Charlemagne: Energetic debate

The European Union wants a new energy policy. Should it have one?

NO SOONER has energy become Europe's hottest topic--barely a week goes by without somebody trying to create a national energy champion somewhere--than, lo and behold, up pops the European Commission with a sparky new energy policy. As a rule of thumb, it is best to assume that the EU over-regulates everything, so any expansion of its role or powers should be resisted. But the energy market, in which the commission is proposing, in a green (consultative) paper published this week, to extend its influence, may just be an exception.

Not, however, for the reasons that have put energy on the front pages. Attempts to marry utilities in France, Germany and Spain may be dubious or sensible business propositions, but they are matters for the competition authorities, not for energy policymakers. Energy prices may be high; Europe's dependence on imported energy may rise (to 70% of consumption, from 50% now); and its ageing power stations, which were just about adequate in times of abundant cheap oil, may require tonnes of money to modernise. But high prices do not warrant an EU policy response (there is, fortunately, no European oil policy). Nor does past underinvestment, which is surely the responsibility of companies, whether private or state-owned. It is true that there may be political reasons why European countries might want to club together to face Russia, which is their main gas supplier, but even that does not require heavy intervention from Brussels.

Indeed, none of today's big concerns about energy would seem to justify a new policy of the kind proposed by the commission, which includes encouraging new links ("interconnections") between national electricity grids, setting up stockpiles of gas and perhaps creating a European energy regulator. What would justify some of this is the presence in the energy business of two public goods: benefits to people as a whole that are not being realised either by national governments or by markets.

For a decade, the commission has concentrated on liberalising national energy markets. It has been reasonably successful in getting countries to privatise state-owned utilities; most gas and electricity is now supplied by private firms. It has been less successful in reducing the monopoly power of those firms. A recent report by the competition directorate complained that monopoly suppliers still carve up markets, stifle competition and refuse new entrants access to gas and electricity grids. The commission, rightly, threatens to deploy EU competition laws.

But it would surely do that whether the policy questions were national or Europe-wide. Energy liberalisation is not the same as an EU energy policy; nor has it created an EU energy system. Europe has a string of national grids, with few bilateral links. Spain's market is almost entirely self-contained. So is the Baltic one. Less than 10% of European gas is sold across borders.

A genuine European market--ie, one electricity grid and a single spaghetti-plate of gas pipelines--would enable the entire EU-wide network to be run more efficiently. This is the first of those public goods. Every power system needs spare capacity to deal with surges, supply disruptions and so on. The larger the system, the smaller that spare capacity. In the early 20th century, every town in Britain and France had its own power station. When countries then created national grids, they reaped big gains by cutting duplicate spare capacity.

Europe is now at a point where it could do something similar on a continental scale. If it connected its national grids together into a European one, argues Dieter Helm, an energy economist at Oxford University, that would lower the costs of operation by enough to transform the economics of the business. It would also increase trade across the system, lowering prices. That these benefits to society are not realised is largely because a single European grid would threaten the monopoly enjoyed by national energy champions. If there were any doubt about this, the sight of prime ministers queuing up to create more such champions should have laid them to rest. The potential gains from getting right the transition from national to regional grids is huge. But they cannot be secured without European intervention--meaning that the EU will have to develop things like a grid code and information exchanges about who has what capacity.

Exit, followed by a bear

The second public good is a secure supply--something which, as Russia rudely reminded everybody in January, can hardly be taken for granted. European gas stocks vary from about four months' supply in Austria to zero in Ireland, Sweden and Finland. You might say that this is their business: if countries do not want to pay insurance, they must face the consequences. But these consequences affect others: in a single European energy market, they will ripple right through the grid.

For this reason, countries have long run a sort of international oil stockpile: all members of the International Energy Agency maintain minimum reserves. The oil market is international but gas is regional, so it makes sense for a regional group to organise a similar insurance system of gas stocks. This does not have to be done by the EU, but it is an obvious institution to use.

The green paper proposes an energy policy more ambitious than these two public-good arguments by themselves would warrant. But why? What business have European officials trying to pick winners among energy technologies, for instance by encouraging biofuels or wind power? These should be a matter for markets, supported if necessary by taxes that make clearer the environmental costs of carbon emissions. In other areas a European policy might have been justified, but is not proposed. Nuclear safety worries everybody, but the commission steers clear of an EU-wide system of licensing and safety regulation.

The EU is rightly castigated for meddling in areas where it is not needed. How rare, almost refreshing, to find a business in which its intervention can, at least partly, be justified.

Commentary feature in which author says that the EU wants a new energy policy and asks 'should it have one?'

• Primary Source