USEU SCENESETTER FOR UNDERSECRETARY JEFFERY'S

UNCLAS SECTION 01 OF 04 BRUSSELS 000226

SIPDIS

SENSITIVE
SIPDIS

EPT FOR OES
DEPT FOR EUR/ERA
DEPT FOR EEB/ESC

E.O. 12958: N/A
TAGS: ECON ENRG EPET ETRD EU SENV
SUBJECT: USEU SCENESETTER FOR UNDERSECRETARY JEFFERY'S
MEETINGS WITH EU OFFICIALS ON 12 FEBRUA


1. (SBU) Welcome to Brussels. Your visit comes at an
opportune time, as the EU is struggling to develop a common
energy policy, internally and externally. Recent Commission
proposals on internal market liberalization and climate
change measures have met with considerable skepticism from
member states intent on protecting their large energy firms
and their prerogatives over the energy mix. The energy
policy debate is raging among the Community institutions,
industry and public. A deep uneasiness about Europe's
dependence on Russia as an energy supplier adds to this
ferment, and the Commission and the Council are working
together to develop a more coherent external energy strategy
for the EU.


2. (SBU) The Europeans view energy security in broad terms
-- to include alternative sources and supply of gas,
development of additional renewable resources, research into
clean coal, and the deployment of nuclear power plants in
selected EU member states. And overlaying the energy security
debate here is the imperative that European leaders see to
combat climate change. It is thus almost impossible to have
energy-related discussions here in Brussels without
addressing each of these parts of energy security: internal
EU market liberalization, measures to address climate change,
and external energy policy.


3. (SBU) Your schedule here covers players in the EU
institutions involved in developing a common EU energy policy.

-- Energy Commissioner Piebalgs has the lead role in the
Commission on both the internal energy liberalization and the
energy/climate package; his is obviously also the key
Commission voice on external energy policy. With him, you
can note the connection between an open EU energy market and
demand for Caspian and Central Asian gas; strengthen his
support for Nabucco and TGI; underline the importance of
appropriate investment policies, and highlight U.S.-EU
collaboration on energy technologies that address climate
change.

-- Competition Commissioner Kroes also plays a critical role
on energy policy as competition policy is the one area in
which the Commission has autonomous power. You should query
why existing policy instruments cannot be brought to bear
today to open the market and address the problem of dominant
foreign suppliers such as Gazprom. The main issue is the
"unbundling" of French and German vertically integrated gas
and electric companies.

-- Internal Market Commissioner McCreevy you of course know;
although you will want to use this meeting to discuss broader
economic and finance issues, he can also provide you
important insights into the dynamics of EU policy formation
on energy security.

-- Common Foreign and Security Policy High Representative
Solana was charged to work with the Commission to fashion the
EU's external energy policy, and is well-placed to provide
insights into the dynamics among the member states on this
issue.


4. (U) We have also arranged for you to have a working lunch
with the EU reps of some of the key companies involved in
Nabucco and energy development in the former Soviet Union,
including the Caspian and Central Asia regions: British
Petroleum, OMV, RWE and others.


--------------
Proposals
--------------


5. (U) The energy sector has been something of an anomaly in
the European Community, as the member states have jealously
guarded their prerogatives over national monopoly providers
and the energy mix. Russia's January 2006 disruption of
Russian gas to Ukraine and its knock-on effects on Europe
changed all this as the new EU members in Central Europe
highlighted the Community's vulnerability to a dominant
Russian supplier. European Commission President Barroso and
High Representative Solana saw their opportunity to bring
energy fully into the Community's ambit, and, as a result of
their efforts, the European Union is now moving ahead with

BRUSSELS 00000226 002 OF 004


major initiatives on energy market liberalization, external
energy security, and renewable energy. In September 2007,
the European Commission presented the "Third Energy Package"
intended to increase competition and investment in the
internal market for gas and electricity. In January 2008, as
part of its Climate and Energy Package, the Commission
submitted proposals to increase the share of renewables in
the energy mix, promote energy efficiency, and create
cleaner-burning fossil fuels. The Commission is also
promoting a number of pipeline projects to help meet expected
increases in
European gas demand.

