as illustrated in Figure 23.2.21

3. COMMAND-AND-CONTROL MEASURES VERSUS MARKET-BASED INSTRUMENTS As discussed above, environmental economics suggests that the external costs of various activities are to be internalised, incorporated into the mechanisms of the real-world   IPCC (2014), pp. 63–4.   Le Quéré et al. (2016). 21   Mora et al. (2013) find that using 1860 to 2005 as the historical period, the index has a global mean of 2069 (±18 years) for the near-surface air temperature under an emissions stabilisation scenario, and 2047 (±14 years) under a ‘business-as-usual’ scenario. 19 20

438  Research handbook on EU energy law and policy 12 Fossil fuels and industry Land-use change Land Atmosphere Ocean

8

CO2 flux (GtC yr–1)

4 Emissions 0 Partitioning –4

–8

–12

1880

1900

1920

1940

1960

1980

2000

2020

Time (yr) Source:  Le Quéré et al. (2016), p. 626, available at: http://www.earth-syst-sci-data.net/8/605/2016/.

Figure 23.1  Illustration of global carbon budget economy, and the modified price signal will thereby help in getting the right responses. The two main schools of economics dealing with externalities22 are translated into the legal concepts of command-and-control measures and market-based instruments. The relation between the energy and environment sectors is a perfect analytical ground to investigate the efficiency of such measures. In European legislation, the Industrial Emissions Directive23 (IED) is the classical example of command-and-control type

22   Apart from the Pigovian taxation model discussed above, another school of thought emerged in the mid-20th century, which was conceptualised in the Coase theorem – although Ronald H. Coase, Nobel Prize Laureate in Economics, himself stated that the theorem was very loosely based on his essay ‘The Problem of Social Cost’ (1960) and that the ‘Coase theorem’ is not about his work at all. The theorem states that if trade in an externality is possible and there are sufficiently low transaction costs involved, bargaining will lead to a Pareto-efficient outcome regardless of the initial allocation of property. Coase himself classified it as a ‘theoretical proposition’ because he considered that the transaction costs can never be sufficiently low in a real-world situation to reach a Pareto optimum. 23   Directive 2010/75/EU of the European Parliament and of the Council of 24 November 2010 on industrial emissions (integrated pollution prevention and control), OJ L 334, 17.12.2010, pp. 17–119.

439

0

S

8000

12000

Kilometres 16000

The global mean year of climate departure is 2047. The mean for the tropics (shown in the hatched area) is 2038, compared to 2053 for all other latitudes.

2000 4000

E

Figure 23.2  Climate departure mean years in selected cities

Source:  Mora et al. (2013), available at: https://manoa.hawaii.edu/news/article.php?aId56034.

W

N

2020

2040

2060

2080 Year of climate departure

2100

440  Research handbook on EU energy law and policy ­measures, while the Emissions Trading Scheme Directive24 (ETS) and its related legislation are regulating greenhouse gas emissions via a market-based instrument. The two directives are mutually exclusive and address different pollutants (SO2, NOx and dust in the case of the IED and CO2 and other greenhouse gases in the case of the ETS). The IED was adopted in 2010 as a recast of seven existing pieces of EU environmental legislation, including the Large Combustion Plants Directive25 which imposed emission limit values on SO2, NOx and dust from thermal power plants. Chapter III and Annex V of the IED, imposing stricter emission standards, became the successor of the Large Combustion Plant Directive (LCPD) as of 1 January 2016 for existing plants. New plants have already had to meet the tightened requirements of the IED since January 2014. The chapter on large combustion plants was one of the key topics of the negotiations on the Commission’s proposal on the IED in the co-decision, and lengthy debates took place both in the Council and in the European Parliament on this topic. A number of Member States, in particular those heavily reliant on a prominent fossil fuel-based energygenerating sector, were unsympathetic to the Commission’s proposal to tighten the emission limit values for plants with a rated thermal input of 50 MW or more. The original idea in the Commission’s proposal of lowering the threshold to 20 MW for combustion plants to be included in Annex I, and hence requiring the application of best available techniques also for all plants between 20 and 50 MW, was discarded at a rather early stage of the legislative process.26 In the first reading, this was the prime topic of debate, which is also reflected in the Council’s Common Position.27 In the final version of the IED, several flexibility instruments were introduced to address those concerns: the possibility of preparing a so-called Transitional National Plan for existing plants for the period between 1 January 2016 and 30 June 2020; a limited lifetime derogation (opt-out) for existing plants;28 the possibility of applying a desulphurisation rate rather than emission limit values for sulphur dioxide for combustion plants firing indigenous solid fuels, and preferable treatment for plants operating as small isolated systems (that is, on islands).29 The IED requires continuous monitoring of emissions of the pollutants covered by its scope. Furthermore, it includes binding rules for the operator in cases of non-­

24   Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, OJ L 275, 25.10.2003, pp. 32–46. 25   Directive 2001/80/EC of 23 October 2001 on the limitation of emissions of certain pollutants into the air from large combustion plants, OJ L 309, 27.11.2001, pp. 1–21. 26   In 2015, the Medium Combustion Plants Directive (Directive (EU) 2015/2193) was adopted – with that, this legal loophole was closed. 27   Position (EU) No. 1/2010 of the Council at first reading with a view to the adoption of a Directive of the European Parliament and of the Council on industrial emissions (integrated pollution prevention and control) (Recast), OJ C 107, 27.4.2010, pp. 106–7. 28   According to Article 30(2) of the Industrial Emissions Directive, combustion plants which were granted a permit before 7 January 2013, or the operators of which have submitted a complete application for a permit before that date, provided that such plants are put into operation no later than 7 January 2014 shall be considered as existing plants. 29   Vajda (2016).

Energy and environment  441 compliance30 and requires the Member States to set up effective, proportionate and dissuasive penalties31 applicable to infringements of the national provisions adopted pursuant to the Directive. Therefore, under this framework, the incentive for the operator is to avoid non-compliance and the penalties associated with it. As regards market-based instruments, the flagship initiative of the EU is the ETS. According to the European Commission, it is ‘a cornerstone of the EU’s policy to combat climate change and its key tool for reducing greenhouse gas emissions cost-effectively’.32 Even moderate critics of the ETS, however, admit that in the real world and with particular regard to the energy sector, the incorporation of externalities faces major challenges.33 It is fair to concede that increased prices with artificially introduced cost elements are not viewed favourably by those who either sell or buy energy products, thus incorporation of externalities meets resistance in the economy from all sides. The scale of resistance in the economy translates to political resistance, which can ultimately undercut the efforts to internalise the marginal social costs. In the case of climate change associated with energy production, there would be a steep increase of the costs internalised if policy tools became effective. One can argue that the story of the EU ETS scheme is one of design failures, where external costs are not internalised, despite the aim of the system of a market-based instrument to do so. It can be observed that necessary adjustments of the system were hindered by political obstructions from some Member States, thus turning a tool into an obstacle to other policy efforts to ramp up emission reduction in the ETS sector via the so-called ‘waterbed’ effect. This phenomenon resulted in the situation that in the field of air quality, commandand-control regulation (in particular the stricter emission standards of the IED) is more effective in decarbonising the EU ETS sector than the emission-trading system itself, simply by increasing the investment costs of either the construction of new fossil-fired thermal power plants or retrofitting old ones, thereby indirectly putting a price tag on coal, oil and gas and creating a stronger business case for alternative energy generation facilities. Would this mean that traditional command-and-control tools fit better for reducing emissions from the energy sector than market based tools? Command-and-control tools certainly have a validity in this sector as large-scale point source objects can be easily monitored and controlled. The competitive edge of the market-based approach is supposed to be that it is cheaper for the industry subject to the limitations. It remains to be assessed whether the EU ETS in its current, rather complicated form still supports this early argument. It was certainly easier to enact the original legislation for ETS than a comparable command-and-control regime from the aspect of political resistance – but in the past decade it has proven to be ineffective compared to command-and-control style environmental legislation.

  Article 8 of the IED.   Article 79 of the IED. 32  http://ec.europa.eu/clima/policies/ets_en. 33   Laing et al. (2013). 30 31

442  Research handbook on EU energy law and policy

4. AN EXAMPLE OF REGIONAL INITIATIVES IN EUROPE – THE ENERGY COMMUNITY In the Western Balkans and beyond, the Energy Community is one of the key drivers in lowering emissions from the energy sector. The Energy Community Treaty brings together the European Union with the six Western Balkans countries as well as with Moldova, Ukraine and Georgia.34 The three key aims of this international treaty are establishing solutions for an enhanced level of security of supply, creating conditions for the better functioning of energy markets as well as increasing sustainability, thereby providing solutions for each corner of the energy trilemma’s triangle. When looking at the energy sectors of the Contracting Parties, one can see that the challenges discussed above are present in the region on a large scale. A study carried out in 2013 by the Energy Community Secretariat found that for most Energy Community Contracting Parties, the benefits of implementing the requirements of the Large Combustion Plants and Industrial Emissions Directives outweigh the costs more than 15 times.35 This remarkable number, also confirmed by other studies in the region,36 clearly indicates that in the Western Balkans and Eastern European countries, there is a major economic case for emission reduction. Regardless, the discussion still focuses very much on installing new coal-fired generation capacities, making use of the domestically available fuel. Following from what we discussed above regarding the external costs of air pollution, reducing emissions of SO2, NOx and dust results in a healthier and longer life for individuals in a better environment. Therefore, any investment in emission reduction – either via emission abatement technologies, energy efficiency or alternative generation capacities – is also an investment in the quality of life of the individual. Since emission reduction comes at a price, and in many transition economies such as those of the Energy Community Contracting Parties, citizens are very cost-sensitive, it is vital that these initiatives for emission abatement receive broad public support. Therefore, research in the educational field would also be useful with the aim of finding creative and alternative means of communication to spread this message, especially amongst the socially vulnerable population who are most likely not to consider environmental factors when making decisions r­ egarding the generation and use of energy. The Energy Community has as yet no binding legislation related to climate change, although there are positive developments in this direction with the adoption of a Recommendation on the implementation of the Monitoring Mechanism Regulation for greenhouse gas emissions at the 2016 Ministerial Council.37 It is clear that since energy on the one hand, and environment and climate change on the other, are in fact the two sides of the very same coin, the Energy Community also has to embark on a pathway towards decarbonisation of the energy sector. 34   Georgia signed the Accession Protocol on 14 October 2016 to become a fully-fledged member of the Energy Community Treaty. This happened upon ratification of the Accession Protocol by the Georgian Parliament on 24 April 2017. 35   Energy Community Secretariat (2013). 36   HEAL (2016). 37   Recommendation 2016/02/MC-EnC on preparing for the implementation of Regulation (EU) 525/2013 on a mechanism for monitoring and reporting greenhouse gas emissions.

Energy and environment  443 Financing the electricity transition in South East Europe (and in many other parts of the world) is also a challenge – while renewable potentials are significantly higher in this region than in Northern Europe, this competitive edge is reduced and diminished by the significantly higher cost of capital in the region.

