Speaker: Emmanuelle Maincent, Head of Unit B4, Economic Analysis of Energy, Transport, Climate Change and Cohesion Policy
All Party Group on the Costs of Energy
Tuesday 17 June 2014 – meeting notes
Lord Deben, in the Chair, opened the meeting, introducing Emmanuelle Maincent, who then presented, followed by questions from the floor.
The focus was on a report published by DG ECFIN on the economic impact of energy entitled ‘Energy Economic Developments in Europe’. Slides and a link to the report have been previously circulated and are available again on request.
Context and background of the report
During the economic crisis, in some programme countries, energy was an area where structural reforms were needed. The effects can be seen in public finances. In countries such as Greece, Portugal, Romania, Spain there were the issues of electricity tariff deficits, loss making state owned energy companies, or regulated electricity and gas prices which were hampering the functioning of markets.
Energy matters because of its consequences on competitiveness, on public finance and on affordability for consumers.
The policy reasons for the study are:
- 2030 Framework started and in May 2013, the European Council asked the Commission to look at energy prices and costs developments.
- There are lots of questions from the development of shale gas in the US, including the price of energy and the ability of the EU to compete with it.
The findings were discussed with the policy group – the EPC Working Group on Climate Change and Energy (composed of Finance Ministries of Member States).
The report gives an analysis of the energy impact in member states. The objective of the report was for it to be positive, examining how energy could contribute to low carbon economies:
- To provide analysis of the economic impact of energy in the EU and Member States.
- To draw some lessons from EU climate and energy policies.
- Contribute to the discussions on how best energy and climate policies can contribute to the transition to low carbon economies.
The report considered the following:
- What is EU Energy Cost Competitiveness?
- Is the EU still able to compete on this basis?
- What are the energy price drivers?
These questions are important because of US shale gas developments. They focus on the price drivers for electricity and natural gas; specifically carbon prices, and on the EU renewables agenda: the competitive advantage and the benefits of renewable energy trade.
Competitiveness: how competitive is the EU?
The indicator used was the energy unit cost – a similar measure to unit labour costs – which are an important part of the picture. The report tried to do this for all member states:
- to track the evolution of energy prices;
- to consider the effect of energy productivity or its reciprocal – Energy Intensity.
As energy productivity improves faster than energy price, unit energy costs will decrease.
The report compared the Real Unit Energy Costs (RUEC) from 1995 to 2011 in the EU, Russia and Japan. In the period under review, RUEC increased around the world, and particularly in the EU, but RUEC in the EU (and Japan) remained comparatively low.
The good performance of the EU is mostly explained by energy intensity of industry, which is among the lowest. However, the US and China are catching up by reducing energy intensity. The EU needs to be careful not to lose its competitive edge; given high European energy prices, there is no room for complacency.
Of the 27 member states the new members have higher energy intensity.
Understanding the drivers of the unit energy costs
What the analysis shows:
- It helps to identify possible changes in the sectoral composition of manufacturing, which can influence the evolution of unit energy costs.
- It does not identify the causes of restructuring: carbon leakage through the loss of heavy industry may be a factor.
- For the UK, it shows that increase in RUEC is mostly explained by increased energy costs.
Competition between the EU, Japan, US
In the long-term (looking from 1995-2011) most of the energy costs have increased.
The EU share of energy intensive industries has decreased.
In the UK restructuring seems to have increased energy intensity.
Electricity and Natural gas prices
Analysis shows how important oil is in these sectors.
A main finding of the report is that the largest increase in electricity retail prices has been from levies and taxes (including support schemes for renewables). In some countries, households pay more than industry, in other countries; industry pays more than households, depending on governmental policy preferences.
The drivers of carbon prices:
- Fossil fuels still play an important role
- Market opening has a downward effect
- Renewable support schemes contribute to decreasing carbon prices
- In natural gas, interesting to see that lowering import dependency and increasing import diversification have greater downward price effects.
- From mid-2011, the carbon price has been decoupled from coal and gas prices and decreased.
Question: EU concentration of industries with lower energy consumption results in lower energy costs. Is this a policy objective (to shift away from heavy-energy industries) in which case, does this need wider discussion?
Emmanuelle Maincent: This could be an interpretation, but that is not the intention, nor is that supported by the data in the report. EU sectors are more efficient, probably due to high energy costs.
Question: Are EU companies more energy efficient, or is low energy intensity because we are driven into industries which are low energy?
Lord Deben: If we are not careful, assume energy price makes a difference, but perhaps it is more complicated than that. The causes cannot be pinpointed. The Climate Change Committee found that the amount of energy saving and efficiency expected from the market was not delivered.
Question: Regarding the difference between the downward effects of prices on electricity and gas markets, the comparative effects are not clear.
Emmanuelle Maincent: The modelling for gas showed lots of unexplained factors, the impact of competition was less obvious for each of the variables. It was not difficult to explain. The model has limitations, which might be the result limitations of the data.
Question: What other specific work has been done on the heavy users of energy, do the results vary from country to country?
Emmanuelle Maincent: There has not been a specific analysis of individual countries. It is difficult to get detailed information on these issues.
Question: Investment leakage out of Europe is based on an expectation of where prices will be towards the end of the decade. Do you have any thoughts on how to move on from simply observing the correlation that investment flows to where energy prices are low and that investment is not occurring in Europe?
Emmanuelle Maincent: No analysis has been done on this, there are no statistics on the main question “is Europe attractive enough from a demand viewpoint”.
Question: How should companies invest in future, is there a forward-looking analysis?
Emmanuelle Maincent: Yes, the impact assessment for the 2030 framework is based on the models looking forward to 2030 or 2050, which assumed a 31% increase in energy use. There is the assumption of lots of enabling policies and the right framework for the energy system. There is some negative impact on competition but, as a result of the lower energy intensity of energy intensive sectors in the EU, the impact is not such a dramatic effect. Should countries such as China and USA also adopt binding targets, EU industry would not suffer too great a loss of competitive edge.
Question: Is there a divergence between wholesale and retail prices, how does that vary across the spectrum?
Emmanuelle Maincent: That is not included in this report; DG Energy has prepared a report which does include such analysis.
Question: Are the subsidies and regulations on renewables distorting the market, resulting in a lower carbon price; without the subsidies and with a high carbon price, what would the Governments do with the revenues generated from carbon sales?
Emmanuelle Maincent: The assumption from DG Energy and Climate Change is that this money would be used for re-investment in green projects, renewables, but the ETRC states that 50% of this revenue should be unmarked. There is an obligation for Member States to earmark such revenue to promote green energy and renewables. During the crisis there was discussion on using some of the revenues to pay some of the electricity deficit.
Lord Deben: The Treasury would demand its share. British Columbia has an independent group which ensures that every penny raised from carbon tax goes to reduce income tax.
Question: Is there any reference to green jobs, were they cost-effectively created?
Emmanuelle Maincent: This area is not properly assessed in this report, there were problems with the data.
Question: Has progress been made in persuading the heads of European companies of the importance of energy and renewables, so that they can take the issues more seriously?
Emmanuelle Maincent: The EU have been quite ambitious on energy and created some awareness within companies.
The meeting closed