1 1999 Energy Report
3 1999 Energy Report Letter of the Minister for Economic Affairs to the Speaker of the Lower House of Parliament The Hague, 15 November 1999 The Third White Paper on Energy 1995 announced that an energy document would be published at least once every four years. That energy document, now called the Energy Report, has been legislated for in the 1998 Electricity Act. The Gas Bill also stipulates that the Energy Report will relate to gas supplies. This is the 1999 Energy Report. This first Energy Report looks back at the developments in past years and sets out lines for the future. The report indicates the steps the government wishes to take in deregulating the electricity and gas markets and in the field of renewable energy. The 1999 Energy Report is being submitted to the General Energy Council for its recommendations. I look forward to a stimulating debate with your house. The Minister for Economic Affairs A. Jorritsma-Lebbink
4 A publication of the Ministry of Economic Affairs This Energy Report has been presented to the Speaker of the Lower House of Parliament November 1999 Copies are obtainable from: Ministry of Economic Affairs Information and News Department Order number 13B65A P.O. Box EC The Hague Telephone +31 (0) (on weekdays between 9.00 and hours) Fax +31 (0) internet
5 Contents Chapter 1 Setting the scene 1.1 Introduction Liberalisation Sustainability as an objective 8 Chapter 2 Energy, a secure supply 2.1 Introduction Reserves and prices Reserves Prices Uninterrupted supply Oil and crisis policy Gas 15 Chapter 3 Consumer, market and public sector 3.1 Putting the energy consumer in a stronger position The changing role of the public sector: from player to director The public sector as director Acting as director in gas Liberalisation: legislation and pace Legislation Pace of liberalisation Freedom of choice for eco-power customers International level playing field Privatisation and restructuring of companies 26 Chapter 4 A sustainable energy system 4.1 Directions of policy Demand-driven approach Other instruments Additional policy measures Energy conservation Energy conservation targets Combined heat and power Renewable energy Aims, definitions and developments Demand, supply and directions of policy A promising approach Clean fossil Nuclear energy 40 Summary and conclusions 41 Appendices 44
7 1999 ENERGY REPORT 7 Chapter 1 Setting the scene 1.1 Introduction Four years ago the Third White Paper on Energy 1 was published. It focused on policy on the road towards liberalisation and stimulating a sustainable energy system. It was also announced that the Minister of Economic Affairs would publish an Energy Report at least once every four years: a strategic document on the development of energy policy. The legal basis for the Energy Report is the 1998 Electricity Act, and the Gas Bill stipulates that the Energy Report should also cover the supply of gas. Since the publication of the Third White Paper on Energy the key areas of policy mentioned above have been fleshed out, a European directive has been issued on the liberalisation of electricity and gas and international agreements have been made on the approach to the climate problem. At the same time practical experience has also been acquired. This first Energy Report considers this in detail and indicates aspects of policy where adjustments and more intensive work are required. 1.2 Liberalisation The Electricity Act 2 and the Gas Bill break through the monopoly situations that existed previously. Customers are gradually being given the opportunity to choose their energy suppliers, and suppliers will therefore have to compete to win customers. The aim is to ensure that customers, both businesses and consumers, are better served: improved quality and service at relatively lower prices. Freedom of choice is essential for this: the best incentive for a company to improve is to give its customers the opportunity to switch to a different supplier. Experience abroad and in the Netherlands (albeit limited in the latter case) have shown that greater efficiency results in lower prices for all customers. Energy prices are then increased to a higher level through levies in order to influence the process of making choices in the direction of energy-efficient behaviour and the use of renewable energy sources. At the same time the proceeds are largely passed back to consumers, and as a result they have a real interest in a more efficient energy supply. Energy provision is a vital part of the economy. The prospect of a more efficient energy supply is therefore a good reason to continue pursuing the same course. The government has and will continue to have a clear public responsibility in terms of security of supply, the protection of vulnerable groups and meeting targets in the areas of energy conservation and renewable energy. The process of transition to a liberalised market conditioned by stringent public constraints is therefore being guided and evaluated and instruments are being provided for it. The players in the market are under constant government scrutiny. The necessary regulations have been included in the Electricity Act and the Gas Bill for just this purpose. These regulations guarantee: Electricity networks with sufficient quality and capacity. Access to the network for suppliers and customers at the lowest possible cost. That all customers (not only free customers) are allowed to benefit from increased efficiency and lower prices. That supervision of the implementation of the law, the networks and pricing is well regulated. Hence more scope is provided for the players in the market, albeit within clearly defined legal frameworks. A conditioned market is being created, with the government providing a watchdog function through the Dutch Electricity Regulatory Service (Dte) and the Netherlands Competition Authority (NMa) and by monitoring developments. The government can intervene where necessary. The environment is an important constraint in this whole process, both nationally and internationally. The policy in the areas of energy conservation and renewable energy is still a high priority. In order to live up to this the instruments that are used must be tailored to the new situation in the market. This can be achieved by addressing energy consumers more directly, through the pricing mechanism, financial incentives, regulations and voluntary agreements. From player to director Until now the public sector has been a player in the energy market, among other things as the owner of power companies. That situation is changing. Does this now mean that the public sector is withdrawing into the wings? The answer is no: the role of the public sector is changing, but it is still considerable. Until now the public sector has been not only a producer and supplier, but a regulator and enforcer as well. To use theatrical language, the public sector is both a player and the director at the same time. That is what is changing: the public sector is becoming less and less of a player, but more of a director. The players act out the drama, and the director creates the conditions and determines the casting. He is aiming to produce a performance that will provide a good service to his customers, the audience. In energy terms, 1 Parliamentary Papers II, 1995/96, , nos Bulletin of Acts, Orders and Decrees 1998, no. 427
