This month the European Commission will announce the findings of its Strategic Energy Review, the result of nine months of consultation following the publication of its Energy Green Paper in March 2006. In that paper the Commission set out its three priority objectives of climate security, supply security and market competitiveness. As we start another year the key discussion point is determining how much progress has been made toward these objectives and how will Europe’s energy market change in 2007, if at all.
Europe’s energy market is bogged down in bureaucracy with three separate commissioners seeking to influence policy across the three identified objectives. In theory the most important should be the actual energy commissioner, Andris Piebalgs, who is ultimately responsible for EU energy policy, but if climate change is to be the focal point of energy policy then environment commissioner Stavros Dimas also has significant input into energy policy development. And we should not forget the livewire competition commissioner, Neelie Kroes, always forthright, during the past year, on how the EU energy market should have evolved.
When the Commission first deliberated on the development of a single EU energy market the primary driver was market competition, with the rationale being that an efficient and effective competitive environment would send the correct investment signals and thus ensure supply security. The theory behind this rationale is sound, but the problem is most member states have not put this theory into practice.
The Commission may say the EU energy market is competitive, but it is fooling itself if it really believes this to be the case. Since the 1999 electricity competition directive both this and the previous Commission have allowed the gradual vertical integration of the EU energy market. Starting with national consolidation the market has quickly moved onto a European consolidation scale with a reducing number of large vertically integrated players. When talking about the merger between GDF and Suez, the Suez chief executive Gerald Mestrallet said that in the future Europe would have just three large energy companies – EDF, EON and GDF-Suez. Unfortunately he may be right. The Commission may think it regulates the market but its “regulation”, and indeed that of many member states, is largely anaemic. Single market ideals have created an increasingly oligopolistic market structure and such is its scale and momentum it is probably now beyond stopping. In effect the EU energy market is a competitive market without any competition. Responsibility for the poor state of competition rests with Kroes. In the two years since assuming her role she has done nothing to change the deterioration in competition. She may talk a good talk, doling out rhetoric here and there, but her actions have been woefully inadequate as proved by her effectively allowing the merger of GDF and Suez.
Not surprisingly the problems with competition have affected supply security, but it was only with last January’s gas conflict between Russia and Ukraine that the severity of the evolving supply security problems came to the fore. And in the past twelve months most of the security focus has switched to Russia, as the largest exporter of gas into the EU, with external supply security (ie EU imports) being seemingly elevated in importance above that of internal supply security, ie the energy mix.
As with competition, the Commission has failed to address adequately the key issues of supply security. It appears to be tackling it on two levels when in fact it should be addressed as a single issue in which exernal supply security is seamlessly integrated into the actual energy mix and its impact on climate change. And as with competition the Commission has let supply security slip until it became a major concern.
With this Commission seemingly more interested in creating a legacy for itself with regard to climate change, a charge that can also be levelled at the UK government, it has failed to read the supply security warnings over the past few years. It announced its Large Combustion Plant Directive without seemingly giving any thought to the impact of reduced coal-fired generation on long-term security, and it has systematically failed to address the nuclear issue. Even following the International Energy Agency’s World Energy Outlook report, which bravely brought the nuclear issue to the fore, Piebalgs has seemingly declined to enter the nuclear debate.
Since the Russia-Ukraine gas dispute the Commission has poured all its energies into resolving the Russia issue. Punchy rhetoric from both Piebalgs and Commission president Jose Manuel Barroso would have us believe that solving the Russia conundrum is key to Europe’s long-term energy security. It is not. There has been a degree of arrogance in the Commission’s attitude toward Russia on energy – ie Russia needs EU cash from its energy exports to fund its infrastructure development – but the EU is not the only energy import source, and as Russia reminded Europe in the last year it can sell its energy sources to other markets (such as China) if it does not get the preferred terms from Europe.
The Commission’s problem is that it has continued to look at the bigger picture (external supply security) before sorting out the smaller picture, i.e. internal supply security. It needs to reverse this thinking. Security is based on diversity and supply security risks increase with import dependency.
And then there is climate change. For all its rhetoric the EU emission trading scheme has underperformed. Few doubt that this May will see another surplus of allowances against verified emission data for 2006, and it is difficult to see first phase allowance prices pushing back up into double digits having ended 2006 around r7/t. A measure of the failure in the scheme can be seen by comparing where first phase prices started the year, around r23/t. And the prognosis for the second phase looks similarly beak. Even after the first set of allowance assessments in November, with the Commission recommending average allocation cuts of around 7%, the December ’08 contract failed to break through r20/t, which suggests the market will not sufficiently incentivise fuel switching. A measure of the unsatisfactory performance of the Commission on emissions is in it’s allowing France to pull its allocation plan days before the assessments were published. This raises serious concerns, as expressed by Berlin, that the Commission is sensitive to the views of some governments, questioning its independence as a regulator.
If the Commission were a school pupil its end of year report on competition, security and climate change would read: “Shows enthusiasm. Has consistently underperformed. Could, and should, do better.” But as the new school year starts, and the Commission presents its holiday homework, it is almost certainly facing the same damning end of year report this December.
This year the scale of the Commission’s responsibility will increase with the addition of two new member states, but having proved its inability to effectively manage 25 member states it is highly unlikely it will be any more successful with 27. The Commission may think it is in charge, but it is not. It has allowed the market to take control and the market is increasingly paying less attention to the Commission.
For a Commission that is supposedly so in tune with the need to address climate change it has consigned a lot of trees to an early death in producing the voluminous directives, reports and papers that it believes will set the Community on the right path to a competitive, secure and climate friendly energy market. And those trees being sacrificed for this month’s new energy policy papers are also likely to have died in vain.