5. IS IT REALISTIC TO EXPECT ALTRUISTIC BEHAVIOUR FROM ENERGY COMPANIES? HOW TO MAKE THEM INTERESTED IN TRANSITION It has to be accepted that energy companies are profit-making entities – if they operate in the market (some of them do not and are only subject to national regulation). At first, they tried to deny the changing circumstances,38 then attempted to buy time by delaying significant changes for adapting to the changed competitive situation, in order to maximize profits. Only a couple of years ago, such changes in the energy industry were still hard to imagine – they have started nevertheless and are gaining importance. In today’s Germany, for instance, we already see a significant fall in the share of energy giants in electricity production, with newcomers filling the gap who are of a different form and scale. It is undoubtedly a transitional phase, with all the uncertainties that are always involved in such periods, but the changes are already definitely present. The question is: how long will they take and how will they be orchestrated? Similar challenges lie ahead in both the technical and legal management of electricity networks, including the parallel trends of localisation and new, wider types of cooperation, with the underlying need for balancing intermittent renewables. In our view, it is not altruistic behaviour which will drive this energy transition but the framing of success and profit generation, as well as changes in patterns regarding what creates good investment. Having climate change impacts in the current time horizon, energy infrastructure investors can no longer deny the impact of climate change on their profitability and even viability in their anticipated lifetime, or the time needed for receiving a sufficient return on such investment. Looked at from a distance, defining pathways for the energy transition needs to factor in the available time and financial resources for the transformation process. However, there are vested interests which can distort this picture. From the perspective of economic actors, it is a fully rational approach to maintain both interests and positions, thus undertaking the minimum shift of profile necessary for adapting to changing circumstances. If we look at the energy sector, one can conclude that interests in oil (and to a lesser extent, in coal) can be shifted towards gas more easily than towards wind and solar generation, and therefore gas could be more likely imagined as a bridging fuel in energy transition than any other fossil fuel. The current gas infrastructure in Europe is sufficiently developed for this bridging 38   It is a widely known practice that energy companies support think tanks, scientific papers and/or policy briefs that would be sceptical about or would reject the linkages between greenhouse gas emissions and climate change (see, for instance, Toleffson (2010) and Egan (2015)). This phenomenon is widely linked to the concept externalities and is not specific to the energy sector; it can be observed in every sector with a prominent externality element.

444  Research handbook on EU energy law and policy period of the energy transition and resistant enough for multiple supply shocks, according to recent studies and stress tests. However, it shall be noted that this does not hold true for the South East European region, where further work would be needed to analyse the optimal transition strategy which might include a greater role for gas development than in the case of the EU. Furthermore, it should be kept in mind that state actors influencing the energy transition process can have interests outside the long-term interests of transition, resulting in state capture and satisfying rent seeking, which can motivate the preference for large-scale infrastructures over distributed ones.

6. THE COMPLETE ENERGY TRANSITION – IS IT POSSIBLE TO HAVE AN ENERGY MIX BASED ON RENEWABLES ONLY? Phasing out fossil fuels completely in a few decades seems to be an impossible task, bearing in mind how much the energy sector as well as the global economy in general rely on fossil fuels. In the case of the electricity generation segment of the sector, however, it is easier to see the transition pathway. What is usually not welcome (or sometimes even not understood) outside of the epistemic community dealing with climate change is that moving away from fossil fuels is not a choice but an imperative. The age of enlightenment and the technological revolutions of the industrial age brought the connotation that humanity can develop and grow our economy without any limitations, and that, whenever encountering a problem, it can always be resolved with technological fixes. In the meantime, we have both forgotten about the sources of our economy as well as the limits of these sources. These limits are brought back, to a limited extent, by acknowledging externalities of the economic system, but that still fails to acknowledge the plain reality that there are limited resources on Earth and that the life support systems of the planet can only endure pollution and disturbance up to a certain limit. It can be argued that the concept of sustainability which talks about the three pillars of economy, society and environment is a false concept, as they are not parallel and equal pillars, but, by the nature of these systems, embedded in each other. Having such hard limits in front of us after centuries of the perception of unlimited growth is hard to face and understand. Climate change and the impacts of the energy sector that are contributing to it are just a segment – although clearly the most important one – of the basic paradigm shift we are forced to live with. The sustainability of the life support systems of the planet are challenged on several grounds, but those lie beyond the scope of the energy sector. Therefore, in our opinion, 100 per cent renewables is neither a possibility nor a utopia, but rather a limitation we will have to live with. We have a few decades for preparing to adapt to this striking new reality or face hardship for a long time with turbulence in all three systems perceived as the pillars of sustainability. Thus the question is of a different nature – how could we satisfy our needs with completely renewable electricity? This does require significant amounts of research and change in the management of the economy, which provides the boundary conditions to the electricity sector. At the same time, this question also calls for a deeper examination of the relation

Energy and environment  445 between the ruling global economic paradigm, the need for a change to it, and the way energy law could be a catalyst for that. Tomás Sedláček, in his groundbreaking work Economics of Good and Evil, notes that ‘[e]ven the most sophisticated mathematical model is, de facto, a story, a parable, our effort to (rationally) grasp the world around us’.39 He takes a generally critical view of the current economic paradigm centred around growth and indebtedness and notes that it was only in the late 18th century when today’s concept of economics emerged as a mathematical science. Before then, he says, economics lived within myths, religion, theology and philosophy. He embarks on an interesting journey to investigate these origins and to reflect what they might mean for the economics of today. He concludes that instead of viewing maximum growth as the goal of economic policy, we should focus on pursuing reasonable levels of growth while minimising debt levels around the world. The energy sector is a showcase example of indebtedness, as (exponential) economic growth since the first industrial revolution was, and still is, financed almost exclusively by fossil fuels. Therefore, externalities and the future costs of climate change mitigation and adaptation can be seen as a tremendous loan taken on the account of future generations, who will be held responsible for paying the costs – with interest. The European Commission’s Resource Efficiency Roadmap40 was a good step in the direction of recognising this reinvented economic logic; however, with the inauguration of the Juncker Commission in 2014, this initiative – along with many others – has fallen victim to the continued pursuit of economic growth as an absolute priority. The Circular Economy Package, which was adopted as a follow-up to the Roadmap and the Circular Economy Strategy, only contains waste-related proposals, and discussions on these are still underway in the Council and the European Parliament.41 In economic science, very interesting concepts are starting to develop along the same lines of thought as conceptualised by Sedláček,42 which are however not new and there is already extensive literature on the subject.43 However, as it does not fit with the ruling paradigm, this school of thought is almost considered as heresy in economists’ circles, and therefore it is very difficult to secure financing for such research.

7.  CONCLUSIONS AND PROPOSALS Whether talking about the effects of either global or local changes in climate, health problems caused by air pollutants or the sustainability of our modern lifestyle in general,

  Sedláček (2011), p. 6.   COM(2011)0571 final. 41  http://ec.europa.eu/environment/circular-economy/index_en.htm. 42   See to that effect, among others, Victor (2008), Stiglitz et al. (2009), Rogoff (2012), Antal and van den Bergh (2013) and Antal (2014). 43   Meadows et al. carried out an assessment upon the mandate of the Club of Rome in the late 1960s and published their findings in 1972. This was the first important study that indicated the ecological perils of the unprecedented economic growth since the first industrial revolution. In parallel, Georgescu-Roegen (1971) studied the Earth’s carrying capacity via mathematical and statistical models. 39 40

446  Research handbook on EU energy law and policy energy policies and the decisions taken therein always have a major impact. With its long history in fossil fuel-based energy generation, the European Union had recognised the environmental problems directly associated with these fuels already at an early stage (in comparison with other global actors), which resulted in the development of end-of-thepipe style environmental legislation from the late 1970s. Having environmental and climate science providing the framework, we can conclude that a full transformation of our energy systems is inevitable – along with transformation of other sectors in this time period globally. It is important to note that other sectors also need transformation, as such transformations are capital intensive – which can limit the availability of resources for energy systems transformation from public sources. The planning and management of the transition requires, beyond political will, a significant amount of research on the way the transition can be completed with the least cost and highest efficiency. The past thirty to forty years have seen a massive change in the way we think about the generation and use of energy, and the health and environmental consequences that are directly linked to it. Legislation at European level reflects this shifting mindset, and this also has a spill-over effect to neighbouring regions via initiatives such as the Energy Community or EU neighbourhood policy. It has to be admitted that energy transition is always difficult – even the replacement of the heating system of a family house is a major exercise, which requires a lot of planning and a large-scale initial investment, and which might be a major burden for the family budget. It therefore requires responsible thinking, commitment and a lot of work. In the end, however, a much better result is to be expected and this is what should always be borne in mind throughout the implementation of the project. The European Union has already embarked on the pathway of energy transition and the authors are convinced that in the mid- to long-term this will prove to be the right strategy. After the historical political agreement in Paris, other major international actors have started to follow suit, although many uncertainties remain and it is clear that much more will be necessary than the intended nationally determined contributions delivered in the Paris Summit.44 The current situation in other countries, in particular developing ones, allows for them to leapfrog their respective energy transitions, similar to the process witnessed in the telecommunications sector. This leapfrogging, however, has to be managed properly in order to avoid shocks in the educational, social and employment spheres. Based on the above, our proposals on future research are the following: 1. It is strongly recommended that further research is carried out on how to manage the process of energy transition from a comprehensive policy point of view and on what role EU energy, environmental/climate and economic law should play therein as a catalyst. 2. Another interesting topic for future research could be exploring the linkages between

44   It is worth noting that the recent announcement of the United States to withdraw from the Paris Agreement is not likely to have a significant effect on this process. On the contrary and as it is already visible by now, this rather reinforces the message that much more needs to be done to combat climate change.

Energy and environment  447 energy security (one of the prime targets of any sovereign country), lock-in scenarios (with investing in even more coal- or other fossil-fuel-fired capacities that would, if put online, continue dominating the energy sector of countries for many years and perhaps even decades to come) and climate change as a security threat. 3. There is a pressing need for holistic research combining economic, legal, scientific and social disciplines with the aim of finding alternatives to the current economic paradigm and redefining the concept of economic growth, decoupling it from purely GDP-based indicators. If we accept that endless economic growth is not possible on a finite planet (which, in the authors’ opinion, is a must), we have to figure out creative ways to avoid a collapse scenario, inevitably resulting in an all-lose situation. 4. Not independently from the above point, in search of an explanation of the problems of the current global economic paradigm, research could also turn to a discipline beyond law, namely medicine and addiction medicine in particular. The authors are convinced that the global economy is currently addicted to two factors: economic growth expressed in GDP and the fossil fuels that provide the foundations of this growth. Coal and other fossil fuels may seem cheap for whatever (political or marketbased) reason that gives imprecise messages about the costs – this does not make them more sustainable. Reserves may seem infinite and may indeed last for a couple more decades, but depletion is inevitable at a certain point. If the addict is not to get clean, he will look after his source of addiction until the very last bit is used up. The longer we wait to replace fossil fuels in our energy mix, the harder the landing will become. Assessing the application of practices and treatment solutions from addiction medicine could potentially help us to develop smart solutions in the legal sphere, including energy and economic law. We can only hope that recent political developments do not reverse the trend of the addict getting clean. 5. Finally, in our opinion, we are all in this together. Therefore, we have no other option than to embark on the most challenging task of emission reduction and energy transition, together with all partners (and competitors), despite political turbulence or any other hindering factor. This is admittedly a very difficult task and the analogy of a prisoner’s dilemma comes to mind, whereby game theory concludes it is always better not to cooperate in a closed setting that involves no communication and just a limited number of actors. At the same time, it was also concluded by the same theory that, in the long run, cooperation always pays off better than self-isolation. Therefore, our final proposal for future research is to combine long-term game theory with the energy transition model and the toolkits of energy, environmental and economic law, in the hope of finding mutually agreeable solutions for all stakeholders.

BIBLIOGRAPHY Antal, Miklós, ‘Green Goals and Full Employment: Are they Compatible?’, 107 Ecological Economics, 276–86 (2014). Antal, Miklós and Jeroen C.D.M. van den Bergh, ‘Macroeconomics, Financial Crisis and the Environment: Strategies for a Sustainability Transition’, 6 Environmental Innovation and Societal Transitions, 47–66 (2013). Coase, Ronald H., ‘The Problem of Social Cost’, 3 Journal of Law and Economics, 1–44 (1960).