8 1999 ENERGY REPORT 8 the aim is to achieve a system of energy management that is both efficient and sustainable. Regulation and proper supervision are vital in order to achieve this. Therefore: The public sector closely monitors security of supply. The public sector ensures that customers can get a connection to the networks under reasonable conditions. The NMa and the Dte ensure that transport charges are reasonable. The public sector is authorised, where electricity is concerned, to instruct network companies to improve the quality or capacity of their networks where necessary. The public sector ensures that the benefits of efficient market operation are passed on to all customers through tariff regulation for captive customers. A monitoring system will be used to keep track of developments and intervene where necessary. There is the Voluntary Agreement on Benchmarking Energy Efficiency 3 (Benchmark Agreement for short), which ensures that energy producers will be among the absolute leaders in the world in terms of efficiency. There is an extensive range of instruments to stimulate the sustainability of the energy management system. Pace of liberalisation stepped up Developments are happening fast, particularly within electricity generating and distribution companies. Mergers and acquisitions, including those extending beyond the national borders, new parties entering the market, public utilities that are rapidly being transformed into market-driven organisations: these are all things that are leading to a rapidly changing structure in the energy sector. The position of power companies is strengthened as a result, so that it is desirable to put customers in a stronger position as well by giving them a choice more quickly. The OECD has advised the Netherlands to do so. Liberalisation is also moving quickly on the international scene, and in most cases it is going much further than the minimum opening up of the market that is compulsory for EU Member States. In many EU countries the pace of liberalisation is faster than it is in the Netherlands. Partly as a result of this there is pressure at national level to step up the pace: The business sector, consumers and consumer organisations want to benefit more quickly from the advantages offered by the market: freedom of choice, tailor-made solutions and the possibility of negotiating lower prices. Power companies are increasingly demanding faster liberalisation; one reason for this is that they are being overtaken on all sides by active newcomers from countries where liberalisation took place much earlier. When considering the desired pace at which to open up the gas market, lessons can be learned from developments in the electricity sector. The obvious thing to do is also to accelerate that pace. During the next four years the electricity and gas market will continue to develop. The increasing dynamism in the Netherlands and the surrounding countries and the benefits for customers make it desirable to reconsider the pace of liberalisation. The experience of other countries in opening up the market shows that the process really can be accelerated, with demonstrable advantages for all users. The important question is whether that is also the case in the Netherlands and what criteria need to be set. Proper network management and supervision by the Dte and the NMa certainly constitutes one of these. 1.3 Sustainability as an objective Suppliers in the energy market will have to take into account the increasing awareness of quality among consumers. Contractors, equipment suppliers and suppliers of other products that determine energy consumption have already noticed this. This quality awareness is not going to bypass the energy sector. Energy users will not only be asking for a highquality product (security of supply), but they will also be imposing demands on the way in which it is produced ( ecopower ). The energy sector will have to deliver this quality. Regional and local authorities will have to protect the environment (for example with regard to acid emissions) through regulations and licensing. One important aspect of sustainability is the limitation of the CO 2 emissions associated with fossil energy production. Since the signing of the Kyoto protocol in 1997, limiting emissions of greenhouse gases is no longer optional. Within ten years the Netherlands must reduce its emissions of greenhouse gases by 6% as compared with 1990, and must do so under circumstances (economic growth and higher consumption) that could result precisely in an increase in emissions. This objective will therefore have to be placed in an international context. The Implementation Policy Document on Climate Policy 4 describes how the Netherlands is planning to meet the Kyoto emission target. Considerable significance is attributed to energy conservation and renewable energy. The pace of energy conservation must be increased as quickly as possible from 1.5 to 2% 5 and the share of renewable energy must rise to 5% in 2010 and to 10% in The Netherlands is 3 Parliamentary Papers II, 1998/99, , no.21 4 Parliamentary Papers II, 1998/99, , no. 2 5 See: Ministry of Economic Affairs, Energy Conservation Action Programme, 1999 (EZ )
