Today’s European energy market is still poorly interconnected and neither open nor competitive, writes former European Parliament President and former Prime Minister of Poland Jerzy Buzek, currently a Member of the European Parliament. Moreover, energy prices in the EU are much higher than in China and the US and are increasing. According to Burzek, a truly harmonised common energy market and coordinated investment in infrastructure are vital if Europe is to return to growth and remain competitive.
Photo: Tony Hall
The prices of goods and services depend to a significant extent on the price of energy. Excessive energy prices influence the overall competitive potential of an economy, so 20 years after Bill Clinton’s slogan “it’s the economy, stupid!” it is plain that the real depth of his catchphrase is that it acknowledges a prospering economy needs secure, stable and affordable energy. The U.S. seems to have learned this lesson particularly well. Thanks to falling energy prices, American industry is booming. The U.S. expects to achieve independence from oil and gas imports by 2035. By as soon as 2015, the U.S. will be producing more gas than Russia, and in 2017 it will be able to extract more energy resources than Saudi Arabia.
In striking contrast, energy prices in the EU are among the highest in all OECD countries and it is estimated that electricity costs in the European Union will by 2035 be 50% higher than in the U.S. and three times higher than in China. European industries pay four times more for gas than their American competitors.The EU’s dependency on energy imports of 50% at present is projected to grow by another 15 percentage points by 2030.
To be competitive, we should put all our efforts into reversing these trends. To facilitate this, we need a harmonised common energy market that is open and competitive, flexible, well-connected, well-regulated and transparent and predictable. The EU’s internal energy market (IEM) should be seen as the most important of all 12 of the fields in the Single Market Act II. It is after all, the single market which along with innovation based on research and new technologies,constitutes the most direct path towards a fully competitive Europe. And increasing economic competitiveness is needed more than ever to get the EU back on the path to the growth and to the creation of new jobs.
Energy prices are high, and in many cases on the increase, and this is a trend that’s likely to persist.
When I and Jacques Delors launched the European Energy Community (EEC) initiative in May 2010, our purpose was to motivate EU member states to think and act European on energy. The internal energy market is, with joint energy purchases and joint funding of low-emission technologies, one of the three pillars of the Community. Underlying the initiative was our belief that this sector should be integrated and harmonised just like the other sectors covered by the 1992 single market programme.
The EU’s member states have confirmed their commitment to a single energy market and at the European Council in February 2011 set a clear deadline for creating it by 2014. There’s been some progress but there remains more to be done than has so far been achieved.
Today’s energy market in Europe is poorly interconnected. The compatibility of national grids remains low, and that creates challenges like energy islands and loop flows. The market is neither open nor competitive, and it strongly favours the energy industry, disadvantaging consumers. The market is also highly concentrated: single energy producers control over 50% of the markets in as many as 11 member states and in six countries single producers are nearmonopolists, holding more than 80% of market share. This has a variety of implications for all stakeholders, it affects the quality of services and results in insufficient flexibility.
Energy prices are high, and in many cases on the increase, and this is a trend that’s likely to persist. Prices differ heavily across Europe, so in the wholesale trade gas in Tallinn can be 50% more expensive than in London, and electricity can be almost 70% more expensive in Rome than in Tallinn. What’s more in these fragmented markets, energy prices are too often rigidly regulated by member states. Before these energy markets can become fully competitive regulation needs to benefit consumers and prevent energy poverty. At present, though, it all too often imposes excessive limitations and doesn’t increase energy efficiency.
We need a genuine European Energy Community – a locomotive to move our energy project forward along the tracks to a shared destination.
As well as being poorly interconnected and overpriced, the market isn’t transparent enough, so consumers have too little understanding of their options. They lack the tools to compare what is on offer from different suppliers, and they find it hard to tell whether switching between providers gives them access to cheaper and reliable energy supplies. In many member states switching simply isn’t possible, and in others although such possibilities exist it often fails to result in better prices or quality of service.
Our goal must be to create an energy market that will be rebalanced to benefit consumers, so they can better understand their rights and the market rules and are therefore able to make decisions based on clear information. In short, where both private and business consumers will be able to play the market game on equal terms with the energy sector.
Individual consumers would benefit from a truly integrated market via the lower prices resulting from increased competition. They would gain better control of their energy costs and that could generate consumer savings of as much as €13bn annually in the EU. The information available to consumers would be improved and its availability increased. An EU-wide system of protecting consumer rights could be put in place in which vulnerable consumers would be covered while the IEM also made dispute resolution easier. For the business sector, a single market in energy with half a billion consumers would mean new investment opportunities and a strong incentive to maintain business activity in the EU and thus create new jobs. Last but not least, it would offer opportunities for strengthening the economy with high-end technological innovation.
Energy producers, for their part, stand to benefit from predictability, clear rules and as equal and fair access to the single market. In a fully competitive environment, they will be more strongly motivated to produce energy, and that in turn promises a reduced dependence on non-EU sources as well as a stronger negotiation position with external suppliers. All of that translates into greater energy security.