448  Research handbook on EU energy law and policy Egan, Timothy, ‘Exxon Mobil and the G.O.P.: Fossil Fools’, The New York Times, 5 November 2015, http:// www.nytimes.com/2015/11/06/opinion/fossil-fools.html. Energy Community Secretariat, ‘Study on the Need for Modernization of Large Combustion Plants in the Energy Community’ (21 November 2013), https://www.energy-community.org/portal/page/portal/ENC_ HOME/DOCS/2652179/0633975AD55B7B9CE053C92FA8C06338.PDF. European Climate Foundation, ‘A Perspective on Infrastructure and Energy Security in the Transition’ (March 2016), https://europeanclimate.org/wp-content/uploads/2016/03/EUC_Report-WEB.pdf. European Commission, Commission Staff Working Document, Impact Assessment – Accompanying the Communication from the Commission to the Council, the European Parliament, the European Economic and Social Committee and the Committee of the Regions – a Clean Air Programme for Europe, SWD (2013) 531, http://ec.europa.eu/environment/archives/air/pdf/Impact_assessment_en.pdf. European Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Roadmap to a Resource Efficient Europe, COM(2011)0571 final, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri5CELEX:52011DC0571. European Commission, Excise Duty Tables, Part II – Energy products and Electricity (July 2016), http://ec.europa. eu/taxation_customs/sites/taxation/files/resources/documents/taxation/excise_duties/energy_products/rates/ excise_duties-part_ii_energy_products_en.pdf. European Commission, Proposal for a Directive of the European Parliament and of the Council establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC, COM(2001)0581 final, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=​ COM:2001:0581:FIN. European Environmental Agency (EEA), Air Quality in Europe – 2016 Report (23 November 2016), http://www. eea.europa.eu/publications/air-quality-in-europe-2016. Georgescu-Roegen, Nicolas, The Entropy Law and the Economic Process, Harvard University Press, Cambridge, MA (1971). Hallegatte, Stephane, Colin Green, Robert J. Nicholls and Jan Corfee-Morlot, ‘Future Flood Losses in Major Coastal Cities’, 3(9) Nature Climate Change, 802–6 (2013). Health and Environment Alliance (HEAL), Technical Report – Health Impacts of Coal Fired Power Stations in the Western Balkans (March 2016), http://env-health.org/IMG/pdf/technical_report_balkans_coal_en_lr.pdf. Interagency Working Group on Social Cost of Carbon, United States Government, Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (May 2013, rev. July 2015), https://www.epa.gov/sites/production/files/2016-12/documents/sc_​ co2_tsd_august_2016.pdf. Intergovernmental Panel on Climate Change (IPCC), Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds)] IPCC, Geneva, Switzerland (2015), http://ipcc.ch/ pdf/assessment-report/ar5/syr/SYR_AR5_FINAL_full_wcover.pdf. Intergovernmental Panel on Climate Change (IPCC), ‘Summary for Policymakers’. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [O. Edenhofer, R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds)], Cambridge University Press, Cambridge, UK and New York, NY, USA (2014), https://www.ipcc.ch/pdf/assessment-report/ar5/wg3/ipcc_wg3_ar5_summary-for-pol​ icymakers.pdf. International Agency for Research on Cancer (IARC), Air Pollution and Cancer, IARC Scientific Publication No. 161 (2013a), http://www.iarc.fr/en/publications/books/sp161/AirPollutionandCancer161.pdf. International Agency for Research on Cancer (IARC), Outdoor Air Pollution a Leading Environmental Cause of Cancer Deaths, Press Release No. 221 (13 October 2013b), http://www.iarc.fr/en/media-centre/iarcnews/ pdf/pr221_E.pdf. International Energy Agency (IEA), World Energy Outlook 2016, Executive Summary (2016a), http://www. iea.org/publications/freepublications/publication/WorldEnergyOutlook2016ExecutiveSummaryEnglish.pdf. International Energy Agency (IEA), Energy, Climate Change & Environment, 2016 Insights (2016b), http:// www.iea.org/publications/freepublications/publication/ECCE2016.pdf. Kuzemko, Caroline, Andreas Goldthau and Michael F. Keating, The Global Energy Challenge: Environment, Development and Security, Palgrave Macmillan, London (2016). Laing, Tim, Misato Sato, Michael Grubb and Claudia Comberti, Assessing the Effectiveness of the EU Emissions Trading System, Centre for Climate Change Economics and Policy, Working Paper No. 126 (January 2013), http://www.lse.ac.uk/GranthamInstitute/wp-content/uploads/2014/02/WP106-effectivenesseu-emissions-tra​ding-system.pdf. Le Quéré, Corinne, Robbie M. Andrew, Josep G. Canadell et al., ‘Global Carbon Budget 2016’, 8 Earth System Science Data, 605–49 (2016), www.earth-syst-sci-data.net/8/605/2016, doi:10.5194/essd-8-605-2016.

Energy and environment  449 Meadows, Donella H., Dennis L. Meadows, Jørgen Randers and William W. Behrens III, The Limits to Growth, Universe Books (1972). Mora, Camilo, Abby G. Frazier, Ryan J. Longman et al., ‘The Projected Timing of Climate Departure from Recent Variability’, 502 Nature, 183–7 (10 October 2013), doi:10.1038/nature12540. Pigou, Arthur C., The Economics of Welfare, Macmillan, London (1920). Rogoff, Kenneth, ‘Rethinking the Growth Imperative’, Project Syndicate (2 January 2012), https://www. project-syndicate.org/commentary/rethinking-the-growth-imperative. Sedláček, Tomáš, Economics of Good and Evil: The Quest for Economic Meaning from Gilgamesh to Wall Street, Oxford University Press (2011). Stiglitz, Joseph E., Amartya Sen and Jean-Paul Fitoussi, Report by the Commission on the Measurement of Economic Performance and Social Progress (September 2009), http://ec.europa.eu/eurostat/documents/118​ 025/118123/Fitoussi+Commission+report. Toleffson, Jeff, ‘Climate Science: An Erosion of Trust?’, 466 Nature, 24–6 (30 June 2010), doi:10.1038/466024a. United States Energy Information Administration, International Energy Outlook 2016, Report Number: DOE/ EIA-0484 (2016), http://www.eia.gov/outlooks/ieo/pdf/0484(2016).pdf. Vajda, Peter, ‘The Role of the Industrial Emissions Directive in the European Union and Beyond’, ERA Forum (2016), doi: 10.1007/s12027-016-0441-4. Vajda, Peter, ‘Environment in the Energy Community Contracting Parties – a Quest for the Holy Grail of Balance’, 12(2) Oil, Gas & Energy Law Intelligence (2014), OGEL special on the Energy Community. Victor, Peter A., Managing Without Growth: Slower by Design, Not Disaster (Advances in Ecological Economics), Edward Elgar, Cheltenham and Northampton, MA (2008). World Bank, Turn Down the Heat – Confronting the New Climate Normal (2014), http://documents.worldbank.org/curated/en/2013/06/17862361/turn-down-heat-climate-extremes-regional-impacts-case-resiliencefull-report. World Energy Council, World Energy Trilemma Index 2016 (October 2016), https://www.worldenergy.org/ publications/2016/2016-energy-trilemma-index-benchmarking-the-sustainability-of-national-energy-systems/.

24.  Are smart grids the key to EU energy security? Filippos Proedrou

1. INTRODUCTION Deterioration of relations with Russia since 2014 has once again fuelled scepticism as to the European Union’s energy security. Seen macroscopically, the energy security discourse in the EU oscillates between threats of supply cuts, dependence on single external suppliers, lack of diversification, high energy prices, perpetuation of fossil energy and the subsequent inability to form a ground-breaking climate agenda that will decarbonize the EU economy.1 The proposed Energy Union reflects these priorities by underlining security of supply concerns, the further integration of the EU energy market, demand-side policies, increased energy efficiency, decarbonization of the economy and further research and innovation.2 In its most recent directive, issued on 30 November 2016, the so-called Winter Package, the European Commission focuses on the internal market design with an emphasis on the potential of citizens’ engagement, community energy, self-generation, distributed generation, and the creation of prosumers’ markets.3 This new approach puts the citizens at the centre and is inward-looking in the sense that it aims to harness the potential of citizens’ resources to fulfil their energy needs. At the same time, it signals the gradual transition to a new market, which introduces uncertainty and variability of both energy generation and consumption, and thus calls for mechanisms to ensure flexibility at all times. Smart grids have emerged as the omnipotent means to this systemic overhaul. Smart grids are power networks that utilize two-flow transmission of both energy and information with the help of digital technology.4 They optimize assets and operating efficiency, operate resilience against physical and cyber-attacks, enable new markets, products and services, and provide high quality electricity supply, including self-healing capacity from power outages, supply–demand disequilibria and other disturbance events.5 Power

 1   Dieter Helm, ‘The European Framework for Energy and Climate Policies’ (2014) Energy Policy 64.  2   Kacper Szulecki et al., ‘Shaping the “Energy Union”: Between National Positions and Governance Innovation in EU Energy and Climate Policy’ (2016) Climate Policy; Marco Siddi, ‘The EU’s Energy Union: A Sustainable Path to Energy Security?’ (2016) The International Spectator 51, 1.  3   European Commission, ‘New Electricity Market Design: A Fair Deal for Consumers’ (2016) Clean Energy for All.  4   Pravin P Varaiya, Felix F Wu and Janusz W Bialek, ‘Smart Operation of Smart Grid: RiskLimiting Dispatch’ (2011) Proceedings of the IEEE 99; Cherrelle Eid, Rudi Hakvoort and Martin de Jong,  ‘Global Trends in the Political Economy of Smart Grids: A Tailored Perspective on “Smart” for Grids in Transition’ (2016) UNU-WIDER Research Paper wp2016-022. World Institute for Development Economic Research.  5   Cédric Clastres, ‘Smart Grids: Another Step Towards Competition, Energy Security and Climate Change Objectives’ (2011) Energy Policy 39, 5400.

450

Are smart grids the key to EU energy security?  451 markets are hence emerging as powerful energy system integrators, with smart grids being in the process of effecting sweeping changes across all stages of power generation, transmission and reserve power and distribution, thus holding great promise for rendering houses and buildings in general functionally smart and in this way substantially boosting energy management, conservation and efficiency.6 Smart grids have been most prevalent in the EU, the US and China, albeit motivated by different policy goals and thus streamlined to different purposes. In the case of the EU, fulfilling climate goals and rendering energy more affordable, especially in light of increased import dependency and ensuing high exposure to volatility of international energy prices, lies behind smart grids’ development. In the US, on the contrary, such motivations have been far from principal. The need to modernize an aging power system and diminish power outages has led to the deployment of smart grids. In China, meeting the surge in electricity demand, in conjunction with deteriorating air pollution and modest climate goals, encouraged the development of smart grids.7 Smart grids, hence, should be seen as multivalent instruments that can be streamlined to different policy goals, the combatting of climate change being just one of them and apparent only in the European case.8 In other words, electricity markets are at the heart of the energy transition and, as such, lend themselves to ‘the innovators’ and designers’ imagination producing market designs and outcomes better aligned with their political and value preferences’.9 In this chapter, we briefly examine the challenges emanating from the need to design the new market, and how this will impact on the three dimensions of EU energy security. Will climate targets and the transition to a cleaner energy system be achieved through the large-scale deployment of smart grids? Secondly, will smart grids enhance security of supply, rendering (threats of) supply cuts and problematic access to energy a concern of the past? Thirdly, will this be done at affordable/manageable costs for the European consumers, also facilitating the European economy’s competitiveness? The following sections aim to deal with each of these complex questions. In doing so, they also discuss the critical trade-offs involved and existing barriers. The concluding section sums up the findings and enumerates the critical issues that will determine the future impact of smart grids deployment.