9 1999 ENERGY REPORT 9 Four conditions associated with the Dutch target agreed in Kyoto The target agreed in Kyoto for the Netherlands is a 6% reduction in emissions of greenhouse gases in as compared with The government coalition agreement sets out the following conditions for the ratification of this emission target: Ratification of the climate treaty by the US and Japan. Actual implementation of Community measures such as the promotion of renewable energy, energy conservation, combined heat and power (CHP), measures in the traffic and transport sector, waste sector, industry and agriculture. Introduction of a significant European energy tax, also for bulk consumers, by 2002 at the latest. Sufficient scope (about 50%) for the use of flexible instruments such as Joint Implementation, Clean Development Mechanism and Emission Trading. During the next four years energy conservation and renewable energy must continue to grow. The greening of the tax system is giving this process a significant boost. One important part of the greening process is the gradual increase in the energy tax. In order to continue to encourage the demand for renewable energy, this form of energy has been exempted from payment of the energy tax. In addition, a system of renewable energy certificates, or green certificates, will be introduced. Obstacles to the trade in renewable energy will also be removed. It is proposed that all players in the market should be allowed to offer eco-power. It is vital, however, for national and other authorities to deploy new resources to eliminate problems on the supply side. Determined efforts are therefore being made to solve location and integration problems for renewable energy. thus imposing very high standards in comparison with other countries. The targets set will require a considerable effort by the public sector, private consumers and companies. According to estimates by the Netherlands Bureau of Policy Analysis (CPB), simply increasing the conservation rate will require an annual investment of NLG 3 billion. 6 A share of 5% renewable energy means an annual investment of approximately NLG 1 billion in generation capacity. 7 The greening of the tax system will give a significant boost to the demand for energy conservation and renewable energy in the next few years. The Regulatory Energy Tax (Regulerende Energiebelasting - REB) has already meant that energy conservation measures and renewable energy options are moving towards being profitable. This effect will become more pronounced during the next few years with a further increase in the energy tax, combined with the reduced levy and the zero tariff for eco-power. Energy conservation and renewable energy are also being encouraged using many other financial instruments, regulations, incentive programmes run by the Netherlands Agency for Energy and Environment (Novem) and Senter, and through research and development programmes. Nevertheless, by no means all the difficulties can be solved in this way. Hence the problem of spatial planning in relation to wind energy is an obstacle that must be overcome if wind energy is to continue to grow. This will require a strong and, if necessary, forceful approach. 6 See: Ministry of Economic Affairs, White Paper on Energy Conservation, 1998 (EZ ) 7 Netherlands Energy Research Foundation (ECN), De bijdrage van duurzame energie in Nederland tot 2020, 1999, and calculations by the Ministry of Economic Affairs.
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11 1999 ENERGY REPORT 11 Chapter 2 Energy, a secure supply 2.1 Introduction The availability of energy is dependent on the existence of adequate energy reserves in the world. In this chapter we will consider security of supply. One important question is whether the reserves are available at a reasonable price. Price expectations are therefore also considered. A second factor in security of supply is uninterrupted delivery. If there is enough energy, can that energy find its way to customers? Section considers the policy on the oil crisis and possible problems with the supply of gas. Methane hydrate gas In addition to non-conventional oil, natural gas hydrate fields or clathrates are also interesting. These are large quantities of natural gas that arise in pockets in deep seabeds. If these become extractable, the world is expected to have sufficient fossil fuel for many hundreds of years. We have not reached that stage by a long way, but the U.S. Department of Energy has already developed an R&D programme that will make it possible to extract methane hydrate gas within fifteen years Reserves and prices Reserves The world has huge reserves of fossil energy. The perspective on the size of the reserves has changed considerably in recent decades. During the 1970s and early 1980s people were convinced that the reserves would soon be exhausted. Since then new reserves have been identified with the help of new extraction and exploration techniques, and existing reserves can be exploited more effectively and more cheaply. Table 2.1 gives an overview of the expected energy reserves in the world. This table also gives the expected demand for energy during the period from 1990 to The juxtaposition of supply and demand gives an indication of whether or not fuel shortages will arise. 8 See: U.S. Department of Energy, Office of Fossil Energy, A strategy for methane hydrates research & development, 1998 The table shows that commercially and technically extractable reserves are more than sufficient to satisfy the global demand for fossil energy until at least The World Energy Council (WEC) carried out these calculations together with the International Institute for Applied Systems Analysis (IIASA). They were based on two assumptions: growth in the world economy of almost 3% per annum, and reserves that are extractable using today s technology at today s market prices. The International Energy Agency (IEA) also takes technological innovation into account in its estimates of the reserves. This fits in with experience gained in previous decades. Improved exploration and extraction techniques mean that reserves can be identified more effectively and that more oil and gas can be extracted from existing (and new) sources than is the case at the moment. The IEA s estimates therefore work out rather higher than those of the WEC/IIASA. Table 2.1 Energy reserves in the world [Gtoe*] according to IIASA/WEC Fuel Cumulative demand Commercially and technically Reserves not yet commercially extractable reserves or technically extractable Oil Conventional Non-Conventional Gas Conventional Non-conventional Coal Uranium Total * Giga tonnes of oil equivalent (Source: Global Energy Perspective, IIASA/WEC, 1998)
