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DE RUEHBS #1273/01 2311400
ZNR UUUUU ZZH
R 181400Z AUG 08
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHAH/AMEMBASSY ASHGABAT
RUEHTA/AMEMBASSY ASTANA
RUEHKB/AMEMBASSY BAKU

UNCLAS SECTION 01 OF 05 BRUSSELS 001273 
 
SENSITIVE 
SIPDIS 
 
H FOR CODEL LUGAR 
 
E.O. 12958: N/A 
TAGS: EAGR ECON ENRG EPET EU
SUBJECT: SCENESETTER FOR LUGAR CODEL MEETINGS WITH EU 
OFFICIALS ON 3-4 SEPTEMBER, 2008 
 
¶1.  (SBU) Welcome to Brussels.  Your visit comes as the EU 
struggles to develop a common energy policy, internally and 
externally.  One goal of the French EU Presidency is to reach 
political agreement by the end of the year on the EU 
Commission proposals on internal energy market liberalization 
and climate change.  This will not be easy as the proposals 
face opposition from member states intent on protecting their 
large energy firms and their prerogatives over the energy 
mix.  The debate turns on "unbundling" at natural gas and 
electricity energy conglomerates.  That is, separating as 
enterprises the supply (power generation or gas supply) from 
the transmission, as we have been doing in the U.S. for some 
years now.  Mixed into this question is whether Russia's 
Gazprom should be able to buy up European companies in the 
gas and electricity sectors.  Gazprom as the ultimate 
supplier of 25 percent of the natural gas used in Europe 
(with almost total dominance of the market in Central Europe) 
could put itself in complete control of the vertical energy 
chain in Europe.  Starting with the gas wellheads in Siberia 
and ending at the meters attached outside apartments in 
Poland, Germany, and France.  The Europeans should quake at 
this prospect and are.  A deep uneasiness about Europe's 
dependence on Russia as an energy supplier adds to this 
ferment.  The Commission and the Council are working together 
to develop a more coherent external energy strategy for the 
EU.  Finally, Climate change issues are embedded in the EU 
psyche and play a part in any European discussion of energy 
issues. 
 
¶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 construction of nuclear power plants in 
EU member states that favor nuclear power.  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.  You can, 
and we hope will, use this connection to our advantage, by 
underlining our common need to collaborate in the development 
of new energy technologies to address our climate and energy 
security concerns. 
 
¶3.  (SBU) Your schedule here covers: 
 
-- Energy Commissioner Piebalgs.  He has the lead role in the 
Commission on both the internal energy market liberalization 
and the energy/climate package; his is also the key 
Commission voice on external energy policy. 
 
-- Common Foreign and Security Policy High Representative 
Solana.  He works with the Commission on the EU's external 
energy policy, and can speak to the dynamics among the member 
states on this issue. 
 
-- Competition Commissioner Kroes.  She also plays a critical 
role on energy policy, as competition policy along with trade 
policy are two areas in which the Commission has autonomous 
power.  Kroes has successfully used this power to go after 
major energy firms, notably in Germany and France, and U.S. 
companies such as Microsoft and Intel.  But she has been 
reluctant to consider using the same powers to tackle 
anti-competitive practices by Russia's Gazprom. 
 
-- EU Political and Security Committee.  We have also 
arranged for you to meet informally with the Council's EU 
Political and Security Committee.  This body has recently 
been concentrating on issues like combating piracy and the 
crisis in Georgia that have implications for the security of 
energy supplies.  The PSC Ambassadors will also be doing 
preparatory work ahead of the September 5-6 informal meeting 
of EU Foreign Ministers in Avignon (the "Gymnich") in which 
Ministers are expected to discuss the situation in Georgia 
and informally brainstorm on transatlantic relations. 
 
-- Tri-Mission Dinner.  Ambassadors Silverberg, Fox, and 
Volker will be co-hosting a dinner for you with individuals 
involved in EU, Belgian, and NATO security policy. 
 
