The outcome of the political struggle over the release this month (September) of a proposed package of European Union (EU) energy directives and regulations insisting on some unbundling between power producers and transmitters will severely test the EU’s ability to threaten some of the core interests of its national governments.

After months of debating whether it should go for broke, the European Commission has tabled radical proposals that not only push unbundling, they would create an EU agency with real authority to police Europe’s national electricity regulators. These are not timid suggestions. They will – and indeed already have – upset political power brokers in the EU’s traditional supporters France and Germany. The result of the debates and votes within the EU Council of Ministers and the European Parliament will show whether the Commission has bitten off more than it can chew, or whether it really has the stomach to face down such formidable opponents.

The European Commission – increasingly dealing with a wider global marketplace – says it is taking these steps to put consumer choice first and create a more competitive energy market.

“An open and fair internal energy market is essential to ensure that the EU can rise to the challenges of climate change, increased import dependence and global competitiveness. This is about getting a better deal for consumers and business and making sure that third country companies respect our rules,” says European Commission President Barroso. The Commission is also set to launch a new energy charter in 2008 which will include measures to address fuel poverty, information for customers to choose a supplier, actions to lower red tape when changing energy suppliers and protection from unfair selling practices

Brussels has chosen the political high ground for this fight. Energy is the issue of the day within Europe, because it touches so many key cross-border issues of concern. Just having enough electricity and gas to maintain prosperous and comfortable lives is maybe the most important of these. And it is well known that Europe will have to import more and more energy without boosting domestic production capacity and simultaneously making good on energy conservation goals. And energy consumption is of course a big contributor to greenhouse gases. Living in a continent threatened by desertification in the south and the potential weakening of the Gulf Stream in the north, global warming is not an abstract concern for Europeans, it is an issue to be dealt with now.

Best deal for customers

So, it is not for nothing that Brussels’ energy directorate general, on releasing its energy package, said: “Although progress has certainly been made in establishing a truly competitive energy market, the European Commission has found that customers in Europe are not necessarily getting the best deal. And there are other serious challenges regarding all aspects of energy provision and use. If the current energy consumption trends in Europe continue, we will need to import 70% of our energy by 2030. Due to the progressive increase in energy consumption, CO2 emissions are expected to rise by some 60% by 2030, which will in turn lead to irreversible climate change. These numerous challenges need to be addressed and our best option is to tackle them together.”

Tougher EU rules

And it has now explained how it wants these problems dealt with – more liberalisation; greater central EU control; and tough market entry standards allowing EU regulators to block the entry of foreign (read ‘Russian’) energy players to the EU market.

So, how, in detail, would this be achieved? First up liberalisation, or rather as far as this proposal goes, unbundling. Here, Brussels has tried to offer the French and Germans a sop, or rather offer its allies within council (such as Belgium, Italy and Spain), some political cover for a switch to the pro-unbundling camp led by Britain, the Netherlands and others. This fig leaf is couched in terms that resemble a possible exemption to the Commission’s preferred system – complete separation of all electricity producers from transmission operators – and has been named the Independent System Operator model. Under this system, said a Commission memorandum, “network assets would remain with the company which is also active in supply, but the technical and commercial operation of those assets would be put in an independent company, to be designated by a member state.” This operator could not have any interest in a power producer, and furthermore, the owner would have to ensure there was a legal and managerial split between the unbundled segments of its business; it would have to finance investments required by the independent operators; it would have to comply with a 10 year network investment plan drawn up by a national regulator; and the appointment of an independent system operator would be approved by the Commission.

Many impartial onlookers might well conclude that this is formal unbundling in everything but name, and they might be tempted to argue that it would only actually amount to less if in practice the policies of the independent operator reflected an incumbent players’ wishes. This could really only be then achieved by murky back door channels.

But, supporters of the idea could be heartened by the hostile reception it has drawn from German and French players. A spokesperson for Germany’s E.ON was immediately and widely reported as saying unbundling ‘doesn’t lead to lower prices’ and a spokesperson for RWE claimed the plan would ‘discourage investment and competition.’ France’s EdF called the plans ‘a step backwards’. Interestingly, EU electricity federation Eurelectric’s stance was more nuanced. It attacked the idea of independent system operators as entrenching national controls and incumbents and called for the creation of regional transmission operators controlling neighbouring country networks. Unequivocal support for out-and-out unbundling came from Britain’s National Grid.

That Eurelectric – normally very cautious on politically controversial topics – should not duck comments here is telling. There is enough support for unbundling for a real debate on the Commission’s proposals and significant unbundling may well emerge from the oncoming discussions. But the question is – how much?

Rules for non-EU companies

One potential carrot for many politicians and energy companies will be the insistence that non-EU companies will have to abide by these unbundling restrictions if they want to have unfettered rights to control chunks of the EU energy sector. If they did not, the Commission could step in and halt a takeover or joint venture. Obviously unbundling is not a high priority for the Russian government and its energy behemoths, so such a law could be a useful stick to beat off eastern takeovers of key EU energy interests. However – and very handily for Brussels – such a law could only be legal under World Trade Organisation rules on trading fairness if they apply equally to EU energy players too … so no one would be allowed to have their cake and eat it too.

Club for regulators

As for the other elements of the Commission’s energy package, almost certainly the most controversial is the creation of a European Agency for the co-operation of Energy Regulators. This would be invested with authority to intervene on competition and access issues regarding cross-border infrastructure and review decisions taken by national energy regulators that have an impact on the EU market. The devil will be in the detail of this issue, but there will be strong resistance to such an idea within many energy incumbents and national governments, trespassing as it does on industries regarded as strategic.

Keith Nuthall