The creation of a pan-European energy market is being undermined by member states’ reluctance to align their national renewable energy policies, or to rely on their neighbours for back-up capacity, writes David Buchan, Senior Research Fellow of the Oxford Institute for Energy Studies. According to Buchan, “the Commission now has to take a very strong stand if it is to regain control over the forces of disintegration that it failed to anticipate in 2009”.
Photo: Fragmentation by Samandel.com
However great the disarray over Europe’s energy policy, there is still consensus on the goal of a pan-European energy market. The whole point of European Union membership is to provide greater scale for every sector of the economy, and energy is no exception.
In a single market of 28 countries, scale can promote wider competition and through competition convergence on the most efficient price level; scale provides security through diversity of energy sources, and scale can also provide a critical mass of low-carbon investment along with the political influence in the world to make a difference in international climate negotiations.
But there is no longer a consensus that this geographical unification of Europe’s national energy markets can be achieved through liberalisation – if Europe wants at the same time to achieve its climate goals of emission reduction and promotion of low carbon energy. This is because current climate policy is being carried out through increasing doses of random national intervention in the energy market, exactly what liberalisation was supposed to remove.
So what are the alternatives? Drop Europe’s climate goals, or coordinate at EU level the various national interventionist measures? For the moment, the European Commission is pursuing the second option. It is producing guidelines this summer that member states are being asked to follow in the design of their national subsidies for renewable energy and back-up capacity. These national renewable and capacity schemes – which are both key elements and consequences of climate policy – create a real risk of segmenting, or rather resegmenting, the European energy market.
In 2009, the EU put together an energy and climate package of legislation that appeared to be coherent. A third package of internal energy market rules completed the legislative job of unbundling electricity and gas transmission companies from distorting supplier interests so that they could act as common carriers of energy for all. It strengthened the powers and independence (from interference by their governments) of national regulators, and put them under the pan-European umbrella of the Agency for Cooperation of Energy Regulators (ACER). It gave to this body, and to the upgraded European organisations of transmission system operators (TSOs), the task of developing blueprints for building future pan-European grids and of agreeing on market designs and network codes to integrate trading across borders.
Many of those making EU energy policy are in revolt. Energy Commissioner Günther Oettinger now complains openly about the subordination of energy policy to climate policy
On top of this foundation of traditional internal market liberalising and integration measures, a series of ambitious climate targets were overlaid. Some of these – such as mandatory national renewable targets – were clearly non-market in character. The Commission sought to prevent these targets from leading to a national carve-up of the energy market by proposing these targets could be met through a pan-European system of trading renewable power certificates. The European Council and Parliament rejected this in favour of maintaining national renewable subsidy schemes.
The flagship climate instrument of the 2009 package, however, was the reformed Emissions Trading System (ETS). Although non-market in the sense of setting an arbitrary maximum cap on Europe’s carbon emissions, the ETS allows emitters to use the market mechanism of carbon allowance trading to comply with the cap. And back in 2009, the ETS instrument looked to be big enough and market friendly enough to make EU climate policy appear compatible with a liberalised EU energy policy.
But now the ETS has more or less collapsed, with the traded price of carbon too low to change the behaviour of energy generators or consumers because it has proved all too responsive to the market and to the recession-induced fall in energy demand. As the ETS has declined in importance, the non-market instruments of renewable targets and subsidies have grown in importance, and have created worries about insufficient conventional power back-up that EU policymakers simply hadn’t been able to foresee in 2009. And if EU climate policymakers are in a mess, many of those making EU energy policy are in revolt. Energy Commissioner Günther Oettinger now complains openly about the subordination of energy policy to climate policy, in particular about policies that have done little to reduce emissions and a lot to raise energy prices across Europe.
Bearing in mind the key link between fossil fuels and greenhouse gases – energy production accounts for around two-thirds of all greenhouse gases in terms of CO2 equivalence – how did we get to this situation of near-divorce in Europe between energy policy and climate policy?
The economic downturn has, above all, made Europe’s governments and public opinion neurotic about energy prices.
One obvious reason is the recession. As well as effectively neutering the ETS as an instrument for encouraging new low carbon energy, it has also helped undermine the business case for investing in new relatively clean gas-powered electricity generation. Virtually no new gas plants are being planned, and some existing ones are being mothballed. The crisis in Europe’s financial sector has led to most banks and many insurers pulling out of project finance in energy and other infrastructure sectors to focus instead on re-building their capital ratios. This has created a bigger financing gap than could ever be plugged by the €5bn of EU budget money slated for energy infrastructure over the next seven years, and by the European Investment Bank’s plan to use a modest amount of public money for partnering private investors to try to revive project bonds.
The economic downturn has, above all, made Europe’s governments and public opinion neurotic about energy prices. These are being kept high by such outside factors as Russia’s linkage of its gas price in Europe to a stillbuoyant global oil price, and by the upward push to liquefied natural gas prices of strong Asian demand, along with the renewable energy subsidy costs borne by Europe’s electricity consumers. The signs of this energy price neurosis are everywhere. From Bulgaria, where energy price protests recently overturned the government, to Spain which has retroactively (illegally, in terms of contract law) reduced subsidies on existing renewable projects.