-- Caspian Region Ambassadors.  If time permits, you will 
also be meeting with the Ambassadors from Azerbaijan, 
Kazakhstan, and Turkmenistan.  Each of these countries plays 
a role in the EU's plans to increase Europe's energy security 
 
BRUSSELS 00001273  002 OF 005 
 
 
by opening up a southern corridor to bring gas supplies from 
the Caspian region to European markets. 
 
-- Director General for DG Agriculture, Jean-Luc Demarty. 
Also if time permits, we plan to arrange a meeting for you 
with the Director General for DG Agriculture, Jean-Luc 
Demarty, to discuss the inter-related issues of biofuels and 
genetic engineering.  Mr. Demarty has been involved in the 
WTO Doha discussions on agriculture. 
 
--------- 
Proposals 
--------- 
¶4.  (U) The energy sector has been something of an anomaly in 
the European Community, as the member states jealously guard 
their prerogatives over national monopoly utility providers 
and the energy mix.  Russia's January 2006 cutoff of Russian 
gas exports to Ukraine was a wake up call for Europe on its 
vulnerability to a dominant Russian supplier.  Russia's 
current conflict with Georgia will no doubt further these 
concerns. 
 
¶5.  (U) European Commission President Barroso and EU Council 
High Representative Solana saw their opportunity to bring 
energy more fully into the Community's ambit.  As a result of 
their efforts, the EU is now moving ahead with major 
initiatives on energy market liberalization, external energy 
security, renewable energy, and climate change. 
 
¶6.  (U) 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 has also been promoting a number of gas 
pipeline projects to help meet expected increases in European 
gas demand. 
 
----------------------- 
Internal Energy Markets 
----------------------- 
¶7.  (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 from 
Russia or the Caspian region.  The Commission's legislative 
package of two draft directives and three draft regulations 
proposed in September 2007 are designed to ensure greater 
competition and third party access by effectively separating 
supply/production of electricity and gas from transmission 
networks. 
 
¶8.  (U) Under the proposals, vertically integrated suppliers 
would have to either sell off their transmission networks or 
arrange for their transmission operations to be done by an 
"independent" subsidiary.  Just how independent this 
subsidiary would actually be is currently being debated.  To 
ensure that this effective "unbundling" does not result in 
transmission firms being bought up by foreign interests, the 
so-called "Gazprom Clause" would prohibit foreign (non-EU) 
companies from controlling gas pipelines and high voltage 
lines in the EU, although this prohibition could be waived if 
the home country of the firm has a bilateral or multilateral 
agreement with the EU.  While we agree with the geostrategic 
considerations behind the Commission proposal, we are 
concerned that the provision as drafted could unintentionally 
affect potential U.S.  investment in these transmission 
networks. 
 
¶9.  (SBU) Two key aims of the internal market reforms are to 
increase competition, and to encourage the building of 
iterconnections among member stat's electricity and gas 
grids.  The potential gas grid interconnections could play an 
imprtant role in enhancing European energy flexibiity and 
security.  For many of the countries f Central Europe the 
gas pipelines run one way (east to west) and many of these 
countries are heavily dependent on Russian gas supplies for 
their energy needs.  Currently, if these Russian gas supplies 
are disrupted, there are no alternative supplies available. 
Building interconnections among these member states, however, 
would allow for gas to be rerouted from one member state to 
another in such an emergency. 
 
¶10.  (U) The Commission's proposals initially called for 
 
BRUSSELS 00001273  003 OF 005 
 
 
"full ownership unbundling" in the energy sector.  However, a 
blocking minority of six countries in the Council (led by 
France and Germany) opposed forcing large energy producers to 
give up ownership of their distribution networks and proposed 
the so-called Third Option, which allows the continued 
existence of vertically integrated energy companies, but at 
the same time lays down strict conditions to ensure that 
transmission system operators do not discriminate against new 
market entrants. 
 
