Energy is rarely out of the headlines these days, but how much progress is the EU making in its quest for a long-term strategy? Sebastian Vos charts the ups and downs of EU energy policy, and suggests some basic goals for policymakers
At first, energy was a driving force behind the European project. But then, for many years, energy policy was left largely to national governments. As an EU-level issue it only regained some momentum with two waves of single market liberalisation that started in the 1990s. And now, of course, recent developments have revived Europeans’ common interest in energy and put it back at the top of the EU agenda.
We all know the reasons behind this; oil prices are at an all time high, Russia caused a scare at the start of this year by cutting its gas supplies and a number of EU member states broke ranks by heading off cross-border energy mergers with “national solutions”. Underlying Europe’s concerns is the knowledge that today’s 50% dependence on energy imports is likely to rise to 70% by 2030.
The European Commission and the member states have recognised the need for action, and in March and again in June the European Council stressed the need for an “Energy Policy for Europe”. A coordinated EU policy is clearly needed, but what should it be?
Cooperation in coal as well as steel production gave birth to the EU’s forerunner, the European Coal and Steel Community, followed by Euratom in 1957. But these key drivers in the early integration process were soon overtaken by other priorities, so much so that the ambitious Single Market project unveiled in the mid-1980s failed to include energy. Recognising somewhat belatedly that energy is a key to EU competitiveness, the Commission initiated two waves of liberalisation that in the last decade have changed the energy landscape. The first wave was from 1996 to 1998, with the first gas and electricity directives aimed at opening up national energy markets, and the second began in June 2003 with a further set of gas and electricity directives. These stipulated the opening of national markets for all non-household gas and electricity customers by July 2004, and for all customers by July 2007. This liberalisation drive is intended to bring about a full opening of energy markets through greater competition and lower prices, while at the same time safeguarding high standards of public service and ensuring a universal service obligation. In other words, more competition with more consumer protection. But has it worked?
To determine how competitive the EU energy market really is, the Commission is currently working on a “Competition Enquiry” into the whole energy sector. Its final report is due in December, but draft conclusions show that although in theory market forces should lead to a more efficient allocation of resources, the EU’s liberalisations have not delivered the innovation, openness and low prices they were supposed to. Are member governments to blame, or is it the newly privatised companies who are holding things back? The Commission seems to think both are responsible.
Last April, the Commission mounted one of its biggest judicial assaults to date by starting “infringement proceedings” against all member states except the Netherlands for not meeting their energy market obligations. The charges in hundreds of separate cases vary, but all relate to EU governments’ failure to abide by EU legislation on the opening-up of their gas and electricity markets.
Far worse than dragging their feet on liberalisation, countries like Spain and France have been busily erecting barriers to protect their energy markets. When in February German energy giant E.ON made a €29bn bid for Spain’s Endesa, the Spanish government quickly issued a decree giving its National Energy Commission powers to veto or impose conditions on takeovers of domestic utilities. Madrid openly favoured a takeover of Endesa by another Spanish energy group, Gas Natural.
Soon after, France too announced a surprise volte face. After more than a year of discussions between the formerly state-owned water and power company Suez and the still state-owned Gaz de France that had initially met with opposition from the French government, it now backed the deal. Although there is a good business case for the Suez-Gaz de France deal, the announcement came just after Italy’s biggest electricity group, Enel, had made a hostile bid for Suez.
There is a longstanding argument that some areas of a national economy embody strategic or public security interests that require governments to intervene. But these moves to thwart cross-border mergers and acquisitions have raised EU-wide concerns that a new mood of “economic nationalism” meaning protectionism, is taking root.