12 1999 ENERGY REPORT 12 Table 2.1 Extractable reserves by region (Gtoe*) according to the IEA * Giga tonnes of oil equivalent Source: World Energy Outlook, IEA 1998 North-America FSU Europe and North-Africa China oil-conventional oil-non-conventional gas-conventional gas-non-conventional coal South/Middle America Mexico Other Africa Middle East Other Asia Pacific (Australa, New-Zealand, Japan) cumulative consumption ultimate recoverable reserves Table 2.1 provides information not only about reserves but also about the geographical distribution of those reserves around the world. It is noticeable here that there is a significant difference between the distribution of conventional and nonconventional reserves (mainly oil). Conventional oil reserves are mainly concentrated in the Middle East. Non-conventional reserves (oil from tar sands and the like) are mainly situated on the American continent. As time passes, non-conventional reserves will become more important. The geographical distribution of production will become more balanced as a result. The cost of extracting and refining non-conventional oil is higher, in most cases, than the cost of processing oil from conventional sources. The cost of extraction currently varies between USD 5 (very heavy oil from Canada, the United States and Mexico) and USD 17 (shale oil from the United States and oil from tar sands in Canada and Venezuela) per barrel. 9 In many cases extra processing stages are also needed before the oil is usable. It will therefore depend on the world market price whether and to what extent non-conventional oil is exploited. This is evidently linked to the gradual exhaustion of conventional sources and the consequent rise in the price of conventional oil. Oil from non-conventional sources currently meets 5% of the total demand for oil Prices The world oil price is an important reference point for prices of other types of fossil energy. The oil market is a highly developed market with many players. In the gas market more and more gas-to-gas competition is taking place, i.e. price competition between different gas suppliers. Nevertheless, oil and gas are still substitutes and therefore competitors to a certain extent. This applies, for example, to the various ways of generating electricity using gas. The prices of these important energy sources will therefore not develop in strict isolation from each other. Many scenarios assume that the long-term oil price will fluctuate between USD 15 and USD 25 per barrel until Naturally, major fluctuations may occur temporarily as a result of specific circumstances. For instance, the oil price fell to about USD 10 per barrel at the beginning of 1999 due to increased production in the OPEC countries and due to the crisis in Asia. The restrictions on production by OPEC countries and the economic recovery in Asia have now caused the oil price to rise again to more than USD 20 per barrel. If the prices move outside the aforementioned range for a long period of time, adjustments in production can be expected. If prices are below USD 15, exploitation of more and more sources becomes loss-making, production will likely fall 9 See: IEA, World Energy Outlook, 1998
13 1999 ENERGY REPORT 13 Development of demand in long-term energy scenarios A number of institutions has published scenarios in which they estimate the demand for energy and the supply. Scenarios have been produced for the medium term (up to 2020) by the CPB and, internationally, by the IEA. For long-term estimates, the scenarios produced by the WEC/IIASA, the International Panel on Climate Change (the IPCC, a UN organisation) and Shell can be used. This Energy Report uses the long-term scenarios from the WEC/IIASA. The following distinction can be made: and prices will rise again eventually. The opposite can be expected when prices are higher. Given the trend in the cost of non-conventional oil, it is debatable whether the upper limit is not on the high side, and whether the increase in production will take place earlier, for example when the oil price is more than USD 20. Below that level most conventional sources can be exploited profitably, but not much competition is expected from non-conventional sources. Above that level nonconventional sources become increasingly important. Changes in fuel price have an impact on electricity prices. The liberalisation of the electricity (and gas) markets is also significant. Under the influence of increased competition and due to overcapacity, there will be clear downward pressure on prices. 1 Scenarios depicting continuing rapid growth in the demand for energy: energy-intensive growth In this group of scenarios the demand for energy per capita increases virtually parallel with economic growth. Assuming population growth to 12 billion people by the year 2100 and average economic growth of 2 to 3% per annum, this will result in an increase in the total global demand for energy of 1.5 to 3% per annum. In a reasonably competitive market, the profitability of the various energy sources will determine the fuel mix. According to the scenarios, this will be more diverse than at present. Although the consumption of fossil energy is not falling in absolute terms, its share of the energy mix will be cut to 50-60% by After that the share will continue to fall slowly. The share of coal will continue to be substantial, assuming cleaner combustion is possible; the share of oil and gas will fall considerably from 2030 onwards. Various forms of renewable energy will absorb the increasing demand for energy. The share of nuclear energy will be 10 to 15%. Renewable energy options such as solar energy, wind energy and geothermal power are expected to become profitable as a result of a new technology leap during the first half of the next century. 2 Scenarios depicting lower growth in the demand for energy: energy-extensive growth In this group of scenarios the demand for energy per capita will remain approximately the same. Demand per unit of GDP will fall. The economy is dematerialising due to more efficient use of energy and materials on the one hand, and due to a more energy-extensive structure on the other. Assuming population growth to 12 billion people by the year 2100 and average economic growth of 2 to 3% per annum, this will result in an increase in the total global demand for energy of 0.5 to 1.5% per annum. The total demand for energy in 2050 will ultimately be lower by almost half than in the scenarios depicting energyintensive growth. It is noticeable that the fuel mix does not differ very much. This is determined by the demand for clean, cheap energy. This is met by renewable and nuclear energy respectively. The extent to which this can happen and how quickly will depend on technological advances, the availability of capital and government policy.