¶11.  (U) On June 6, Energy Ministers reached a political 
agreement on the Third Option, which is now also being backed 
by the Commission.  In its first reading the European 
Parliament backed away from full ownership unbundling for 
gas, but supported full ownership unbundling for electricity. 
 The French Presidency of the EU is determined to reach a 
political decision on the Third Energy Package by the end of 
this year.  If political agreement is reached by the end of 
the year, it could enter into force early next year.  The 
provisions would then go to the Member States where they 
would have to be transposed into national law before they 
actually take effect.  However, if political agreement is not 
reached by the end of the year, the process likely will be 
postponed until after the Parliamentary elections next summer 
and perhaps much longer. 
 
---------------------- 
External Energy Policy 
---------------------- 
¶12.  (U) About one-quarter of total European energy 
consumption is based on natural gas.  Recent International 
Energy Agency (IEA) predictions suggest that gas demand in 
the EU will more than double by 2030, while Europe's own 
production -- now primarily from the North Sea and Norway -- 
is declining.  Meeting the new demand will require 
significant increases in gas-imports and import capacity. 
The IEA estimates that annual European demand could increase 
by about 200 billion cubic meters (bcm), or 7 trillion cubic 
feet, over the next two decades from 500 bcm now, while 
production declines from roughly 300 bcm to about 200 bcm. 
Today Russia itself accounts for about a quarter of the EU 
27's import needs, while imports from Norway, Algeria, and 
the Caspian and Central Asian states through Russia comprise 
the remainder.  The dependence on Russian gas is much higher 
for many Central European countries who rely on Russia for 
more than 75 percent of their gas imports.  The EU will have 
to develop a number of new transport pipelines if it is to 
reduce this over-dependency on gas coming from and through 
Russia. 
 
¶13.  (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, has 
publicly argued for more effective EU coordination on 
external energy issues, with the strong backing of the 
Central European states, who are most concerned about 
Gazprom's hegemony and continued German courting of Moscow. 
EU Energy Commissioner Piebalgs supports this as well.  The 
Treaty of Lisbon, rejected in the recent Irish Referendum, 
contains language intended to give the EU additional say over 
crafting and implementing a common external energy policy. 
That said, many member states remain divided on what the 
policy should be, and the EU does not speak with one voice on 
external energy issues.  Russia has excelled at exploiting 
the divisions among member states with Gazprom continuing to 
make inroads into European gas distribution and supply. 
 
¶14.  (SBU) To date, the Commission has publicly taken an open 
approach to new gas infrastructure projects.  While 
supporting the Nabucco and Turkey-Greece-Italy Interconnector 
(TGI) pipeline projects they have also supported the Russian 
Nord Stream and South Stream projects, even though South 
Stream, which could transport about 30 bcm of gas a year from 
Russia and Central Asia via a Black Sea route that bypasses 
Turkey, is a direct competitor to the Nabucco project. 
Privately, Commission officials have indicated they prefer 
the non-Russian solutions, but view South Stream as a 
convenient bargaining tool in transit negotiations with 
Turkey. 
 
¶15.  (SBU)  In the fall of 2007 the Commission appointed 
Jozias Van Aartsen, former Dutch Foreign Minister and current 
Mayor of the Hague, as a special Coordinator for the Nabucco 
project.  Van Aartsen's original mandate was to facilitate 
the negotiation of the transit agreement and necessary 
 
BRUSSELS 00001273  004 OF 005 
 
 
inter-governmental agreements to enable the Nabucco project. 
Van Aartsen's mandate has since been redefined to include all 
the Southern Corridor projects intended to bring Caspian 
region gas to Europe.  Van Aartsen's focus so far has been on 
working with Turkey to arrive at terms for a transit 
agreement that would be attractive to European buyers and 
Caspian producers, while still meeting Turkey's concerns over 
its own security of gas supply concerns.  The major sticking 
point from the EU side has been Turkey's insistence on a 15 
percent take off clause allowing Turkey to take 15 percent of 
any gas flows at a reduced rate. 
 