The growth we are striving for needs to be sustainable and environmentally sensitive. By ensuring we have a more efficient means of producing, storing and distributing energy, a competitive European market will, along with investments in new technologies, make the sector more environmentally friendly. A well-designed open and coherent energy market should also speed the way to a low-emission economy.
In April of this year, I prepared a European Parliament report on the internal energy market. Entitled “Making the Internal Energy Market Work”, it pointed to the actions that the EU’s institutions, member states and corporate sector must undertake urgently to facilitate the single energy market. The main areas in the report were:
- A comprehensive harmonisation of the regulatory framework is needed; the member states must fully transpose the Third Energy Package, yet it is most disturbing that not even the second package has been fully adopted by all EU countries. It will be impossible to build the third floor of a house when the second has not been finished, and to ensure the regulatory framework’s stability harmonised network codes and rules must first be introduced.
- Infrastructure investment must be better coordinated so as to ensure a fully EU-wide system of connectivity that is cost-effective. We are going to need €210bn just for the construction of new transmission networks for electricity and gas. This all includes €140bn for electricity infrastructure, intelligent networks, storage and high-voltage transmission networks; €70bn for reverse flow interconnectors, gas infrastructure: storage, gas pipelines and LNG terminals and €2.5bn for CO2 transporting infrastructure. The total investment needed amounts to around €1 trillion. It is worth stressing that the introduction of smart technologies must not be restricted to automatic meter-reading only but must be completed with dynamic, online grid management.
It has to be acknowledged that certain aspects of infrastructure development may not be commercially viable but are needed to provide stable energy supply. Cross-border interconnectors are a key prerequisite for the internal energy market and are also an excellent example of the community-wide investment in energy infrastructure that could and should be funded with community resources. The cuts made to the Connecting Europe Facility during the negotiations of the 2014-2020 Multiannual Financial Framework seem very likely to constrain key investments of this sort. It is difficult to demand more Europe with less money.
We cannot ensure the prosperity of Europe’s citizens without affordable energy prices.
To support future infrastructure investment, we ought to rethink our own protectionist measures. EU member states must refrain from regulating their own retail energy prices because all aspects of energy trading should be stable and predictable. The gradual phasing out of subsidies to renewables means that after 2020 they will be at a substantially lower level than today. But at the same time, carbon pricing will depend on the design of climate policy and its interconnection with the Emissions Trading Scheme. Its stability requires that these should be free of disruptive interventions like the recently attempted backloading of emission allowances.
With the EU’s economy stagnating, there is currently no demand for an increased supply of energy. That’s a normal market reaction and slow growth, no growth has made us more energy efficient. But in the scenario of returning to steady growth in a few years from now, demand for energy will again increase. Then, in line with basic market principles, those who have invested in new infrastructure and developed their production, storage and distribution capabilities, will have a clear advantage. The investment banking sector should play an important role here and help carry the risk of these future investments. That such investments will soon pay off is in little doubt – after any crisis, growing demand and rising prices mean the rates of return increase substantially.
Europe’s internal energy market is not an end-goal. It is a tool that will serve the long-term objectives of an efficient and reliable energy system and the costeffective transition to a low-emission economy. It also has a chance to become our greatest asset in the global competitiveness race. We cannot ensure the prosperity of Europe’s citizens without affordable energy prices.
We know what must be done, and we also know there’s no time to lose. An integrated energy market will never become reality unless today’s spectrum of different national approaches to energy generation, storage and distribution, is replaced by an overall European approach. We need a genuine European Energy Community – a locomotive to move our energy project forward along the tracks to a shared destination. Winston Churchill once said that attitude is a small thing that makes a big difference. EU member states are on the horns of a dilemma – they have to decide whether to demonstrate close cooperation for the sake of their citizens, or to further delay taking these crucial steps and so endanger European competitiveness. Big difference or indifference – it is up to we Europeans to decide.
This is the sixth and last in a series of essays that first appeared in the discussion paper EU’s Internal Energy Market: Tough Decisions and a Daunting Agenda published by Friends of Europe on 4 June 2013. We are grateful for the author’s and Friends of Europe’s permission to reprint it here.
In the first article in this series, Jorge Vasconcelos, founder of the Council of European Energy Regulators and member of the Energy Roadmap 2050 ad hoc Advisory Group, argued that we need to “rethink the single energy market”.
In the second article, Fernand Felzinger, President of the International Federation of Industrial Energy Consumers (IFIEC) Europe, expounded the view that the internal energy market should be much more closely linked to Europe’s global competitiveness position.
In the third article, David Buchan, Senior Research Fellow at the Oxford Institute for Energy Studies, warned that the internal energy market is being undermined by member states’ reluctance to align their national renewable energy strategies or to depend on one another for back-up.
In a fourth paper, Johannes Meier and Arne Mogren from the European Climate Foundation argued that well-functioning markets are essential for decarbonisation.
In the fifth paper, Jean Michel Glachant, Director of the European University Institute’s Florence School of Regulation, takes the positive view that an EU-wide power market has now emerged. He nevertheless warns that renewable energy and a “smarter” grid remain challenges to its further development.