Progress with energy markets in Europe

A critical appraisal of the European Commission Communication ‘Making the internal energy market work’ (2012) 367 final

Professor Steve Thomas, PSIRU, University of Greenwich - May 2013


Preface



Such is the dogma that the EU needs an internal market for electricity and gas, that it is extremely difficult to find critical appraisals of its impact and how to go forward. Almost every European Council and Council of Ministers meeting, as well as positions of BusinessEurope and the conservative dominated European Parliament on energy, on the internal market and on the European economy repeat that we have to complete the internal market for electricity and gas. All this would help the EU to improve its competitiveness.

This has become a mantra and my experience is that without exception all Ministers I have met to discuss the problematic nature of the internal market have a Pavlovian reaction with the words competition, consumer benefits, employment creation dripping like saliva from their mouths.

We asked Steve Thomas, Professor of Energy policy at the University of Greenwich to consider the state of affairs and have a critical look at the recent Communication of the Commission on the internal market also considering the experience of the first “open” markets: the UK. Professor Thomas has done work for EPSU in the past and pointed at fundamental flaws in the conception of the internal amrket which would hound the EU’s energy policy.

Over 15 years have passed since the European Union embarked on the creation of an internal market for electricity and gas. The assumption was that this would provide positive benefits for Europe’s citizens leading to lower prices and provide more security of supply as companies would be able to buy electricity and gas in other countries. The opening of the EU electricity and gas markets is built on the belief that markets will provide adequate signals to investors and electricity and gas companies to build new capacity and infrastructure if required.

EPSU has always questioned these assumptions. We consider that the provision of gas and especially of electricity is a public good. Modern European society cannot do without electricity. It would grind to a halt immediately with serious consequences for the economy, human welfare and personal security. Leaving the provision to markets is therefore a dangerous experiment certainly considering that the build up of our prospering economies until 2000 have benefitted from public investment in public infrastructure and what were predominantely publicly owned companies.

Professor Thomas’ study reveals how shaky the project of the internal market is, remaining an experiment which now hinders the development of policies that do really protect the user and ensure investment in those technologies people now want to address climate change. We hope the study assists in critical reflection. The utter failure of the deregulated banking sector which threw the EU and US in an economic and financial crisis, and which was addressed with another failed policy of austerity that sinks many countries of the EU in a deepening social crisis with record levels of unemployment, ultimately calls for critical thinking and addressing fundamental issues. There are alternatives to the extreme corporate and free market orientated appraoches.

Jan Willem Goudriaan
EPSU Deputy General Secretary


Introduction




It is 15 years since the European Commission’s electricity liberalisation Directive came into force quickly followed by a similar gas Directive. At the heart of the policy was a belief that the monopoly electricity and gas industries could be transformed into competitive industries with significant benefits to consumers. This paper examines the European Commission’s review published November 2012 of progress towards competitive energy markets. It examines four aspects of the markets:
-* Wholesale energy markets;
-* Retail energy markets;
-* Corporate structure;
-* Impact of smart meters on competition.

It concludes by reviewing the Commission’s recommendations for action to improve the situation. It also reviews the changes proposed to UK energy markets in the government’s Energy Bill also published in November 2012. The UK privatisation of gas in 1986 and electricity in 1990 formed the model for the Commission’s Energy Directives and any changes to the UK model brought about by perceived failings of the original model are of relevance to the EU. We mostly focus on electricity in this paper although the arguments concerning gas are usually similar.
Much of the Commission’s efforts have been directed at ’unbundling’ the networks: high-pressure gas transmission, high voltage electricity transmission, low pressure gas distribution and low-voltage electricity distribution. These will remain regulated monopolies for the foreseeable future and as a condition for competition; access to these networks should be available to all competing companies, producers and consumers, on equal non-discriminatory terms. There has been considerable debate about how far the owners of the network should be distanced from the competing companies. The Commission has moved progressively towards full ownership unbundling or at least legal unbundling. In the former case, the networks should not be owned by a company with any connection to companies competing in the energy markets, while in the latter, they must be owned by a legally separate company. Whilst third party access might be a necessary condition for competition, it is far from being sufficient. The UK has met all the conditions for unbundling network companies but, as described below, this has been far from sufficient to ensure efficient markets. Unbundling only might make sense if there is a proposal to introduce wholesale and retail energy markets. It is therefore no more than an enabling reform and is not discussed further in this paper.

For the full study:




- read our press release (13 May 2013)

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