2. SUSTAINABILITY PROSPECTS AMIDST THE FOSSIL INDUSTRY’S (AWAITED) RETORT As far as the upstream, generation sector is concerned, smart grids inherently promote renewable production (not least due to the priority dispatch mechanism) and integrate different sources of power in the form of virtual power plants.10 In the downstream sector,   Matthias Wissner, ‘The Smart Grid – a Saucerful of Secrets?’ (2011) Applied Energy 88.   Eid, Hakvoort and de Jong (n 4).  8  Ibid.  9   Albert Bressand, ‘The Role of Markets and Investment in Global Energy’, in Andreas Goldthau (ed.), The Handbook of Global Energy Policy (Wiley-Blackwell 2013) 25. 10   Jaap Jansen and Adriaan Van der Welle, ‘The Role of Regulation in Integrating Renewable  6  7

452  Research handbook on EU energy law and policy the utilization of digital technology will allow European consumers to systematically monitor their energy consumption, and adjust it to better fit their needs, either directly or through their electricity provider. It is normal to expect that rationalization of energy use will lead to energy conservation and efficiency, amounting to a substantial drop in energy consumption and hence more sustainable energy use. Smart meters are the indispensable revolutionizing device that allows for critical information on supply, demand, transmission and real-time consumption to be generated, shared by stakeholders, and lead to the efficient function of power markets.11 Other devices, such as in-home displays and in-home automation are also expected to further improve the function of smart grids.12 Furthermore, and in a ground-breaking mode, smart grids will enable consumers to become producers of energy themselves. On the one hand, this will translate into a substantial increase of overall renewable power generation that should, accompanied by energy conservation and efficiency, lead to a reduction in the quantities of fossil energy imports. This indirect substitution of (mostly imported) fossil energy with clean fuels can be a far-reaching game-changer. What is more, self-generation will allow energy to be consumed at the place of its production, thus minimizing leakages and logistics-related hurdles, taking pressure off the grid and locking in the consumption of renewable energy as first in line.13 Smart grids can also support distributed generation (micro-generation), thus realizing the ideal of community energy. Increasing renewable energy production from individual, household and community generators can also be linked to the development of storage batteries, crucially including electric vehicles and in this way also extending to the transportation sector.14 This represents a crucial spill-over to one of the most polluting sectors of the European economy and hence can substantially add to further emissions reductions and sustainable energy use. While the potential is immense, the deployment of smart grids faces several hurdles. First of all, power markets remain behind the pace of renewable energy generation; their regulation, secondly, remains behind the workings of the market and hence strives to deal with the challenges it poses. An indicative example is that in many cases generation from renewable energy has been either turned off (wind power) or just lost (solar power) due to the weakness of the network to store it or balance the load.15 To add insult to injury, renewable energy generation was initially seen as an addendum to the mainstream fossil energy and supported as such to hedge against supply security risks and run-away climate change. To the extent it threatens to displace fossil energy, though, the spectre of stranded fossil assets is bound to provoke strong resistance by Energy: The EU Electricity Sector’, in Andreas Goldthau (ed.), The Handbook of Global Energy Policy (Wiley-Blackwell 2013) 325. 11   Wissner (n 6); Soma Shekara Sreenadh Reddy Depuru, Lingfeng Wang and Vijay Devabhaktuni, ‘Smart Meters for Power Grid: Challenges, Issues, Advantages and Status’ (2011) Renewable and Sustainable Energy Reviews 15. 12   Eid, Hakvoort and de Jong (n 4). 13   Marilyn A Brown and Benjamin K Sovacool, Climate Change and Global Energy Security: Technology and Policy Options (MIT Press 2011) 22. 14   Ibid 117; Sophia Ruester et al., ‘From Distribution Networks to Smart Distribution Systems: Rethinking the Regulation of European Electricity DSOs’ (2014) Utilities Policy 31. 15   Wissner (n 6); Eid, Hakvoort and de Jong (n 4).

Are smart grids the key to EU energy security?  453 incumbent power producers, as well as lead to the design of competitive market services. The deployment of micro-LNG grids represents one such response and features as an efficient way to monetize stranded gas in the near future, fiercely competing with renewable energy and smart grids. Crucially, for as long as battery technologies do not improve to become available at a commercial scale, LNG micro-grids will present the essential advantage of storage capacity. The generously rewarded capacity mechanisms, moreover, through which EU member states retain back-up capacity in case of an emergency, are considered a backdoor to fossil energy, since they provide a strong rationale for coal- and gas-fired plants to continue their life-cycle.16 Prioritizing storage capacity in sustainable forms (e.g., electric batteries, electric vehicles), functional interconnections with neighbouring power networks, real-time congestion management and built-in flexibility, are all important schemes that can, most forcefully in conjunction rather than separately, substitute for the capacity mechanism.17 They are also bound, however, to meet with resistance from fossil energy generators and incumbents who profit from providing back-up capacity. As a matter of fact, the advance of renewable generation has ironically been matched with an increase in the consumption of coal in several cases. While renewable investments have sent signals for depressed demand for oil and gas, their sub-optimal performance and pricing have led to the return of coal as a preponderant source in the energy mix. The German example amidst its Energiewende is indicative.18 A more general point regards the conclusion that the more electricity use expands in a greater number of sectors, the energy carriers feeding the grid become all the more important in terms of climate goals. Substituting oil and gas heating with electric heating, for example, only adds to decarbonization goals in so far as the percentage of coal is kept to a minimum and the electricity mix becomes greener. On the contrary, the return of coal together with the expansion of electricity is a daunting combination that will only lead to adverse results. Electric vehicles charged by coal-fired electricity, it should be stressed, go against and undermine, rather than serve, sustainability and climate change mitigation goals. Furthermore, the entrenched EU first gas policy, with its emphasis on extensive gas infrastructure (including gas pipelines from Russia, the Southern Gas Corridor, new links with Caspian gas-producing states and a handful of LNG terminals) sits at odds with ambitious smart grids deployment. It threatens to lock in gas use for the next decades, thus applying the brakes to the full potential of renewable energy generation and hence a rapid decarbonization agenda.19 The contemporary gas glut that makes gas prospects promising is to a significant extent

  Eid, Hakvoort and de Jong (n 4).   Varaiya, Wu and Bialek (n 4); Louis Boscán and Rahmatallah Poudineh, ‘FlexibilityEnabling Contracts in Electricity Markets’ (2016) Oxford Energy Comment, The Oxford Institute for Energy Studies 2. 18   Renn Ortwin and Jonathan Paul Marshall, ‘Coal, Nuclear and Renewable Energy Policies in Germany: From the 1950s to the “Energiewende”’ (2016) Energy Policy 99. 19   Thomas Raines and Shane Tomlinson, ‘Europe’s Energy Union Foreign Policy Implications for Energy Security, Climate and Competitiveness’ (2016) Chatham House: The Royal Institute of International Affairs. Europe Programme/Energy, Environment and Resources. 16 17

454  Research handbook on EU energy law and policy underpinned by the shale revolution. Shale gas, nevertheless, is drilled through horizontal fracking, a method which not only leads to higher emissions than conventional gas, but is also culpable in respect to dwindling water reserves, contamination of water tables and the provocation of earthquakes.20 In all, while smart grids are a perfect fit for the EU’s existing climate agenda and ensuing ambitions to speed up the decarbonization process in the aftermath of the Paris Agreement that breathed life to a new paradigm of domestically driven climate action,21 a first gas policy seems to contravene and antagonize their rapid deployment.

3. STRENGTHENING SUPPLY SECURITY AT THE MEMBERSTATE LEVEL Smart grids promise to enhance the European Union’s security of supply by means of expanding power generation, facilitating energy use rationalization, efficiency and conservation, and partially substituting imported, often (perceived as) unreliable fossil energy for locally-generated renewable energy. Crucially, smart grids substantially contribute to the Union’s diversification agenda, in terms of fuels, sources of supply, and routes of supply diversification. This way, overall dependence on importers and ensuing vulnerability is curtailed, thus giving flesh and bones to the Energy Union’s vision for low carbon security. 22 Together with, and further building upon, the progressive completion of the single energy market, the deployment of smart grids can hedge against supply risks in the least resilient southeast and central and eastern European markets, which have suffered in the recent past from erratic unilateral moves by producers (Russia) and been held hostage to producer-transit states controversies (Russia-Ukraine). Furthermore, smart grids should have a healing effect on the alleviation of energy poverty and improve access to energy, principally by means of self-generation. Smart grids also convey an additional advantage when it comes to the physical security of the power grid. In contrast to the exposure and vulnerability of centralized power generation and transmission structures to terrorist attacks, the decentralized nature of smart grids renders any such endeavour meaningless.23 Last but not least, the designated use of electric vehicles as means of storage will strengthen congestion management of the power markets, add to their resilience and in this way fortify security of supply.24 This having been said, for electricity markets to provide secure energy at all times,

20   Michael Bradshaw, Global Energy Dilemmas (Polity Press 2014) 61–7; David G Victor, ‘The Gas Promise’ (2013) ILAR Working Paper 7, 21. 21   Robert Falkner, ‘The Paris Agreement and the New Logic of International Climate Politics’ (2016) International Affairs 92, 1114. 22   Caroline Kuzemko, Michael F Keating and Andreas Goldthau, The Global Energy Challenge: Environment, Development and Security (Palgrave Macmillan 2015) 111; Filippos Proedrou, ‘EU Energy Security Beyond Ukraine: Towards Holistic Diversification’ (2016) European Foreign Affairs Review 21. 23   Brown and Sovacool (n 13). 24   Ruester et al. (14).

Are smart grids the key to EU energy security?  455 either supply and demand should be constantly balanced, or adequate storage capacity is essential. In particular, the intermittent nature of renewable energy has initially stressed the need for storage and back-up capacity. As renewables penetrate further the energy mix and are projected to become basic pillars of supply, more effort is placed on achieving the constant balancing of supply and demand. This balancing is treacherous and in the case of failure may result in reduced electricity being on offer for certain time intervals, thus eventually endangering rather than facilitating security of supply and access to energy. A number of market instruments, which in many cases call for the active participation of consumers and are subsumed under the umbrella term demand response management, and include, among others, realtime pricing, decentralized control automation, load-shedding, self-rationing, scarcity pricing, intra-day markets and new types of contracts, have been designed to address the challenge.25 For now, the capacity mechanism survives even though the availability of generation capacity across borders could lead to its drastic reduction. Poor infrastructural interconnection and, most importantly, sub-optimal data availability, exchange and coordination, mean that in many cases electricity does not flow where it is most needed. On the back of this reality, member states often resort to national assessments and strategies to minimize security of supply risks, in this way also further distorting the common market and going back on its aspirations and potential.26 Germany’s energy policy and its impact on central European markets is an illustrative case in point.27

