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DE RUEHBS #0226/01 0391820
ZNR UUUUU ZZH
R 081820Z FEB 08
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMUC/EU CANDIDATE STATES COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUCNEUD/EUR DTSPO SITES COLLECTIVE

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 
.