¶16.  (SBU) The U.S. has been supportive of the EU's efforts 
to open up the Southern Corridor.  Special Envoy C. Boyden 
Gray and Deputy Assistant Secretary Matt Bryza in particular 
have held numerous discussions with the Europeans, Turkey, 
and representatives from producer and consumer states with 
the aim of encouraging them to find a middle ground that will 
allow the gas to flow.  From the U.S.  standpoint, opening 
the Southern Corridor is a win, win, win scenario, in 
providing greater independence for the Caspian States, 
increasing Turkey's ties with the West, and increasing 
Europe's energy security. 
 
------------------------- 
Energy and Climate Change 
------------------------- 
¶17.  (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 an integral part of a 
broad package of measures including renewables, clean coal, 
nuclear power, and emissions trading, in addition to new 
sources of gas supply. 
 
¶18.  (U) On January 23, the European Commission announced 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 by 2020. 
Although this legislation is not quite as far along as the 
energy liberalization package, again the French intend to 
push this to at least political agreement by the end of their 
presidency. 
 
¶19.  (U) One of the most hotly contested parts of this 
package is the allocation of the greenhouse gas (GHG) 
reduction among the member states.  Poland recently broke 
ranks over emissions caps proposed in the new legislation, 
arguing that reducing dependence on coal -- currently 96% of 
Poland's electricity generation -- in favor of renewables 
would present a large obstacle to economic growth.  Poland's 
other option, replacing coal with natural gas, would require 
a new dependence on Russia, which Poland claims will 
sacrifice energy security.  Poland claims to have up to eight 
member states supporting it, although these have not yet been 
identified.  In addition, many of Europe's traditional 
energy-intensive industries - including steel, autos, 
chemicals and cement -- are deeply concerned that the EU's 
ambitious GHG reduction targets could seriously disadvantage 
them globally; they could at the very least try to ensure the 
EU retains the ability to "level the playing field" by 
imposing a carbon tax on imports. 
 
¶20.  (U) A third issue is the development and use of 
renewable energies.  The Commission included proposals to 
increase renewable energy to 20 percent of the EU total and 
reach 10 percent alternative fuels use for transport, also by 
¶2020.  (The transport directive is often called the biofuels 
mandate, named for the fact that biofuels are expected to 
comprise the majority of the 10 percent, as opposed to 
hydrogen fuel cells or electric cars.)  The biofuels mandate 
has come under the most scrutiny because of the fuel or food 
argument and also because of concerns raised over 
sustainability. 
 
¶21.  (SBU) The EU, like the United States, understands that 
measures that enhance energy technology to address climate 
change concerns are also directly related to energy security 
needs.  That said, they often emphasize the climate 
connection in their rhetoric, and distinguish their own 
"environmental" aspirations from our "energy security" 
concerns.  We have been trying to erase this false dichotomy 
by emphasizing that the U.S. and EU have shared concerns on 
 
BRUSSELS 00001273  005 OF 005 
 
 
both global warming and energy security, and that stepped-up 
transatlantic collaboration on energy technologies helps 
address both.  It will be helpful if you can reinforce this 
theme in your public comments by pointing to the robust 
domestic energy program the President and Congress have 
instituted, as well as our robust and growing U.S.-EU 
cooperation on energy efficiency, biofuels, hydrogen fuel 
cells, solar power, and carbon capture and sequestration. 
 
¶22.  (SBU) It will also be extremely useful if you highlight 
the President's efforts to advance the UN Framework 
Convention on Climate Change (UNFCCC) negotiations through 
the Major Economies Process.  Any international agreement 
that does not include binding commitments on China and other 
key emerging countries will likely draw a skeptical response 
in Washington.  This is also a shared U.S.-EU interest; we 
need the EU to work more actively with us to attain a global 
solution. 
 
¶23.  (SBU) To sum up, you are coming to Brussels as key 
energy and climate related proposals are being debated 
widely.  The European Commission and Solana are frustrated by 
the lack of a common EU energy policy, but with member states 
still jealously guarding their prerogatives it has been 
difficult for Brussels to play a greater role.  Though its 
energy policy is nascent, Brussels nonetheless does have 
powers and is pressing for more. 
 
 
Silverberg 
.