4. AFFORDABILITY AND COMPETITIVENESS GAINS IN A PROSUMERS’ MARKET IN THE MAKING Smart grids call for massive investments across generation, transmission, distribution and consumption levels, thus raising the question of the associated costs which will one way or another be borne by European taxpayers. With the Union in stark need of massive energyrelated investments, their prioritization is a topical issue.28 The need to implement the transition to low-carbon energy systems amplifies the demand for targeted investments, but at the same time competes for funding with schemes to replace ageing infrastructure, put in place new interconnectors and implement projects linking the common energy market with external suppliers, especially in the gas sector. These projects are inscribed within the diversification and liberalization agendas of the EU that are seen as crucial for the EU’s security of supply. It is imperative to stress though that diversification is rather costly (and hence has been advanced very sluggishly and only marginally, even by its most vocal proponents, the east   Clastres (n 5).   David Buchan and Malcolm Keay, ‘EU Energy Policy – 4th Time Lucky?’ (2016) Oxford Energy Comment. The Oxford Institute of Energy Studies. 27   David Buchan, ‘How to Create a Single European Electricity Market – and Subsidise Renewables’ (2012) Centre for European Reform Policy Brief. 28   Andreas Goldthau and Benjamin K Sovacool, ‘The Uniqueness of the Energy Security, Justice, and Governance Problem’ (2012) Energy Policy 41, 235. 25 26

456  Research handbook on EU energy law and policy European member states), since it calls for multi-billion dollar investments on expensive LNG terminals and (subsea) pipelines. Liberalization and third-party access clauses also translate into less than full network capacity being utilized in many cases, thus also raising the bill.29 Contrary to the aforementioned investments, which are merely a replica of businessas-usual policies (hence retaining associated risks), smart grids can amount to as much as a Green New Deal, with investments being channelled within the EU economy and the harnessing of European generation potential, leading to increased employment and, crucially, recycling the revenues to European prosumers (consumers who produce energy themselves).30 To begin with, smart grids can bear the dual positive effect of, firstly, lowering energy bills through self-generation and demand management, as well as, secondly, providing prosumers with the additional income that will emanate from the energy sold to other market players (such as energy aggregators, cooperatives and utilities). Since the poorest part of the population spends a proportionately higher portion of its income on energy, smart grids should have a soothing effect on their budget, allowing for an increase in their purchasing power. This is crucial in the context of austerity-plagued Europe, since it can boost aggregate demand. Smart grids can in this way also bear a corrective distributional effect on European societies.31 Secondly, smart grids and the associated increase in renewable energy generation emerge as an important shield from the vagaries and abrupt fluctuations of the international energy markets. Electricity delivered through integrated smart grids, on the contrary, is expected to have low price volatility. To deliver on this goal, nevertheless, it is essential that the system is optimized so that it can absorb at all times the renewable energy generated, rather than have wind turbines switched off, or solar power lost, as has been the case on several occasions. The end result can be improved finance for the corporate sector, which can expedite the Union’s global competitiveness and offset the trend of carbon leakage.32 For the time being, and absent any major breakthroughs in the field of electricity storage, the established capacity mechanism generously rewards the generators for reserving capacity that can be channelled into the power grid at any moment to prevent disruptions. This, however, besides compromising the EU’s climate policy by means of retaining fossil energy generation, also translates into increased retail prices. The priority dispatch mechanism, which ensures that renewables enter the market even if this translates into higher prices, points to yet another trade-off, this time between sustainability and affordability. The EU electricity market is thus fraught with a plethora of subsidies and ensuing distortions to market signals that do not bode well for overburdened European households.33 On the other hand, the potential weakness in effectively managing the electricity 29   Yuri Yegorov, Franz Wirl and Jalal Dehvani, ‘Future of Natural Gas in EU: Will Geopolitics Take Over Economics?’ (2015) IAEE Conference Paper, Antalya, Turkey 11. 30   Filippos Proedrou, ‘A New Framework for EU Energy Security: Putting Sustainability First’ (2016) European Politics and Society. 31  Ibid. 32  Ibid. 33   Buchan and Keay (n 25).

Are smart grids the key to EU energy security?  457 load at all times may lead to higher prices, thus endangering the goal of access to energy at affordable, manageable costs.34 The European Commission has traditionally taken a strong stance against subsidies, and in this policy context aims to substitute the capacity mechanism with scarcity pricing so that supply–demand dynamics are clearly reflected and the power markets are allowed to work optimally. Indeed, balancing the power network through demand response management mechanisms is a cost-saver since it maximizes the efficiency of the network and does away with the costly capacity mechanism. This could be ‘a triple win – encouraging investment, enabling demand response and lessening the need for capacity mechanisms’.35 In practice, though, scarcity pricing is indistinguishable from monopoly pricing and abuse of a dominant market position. In practical terms, the European Commission has no competence to constrain member states’ governments and competition authorities in the case of monopolistic pricing patterns. On the other hand, scarcity pricing sits at odds with the politics and popularity of price controls. While the European Commission aspires to create conditions of perfect competition, democratic politics and short electoral cycles mandate a strong grip on energy prices as a means for governments to protect themselves from popular discontent. Last but not least, an inherent contradiction in the European Commission’s thinking is its ambition to have variable wholesale prices but steady retail prices. It is hard to see how this friction can be resolved.36 In general, the regulatory architecture and the designated prosumers’ market draw from mainstream neo-classical economics. In this perfect market paradigm, consumers are considered rational actors and utility maximizers, and no real-life time constraints and information limitations are taken into account. Consumers, though, are only bounded rational actors and operate in a complex world with actual time and information constraints.37 Education and consumer engagement schemes are hence indispensable, with an emphasis on the most vulnerable social groups, such as seniors, if a fully-fledged prosumers’ market is to be established and demand response management fully utilized. Demand response management, especially real-time pricing, flexible contracts and intra-day markets, furthermore, introduce us to a new electricity market where speculation and arbitrage tactics will be inherent elements. This financialization of electricity markets is also expected to meddle with supply-and-demand dynamics, at least in the margins. In the liberalized EU energy market, furthermore, funding and ownership of the smart grids is a pivotal issue. While it lies with the Distribution System Operators to invest, this is to the benefit of suppliers and consumers who can rationalize their portfolios, and authorities who can live up to their climate goals. As a consequence, some kind of compensation will have to be granted to Distribution System Operators to provide a stimulus for the fully-fledged roll-out of smart grids.38 Crucially, such compensation has be ‘fair’ and ‘efficient’, meaning not only that it does not surpass economic benefits to other actors in the market chain, but also that it provides significant incentives for investments. It is  Ibid.   Ibid 3. 36  Ibid. 37   Tony Dolphin and David Nash (eds), ‘Complex New World: Translating New Economic Thinking into Public Policy’ (2012) Institute for Public Policy Research. 38   Eid, Hakvoort and de Jong (n 4). 34 35

458  Research handbook on EU energy law and policy also essential that such compensation schemes are couched in a public goods provision and sustainability-targeting language to justify the public expenses involved.39 This argument extends to the deployment of electric vehicles as storage batteries, including recharging infrastructural investments, which will put upwards pressures on total investments costs. Also, in juxtaposition to the traditional electricity networks and fossil energy infrastructure, smart grids are vulnerable to cyber-attacks, this adding a further layer of expenditure regarding their roll-out. Such costs have to be internalized and justified as indispensable investments in a cleaner future. If cost-efficiency frameworks do not justify such projects, cost-effectiveness ones definitely do.40

5. CONCLUSION To wrap up, the deployment of smart grids emerges as the pivotal political economy issue for the EU, as it stands in the nexus of energy, politics, markets and the transition to lowcarbon systems. The picture for now remains mixed. On the one hand, smart grids are indeed emerging as all-powerful systems that can help achieve all three principal energy security goals. Smart grids integrate renewable sources in the system, advance overall renewable generation, including self-generation, enable energy efficiency and conservation, and promise to achieve low carbon security by means of decreasing the amount of imported fossil energy, in this way also lessening the impact of the traditional geological, geopolitical and economic risks associated with oil and gas markets, including exposure to volatile and sky-rocketing global energy prices. Further co-benefits, such as the empowerment of citizens and a boost of aggregate demand, also add to the strong case for the full roll-out of smart grids. On the other hand, smart grids call for high upfront investments, the establishment of operative markets that necessitate large-scale citizens’ engagement, incentivization and education, as well as for taking into consideration the voluminous gap between textbook economics and the economy’s actual workings. Moreover, while realizing the transition to constantly balanced power loads by means of demand response management is highly promising, it may also generate a handful of adverse results; it is thus essential to both appropriately and in-time communicate these likely mishaps to European citizens, and prepare matching compensatory policy tools. This all having been said, at the time of writing the EU finds itself in a regulatory void with a number of critical issues still to be decided. What will be the role of, and the division of labour among, Transmission System Operators and Distribution System Operators, in the new energy landscape? How is it possible to further facilitate cross-border power systems’ coordination and achieve optimal load balancing at an EU-wide scale? Moreover, how quickly and efficiently will integrated energy services companies emerge to capitalize on the new developments and improve the function of the market? How will

39   Rolf Wüstenhagen and Emanuela Menichetti, ‘The Influence of Energy Policy on Strategic Choices for Renewable Energy Investment’, in Andreas Goldthau (ed.), The Handbook of Global Energy Policy (Wiley-Blackwell 2013) 376. 40   Brown and Sovacool (n 13).

Are smart grids the key to EU energy security?  459 the fundamental human-rights-related issue of data privacy, security and management be reconciled with the deployment of smart grids? Are feed-in tariffs, feed-in premiums, or other policy tools the most appropriate ways to incentivize a boom in renewable energy generation? In particular, will an EU-wide carbon tax, or a broader ecological tax reform, be utilized to facilitate renewable energy generation? What will be the role of energy behemoths, energy aggregators, community cooperatives and self-generation in producing, transmitting and distributing energy? These issues merit close scrutiny and further research as the decision-making process evolves. The new rules of the game will be determined by institutional infighting and intense lobbying competition between the incumbent fossil industry and utilities on the one hand, and the empowered renewable energy industry on the other, meaning that research on the interplay of political forces within Brussels and European capitals is indispensable.

25.  Renewable energy, waste management and the circular economy in the EU: solar PV and wind power Feja Lesniewska

1. INTRODUCTION As renewable energy sectors like solar PV, wind and modern biomass mature it is important to focus on the environmental, social and economic impacts resulting from the system infrastructure designs over the course of the entire life cycle. Renewables are perceived as a clean alternative to the unsustainable fossil fuel economy that is based on a take-makedispose rationale, an alternative that can help meet international goals to prevent dangerous anthropogenic climate change. It is imperative that these new energy systems do not perpetuate the traditional, established rationale under the guise of a green low-carbon economy. One area that has received limited research attention by law and policy scholars is the issue of end-of-life-cycle waste management in the solar PV and wind energy sectors.1 This chapter provides an initial survey of the key issues within a broader context of resource security in the EU. The chapter firstly introduces the growth in renewable energy capacity in the EU as a consequence of climate and energy law and policy. Before providing an overview of EU waste law a brief section highlights the key issues relating to solar PV and wind turbine waste management. The following section documents amendments and proposed revisions to EU waste law to address solar PV and wind turbine end-of-life-cycle waste. The chapter concludes by considering how the circular economy concept offers a new rationale to the use of material assets, and considers the value to the r­ enewable energy sectors of PV solar and wind power of doing so.

2.  EU RENEWABLES ENERGY POLICY The provision of energy from renewable energy sources has increased significantly in the EU since the late 2000s. The European Union has prioritised the goal of securing affordable and low-carbon energy as a basis for a green economy. It has set aspirational goals and associated targets to launch an Energy Union beyond 2020.2 To encourage this transition to a more secure, affordable and decarbonised energy system the EU adopted climate and energy targets for 2020 and 2030, together with a long-term goal to reduce EU-wide green 1   Modern bioenergy has received more attention on this issue in relation to debates on sustainability criteria.  2   Noriko Fujiwara, ‘Overview of the EU Climate Policy Based on the 2030 Framework’, in Raphael Heffron and Gavin Little (eds), Delivering Energy Law and Policy in the EU and the US: A Reader (Edinburgh University Press 2016).