In the UK, the public, the media and the politicians are more focussed on the immediate issue of “price gouging” by energy companies than the country’s looming shortfall in electricity generation, while in Germany the powerful manufacturing sector is complaining, with some exaggeration, that energy costs risk causing deindustrialisation, not just in Germany but throughout Europe. For all these reasons, the focus of the European Council summit in May was on energy policy and prices, and on replicating the U.S. shale gas revolution to bring gas prices down. Europe’s energy price neurotics see shale gas as the EU’s get-out-of-jail card.
There is another reason why the ‘single marketeers’ who dominate EU energy policymaking fret at climate policy. This reason is the disruptive effect of national renewable energy programmes on EU policymakers’ attempts to integrate the market – both in terms of the geographical unification of national energy sectors and in terms of smoothly marrying conventional fossil fuels with renewables in the commercial marketplace. The EU is on track to meet its overall target of achieving an average of a 20% renewables share of total EU energy consumption by 2020. But while some member states will struggle to meet national targets that require a surge of new renewable energy deployment in the last few years running up to 2020, the biggest member state, Germany, is deploying renewable generation to a spectacular – and destabilising – extent.
But all capacity schemes in Europe tend to prefer national generators over foreign ones, because most politicians would rather not rely on foreigners to keep their country’s lights on.
Germany has doubled its renewable generation capacity – wind, solar, biomass and small hydro – from less than 40 gigawatts (GW) in 2008 to more than 80 GW today. At maximum potential, this is almost enough to meet peak German energy demand of around 85GW. But most of this capacity (60 GW) is intermittent wind and solar energy. For much of the time, this meets only around a quarter of German demand, but occasionally it is enough to blow conventional generation – gas, coal and what remains of nuclear – right out of the marketplace and therefore out of the money.
There is therefore growing clamour by Germany’s providers of non-renewable power for some form of capacity subsidy as payment for keeping plants ready as standby generators. Some countries already have, or plan, capacity mechanisms, although not all have the same motive as Germany. The UK has a far smaller renewables sector than Germany, but plans to introduce a capacity market in 2014 because forced closure of dirty plant and years of dithering about new plant have left it with an impending shortage of overall capacity, not just back-up.
But all capacity schemes in Europe tend to prefer national generators over foreign ones, because most politicians would rather not rely on foreigners to keep their country’s lights on. This combination of national renewable and capacity schemes may deal the EU energy market a double blow – a blow to the energy sector’s geographical unity because the schemes are national, and a blow to the normal workings of a commercial marketplace because the schemes involve subsidies.
In this summer’s guidelines, the Commission is urging a Europeanisation, or at least a regionalisation, of national renewable and capacity schemes. This would involve neighbouring countries aligning the structure and level of their renewables subsidies to reduce distortion of trade and investment in renewables, and so allow neighbouring countries to participate in each other’s capacity schemes where there’s sufficient interconnection between them. That’s the rub; the building of more cross-border links, and negotiations on cross-border trading arrangements, are all in train, but are not moving as fast as the deployment of renewables or capacity scheme planning.
Come next year, the European Council will find that it could no more command completion of the internal energy market by that date than the Anglo-Saxon King Canute could command the ocean tide to turn back
The new EU infrastructure regulation, which streamlines national procedures for permitting priority trans-frontier energy links will speed transmission construction, especially of overhead electricity pylons that attract more public opposition than buried gas pipelines. But the difference will not be dramatic. TSO organisations in Europe are pumping out agreed network codes for electricity and gas as fast as they can, but they struggle to meet the arbitrary deadlines set by politicians. “We had been aiming to complete our work on network codes in 2015”, said a TSO executive. “But when the European Council in February 2011 suddenly set 2014 as the deadline for completion of the internal energy market, we found that in one day we had lost a year”.
Come next year, the European Council will find that it could no more command completion of the internal energy market by that date than the Anglo-Saxon King Canute could command the ocean tide to turn back. Yet next year will see substantial achievement, in particular the coupling of day-ahead trading for electricity in almost all the 28 national markets. The European Council will, though, find its 2011 edict of an end to the isolation of all EU energy markets by 2015 unfulfilled; the three Baltic states will still be linked to the Russian electricity and gas grid, partly because they cannot agree among themselves where and how to build both a regional nuclear reactor and a regional terminal to receive outside LNG supplies.
Rather than the artificial completion of Europe’s energy market, it is more important to aim for coherence of this market – in particular to reduce the mismatch between fast-developing national renewable and capacity schemes and slower-moving infrastructure construction. One way to do this would be for the European Commission to use its powers for policing state aids to say that it will approve national capacity schemes only if the member state in question devotes some money to improving interconnections with its neighbours. Increased interconnection would increase the member state’s ability to draw on its EU neighbours’ energy supply in case of emergency, and should also make it easier for countries to compensate for supply/demand imbalances caused by renewables. In doing this, the Commission would be taking a strong stand in the area of security of supply, which is one of great political sensitivity to national governments. Needless to say, the Commission now has to take a very strong stand if it is to regain control over the forces of disintegration that it failed to anticipate in 2009.
This is the third of a series of short 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.