Seeking an energy holy trinity
Jan 10th 2007
1 NEELIE KROES, the European Union's competition commissioner, did not mince her words when reporting on Europe's energy markets on Wednesday January 10th. Europe's energy firms have failed to invest in networks and so customers are suffering. Those "vertically integrated" energy companies such as Electricité de France (EDF) or Germany's E.ON, widely dubbed as "national champions", are effectively behaving like local monopolies. Shy of competition, eager for artificially high prices, they are helping to block the efficient generation, transmission and distribution of energy on the continent.
2 Energy prices vary wildly across Europe. Ms Kroes wants to see cheaper energy, and intends to push suppliers to divest their distribution network and to get them to invest more in transportation systems so that more energy—in the form of gas, or electricity, for example—can flow easily over borders. It is remarkably hard, for example, for gas-poor Germany to import from the neighbouring, gas-rich Netherlands. Companies that dominate national markets have, so far, had little interest in improving the interconnections which would mean lower prices for consumers across the continent.
3 Ms Kroes, of course, will struggle to get her way. The European Commission, which on the same day presented its recommendation for improving EU energy policy, also wants to see the unbundling of ownership, the legal separation of energy suppliers and transporters, something that the integrated energy companies and interested governments, notably in France and Germany, are bound to oppose ferociously.
4 Complicating the matter is an argument over the security of energy supply in Europe. Much has been made of the risk for western Europe of depending too heavily on Russian exports of gas. Russia under Vladimir Putin is prone to using energy exports as a blunt tool of foreign policy, especially when trying to bully countries in its hinterland. Last year Russia interrupted gas deliveries to Ukraine, affecting supplies in central and western Europe too. This week it blocked oil exports passing via Belarus to Europe, though that spat was soon resolved.
5 The risk is that concerns about security of supply may be used spuriously by those in Europe who oppose the sort of liberalisation encouraged by Ms Kroes. The likes of E.ON and EDF may claim that only protected national champions are able to secure supply, by striking long-term deals with powerful foreign suppliers. The Commission disagrees. Such deals are too often politically motivated and far from transparent. Protection has been tried for long enough and evidently has not worked for the internal market, nor have these companies secured the best deals for consumers from the Russians.
6 In contrast, the Commission's new policy proposes, ideally, a break-up of these companies into suppliers and distributors. (As a second best solution, especially for France and Germany, it recommends the management of the networks by a third party.) Properly independent managers of Europe's energy networks would have a strong incentive to build interconnecting pipelines and power lines across borders. For the gas market another means of ensuring competition and security would be finding a more diverse range of suppliers, for example by building more terminals for the import of liquified natural gas. It would also be likely to mean lower prices, if the example of liberalised Britain over the past ten years is anything to go by.
7 Whether any of this is likely to happen soon, however, is another matter. The Commission is also calling for European governments to agree on a common effort to reduce carbon emissions by at least 20% by 2020 (compared with 1990 levels). If America is willing to play ball, the Commission proposes to reduce emissions by as much as 30%. Achieving either target would mean promoting cleaner cars, a more effective emissions-trading system for Europe, wider use of public transport and a sharp increase in the use of renewable sources of energy, like wind and solar power. All that is laudable enough, but will also require political horse-trading as governments—Europe's leaders are due to meet in March to discuss the various energy proposals—try to avoid commitments that may hurt domestic energy companies or make European firms less competitive than rivals in America, Asia and elsewhere.