460

Renewable energy, waste management and the circular economy  461 house gas emissions by 80–95 per cent below 1990 levels by 2050.3 In 2014 the EU set the target to reduce greenhouse gas emissions by at least 40 per cent by 2030 from 1990 levels.4 Investing in and deploying renewable energy is key to achieving this goal. The present Climate and Energy Package that is being implemented includes a target of 20 per cent for EU energy consumption to be produced from renewable resources by 2020.5 This target was revised in the 2030 EU Climate and Energy Package to 27 per cent.6 Directive 2009/28/EC on the promotion of energy from renewable sources was part of the 2020 Climate and Energy Package.7 This translates the target of a 20 per cent share of energy from renewable energy sources in overall EU energy consumption by 2020 into individual targets for each Member State. The individual contributions were calculated taking into account the Member States’ different starting points and potentials, including the existing level of energy from renewable sources and the energy mix.8 For the purposes of the Directive, ‘energy from renewable sources’ refers to energy from wind, solar, aerothermal, geothermal, hydrothermal and ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas, and biogases.9 Each Member State was required to adopt a national renewable energy action plan setting out its national targets for the share of renewable energy targets and the measures to be taken to achieve these national overall targets.10 The Renewable Energy Directive has promoted investment in renewable energy generation capacity. The EU-wide share of renewable energy increased from 14.3 per cent in 2012 to 16.0 per cent in 2014.11 Yet at the Member State level renewable energy shares vary widely, ranging from over 30 per cent of gross final energy consumption in countries such as Finland, Latvia and Sweden, to less than 5 per cent in Luxembourg, Malta and the Netherlands.12 Biomass, used for renewable heating and cooling, represents over half of all gross final consumption of renewables in 18 Member States. However, the EU renewable electricity market sector grew fastest in 2013, driven by sustained growth especially in the onshore wind and solar photovoltaic (PV) power technologies.13 In 2014, the EU had the largest installed and connected solar PV capacity in the world (three times bigger than China) and the largest wind power capacity globally.14 The increase in these renewable energy sectors is set to continue as Member States aim to meet their targets.

  European Commission, ‘Energy Roadmap 2050’ COM(2011) 885 final (15 December 2011).   Conclusions on 2030 Climate and Energy Policy Framework, SN79/14 (23 October 2014).  5   An Energy Policy for Europe COM(2007) 1 final; and Limiting Global Climate Change to 2 degrees Celsius – The Way Ahead for 2020 and Beyond COM(2007) 2 final.  6   Conclusions on 2030 SN79/14 (n 4).  7   Directive 2009/28/EC of the European Parliament and of the Council on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC [2009] OJ l 140/16.  8   David Langlet and Said Mahmoudi, EU Environmental Law and Policy (Oxford University Press 2016) 256.  9   (n 7) Article 2. 10   (n 7) Articles 3 and 4. 11   Renewable Energy in Europe 2016: Recent Growth and Knock-on Effects (European ­Environ­ment Agency 2016) No 4/2016 10. 12  Ibid. 13  Ibid. 14  Ibid.  3  4

462  Research handbook on EU energy law and policy

3. WASTE STREAMS: SOLAR PHOTOVOLTAIC (PV) AND WIND TURBINES The global growth in renewable energy capacity will soon bring end-of-life-cycle waste management issues to the fore. Planning ahead is necessary to firstly mange the existing waste stream from established renewables, and secondly to also promote a circular closed loop approach to the whole life cycle of products to contribute to a green economy.15 Countries need to undertake reforms of existing laws and also develop innovative policy and regulation to meet these challenges. The stakes are high primarily because renewable energy – including bioenergy – is far from ‘clean’. As the following section illustrates, solar PV and wind turbines present environmental and social challenges that need to be addressed at the end of their operating lifespan. 3.1  Solar PV Solar PV energy is the third most important renewable energy in terms of installed capacity. The importance to global energy supply of solar is expected to continue to increase as the costs of technologies fall. Different scenarios expect that solar technologies will provide between 7 and 18 per cent of the global electricity demand by 2030.16 Based upon these scenarios, an estimated 7.3–9.5 million tonnes of end-of-life solar PV panels will need to be dispensed with.17 This is a conservative estimate using the approximate lifespan of a solar PV module of 25 years. However, new technologies with more efficient solar PV panels are incentivising the replacement of old PVs prior to the end of their life cycle, resulting in higher levels of waste than predicted. Solar PV modules are considered a hazardous waste because of the metals they usually contain.18 Cadmium, selenium, tellurium, gallium, molybdenum, indium and silicon are some of the major elements used in these PV cells. As a consequence, there are risks from solar PVs panels. If not disposed of correctly then hazardous materials could be released, threatening human health and the environment.19 However, an additional consideration that could incentivise improved waste management is the fact that several metals contained in PVs are valuable. There are concerns over the future limits in the availability of these elements. So, arguably, recycling is the most advisable end-of-life strategy to save the raw materials for future production.20 However, the economics of recycling PVs 15   UNGA, The Future We Want A/RES/64/236 (21 to 22 June 2012); Elisa Morgera and Annalisa Savaresi, ‘A Conceptual and Legal Perspective on the Green Economy’ (2013) Review of European, Comparative & International Environmental Law 22(1), 14–28. 16  IRENA, REthinking Energy: Accelerating the Global Energy Transformation (International Renewable Energy Agency 2017) IRENA, Abu Dhabi. 17   Veronique Monier and Mathieu Hestin, Study on Photovoltaic Panels Supplementing the Impact Assessment for a Recast of the WEEE Directive, Final Report (14 April 2011), ENV.G. 4/ FRA/2007/0067 6. 18   Nicole McDonald and Joshua M. Pearce, ‘Producer Responsibility and Recycling Solar Photovoltaic Modules’ (2010) Energy Policy 38(11), 7041–7. 19  Ibid. 20   Pablo Dias et al., ‘Recycling WEEE: Polymer Characterization and Pyrolysis Study for Waste of Crystalline Silicon Photovoltaic Modules’ (2016) Waste Management 22–30.

Renewable energy, waste management and the circular economy  463 has proved a disincentive in some cases. A lack of appropriate recovery technology and human capacity is a major obstacle to the safe recycling of PVs globally.21 This is a serious concern because, without action, end-of-life waste from solar PVs will increasingly add to an already significant global electric and electronic goods waste management problem (including white goods like fridges and washing machines, as well as computers, mobile phones and other devices), with much of the waste being exported to developing countries and recycled illegally.22 3.2  Wind Turbines Installed wind capacity globally has increased 50 times in the past two decades, from 7.7 gigawatts in 1997 to more than 371 gigawatts in 2014. At the end of 2015 Germany and Spain were in the top five countries in the world for total installed wind power capacity.23 The growth in wind power generative capacity, like solar PV, is only set to increase in the coming decades with the entry into force of the United Nations Framework Convention on Climate Change’s Paris Agreement, in which multiple Parties have agreed to increase renewable energy as a climate change mitigation strategy. Wind turbines that are installed today will reach the end of their design life after 20 years. Not only is the number of wind turbines being installed increasing, so too is their size. The scale of wind turbines has increased significantly since they were first introduced in the late 1970s and early 1980s as a source of renewable energy. According to the Global Wind Energy Council, by 2008 modern turbines were 100 times the size of those built in 1980.24 Over the same period, rotor diameters have also increased eightfold, with turbine blades now frequently surpassing 60 metres in length. Given the increase in the adoption of large-scale wind turbines, it is estimated that by 2034 over 225,000 tonnes of rotor blade material will need to be recycled annually worldwide.25 This figure will be much greater now given the increasing installation of large-scale onshore and off-shore wind turbines globally. The dismantling and disposal of wind turbines poses a range of waste issues. Although the average recyclability across modern wind turbines components is approximately 80 per cent by mass (excluding the foundations), the composite wind turbine blades present challenges for producers.26 Wind turbine blades are made from composite materials consisting of steel, aluminium, copper, glass fibre, polyester, carbon fibre and epoxy. Recycling complex composites is inherently difficult to do and consequently not cost 21   Songi Kim and Bongju Joeng, ‘Closed-Loop Supply Chain Planning Model for a Photovoltaic System Manufacturer with Internal and External Recycling’ (2016) Sustainability 8(7), 596. 22   Shunichi Honda, Deepali Sinha Khetriwal and Ruediger Kuehr, Regional E-Waste Monitor: East and Southeast Asia (United Nations University 2016). 23  GWEC, Global Wind Report Annual Market Update 2015 (Global Wind Energy Council, Brussels, 2016). 24  GWEC, Global Wind Energy Outlook 2008 (Global Wind Energy Council, Brussels, October 2008). 25   Tim Joyce, ‘A World Made of Rotor Blades’, No Tech Magazine (8 February 2015), http:// www.notechmagazine.com/2015/02/a-world-made-of-rotor-blades.html. 26   Ruth Cherrington et al., ‘Producer Responsibility: Defining the Incentive for Recycling Composite Wind Turbine Blades in Europe’ (2012) Energy Policy 47, 13–21.

464  Research handbook on EU energy law and policy effective at current market rates. In Europe, for example, in 2011 most end-of-life wind turbine blades were disposed of in landfill or burned in waste incineration plants.27 Such end-of-life-cycle waste disposal has negative environmental and health impacts. It also perpetuates inefficient natural resource use that is uneconomic and unsustainable in the long term. It is evident from the growth in the installation of solar PV and wind power that as the first end-of-life phases approach, significant waste management will be required. Given the EU’s significant installed capacity in wind and solar PV this is an issue that waste regulators need to address by assessing the appropriateness of existing EU waste law and considering if amendments are required, or indeed new specific regulation.

4.  EU WASTE REGULATION The EU has an extensive legal framework on waste management.28 The 1975 Framework Directive on Waste (FDW) laid the foundation for EU waste law. It defined key concepts, established major principles such as the waste hierarchy, and allocated responsibilities between different actors: authorities, producers and households.29 Another important Directive in terms of renewable energy end-of-life-cycle waste is the 1999 Landfill of Waste Directive. The Directive requires Member States to draft a national strategy for the implementation of measures to develop a whole life-cycle approach to waste management and landfills.30 The Directive sets targets to progressively reduce the level of biodegradable waste going to landfill and bans the landfilling of certain hazardous wastes.31 The overall goal within the EU is to reduce the percentage volume and value of waste being discarded in landfills. Additional Directives for specific waste streams were subsequently developed as part of the 1975 FDW. These included the Packaging and Packaging Waste Directive,32 the End-of-Life Vehicles Directive,33 and the Waste Electrical and Electronic Equipment (WEEE) Directive.34 Each directive takes forward the FDW waste hierarchy and extended responsibility principles. In 2008 a new FDW developed the waste hierarchy and extended responsibilities, especially for producers. The Directive was based on Article 192(1) of the Treaty Framework of the European Union. This commits the EU to the protection of the environment and human health by preventing or reducing the adverse impacts of the generation and management of waste and by reducing overall impacts of resource use and improving the efficiency of such use.35 The 2008 Directive advanced the whole life cycle of products and materials concept and encouraged the recovery of waste and use of recovered materials

 Ibid.   Langlet and Mahmoudi (n 8) 283. 29   Framework Directive on Waste 75/442/EEC [1975]. 30   Landfill of Waste Directive 99/31/EC Art 1 [1999]. 31   EC Landfill Directive 99/31/EC [1999]. 32   Directive 94/62/EC [1994]. 33   Directive 2000/53/EC [2000]. 34   Directive 2002/96/EC [2002] – recast as Directive 2012/19/EU [2012]. 35   Ibid, Article 1. 27 28

