The Energy Union, writes Jonathan Gaventa, Associate Director of E3G, offers Europe a unique opportunity to move to a more modern, efficient and technologically advanced energy system, to bring down Europe’s outrageously high energy import bill and to lead global clean energy markets. Unless we allow it to be hijacked by incumbent utilities and oil and gas players who will use it to advance their own interests.
With considerable fanfare, last month the European Commission launched its plans for an EU ‘Energy Union’. Commission Vice President Maros Sefcovic calls it ‘the biggest energy project since the Coal and Steel Community’, established in 1951. Yet other commentators have responded that there is little new in the Energy Union proposals, or claim that the strategy represents a mere ‘rebranded workplan’.
So is the Energy Union a big deal or not? Ultimately it will depend on whether the Commission can hold its nerve.
We have, in a sense, been here before. In 2007 the EU put forward what it called “truly ambitious and far-reaching” proposals to integrate and open up Europe’s energy market, through its ‘Third Energy Package’. The package created new EU bodies for regulatory cooperation and grid planning. It split up vertically-integrated utilities by forcing them to spin off their transmission grid businesses. It also set up a common set of rules for accessing networks, to make it easier to participate in different national markets.
The Third Energy Package was designed around a very different energy system than the one we face today
This ambition didn’t go down well with the incumbents, who threw the full weight of their lobbying power into watering down its provisions, leading to a bruising battle as the legislation progressed. But proposals did eventually get enacted, driven by the belief that the benefits on offer would outweigh the political pain of getting there.
The world has changed since 2007 and the new proposals do more than just reopen old battles. The Third Energy Package was designed around a very different energy system than the one we face today: business models, consumption patterns and technologies have all moved on substantially. In 2007, the energy sector was dominated by big, centralised utilities – a business model that today not even the incumbents still think is viable in its current form.
When the package was launched, energy consumption was still rising, and this trend expected to continue. Instead energy consumption has fallen by 7%, including an 11% fall in gas consumption. 2007 saw the launch of the first-generation iPhone, and demand flexibility was still a futuristic concept. Since then, we’ve seen a surge in technologies and business models based on enabling consumers to take control of their energy use. In 2007, wind and solar were expensive and marginal power generation technologies. After dramatic cost reductions and a surge in deployment, renewable power is now expected to make up over half of Europe’s electricity mix within 15 years.
Lobbyists for gas interest groups will exploit the war in Ukraine to promote a dash for investment in new pipelines and LNG terminals
The Energy Union proposals offer the potential for Europe’s energy market regulation to catch up to this new reality, and to accelerate the move to a more modern, efficient and technologically-advanced energy system. The Energy Union package promises major reforms to ‘make energy markets and grids fit for renewables’. The hardware will be put in place to link markets across Europe. In place of a system dominated by a small number of incumbent utilities, citizens and new actors such as cities will play an active and direct role in the market. Measures will be introduced so that ‘energy efficiency and demand-side response can compete on equal terms with generation capacity’. There is a long way to go to flesh out the policy detail, but the ambition is there.
The size of the potential price at stake for the Energy Union is even bigger than previous EU energy reforms. It marks an opportunity for Europe to bring its €400 billion per year fossil fuel import bill under control. A fully active demand side of the market could be worth up to €100 billion per year, according to the Commission. Fully integrating European energy markets could deliver €40-70 billion of cost savings annually. European companies, researchers and manufacturers could regain a leading edge internationally on clean energy technologies.
But the efforts required to get there will also be harder. Delivering an Energy Union with the ambition levels set out by Sefcovic will mean facing down the special interests groups who will be pushing for an Energy Union that seeks to prop up the past rather than looking to the future. National incumbents will agree with a European energy market in principle, but in practice continue to seek state support for their favoured technologies and preferred treatment to protect their domestic market positions.
Big utilities with large coal generation portfolios will push for ‘technology neutral capacity mechanisms’ to throw a lifeline to unprofitable coal plant and make consumers carry the burden for their past investment decisions. Lobbyists for gas interest groups will exploit the war in Ukraine to promote a dash for investment in new pipelines and LNG terminals, regardless of whether Europe will actually have the gas demand in future to make them viable or whether alternative investments could deliver security more cost effectively. Oil majors will seek to dilute the focus on electrification of transport and to delay the Europe-wide roll-out of electric charging infrastructure.
Europe has not competed in the global economy by using more energy, but by using energy more efficiently
If the Commission gives in to these siren voices, it will prove the cynics right. The Energy Union would indeed end up being incremental rather than transformational, and ultimately no big deal.
Stacked up against the incumbents of the old energy system, however, are a much wider yet more diffuse set of actors who have a core interest in the success of the Energy Union succeeding. These interest groups include, amongst others, the citizens and consumers who want to take control of their energy use; cities and communities who will be empowered to participate directly in the market; the technology providers, data management companies, and market aggregators who will develop new energy products and services; the copper, glass, steel and chemicals industries providing the raw materials for new energy technologies; renewable power generators and grid operators who will be able to trade electricity across borders; construction industry workers retrofitting Europe’s buildings; and the communities and companies who rely on a stable climate for their prosperity.
The challenge now is to ensure these voices are heard, and to ensure the Energy Union lives up to the scale of its original promise. Europe has not competed in the global economy by using more energy, but by using energy more efficiently. As resource prices rise and climate change intensifies so does the global demand for Europe’s efficient, clean and smart energy solutions. An ambitious Energy Union would provide the home markets and incentives for European companies to continue leading global clean energy markets.