1. EU Energy Policy Green Paper – A European Strategy for Sustainable,
Competitive and Secure Energy
AEP1
Response
1. Main Points
- AEP welcomes the publication of the Green Paper, which provides
a thorough and concise analysis of the current energy challenges
facing Europe;
- The Association is particularly pleased to note the Commission’s
emphasis on open energy markets, cost-effective policy options and
impact assessment of major proposals;
- There are nevertheless some inconsistencies between the Green
Paper’s support for open markets and the regular recourse to policy
targets;
- The Commission should give priority to implementing the existing
liberalisation package, focussing particularly on non-discriminatory
access to networks and removing barriers to cross-border trade;
- AEP does not see the need for a European energy regulator but
would welcome closer cooperation among national regulators
- The Association is opposed to any prescription of the fuel mix and
sees difficulties with the concept of a strategic energy benchmark;
- AEP does not support national targets for gas storage or for
interconnection; both should be built on a commercial basis;
- It is very positive that the Commission recognises the major
investment challenge now facing the energy industry; a stable
regulatory framework is needed to help deliver this investment;
- AEP is strongly opposed to early review of the Electricity and Gas
Security of Supply Directives, given that these measures have only
just been adopted;
- Demand-side measures, renewables and carbon capture are
important elements in a strategy to reduce greenhouse gas
emissions; however, nuclear energy and higher-efficiency fossil fuel
generation will also be needed if Europe is to meet its climate
change targets;
- It is crucial that longer time horizons are provided for future phases
of the EU Emissions Trading Scheme, so that companies are able
to undertake the necessary investments in carbon abatement;
1
The Association of Electricity Producers (AEP) represents large, medium and small companies
accounting for more than 90 per cent of the UK generating capacity, together with a number of
businesses that provide equipment and services to the generating industry. Between them, the members
embrace all of the generating technologies used in the UK, from coal, gas and nuclear power, to a wide
range of renewable energies.

2. - It should be a central objective of EU external relations policy to
reach an agreement with other major emitters on tackling climate
change.
2. General
The Association welcomes efforts to forge a more consistent and effective
energy policy across the EU. It is also helpful if the EU can speak with a more
unified voice on political issues related to energy.
Energy policy must take a long-term view and be underpinned by stable and
coherent regulation. It should be based on the three pillars of
competitiveness, sustainability and security of supply. Given current concerns,
the Green Paper understandably puts the focus on security of supply, but it is
equally important that the other two pillars are given due consideration. The
comments below are ordered in line with the six priority areas identified by the
Commission.
3. Completing the Internal European Electricity and Gas Markets
The Association strongly supports the development of a fully competitive EU
energy market. If this is to be achieved, it is crucial that the existing
liberalisation package is fully implemented by Member States. The
Association believes that particular priority should be given to ensuring non-
discriminatory access to networks and to creating more liquid gas markets.
We would also like to see more progress towards removing barriers to cross-
border trade. This will require greater cooperation between both regulators
and TSOs.
European Regulator
The Association does not see the need for a European energy regulator at
this stage, nor does the Green Paper provide strong arguments in favour of
one. Such a regulator could lead to additional layers of regulation, which
would run counter to the objective of an open market, and could raise
demarcation issues in relation to the European Commission and national
regulators. Similar issues have proved problematical in the USA.
On the other hand, the Association does see the need for more cooperation
and consistency between national regulators to ensure that electricity and gas
can more readily be traded across borders. The Association would like to see
closer alignment of the powers of national regulators and greater convergence
of regulatory approaches in the various Member States. In particular, when
regulators deal with cross-border issues, they should not take a narrow view
of national customers’ interests but take into account the benefits for the wider
European market.

3. Centre for Energy Networks
The Green Paper suggests the creation of a number of new institutions such
as a Centre for Energy Networks. There is now a plethora of energy
consultative bodies at European level, and in the Association’s view, new
organisations should only be set up if they provide a clear added value.
European TSOs already have an association in ETSO, which advises on
transmission network issues. The suggestion that a new grouping might
“report to energy regulators” and “implement schemes approved by the
relevant regulatory institutions” is too interventionist and runs the risk of
blurring the roles of TSOs and regulators. The Association therefore remains
to be convinced of the case for a Centre for Energy Networks.
European Grid Code
The Association would like to see clarification of what is meant by a European
Grid Code. There would be some value in a common market access code,
which would make it easier to trade electricity and gas across Europe. On the
other hand, full harmonisation of the technical rules set out in national grid
codes is unnecessary; there will inevitably be differences in the operating
requirements, for instance, of the Irish and UCTE networks. There should
therefore be clarity about the objectives of any code before it is developed.
Interconnection
The Association recognises that the construction of new interconnectors in
some regions would help the integration of the European market, but does not
support arbitrary targets for interconnection.
Greater interconnection is only one of several approaches which can be used
to promote competition and increase trade. Better management of the
generating reserve, the closure of old generating plant, and the construction
of new generating plant close to load centres can all have the same effect on
interconnector congestion as the construction of new lines. Arbitrary
intervention in transmission investment can distort the generation market and
should be avoided.
Consequently, new interconnection should be justified primarily through cost-
benefit analysis undertaken by TSOs or other developers. It is not sensible to
aim for a set level of interconnection across the EU. The Commission should
concentrate its efforts on creating the right conditions to enable investment in
new cross-border infrastructure and helping to tackle planning barriers. It
should be noted that interconnection is important not only for security of
supply and competition reasons but is also for the development of renewable
power generation.