14 1999 ENERGY REPORT 14 Diversification Until recently a policy of diversification was pursued in the Netherlands and in other European countries in relation to the use of fuel. The reason for this was the high level of dependence on a single energy source and on a small number of producing countries on the one hand, and reducing the risk of sharp price increases on the other. In view of the current distribution of fuels within the EU Member States, there is no reason for the Dutch government to seek to influence the use of fuel types for reasons of security of supply or price stability. Furthermore, the market has turned out to be perfectly capable of offering security of delivery and stable prices. If there is a greater need for more diversification of fuel types in future and the market is not meeting this need itself, then the obvious solution will be to pursue a policy of diversification on a European level. 2.3 Uninterrupted supply In the previous section it was noted that energy reserves are adequate. The figures also indicate that, in the long term, the geographical distribution of oil reserves will become more balanced and that oil supply will gradually become less vulnerable. Nevertheless, there are still international agreements on the policy to be pursued in the event of an oil crisis. The picture with regard to the gas supply in Europe is more subtle. As time passes, dependence on countries in the former Soviet Union and Algeria will increase. The question of whether this will increase vulnerability is considered in Section also obliged to make such provisions. The existence of a crisis policy has a certain preventive effect. Western countries have reserves for a minimum of ninety days, which means that turning off the oil tap will not hurt immediately. The party turning off the oil tap will, however, feel the lack of income right from day one. In the longer term it could even lead to a loss of their position in the market for producing countries, as purchasing countries look for alternative sources or suppliers. Shutting off the oil tap completely has therefore become a very expensive political weapon. Internationally, a great deal of value is still rightly attached to having adequate reserves to cover the eventuality of a serious interruption in supply. However, the question is whether, in view of the changes in the oil market, the principles and structure of the international policy are still fully in step with the times. The Netherlands will raise this question during international consultations and will ask for particular attention to be devoted to increasing flexibility concerning the use of crisis reserves and to a more detailed analysis of the necessary size and quality of those reserves. Independent of the outcome of these consultations, a proposal to modernise the Dutch oil crisis policy will be presented to the Lower House in late The desire to do this led to the beginning of the reconsideration of Dutch policy as early as The General Energy Council (AER) published a recommendation in 1998 on the revision of policy. 11 This recommendation has been incorporated in the new plan. figure 2.2 Gas supplies to Europe Oil and crisis policy In recent decades the European Community and later - after the oil crisis in the IEA have formulated an oil crisis policy. Commitments entered into within the context of the European Union (EU) and the IEA define the outlines of national crisis measures. 10 In comparison with the 1970s there is a broader spread in the supply of crude oil. Thanks to Information and Communications Technology (ICT) and developments in logistics, there is also a much better understanding of oil reserves and oil flows. Nevertheless, the possibility of a new oil crisis can never be ruled out. It is therefore useful to make arrangements in case supply problems should arise. On the basis of agreements made within the context of the IEA and the EU, the Netherlands is 10 The commitments ensue from the International Energy Programme (IEP), the relevant Directives 68/414/EEC, amended by Directive 98/93/EC and Decisions 77/706/EEC and 79/639/EEC". 11 See: AER, Oliecrisisbeleid tussen risico en realiteit, 1998
15 1999 ENERGY REPORT 15 The basic principles of the new oil crisis policy are simplification and an improved market focus. The compulsory national reserve should consist more of the operating reserves existing in the Netherlands. Specific crisis reserves can then be reduced. In the event of a crisis, only minor measures would have to be taken to limit demand. The major demand limitation measures can be abolished Gas The importance of gas in energy supply in the Netherlands and Europe will increase during the next few decades. Europe will become more dependent on less stable regions for its supply of gas. This could make the European energy supply more vulnerable. It can, however, be said that: The Netherlands is easily able to absorb import problems at present, thanks to flexible production in the Groningen field and thanks to underground storage. The supply has been extended and is more widely distributed due to the increase in the number of pipelines from Asia and Africa to Europe. There are also plans to extend the Liquid Natural Gas (LNG) infrastructure. Research by the IEA 12 has shown that even if one of the producers in the European market did close down on a large scale, no acute problems would arise. The Energy Charter has been regulating international cooperation in the field of energy for several years now, in order to reduce the risk of interruptions in supply. The Charter was signed in 1991 by all European countries, the countries of the former Soviet Union, the United States, Canada, Australia and Japan. 