European Council

The EU's heads of state and government met on 22 May in Brussels to come up with new guidelines to tackle the on-going economic crisis. Two particular issues figured prominently on the agenda: affordable sustainable energy and tax evasion. As the European Council conclusions show, the energy debate has seen a clear shift in terms of the leaders' rhetoric regarding energy and climate considerations. Whereas previously the energy debate tended to be framed in terms of climate considerations, the rhetoric seems now to be primarily focusing on economic considerations.

The conclusions focus on a range of practical issues designed to help Europe get out of the crisis. Of particular note is the emphasis on the need to re-launch Europe's energy industry by completing the internal energy market and increasing security of supply. Another key priority is lowering energy prices. Climate considerations are also mentioned, such as further developing renewable energy sources and smart grids. However, they figure less prominently than in previous conclusions.

To some extent, this shift in the leaders' rhetoric is the result of a process directly linked to the current economic downturn, as a result of which Europe's energy priorities have significantly evolved. As the next European Commission is widely expected to be much more focused on competitiveness, this evolution will arguably continue next year.

Shale Gas

Political momentum for shale gas development continues increasing

Herman Van Rompuy, the President of the European Council, has become the latest EU leader to openly support the exploration and development of Europe's shale gas resources. Speaking at a press conference following the last European Council meeting on 22 May, Van Rompuy said that "shale gas can become part of the energy mix for some Member States," arguing that this could help lead to energy independence and lower energy prices.

Only last month, Energy Commissioner Gunther Oettinger argued that developing the continent's shale gas resources would lead to a more competitive gas market. During the last two years, since the debate around shale gas kicked off in Europe, top-level EU policy-makers have been extremely cautious when talking about shale gas, not least due to national sensitivities around this issue. However, more and more of them have supported its development in public in the last few months.

While the European Council conclusions do not explicitly refer to shale gas, the document stresses the need to "further intensify the diversification of Europe's energy supply and develop indigenous energy resources to ensure security of supply." With regard to this issue, the document continues, the European Commission is due to present a new framework for the extraction of fossil fuels in Europe.

As reported last month, the Commission is currently analysing the feedback received in the public consultation on shale gas launched earlier this year. The next College of Commissioners is expected to propose new legislation dealing with the exploration and extraction of shale gas. While Member States remain fully independent to make their choices regarding their energy mix, an EU legislative framework regulating shale gas operations could help willing Member States to start operations.

Trade

Chinese solar panels: Commission imposes duties, offers political solution to China

In early June the European Commission announced the provisional imposition of duties on Chinese on photovoltaic panels, cells and wafers. This is as a result of the Commission's conclusions that Chinese solar manufacturers have dumped their goods in the European market. An 11.8% duty will apply on these products as of 6 June during a two-month transition period. The level of duties will increase to 47.6% on 6 August.

When presenting the Commission's decision to impose duties, Trade Commissioner Karel De Gucht emphasised that he hopes to negotiate a solution with Beijing in order to avoid a trade war. In this context, the Basic Anti-Dumping Regulation allows for a suspension of provisional duties while a negotiated solution is achieved.

This debate will now move to the Council of Ministers, where Member States are due to start official discussions. After a six-month period, Member States will vote by simple majority on whether to ratify these provisional duties, which would become definitive for a five-year period, or to abolish them. This will be a highly political process, in which every country will carefully weigh the state of its commercial relationship with China before adopting a position. It will also provide a window of opportunity to negotiate a political solution with Beijing. The role of Germany, the largest Member State as well as Europe's largest exporter to China, will be crucial.

Ever since the Commission started these trade defence investigations, Chancellor Angela Merkel has repeatedly called for the EU to negotiate a solution with the Chinese authorities, rather than to pursue litigation. Her government is likely to take the lead at the Council discussions and, at the same time, step up their dialogue with Chinese authorities in order to find a solution that satisfies both parties.

A parallel anti-subsidy investigation is still on-going. The results of the Commission's investigation and the imposition of provisional duties, if any, are expected by 7 August 2013.