4. 4. Security of Supply – Solidarity
The Association supports the principle of solidarity between Member States
but is unsure about how this will work in practice, e.g. the Commission
proposal for a mechanism to provide assistance to a Member State in case of
damage to essential infrastructure. It is important that the Commission does
not intervene in the market in the name of security of supply. To do so could
lead to unintended and damaging consequences.
Gas Stocks
The Association considers that the Commission’s attempt to reopen the
debate about strategic storage for gas is ill-timed. A similar proposal was
rejected by Member States in 2004 and there is no reason for it to be
reopened now. The imposition of minimum gas stocks will prevent efficient
investment by companies in gas storage and add to political risk, given the
uncertainty about when stocks would be released to the market. The
Commission should not be interventionist in this area when it promotes free
markets elsewhere. In the UK, new storage facilities have been built in recent
years, showing that the market adapts to new supply situations.
Review of Electricity/Gas Security Directives
The Association does not see any case for revising the Electricity and Gas
Security of Supply Directives just after they have entered into force. To amend
legislation before there is any real experience of implementation is not in line
with good regulatory practice.
5. Security and Competitiveness
The Association believes it is important that the principle of subsidiarity is
respected in the energy policy field, particularly with regard to choice of fuel
mix. EU energy policy should facilitate but not limit Member States’ fuel and
technology choices. The Association therefore fully supports the Green Paper
statement that “each Member State and energy company chooses its own
energy mix”.
EU Directives on renewables and emissions trading already provide a
stimulus to a more sustainable fuel mix reflecting environmental concerns.
The Association does not believe that an additional low-carbon target as
proposed by the Commission would be helpful. It would be difficult to define
benchmark of “secure and low-carbon” energy sources because this
combines two separate policy objectives. Moreover, it is unclear how
individual Member States could in practice be prevented from making their
own energy choices even if they were not in line with the benchmark.
The Association recognises that a Strategic Energy Review could help to
provide a clearer EU context for national and company decision-making.

5. However, it is important that such an approach is not used as a means of
restricting energy options. Fuel diversity is clearly an important element in
ensuring security of supply and EU policies should seek to promote it. AEP
would emphasise that market players themselves have a strong incentive to
diversity fuel sources and suppliers as a means of managing their risks.
6. Integrated Approach to Climate Change
The Association supports the Commission’s call for an integrated approach to
climate change and recognises the key role of the EU Emission Trading
Scheme. However, the Green Paper should place more emphasis on the
global dimension of climate change. The European Union will soon account
for less than 10% of global emissions and there is no logic in adopting a go-it-
alone approach. It should be a central objective of EU foreign policy to
achieve an agreement on future climate policy with other major emitters.
The Association also believes that a broad range of policy instruments will be
required to meet climate change targets, not simply energy efficiency,
renewables and carbon capture, as suggested by the Green Paper. In the
electricity sector, clean coal, other efficient fossil generation and nuclear
energy also have a major role to play.
The EU Emission Trading Scheme is the key instrument for delivering carbon
reductions in the EU. It is important that the EU clarifies, as soon as possible,
the long-term framework well beyond 2012 so that electricity generators have
greater certainty in relation to major investment decisions. The current three-
to-five year phases are simply too short. Moreover, governments and
regulators must avoid interference with the pricing mechanism, which
explicitly aims to increase the costs of fossil-fuel use
EU-wide initiatives on energy efficiency and renewables are also welcome in
order to ensure a level-playing field across the EU and contribute to a
sustainable energy policy. A renewables road map could be helpful in helping
to provide long-term stability for new investment.
The Association welcomes the broad range of energy efficiency initiatives
proposed by the Commission. All sectors, including domestic consumption
and transport must play their role in tackling climate change and promoting
efficient resource use. It must also be borne in mind that electricity
applications such as heat pumps, microwave etc can significantly reduce
energy consumption by displacing the direct use of fossil fuels.
AEP believes that more analysis needs to be done before an EU-wide White
Certificate scheme is introduced. While trading often promotes cost-effective
outcomes, risks are associated with the establishment of multiple certification
schemes, e.g. carbon, renewables, CHP, energy efficiency etc. In the longer
term, there needs to be some coherence between such schemes.

6. 7. Encouraging Innovation
The Association fully supports the development and deployment of new
energy technologies, e.g. carbon capture and storage, hydrogen, and wave
and tidal. In addition, research should be carried out into improving existing
technologies, for example clean coal.
AEP welcomes the increased involvement of industry stakeholders in EU R&D
programmes, such as the technology platforms. This should lead to more
practical outcomes than in the past.
8. A Coherent External Energy Policy
The EU should pursue a more unified common energy policy towards third
countries, but it should not limit Member States’ freedom to choose which
countries they wish to trade with.
The Association is in favour of more cooperation at European level and
believes that Commission negotiations with third countries should concentrate
on facilitating security and diversity of supplies. However, it should be kept in
mind that EU external policy is governed by unanimity, i.e. the EU can only
adopt a common standpoint if all twenty-five member states agree. It is
therefore unrealistic to assume that the EU can replace bilateral relations
altogether.
22nd
May 2006
Association of Electricity Producers
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