13 In view of these points, the vulnerability of the Dutch and European gas supply does not seem to be increasing. Until now the security of the Dutch supply has also been guaranteed by the fact that Gasunie reserves a 25-year supply of gas, mainly from domestic supplies, for the total expected Dutch demand. In a liberalised market where customers can buy their gas anywhere and suppliers have free access to the networks and can therefore supply their gas everywhere, this is no longer appropriate. This is because there is no longer any certainty that domestic customers will want to buy the gas. There is also no reason from the point of view of security of supply to place a limit on the level of production in the Netherlands. That does not mean that the level of production of Dutch gas will be completely free and can be determined purely by commercial reasons. Within the framework of prudent management of national mineral resources, it is desirable to establish rules governing the rate at which the Dutch gas fields are depleted. We will consider this in more detail in chapter 3, section See: The IEA Natural Gas Security Study, In 1994 the same countries, with the exception of the US and Canada signed an Energy Charter Treaty in order to create legally enforceable certainties for the business sector. The Maghreb countries, which include the important gas producing country Algeria, are considering accession to the Treaty.
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17 1999 ENERGY REPORT 17 Chapter 3 Consumer, market and public sector 3.1 Putting the energy consumer in a stronger position The position of the energy consumer is a central factor in the development of public sector policy on the energy market. The dynamism of energy markets dependent on pipelines and cables is increasing in all EU countries. Until 1 January 1999 there was no freedom of choice. With the exception of a small number of major gas consumers, every customer was condemned to use the power company in his or her own region. No negotiation on prices was possible. In the new situation, customers have freedom of choice and companies will have to make more of an effort to acquire and keep their customers. This places the consumer in a stronger position. This development has far-reaching implications for public sector policy. This is because the public sector still has to guarantee that the quality of supply remains at a high level even in this more dynamic situation, and also ensure that no one gets left out. 3.2 The changing role of the public sector: from player to director The public sector as director The public sector is still responsible for ensuring a good supply of energy. The way in which this task is fulfilled is changing, however. Until recently the public sector had a strong guiding role in the organisation of the energy sector. Strategic decision-making was a joint responsibility for businesses, the government and Parliament. In the electricity sector, for example, all important investment decisions were preceded by a broad social debate. These players are still very much involved in the gas sector. The government itself is less and less of an active player in the energy sector. That means clearer relationships and responsibilities. Hence the public sector increasingly has an essential part to play as the regulator and guardian of objectives and constraints, and is therefore taking on the role of director of the energy market. The underlying principle in the new situation is that there will be more scope for the other market players, so that consumers can choose. The key factors for effective market operation and a good supply must be ensured through legislation. Gas and electricity are such essential commodities that the public sector will always retain a significant responsibility. This is referred to as conditioned operation of market forces. National government is therefore still responsible for legislation. Actual supervision of the functioning of the market is the responsibility of the NMa. This will have a central part to play in making sure that the market works well. The Dte is part of the NMa and will eventually be integrated within it. The government also has an important part to play in the field of town and country planning and the environment. It therefore imposes constraints on the workings of the energy market, as is the case for other markets Acting as director in gas Even in a liberalised energy market the government is still responsible for the prudent management of our national mineral resources. The Netherlands still has significant quantities of extractable gas. The large Groningen field still has reserves of more than 1200 billion cubic metres. By 1 January 1999 a total of 341 smaller gas fields had been discovered. Of these, 167 are in production. Twelve fields have now been exhausted. The remaining 162 fields have not yet started production. This situation is dependent on economic factors. The vast majority of these fields have initial reserves of less than 4 billion cubic metres. The aim of the policy on small fields is to discover, develop and operate still more fields, with an optimum yield for society. The quantity of natural gas in small fields amounts to 600 billion cubic metres, including futures (see Table 3.2). The current climate in the mining industry is such that the majority of these fields will actually start production. The purchasing policy of Gasunie is an important component of the climate in the mining industry. Gasunie is willing and able to accept production from small fields on a priority basis and with a high load factor. This is possible because Gasunie is able to adjust its purchases from the large Groningen field in order to make room for gas from small fields. The favourable characteristics of the Groningen field should therefore remain available for as long as a reasonable supply from small fields is expected. That imposes limits on the depletion rate: excessive production would rapidly bring forward the time when there is no longer the flexibility to accommodate the fluctuating production from small fields. Against this background it is still desirable for the Minister for Economic Affairs to determine what quantity of gas can be extracted from Dutch reserves each year on average. Within that quantity, production from small fields is the priority, assuming efficient extraction. The rest can be made up with production from the Groningen field. The level at which the average annual quantity is set is therefore mainly significant with regard to Groningen. It has already been indicated above that this quantity must not be too large. It must not, however, be too small either. Production from the Groningen balancing field should not be reduced to the point where operational problems arise. The operators of the Groningen field also demand a reasonable depletion rate.