--------------
INTERNAL ENERGY MARKETS
--------------


6. (U) New energy sector liberalization proposals under
consideration in the EU could have an important role in
facilitating distribution of gas from the east, whether
through Nabucco or any other pipeline system. The two draft
directives and three draft regulations the Commission
proposed in September 2007 are designed to ensure greater
competition and third party access by effectively separating
the supply/production of electricity and gas from
transmission networks. Under the proposals, vertically
integrated suppliers must either sell off their transmission
networks or arrange for their transmission operations to be
done by a completely independent subsidiary. In order to
ensure that this effective "unbundling" applies as well to
non-EU suppliers, the proposals prohibit any company owned by
third country nationals from controlling gas pipelines and
high voltage lines in the EU, although this prohibition can
be waived if the home country of the firm has a bilateral or
multilateral agreement with the European Community.


7. (U) The liberalization proposals have met with strong
opposition from the member states, led by France and Germany.
This Franco-German coalition appears strong enough to block
Commission plans for full ownership unbundling. On the other
hand, the coalition's recently proposed third option for
"Effective and Efficient Unbundling" does not go far enough
to address Commission concerns over lack of competition and
investment in the transmission networks. As such, we expect
an extended debate in the Council and Parliament over this
issue.


8. (SBU) We obviously support the EU's move toward energy
liberalization because it will stimulate economic growth and
contribute to creating the demand needed to support Nabucco
and the Turkey-Greece-Italy interconnector. We also share
the EU's concern about Gazprom taking advantage of unbundling
to expand its position in Europe. The "anti-Gazprom" clause,
however, creates a far more restrictive approach to
investment in the energy transmission sector than is
necessary to achieve the EU's objectives. This is the first
time the Commission has proposed such a strict limitation on
foreign investment (outside the aviation sector). And
ironically the provision might affect countries like the U.S.
more than Russia, as the United States has no energy-related
agreements with the European Community whereas Russia can
arguably point to its signature of the Energy Charter Treaty
(ECT) and the EU-Russia Partnership and Cooperation agreement
as reasons to waive the prohibition. (Note: Russia has not
yet ratified the ECT.) While the clause may not survive in
the final directive, you should offer to have our experts
work informally with the Commission to find language that
achieves our shared strategic ends without unduly restricting
the EU's generally open capital markets.


9. (SBU) Competition Commissioner Neelie Kroes, with whom
you will be meeting, is outspoken about the need for
competition in the energy sector, and has pursued fines
against a number of EU energy firms for competition
violations. Your meeting with Kroes will be a good
opportunity to stress our support for market liberalization
while at the same time reinforcing our desire for a careful
approach that does not unfairly penalize potential investors.
You will also have the opportunity to raise our concerns
over the third-country restrictions with Internal market
Commissioner McCreevy, who is partially responsible for EU
laws governing cross-border investment. He and Finance
Commissioner Almunia were reportedly the only two

BRUSSELS 00000226 003 OF 004


Commissioners to express concern about the treatment of
companies from third countries when the energy package was
debated in the college of Commissioners. Although he did not
succeed in effecting changes to the text, he will be an
influential voice in the debate on the energy package this
year. Your meeting provides an opportunity to underscore our
strong commitment to avoiding restrictions on foreign
investment in the European Union.

--------------
EXTERNAL ENERGY POLICY
--------------


10. (U) About one-quarter of European energy consumption is
based on natural gas. Recent predictions suggest that gas
demand in the EU will more than double by 2030, while
Europe's own production is declining; meeting the new demand
will require significant increases in gas-import capacity.
The International Energy Agency estimates that European
demand could increase by about 200 billion cubic meters, or 7
trillion cubic feet, over the next two decades from 500
billion cubic meters now. To meet these needs the EU will
have to develop a number of new transport pipelines.


11. (U) To date, the Commission has taken an open approach
to new gas infrastructure projects. While publicly
supporting Nabucco and TGI thy have also supported the
Russian Nord Streamand South Stream projects, even though
South Stream, which would transport about 30 billion cubic
meters of gas a year from Russia and Central Asia via a
sub-Black Sea route that bypasses Turkey, is a direct
competitor to the Nabucco project.