Renewable energy, waste management and the circular economy  465 to develop end-of-life-cycle waste criteria for specified waste streams.36 Under the 2008 FDW, top priority should be given to prevention, followed by preparing for re-use, recycling, and other recovery, including energy recovery. Disposal is the least desirable option and at the bottom of the hierarchy. The principle of responsibility is expanded under the 2008 FDW. The FDW places responsibility for waste treatment on the original waste producer. Under Article 15, Member States can ‘specify the conditions of responsibility and decide in which cases the original producer is to retain responsibility for the whole treatment chain or in which cases the responsibility of the producer and the holder can be shared or delegated among the actors of the chain’.37 This includes that the original waste producer bears the cost of waste management. Member States may encourage the design of products in order to reduce their environmental impacts and the generation of waste in the course of the production and subsequent use of products.38 The trend in the EU is towards the extension of extended producer responsibility to new products, product groups and waste streams such as electrical appliances and ­electronics.39 However, the effectiveness of extended producer responsibility within Member States is variable. Different national applications of the extended producer responsibility principle lead to substantial disparities in the financial burden on economic operators. Having different national extended producer responsibility interpretations for waste electrical and electronic equipment hampers the effectiveness of recycling policies. For that reason, in 2012 the Commission proposed that essential criteria needed to be laid down at the level of the Union, and minimum standards for the treatment of waste electrical and electronic equipment should be developed.40 Recently EU waste law has increasingly become part of a wider policy discourse advancing a framework for sustainable production and consumption and the so-called circular economy. For example, as part of the Circular Economy Package, the Commission has proposed the addition of an obligation to ensure that by 2030 the amount of municipal waste put into landfill is reduced to 10 per cent of the total amount of such waste ­generated.41 The implications of this new discourse framing are yet to fully be ­appreciated; however, its significance is considered in the final section below.

5.  RENEWABLES: AMENDING EU WASTE REGULATION The EU has undertaken one substantive initiative in an effort to manage the increase in end-of-life materials coming from both the solar PV and wind turbine renewable energy sectors. This major initiative was an amendment to the WEEE Directive that set the

  Framework Directive on Waste 2008/98/EC [2008].   Ibid, Article 15. 38   Ibid, Article 8. 39   OECD, Extended Producer Responsibility – see http://www.oecd.org/env/tools-evaluation/ extendedproducerresponsibility.htm. 40   Recital (6) WEEE (Waste Electrical and Electronic Equipment) Directive 2012/19/EU [2012]. 41   Proposal for a Directive of the European Parliament and of the Council amending Directive 1999/31/EC on the landfill of waste (2 December 2015) COM(2015) 594 final. 36 37

466  Research handbook on EU energy law and policy fundamental legal rules and obligation for collecting and recycling solar PV panels in the European Union. The WEEE Directive is particularly important in terms of the future management of end-of-life-cycle waste from solar PV. The purpose of the WEEE Directive is to contribute to sustainable production and consumption of electric and electronic equipment. Electric and electronic equipment often consists of numerous precious and scarce metals, which makes recycling it meaningful economically and environmentally. The WEEE Directive aims to reduce the amount of electrical and electronic equipment (EEE) being produced and encourage reuse, recycling and recovery of discarded end-of-life products so as to reduce the disposal of waste and to contribute to the efficient use of resources and the retrieval of valuable secondary raw materials.42 The Directive is also intended to improve the environmental performance of all operators involved in the life cycle of EEE, for example producers, distributors and consumers, and, in particular, those operators directly involved in the collection and treatment of waste EEE. Founded on the principle of extended producer responsibility, the WEEE Directive requires that the original producers of goods take back and recycle within the countries of the EU. The Directive places responsibility for the associated costs of collection, treatment, recycling and recovery on producers and distributors. End consumers must not face any additional cost at the time of the disposal. In January 2012, the European Parliament approved an updated version of the WEEE Directive on collection targets.43 The amendment addressed the issue of solar PV waste management. The recast WEEE Directive 2012/19/EU provides a legislative framework for extended producer responsibility of PV modules at the European level. Most Member States have revised EEE waste regulation to include solar PV in national law, for example Spain44 and Italy.45 Under Italian regulation, in order to legally place their products on the national market, producers of solar PV modules must register in the EEE National Producers’ Register after joining a collective scheme or having established an individual system approved by the competent authorities.46 Producers of solar PV modules must organise and finance the collection and recycling of discarded solar PV modules individually or through joining a collective scheme.47 This should create a market to stimulate value for end-of-life solar PV panels, generating incentives for recycling operators to invest in the sector throughout the EU, benefiting from the common market. The principle of producer responsibility could be extended for manufacturers to recycle wind turbine blades, as has been done so effectively with the WEEE Directive amendment.48 If legislation is introduced within the wind energy industry it is likely to be similar to end-of-life vehicles legislation that encompasses extended producer responsibility by introducing set recycling and recovery targets for manufacturers. Independently, Member

  WEEE (Waste Electrical and Electronic Equipment Directive) 2002/96/EC [2002].   WEEE (Waste Electrical and Electronic Equipment Directive) 2012/19/EU [2012]. 44   Real Decreto 110/2015, de 20 de febrero, sobre residuos de aparatos eléctricos y electrónicos. 45   Decree n. 49/2014 Attuazione della direttiva 2012/19/UE sui rifiuti di apparecchiature elettriche ed elettronice (RAEE). 46  Ibid. 47  Ibid. 48   Cherrington et al. (n 26) 24. 42 43

Renewable energy, waste management and the circular economy  467 States have adopted measures to deal with the problem of wind turbine blades landfill dumping. Since 2005 Germany, for example, has enforced a landfill ban for untreated municipal solid waste. As a result, materials with a high organic content, such as wind turbine blades with an organic content of 3 per cent, are required to find alternative endof-life routes. A review of European waste management policy has shown that landfill bans effectively divert waste from landfill and promote a drive towards energy recovery.49 Increasingly EU legislation discourages the disposal of waste to landfill, setting steeper reduction targets, for example the 10 per cent target by 2030 included in the Circular Economy Plan.50 Wind turbine manufacturers could take the initiative. To drive down technology costs and increase systems’ efficiencies, manufacturers should invest in research and development. This in the longer term will reduce any economic penalties resulting from the enforcement of legislation.51 The interventions to date to address the problems associated with waste from the solar PV and wind power renewable energy sectors continue approaches adopted by the EU FDW. The amendments to the WEEE Directive to increase recycling of solar PV panels and proposals to limit the discarding of wind turbine blades in landfills are important steps to manage the end-of-life waste from these renewable energy sectors. Yet the regulations fail to address the limitations of the ‘linear economy’, where waste is tolerated alongside the environmental and climate change impacts. A new model is needed, and the EU has begun that initiative with the Circular Economy Action Plan.

6. THE CIRCULAR ECONOMY: CLOSING THE RENEWABLE ENERGY WASTE LOOP The circular economy, also known as a ‘closed loop’ economy, is an industrial and social evolutionary concept that pursues holistic sustainability goals through a culture of no waste. In a circular economy, the end-of-life stage of products and materials must be replaced by restoration.52 Reducing waste is at the core of the circular economy model: closing the loop.53 It is a concept that recognises the continuous potential value of materials in an effort to reduce resource inefficiency in production and consumption. A circular economy requires a transformation of both production and consumption systems; the standard approach for creation, fabrication and commerce of products. The EU is heavily dependent on imported raw materials, especially metal ores and non-metallic minerals that are found in

 Ibid.   Proposal for a Directive of the European Parliament and of the Council amending Directive 1999/31/EC on the landfill of waste (2 December 2015) COM(2015) 594 final. 51   Katherine Ortegon, Loring Nies and John Sutherland, ‘Preparing for End of Service Life of Wind Turbines’ (2013) Journal of Cleaner Production 39, 191. 52   Irel Carolina De los Rios and Fiona Charnley, ‘Skills and Capabilities for a Sustainable and Circular Economy: The Changing Role of Design’ (2016) Journal of Cleaner Energy Production 1, 14. 53   Communication from the Commission to the European Parliament, Closing the Loop – An EU action plan for the Circular Economy, COM(2015) 614, Brussels 2.12.2015. 49 50

468  Research handbook on EU energy law and policy EEE. The design of a product directly influences the way a value chain will be managed; building circular, globally sustainable value chains inevitably signifies a fundamental change in the practice of design.54 In 2017 the EU Commission will publish a report on critical raw materials and the circular economy with a view to developing material-efficient recycling of electronic waste, waste batteries and other relevant complex end-of-life products.55 A monitoring framework will also be proposed. With the rapid transition to renewable energy systems under solar PV and wind set to increase with the 2030 EU Climate and Energy Package, greater efforts need to be made to incorporate circular economy principles into systems infrastructure design. The EU is leading the way, but there needs to be a coherent approach if the loop of renewable energy waste from solar PV and wind turbines is to be closed in the long-term.

7. CONCLUSIONS End-of-life waste from solar PV and wind turbines is set to increase significantly as global renewable energy capacity continues to expand, driven by international and national climate change and energy priorities. The EU as a leader in both solar PV and wind power capacity is starting to address the problem using its established FDW. Amendments to the WEEE Directive in 2012 and subsequent reforms to Member States’ domestic law has established extended producer responsibility to solar PV panel providers. New targets to reduce landfill waste to 10 per cent of the total amount of waste generated are aimed at incentivising the processing of materials higher up the waste hierarchy, for example through recycling. However, a specific link to wind turbines is needed, including extended producer responsibility for this to directly reduce the discarding of blades. The EU’s law and policy interventions lack long-term vision. Despite the FDW’s waste hierarchy principle, the Directive is based on and perpetuates a linear approach to resource use. With an increasing world population, and rising material standards of living, including renewable energy demand, the phenomenon of resource scarcity could in the near future undermine the EU’s economic competitiveness, especially given its import dependency on primary materials like metal ores. In the long term, policy- and law-makers need to work alongside designers to achieve a circular economy, one in which the value chain is sustainable and materially efficient. Incorporating this approach into the renewable energy sector including solar PV and wind turbines, as much as bioenergy, is needed as soon as possible if a take-make-dispose rationale is to be avoided in the low-carbon green economy. Achieving this will require investment not only in technical, engineering and design aspects, but also in law and policy to develop systems that ‘close the loop’.

  De los Rios and Charnley (n 52).   Annex 1 Communication from the Commission to the European Parliament, Closing the Loop – An EU action plan for the Circular Economy, COM (2015) 614, Brussels 2.12.2015 3. 54 55

26.  The role of renewable energy law and policy in meeting the EU’s energy security challenges Penelope Crossley

1. INTRODUCTION By any objective measure, the European Union (EU) has a serious energy security problem. It is the largest importer of energy in the world1 and has consistently had energy dependency rates of over 50 per cent for the past ten years,2 with very high levels of market concentration among the few countries that supply the majority of the EU’s energy imports.3 This makes the EU vulnerable in the event of supply shocks or price volatility. However, the challenges with energy security are not homogenous across the 28 EU Member States, as they have differing indigenous fossil fuel and renewable energy sources, energy mixes and political and economic circumstances. Accelerating the deployment of renewable energy to reduce energy import dependency and to diversify the national energy mix is often mooted as a potential solution to this problem.4 However, given the scale of the problem and that energy policy is a shared competence under Article 194 of the Treaty for the Functioning of the European Union, meeting the disparate challenges faced by the EU-28 while managing their individual and collective interests is likely to prove difficult. Section 2 of this chapter will begin by examining the complex and multi-dimensional nature of ‘energy security’, before considering how the EU’s definition of energy security has changed over time. Section 3 will then analyse the energy security challenges faced by the European Union, while section 4 will evaluate the role that renewable energy has played to date in assisting to meet those challenges. Section 5 of the chapter will then consider the development of European renewable energy law, with section 6 examining some of the recent developments within EU energy law and policy that are most relevant to renewable energy and energy security. The chapter will conclude in section 7 with an assessment of whether the proposed shift towards ‘coordinated cooperation’ in renewable energy is likely to be the solution to the EU’s energy security concerns.