18 1999 ENERGY REPORT 18 Table 3.1 The changing role of the public sector, from player to director Theme Role of the public sector in the past Role of the public sector in the past (before 1 January 1999) Security of delivery Joint director of the energy sector Legislation and supervision Authority to allocate/duty to supply (gas) Providing transparency through the publication of performance results on quality (result of Lower House amendment) 14 Security of supply Monitoring, oil crisis policy and determining Determining the rate of depletion solely the rate of depletion of natural gas reserves, on the basis of prudent management of partly on the basis of the cumulative expected national mineral resources. Monitoring and demand over 25 years oil crisis policy unchanged Ownership of power companies Owned by regional authorities Diminishing role due to increasing privatisation Use of fuels in electricity Approval of electricity plan by the Minister Creating constraints on the basis of generation for Economic Affairs after consultation with environmental policy the House Electricity prices Approval of maximum prices by the Minister For the free part of the market, no role for Economic Affairs (at a higher level than apart from NMa supervision the most efficient supplier) For monopoly functions the Dte sets prices (means more influence on prices than before) Captive customers: Minister for Economic Affairs sets prices Domestic gas tariffs Approval by the Minister for Economic Affairs For the free part of the market, no role apart from NMa supervision Captive customers: Minister for Economic Affairs sets prices Gas exports Approval by the Minister for Economic Affairs No role: export at market prices Establishment of electricity Fully regulated Generation: no role, freedom of establishment supply company subject to environmental protection constraints Networks: regulated: Delivery: no role after 2007, delivery is then free Freedom of choice Legally regulated monopoly Market gradually becoming completely free, for consumers hence a diminishing public sector role Governance of electricity Observer for the Minister for Economic No role supply companies Affairs at Supervisory Board meetings of the Dutch Electricity Generating Companies and Generating Board (SEP) Gas extraction Granting of concessions by the government Extraction licences in conformity with the on the basis of the Mining Act and the new Mining Act Continental Shelf Mining Act Management of mineral Government sets depletion rate, small fields Unchanged resources policy and national gas production 14 Amendment introduced by Dutch MP Crone (Parliamentary Papers II, 1998/99, , no. 28)
19 1999 ENERGY REPORT 19 figure 3.2 Opening of the electricity market Situation in The Third White Paper on Energy stated that, with a view to good reserve management in future years, a continuation of the present average production level in the Netherlands of approximately 80 billion cubic metres per annum is necessary and justified. The White Paper also announced that the Energy Report would also consider whether the level is still correct. The following factors have an important part to play here: Situation of Dutch reserves, including futures. Production prognosis for small fields, which must be in line with policy on small fields. Period during which the Groningen field will remain able to fulfil its balancing function. The reserve position has already been described above. On the basis of this it can be concluded that it will be necessary to take into account the integration of production from small fields for a long time to come. In recent years production from small fields has been 50 to 55 billion cubic metres per annum and it is expected that this level will be maintained in the next couple of years. This means that the scope for production from the Groningen field is currently 25 to 30 billion cubic metres per annum. At that depletion rate, according to current opinions, the flexibility offered by Groningen will continue to be available for long enough. There is therefore no reason to revise the average production level of 80 billion cubic metres per annum set out in the Third White Paper on Energy. Figure 3.1 Development of gas reserves (billions of cubic metres) in the Netherlands Groningen field Other onshore fields Continental shelf Situation in % 45-90% 100% 33-45% 45-90% 100% 3.3 Liberalisation: legislation and pace Legislation The liberalisation of energy markets dependent on pipelines and cables essentially comprises the following points: The new Electricity Act allows freedom in the area of electricity production. Anyone can set up a power station without a special licence. Environmental policy does, of course, still play a vital part. Customers are given the freedom to decide who they will buy their electricity or gas from. The market is changing from being supply-driven to being demand-driven. A recognisable and approachable regulator (NMa and Dte) to strengthen the consumer s position and prevent the abuse of dominant positions. Quality of supply becomes transparent. As a result of an amendment by the Lower House 15 power companies have to publish details of their performance. The organisation of access to electricity networks and gas pipelines will take on a key role. The network must be accessible under transparent, nondiscriminatory conditions. Transport charges for electricity will be regulated. Transport charges for gas will be determined in a good negotiating climate. A procedure for dealing with disputes offers a way out if problems do arise. The Electricity Act makes it compulsory for networks to be accommodated within separate companies. This is because the networks will increasingly also be used by companies competing with their owner. The relationship between the owner and the company is regulated in the Electricity Act and was recently defined in more detail in a Policy Rule from the Minister for Economic Affairs. 15 Amendment introduced by Dutch MP Crone (Parliamentary Papers II, 1998/99, , no. 28)
