European energy, and particularly climate, markets have enjoyed a high profile during the first half of the year. There have been numerous reports from policy makers, consulting groups, environmentalists and consumer organisations, but at the mid-year summer break it would be difficult to say that these markets had tangibly or meaningfully progressed.
Lack of progress is easily illustrated with two simple examples. In the climate market, the latest verified emission data published in April may well have been an improvement on last year, with the excess of allowances over emissions less in 2006 than in 2005, but there are still issues with the integrity of the EU emissions trading scheme. And in the energy market, the 1 July deadline for full EU competition in gas and electricity markets passed with barely any recognition by the European Commission, which is understandable as there is no fully competitive European energy market.
This year started with so much promise of change and improvement but none has yet been realised, and pessimists (or should that be realists?) will argue that it looks unlikely to improve by the end of the year.
Landmark policy documents such as the European Commission’s Energy Policy for Europe and the EU competition commissioner’s report into energy market competition, both published in January, were meant to set the tone for a year of progress toward a truly internal and sustainable European energy market. But rather than progress, the market is seemingly embroiled in continuing recrimination with member states split on energy and climate issues and the Commission, as referee, struggling to maintain any real order.
The UK market has also endured its fair share of political posturing and musical chairs in the energy and climate sectors. After last summer’s generally well received and solid Energy Review the market was served a rather undercooked and generally unappetising Energy White Paper in May, with the major ingredient of new nuclear build missing while the government hastily drafted a new public consultation process.
The government has also been consulting on its draft Climate Change Bill, which has received mixed reviews with two parliamentary committees believing that the government has learned its lesson from missing its 2010 carbon emission reduction target but also raising concerns that the draft bill contains a number of weaknesses, not least that the proposed Committee on Climate Change is toothless and there is too much reliance on carbon credits. Both committees, the Environmental Audit Select Committee and the Joint Committee on Climate Change, also believe the emission reduction targets for 2020 and 2050 need to be toughened. And aside from its flagship climate change bill the government has also proposed a raft of new measures, which it believes will stimulate carbon emission abatement both in the domestic sector and for businesses, while the leadership baton has passed from Tony Blair to ex-chancellor Gordon Brown.
Across the Channel there is a new French president in Nicolas Sarkozy, but those who had hoped his free-market spiel in his election campaign would be translated into market action have been left disappointed. Just like his predecessor, Sarkozy is maintaining the prospect of a more protectionist marketplace, which is ominous for European competition.
Germany has also joined in the energy politics debate recently as the sensitive issue of nuclear was placed back on the table at the recent energy summit in Berlin. There is a growing body of opinion on the political right that only by reversing the planned nuclear phase-out can the country meet its emissions targets and secure its energy supply. One of the conditions of agreeing the grand coalition between chancellor Angela Merkel’s CDU party and the SDP was to maintain the planned phase-out, but with regional elections early next year in CDU-held seats that are strongly anti-nuclear the SDP are now looking to make political capital out of the divisions in the CDU over nuclear, and claw back some points in the opinion polls.
So with governments across Europe now in summer recess, and most captains of industry recharging their batteries, the second half of the year is shaping up to be a battle royal on the energy and climate fields of Europe. The strategies might have been put in place in the first half of the year but the real action will commence once summer ends.
The first battle will undoubtedly be centred on competition. Ever since its first electricity directive was published in February 1999 the European Commission has been fighting a war of attrition on energy competition, more often than not taking one step forward only to be pushed two steps back. Now, after the lengthy sector investigation by the competition commission, the results of which could probably have been predicted before the investigation actually commenced, the Commission is currently embroiled in a battle over ownership unbundling.
In September the Commission is expected to publish draft legislation on competition and although a majority of member states, and the European Parliament, support the concept of ownership unbundling it appears the Commission has already caved in to the pleas of Paris and Berlin, with the former arguing that ownership unbundling potentially introduces supply security risks through foreign ownership of European energy asset infrastructure. What is surprising is not so much that the Commission has caved in under pressure from France and Germany, as it usually does, but that it has actually swallowed the rationale put forward by France against ownership unbundling, namely that it risks supply insecurity. The only security threatened by ownership unbundling is the business margin of dominant national utility champions such as EDF, E.ON and RWE. Put simply the opposition to ownership unbundling has more to do with a fear of competitive energy markets than supply insecurity.
Perhaps we should not be surprised by these developments. After all, the Commission says in its supporting statements surrounding its recently commenced proceedings against E.ON and GDF, and its investigation into EDF and Electrabel, both for possible competition infringements, that its recent energy sector competition inquiry allowed it ‘to gain an in-depth understanding on the functioning, and in some respects malfunctioning, of the energy sector, which is of key importance for the overall competitiveness of the European economy. It’s a sobering thought that the current Commission has now been managing Europe’s energy market for over two years without seemingly having an in-depth understanding of that market.
Aside from European competition, which almost seems destined not to make any progress this year, arguably the Commission’s most intriguing challenge in the coming months
will be its proposed burden sharing agreements to achieve the 20% renewable energy and 20% emission reduction targets by 2020. Few believe it will achieve the necessary member state consensus.
Europe, it seems, is growing more divided on energy and further away from the Commission’s ideal of an internal market. And based on the somewhat fractious debate of the first six months between member states and Brussels there is potentially another storm building. Could we be facing an energy winter of discontent?