Trade

EU-U.S. FTA negotiations to impact energy relations

EU authorities are getting ready to start negotiations with the United States on a Transatlantic Trade and Investment Agreement (TTIP), with Member States due to grant the European Commission a mandate to start negotiations on behalf of the European Union this month. The Chairman of APCO's Global Political Strategies, Bill Richardson - former US Secretary of Energy (1998-2001) and Governor of New Mexico (2002-2010) - was in Brussels this month, sharing his insights about this topic with members of the industry and European institutions.

The TTIP is sure to have an impact on EU-U.S. energy relations. For starters, U.S. restrictions on the export of liquefied natural gas (LNG) to Europe would likely be lifted - currently, the United States only exports LNG to countries with whom they have an FTA. That said, in light of the shale gas boom the United States has witnessed in recent years, there is a debate in Washington, D.C. about potentially lifting these restrictions immediately, with a draft bill recently introduced in the Senate to that effect.

It is clear, however, that the energy implications of an EU-U.S. FTA on energy would go way beyond LNG exports. With the negotiations likely to focus on non-tariff barriers and the mutual recognition of standards, energy technology developers on both sides of the Atlantic would stand to gain. For instance, in light of the opportunities to extract shale gas in Europe, U.S. companies that have developed hydraulic fracturing technologies will look forward to a more open framework for exporting their products. European renewable energy developers could also benefit from a renewed EU-U.S. dialogue on the production of clean power.

Emissions Trading System

ENVI seeks to rescue the backloading proposal

Last month the European Parliament rejected the Commission's bid to reform the EU's Emissions Trading System (ETS). Dubbed the "backloading" proposal, the Commission seeks to control the supply of allowances in order to increase the current historically-low prices. The dossier has been sent back to the Environment Committee (ENVI), where its members will seek to reach a new agreement.

With the new round of ENVI negotiations due to take place this month, some of the committee's members are considering introducing new amendments to further protect energy intensive industries. This, they hope, will help the proposal survive the next Plenary vote and become EU law. Chris Davies MEP, the shadow rapporteur for the Alliance of Liberals and Democrats for Europe (ALDE Group), has proposed to set up a new round of NER300 funding, with the revenues collected to be used to finance technological developments which help to reduce emissions in energy intensive industries. In a move designed to ease concerns raised by centre-right European People's Party (EPP) MEPs, who do not want to allow the Commission to intervene in what they believe should remain a free market, Green MEP Bas Eickhout has proposed to clarify that this would only be a one-off intervention .

Still, this negotiation's outcome still looks far from certain. The EPP, the largest parliamentary group, remains largely divided on this issue.

Ukraine

Energy Diversification through LNG

Ukraine is stepping up efforts to weaken Russia's dominance over its energy sector and tackle Gazprom's monopolistic position as the country's only gas supplier.

With 60% of Ukrainian energy supplied in the form of Russian gas, and with the price of gas in Ukraine among the highest in Europe, the country is particularly keen to take steps toward diversifying energy supplies and reducing its gas bill. Ever since the gas wars of 2006 and 2009, which saw supplies from Russia cut off during the coldest part of the year, Ukrainian energy independence has also been a key priority for EU Member States reliant on Ukraine as a transit country - currently 84% of Russian gas supplies to Europe arrive through Ukraine via pipelines.

In a recent report, the UK's House of Lords noted that high levels of dependency on gas from Russia can leave countries vulnerable in the event of disruptions and highlighted the development of liquid natural gas (LNG) as a potentially important method to help ensure greater energy security. Since LNG does not rely on fixed pipelines - but, instead, allows gas to be transported via tankers - it can be supplied with greater ease and flexibility. This can therefore result in reduced dependency on individual countries.

To this end, Ukraine is including LNG in its strategy to diversify its energy supplies. As well as exploring the country's potentially vast reserves of shale gas, and implementing reverse flow technology to import Russian gas from countries such as Germany and Hungary at a cheaper cost than from Ukraine's Eastern border, the country is also moving ahead with its project to construct an offshore LNG regasification terminal on the Black Sea coast**. This aims to secure up to 25% of the country's gas supplies in the form of LNG shipped from the United States or Qatar. Ukrainian Vice Prime Minister Yuri Boyko anticipates that LNG may arrive at the Black Sea coast as soon as 2014.

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