20 1999 ENERGY REPORT 20 The debate with distribution companies on the organisation of the management of electricity networks is now coming to an end. Initially the proposals from companies to regulate the network management system did not meet the requirements of independence. The new proposals do seem to meet these requirements. The legislation that applies to the networks guarantees that all consumers can use the network at reasonable tariffs. Network companies managing electricity networks have an obligation to provide a connection. In the gas market the Competition Act provides for the system whereby everyone who wishes to participate in this market has access to a connection under reasonable conditions. This satisfies the government s continuing duty to provide proper access to these essential facilities for all users. Evaluation The Electricity Act and the Gas Bill contain certain evaluation stipulations. Within four years after they come into force, the Minister for Economic Affairs will report to the House on the effectiveness and impact of the Acts in practice. This may lead to the conclusion that some aspects of one or both of the Acts need to be adapted. The evaluation will in any case examine the following: The quality of service Security of supply, reliability, customer satisfaction, efficiency and the level of prices. Actual developments in the market Dynamism (customers changing supplier, diversity of contracts), market structure (vertical and horizontal integration), development of prices, effect of the Amsterdam Power Exchange (APX), imports, consequences for smallscale consumers. How network management functions Is network management sufficiently independent of the commercial activities of companies, new problems and their solutions, existing problems. How supervision and the constraints imposed are functioning The effects of action taken by the NMa and the Dte, opportunities and limitations in relation to their supervision, current specific competition rules. 16 During the next few years the process of change will be followed closely and charted through regular surveys. Two studies have already been carried out within this framework; these can be seen as a zero (i.e. reference) measurement. Amsterdam Power Exchange (APX) The ambition of the APX is to develop into an international electricity exchange. A sound exchange is a central location for price setting, leading to an increase in the transparency and accessibility of the market. A spot market and probably also a futures market will develop. A futures market of this kind offers the possibility of protecting against the risk of price changes in the longer term. The APX is open to all players in the market (suppliers, consumers and traders) and has clearly expressed its ambition to play a part in the gas market too. Background The APX has been set up according to the Scandinavian model, which means that trading is private and voluntary. There is no question of a compulsory supply of electricity through an exchange, similar to the situation in the United Kingdom. The exchange is a private initiative based on voluntary participation by consumers and suppliers, and it is accessible to producers, traders and consumers alike. The exchange began its activities on 19 February The advantage of an exchange is that there is a central location for price setting, which helps to make the market more transparent. The exchange is initially focusing on the spot market (24 hours ahead, a day ahead to absorb temporary surpluses and shortages). Other options in future will be the development of a long-term market and a (very) short-term market (two hours ahead), the possibility of offering gas or, if a system for trading in green certificates is developed, offering renewable energy. The level of unity in the development of exchange prices/indices in different countries is an indication of the openness of the market. The development of prices in the free market within Europe can be followed on the basis of exchange prices at Nordpool (mainly hydroelectric power), UK pool, Swiss Index, the Spanish Exchange, and the Dutch APX, for example on the internet. It is expected that price setting through the exchange will result in greater price differentiation during the day as a result of the fact that supply and demand will be better matched. Further information at: 16 See: EIM (Economic Institute for Market Research), meting van marktwerking in de elektriciteits- en in de gassector, 1999, and Arthur D. Little, Marktwerking in de leidinggebonden energiesector, 1999.