 1   Eurostat, ‘The EU in the world – energy’ (European Commission, 17 August 2016) http:// ec.europa.eu/eurostat/statistics-explained/index.php/The_EU_in_the_world_-_energy (accessed 12 December 2016).  2   Eurostat, ‘Energy Production and Imports’ (European Commission, 21 September 2016) http:// ec.europa.eu/eurostat/statistics-explained/index.php/Energy_production_and_imports (accessed 12 Decem​ber 2016).  3  Ibid.  4   See e.g., Samantha Olz, Ralph Sims and Nicholai Kirchner, ‘Contribution of Renewables to Energy Security’ (International Energy Agency, 2007).

469

470  Research handbook on EU energy law and policy

2.  WHAT IS ENERGY SECURITY? Energy security is a complex and multi-dimensional concept, whose characterisation is highly context dependent. The International Energy Agency has defined energy security to mean a situation where energy supply is ‘adequate, affordable and reliable’.5 Barton et al. have defined it as ‘a condition in which a nation and all, or most, of its citizens and businesses have access to sufficient energy resources at reasonable prices for the foreseeable future free from serious risk of major disruption of service’.6 While, Jonsson et al. have stated that ‘energy security’ may include ‘[. . .] aspects such as security of supply, security of demand, affordability issues and revenues from energy, geopolitical considerations associated with security and defense policy, other political risk factors, economic risk factors and energy poverty, as well as technological and environmental factors’.7 Yet even Jonsson’s very comprehensive definition, arguably fails to consider the important aspects of competition law and international trade law given the key role bilateral and multilateral trade deals play in securing supply.8 Thus, as can be seen by these range of definitions, the definition of ‘energy security’ has long been contested, with different parties advocating for the prioritisation of different elements, depending upon the context in which the term is being used. Indeed, it is arguable that attributing meaning to the term ‘energy security’ is a clear example of a situation in which defining the problem is a politically mediated process, which also delimits the range of potential solutions. 2.1  The EU Definition of ‘Energy Security’ The European Union has adopted a number of different definitions of ‘energy security’ over time, reflecting their increasing dependence on imported fossil fuels, their changing policy focus and the growing volatility of international energy markets. In its 2000 Green Paper, ‘Towards a European strategy for the security of supply’, the Commission adopted a broad definition of ‘energy security’, stating, ‘energy supply security must be geared to ensuring . . . [t]he uninterrupted physical availability of energy products on the market, at a price which is affordable for all consumers (private and industrial), while respecting environmental concerns and looking towards sustainable development’.9 More recently, in its 2014 ‘In-depth study of European Energy Security’, the Commission departed from its previous consideration of environmental concerns and sustainable development within its definition of ‘energy security’, adopting the far narrower definition of energy   Ibid, 13.   Barry Barton et al. (eds), Energy Security: Managing Risk in a Dynamic Legal and Regulatory Environment (Oxford University Press, 2004) 5.  7   Daniel K. Jonsson et al., ‘Energy Security Matters in the EU Energy Roadmap’ (January 2015) 6 Energy Strategy Reviews 48.  8   See e.g., Rafael Leal-Arcas, ‘How Governing International Trade in Energy Can Enhance EU Energy Security’ (2015) 6(3) Renewable Energy Law and Policy 202; Rafael Leal-Arcas, Costantino Grasso and Juan Alemany Ríos, Energy Security, Trade and the EU: Regional and International Perspectives (Edward Elgar Publishing, 2015).  9   European Commission, Green Paper: Towards a European strategy for the security of energy supply, COM(2000) 769 final, 29 November 2000.  5  6

The role of renewable energy law and policy  471 security as the ‘uninterrupted access to energy sources at an affordable price’.10 This change to the definition of ‘energy security’ adopted by the European Commission is not a matter of mere semantics, but, as will be shown in this chapter, reflects the changing direction of the European Union as to how it will address its energy security concerns. This is shown by the increased emphasis given in the recent Energy Security Package (2016) to improving the diversity of suppliers, supply routes and transport mechanisms for imported gas, and international energy diplomacy, while reducing the emphasis given in at least the short-term to increasing the deployment of indigenous sources of renewable energy.11 This may reflect the changing nature of the energy security problems faced by the European Union.

3. THE ENERGY SECURITY CHALLENGES FACED BY THE EUROPEAN UNION While the problem of energy security is not unique to the European Union, the EU is the third-largest consumer of energy in the world12 and the largest energy importer.13 This means that global issues, which have led to an increased emphasis on energy security in other countries, have had a pronounced effect within the EU. For example, there have been growing concerns expressed about the vulnerability of Europe given the heavy dependence on Russian oil and gas, particularly in light of past, and more recent, conflicts with the Ukraine.14 Equally, the sectarian violence in parts of the Middle East such as Iraq and Syria, concerns about Iran’s nuclear programme and events such as the Arab Spring have led to anxieties about supply disruptions.15 Further issues are being created by the ‘grab for resources’ by China and India as they seek to secure access to foreign sources of supply to meet their rising energy demand.16 Indeed in 2014, the EU imported 53.5 per cent of its total annual energy consumption,17 at a cost of over €1 billion per day.18 The dependence of the EU on energy imports is not 10   European Commission, ‘European energy security strategy – In-depth study of European Energy Security’, SWD(2014) 330 final, 3. 11   European Commission, ‘European Energy Security Strategy’ COM(2014) 330 final, Brussels, 28 May 2014. 12   See n1. 13  Ibid. 14   See e.g., Karen Smith Stegen, ‘Deconstructing the “Energy Weapon”: Russia’s Threat to Europe as Case Study’ (2011) 39(10) Energy Policy 6505; Philipp M. Richter and Franziska Holz, ‘All Quiet on the Eastern Front? Disruption Scenarios of Russian Natural Gas Supply to Europe’ (2015) 80 Energy Policy 177. 15   See e.g., Luca Franza and Coby Van Der Linde, ‘Geopolitics and the Foreign Policy Dimension of EU Energy Security’ in Svein S. Andersen et al. (eds), Energy Union (Palgrave Macmillan UK, 2017) 85–98. 16   Gawdat Bahgat, ‘Europe’s Energy Security: Challenges and Opportunities’ (2006) 82 International Affairs 961. 17   See n2. 18   European Commission 2016, Imports and Secure Supplies: Diverse, affordable and reliable energy from abroad, http://ec.europa.eu/energy/en/topics/imports-and-secure-supplies (accessed 11 December 2016).

472  Research handbook on EU energy law and policy a new phenomenon, with the EU consistently importing over 50 per cent of the energy it has consumed annually since 2004.19 Further, despite considerable national differences in energy import dependency rates, all EU Member States are now net energy importers.20 The reliance of the EU on energy imports is particularly pronounced for crude oil and petroleum products (88.2 per cent dependency) and for natural gas (67.4 per cent dependency), although both coal and other solid fuels, and uranium and other nuclear fuels, have import dependency rates of over 40 per cent of total consumption.21 The extent of the reliance on imported fuels is even more severe within the transportation sector, with 94 per cent of transport within Europe being oil dependent, of which 90 per cent is imported, making it highly vulnerable to supply shocks and price volatility.22 If either of these events were to occur, they would present serious follow-on effects for all other areas of the European economy. Despite the seriousness of these issues, the EU’s level of energy import dependency is set to worsen over the coming years, with the EU predicted to import 95 per cent of its total oil consumption, 85 per cent of its total gas consumption and 60 per cent of its total coal consumption by 2030.23 While import dependency in and of itself is not a problem per se,24 the market concentration of countries that supply fossil fuels to the EU and the growing global demand for energy does represent a significant source of concern. In 2014, almost 70 per cent of the EU-28’s imports of natural gas, and 43.5 per cent of crude oil imports, came from either Russia or Norway.25 Meanwhile, 70.7 per cent of solid fuels imported into the EU originated in either Russia, Colombia or the United States.26 The extent of the problem of energy import dependency becomes even starker when national dependency rates are studied. In 2014, Malta recorded an energy import dependency rate of 97.7 per cent, Luxembourg 96.6 per cent, Cyprus 93.4 per cent, Ireland 85.3 per cent and Belgium 80.1 per cent,27 while a further six EU Member States were entirely dependent on Russia for their natural gas supplies.28 These statistics highlight that EU Member States are vulnerable to disruption either in the supply of specific fuels or

  See n2.  Ibid. 21  Ibid. 22   G. Quinti et al., ‘European Distributed Renewable Energy Case Studies’ in Max Gruenig and Patrizia Lombardi (eds), Low-carbon Energy Security from a European Perspective (Academic Print, 2016) 170. 23   G. Cotella and S. Crivello, ‘The Macroregional Geopolitics of Energy Security: Towards a New Energy World Order?’ in Max Gruenig and Patrizia Lombardi, Low-carbon Energy Security from a European Perspective (Academic Press, 2016) 84. 24   See e.g. the discussion in n7, 49–50. 25   Eurostat, ‘Main origin of primary energy imports, EU-28, 2004–14’ (European Commission, 28 July 2016), http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Main_origin_of_pri​ mary_​energy_imports,_EU-28,_2004%E2%80%9314_(%25_of_extra_EU-28_imports)_YB16.png (accessed 7 December 2016). 26  Ibid. 27   Eurostat, ‘Energy dependency in the EU’ (European Commission, 4 February 2016), http:// ec.europa.eu/eurostat/documents/2995521/7150363/8-04022016-AP-EN.pdf/c92466d9-903e-417cad76-4c35678113fd (accessed 7 December 2016). 28   European Commission, ‘A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy’ COM(2015) 80 final, 25 February 2015, 2. 19 20

The role of renewable energy law and policy  473 from specific suppliers. The European Commission has identified the less integrated and interconnected regions of the Baltic States and Eastern Europe as particularly vulnerable in this regard.29 Within these highly energy import dependent and the less integrated and interconnected countries, diversifying the energy mix may be beneficial. Such a move would lessen ­‘technological risks, secure additional reliability benefits, support the expansion of the renewable energy industry, spread the local benefits around geographically, advance less mature technologies so that they are less costly when other lower-cost technology potential is tapped out, or respond to the expressed preferences of the public’.30 It would also help the European Union to meet their ambitious target of achieving an 80 to 95 per cent reduction in greenhouse gas emissions compared to 1990 levels by 2050.31 These benefits would not be confined to the countries that increase their proportion of renewable energy within their national energy mix but may also provide benefits to neighbouring countries, if the EU’s planned electricity interconnection target of 15 per cent between EU countries by 2030 is met.32 However, as shown in Table 26.1 the 28 EU Member States are not homogenous, with huge disparities evident in the fuel mix used and the levels of energy dependence between different Member States. In contrast to the highly energy import dependent countries, in 2014 Estonia only imported 8.9 per cent of its total energy consumption, while Denmark imported 12.8 per cent and Romania 17 per cent.33 Further, Siddi has noted that ‘some member states, most notably Hungary, do not show particular concern for the EU’s dependence on Russian energy supplies and feel that the Energy Union could be a hurdle to future deals with Russia’.34 He also notes that ‘due to the current low prices of fossil fuels and the costs of transition to a low carbon economy, many of the EU’s East European members consider the decarbonisation of their economy unaffordable and are reluctant to endorse policies in favour of renew