The energy companies have not escaped criticism either. Competition Commissioner Neelie Kroes has said that the energy sector’s market structure is still excessively concentrated, and that this reflects the “old market structure of national or regional monopolies”. In May, Commission officials carried out surprise inspections known as “dawn raids” on the headquarters of some of Europe’s largest energy utilities, including E.ON, RWE and Gaz de France. A number of them, including former state monopolies, now stand accused of blockading their home markets against other European competitors and keeping prices artificially high. The investigations are still ongoing, but it is no secret that the Commission feels that many of Europe’s energy companies could do much more to ensure that the benefits of liberalisation are shared with consumers.
In short, the European strategy for competitive energy faces a number of substantial obstacles. But the good news is that big energy companies across Europe are increasingly willing to go head-to-head with EU member governments that try to stand in the way of their cross-border merger plans. And the single market rules together with the EU’s merger regulation also give the Commission powers to deal with recalcitrant member governments like Spain and France. Charlie McCreevy, the EU’s internal market Commissioner, has warned that Spain’s decree violates the Union’s guarantees of free movement of capital, as well as the right to set up a business in any of the member states. When Madrid failed to explain satisfactorily its position within the deadline it was given, Mr McCreevy launched infringement proceedings. Commissioner Kroes has said that she will take a case-by-case approach, and has made it clear that she intends to prevent undue interference by any national government. She has stressed her belief in “Europe-wide competitors rather than dominant national players”.
The Commission has considerable powers to push for liberalisation, investigate possible abuses and, when pushed hard enough, to take action to counter protectionism. But what about Europe’s aims of secure and sustainable energy? Single market and merger control rules give the Commission some powers to influence Europe’s energy markets, but the Barroso Commission now seems keen to expand them further.
The Commission called in its green paper on energy policy for a common approach to dealing with foreign suppliers, compulsory gas storage, more green energy and a powerful European energy regulator. These proposals received a mixed reception from national governments, but they clearly demonstrate the Barroso Commission’s determination to use energy policy to unite Europe’s free-marketeers with the integrationists.
The EU would clearly benefit from a coherent external energy policy. Although the Union as a whole is the world’s largest importer of oil, gas and coal, energy relationships with third countries are a matter of national sovereignty and remain within the competence of member states. Formulating a common external energy policy that draws on the full range of the EU’s internal and external capabilities, would substantially reinforce Europe’s position when speaking to key suppliers such as Russia and OPEC.
Compulsory gas storage would also make sense. All members of the International Energy Agency have to hold minimum oil reserves, but there is no such system for gas. Most EU member states have at least several months’ gas supply, but others like Ireland, Sweden and Finland have no gas stocks at all. This makes not only those countries vulnerable, but also those around them.
An EU wide electricity grid and network of gas pipelines could, in the longer term, also contribute to better energy management and improve security of supply. Since all power systems need spare capacity in case of supply disruptions or surges, the bundling together of Europe’s separate national and regional networks and the sharing of spare capacity could yield substantial efficiencies.
The EU’s member states have made it abundantly clear, though, that they are not ready for a European regulator and do not want to be told what kind of energy they should use. The Commission was left in no doubt at the European Council summits in March and June of this year that the choice of “energy mix” will remain a national decision; domestic electorates, the Commission was told, would not look favourably on Brussels telling them, for example, whether or not they should use nuclear energy. But what the Commission could do is to encourage the drafting of EU-wide safety standards for nuclear energy, so that when countries do decide to go nuclear, at least their neighbours would have fewer worries. The EU could also look more seriously at taxation policies that favour environmentally friendly investment and innovation thus spurring market forces, rather than obstructing them with unnecessary legislation.
That the EU is now making a renewed push for liberalisation in the hopes of pushing energy prices lower is a positive development. And that it is looking to enhance efforts in other areas of energy policy is also good. But it is one thing to curb bad behaviour, and quite another to bring about good behaviour. In tackling issues related to security of supply there are gains to be had from the Commission and EU member states joining forces. But in developing a new policy, the third key ingredient, market forces, must not be forgotten. Market forces will be crucial to attaining the goal of an affordable, sustainable, competitive and secure energy supply for Europe.