12. (U) The Commission and Council have proposed a more
robust role for the European Union in developing an external
energy policy. Javier Solana, whom you will see, just last
week delivered a speech in which he argued for a more
effective EU coordination on external energy issues.
Commissioner Piebalgs supports this as well. The revision of
the European treaties that is due to come into effect in 2009
gives the EU additional say over crafting and implementing a
common external energy policy. But the EU does not speak
with one voice on external energy issues, with Central
European member states closest to Russia most concerned about
it - and about continued German courting of Moscow. This was
displayed over the past couple of weeks as Gazprom made
further inroads into the gas distribution and supply in
member states.


13. (U) One specific concern we have heard and that would be
worthwhile raising with Commissioner Piebalgs and Solana is
that the EU appears to be less supportive of the
Turkey-Greece interconnector. We should emphasize to EU
officials that TGI is key to developing another gas corridor
of gas out of the Caspian region. We will also have an
opportunity to discuss this in more detail with Piebalgs when
we have our Energy Security Review discussions in Washington
in early March.

--------------
ENERGY AND CLIMATE CHANGE
--------------


14. (U) While its external powers are still relatively
limited, the Commission has power under environmental and
internal market rules to promote broad measures on climate,
energy security, and competitiveness. Commissioner Piebalgs
and others will likely raise these issues with you because
the Commission sees energy security as part of a broad
package of measures including renewables, clean coal, nuclear
power, and emissions trading, in addition to new sources of
gas supply.


15. (U) On January 23, the European Commission released a
new energy and climate change legislative package to
implement the March 2007 mandate from EU leaders to achieve
reductions of 20 percent in EU carbon emissions, increase
renewable energy to 20 percent of the EU total, and reach 10
percent biofuels use - all by 2020. The package includes
proposals to revise the EU Emissions Trading Scheme (EU ETS)
post-2012 and to implement new EU targets on renewable
energies through burden sharing among EU member states. The
renewables legislation includes a separate mandate for

BRUSSELS 00000226 004 OF 004


biofuels and, controversially, lays out a scheme for
certifying the "sustainability" of biofuels. This provision,
ostensibly directed to prevent forests and wetlands from
being affected by the "rush" to biofuels, could create a
massive bureaucratic swamp and have a particularly
deleterious impact on developing countries. The Commission
also presented a draft legal framework on carbon capture and
storage (CCS),designed to permit the geological storage of
carbon dioxide. The Commission also has presented recently
several initiatives designed to promote the development of
energy and climate technologies, including hydrogen fuel
cells and cleaner commercial aircraft, which offer the
opportunity for third country participation.


16. (U) Now that Commission President Barroso has presented
the package of initiatives to the European Parliament, it
will need to pass both the EU Council and Parliament to enter
into force, not expected before the end of the year. As the
EU attempts to grapple with the treatment of energy intensive
industries under the new rules, Barroso has indicated that
certain industries could be eligible for special provisions.
In particular, several sectors may continue to get their
emissions allowances for free under the Emissions Trading
System, if the Commission determines that significant carbon
"leakage" could occur (for example, a steel plant moving to a
country without binding CO2 emissions requirements.) Barroso
indicated in a speech this week that international sectoral
agreements could help, but that the Commission would be
prepared to act if no sectoral or overall international
climate agreement is reached.


17. (SBU) If time permits, it would be worthwhile to discuss
these energy and climate issues with Piebalgs. We cooperate
actively with the EU on energy R&D, biofuels, carbon capture
and storage, energy efficiency and other such issues, and
indeed will have a series of meetings related to them the
week after your visit and on the margins of WIREC, which
Piebalgs will attend. Ideally, we would like him to be a
more forceful advocate of a technology-driven approach to
climate change in the Commission's internal deliberations
about MEM and the UNFCCC. And it would be a bonus if he
could underline the extent of our collaboration to help us
convince the European public that we take climate change
seriously.


18. (SBU) To sum up, you are coming to Brussels as key
energy and climate-related proposals have been tabled and are
being debated widely. The European Commission and Solana are
frustrated by the lack of a common EU energy policy and have
tried to push the EU to take a more central role on energy.
But with member states still jealously guarding their
prerogatives, it has been difficult for Brussels to develop a
coherent EU-wide approach to energy. You will have the
chance to lay down our markers and promote further
collaboration with the EU. For, though its energy policy is
nascent, Brussels does have powers and is pressing for more.
As such, we have the chance to deepen our relationship,
particularly on our strategic energy concerns.

Murray
.