Can Europe deal with an internal energy market?

Two MEPs discuss gas and electricity markets.

Alejo Vidal-Quadras

The industry, research and energy committee of the European Parliament adopted on 18 June its report on the completion of the internal markets for electricity and gas, for which I was rapporteur. This document, which was adopted nearly unanimously, aims to provide a better description of the internal energy market in line with the principles of liberalisation, competitiveness, transparency and sustainability.

This happens at a very sensitive time, a week after the Council rejected, once again, Energy Commissioner Andris Piebalgs’s ambitious proposal to enforce ownership unbundling of the energy markets and days before the end of the German presidency of the EU. On this occasion, the Parliament is sending the European Commission a clear message of support on the majority of the proposals included in January’s energy package. Not only on ownership unbundling, but on several other equally important issues such as the powers of national regulators, harmonisation of rules, increased interconnections, transparency, consumer protection. And, last but not least, MEPs backed the Commission’s efforts in pressing member states fully to implement existing legislation and condemned the increasing interventionism of some governments in an attempt to promote so-called national champions.

The Commission is expected to adopt its third package of legislation on liberalisation of the energy markets after the summer recess and Parliament will be keen to see its recommendations included in the proposals that will be debated during the Portuguese and Slovenian presidencies.

First of all, I would like this package to be the final set of legislation on the internal energy market. The amount of investment required in this sector is of such magnitude that a stable regulatory, investment-friendly framework is essential. Second, I would like to see a concrete proposal on the so-called European regulator. In the long run, such a figure will be necessary as the present situation where 27 different regulators co-exist is unsustainable. Focus should be placed on harmonisation at EU level of the power of national regulators and in changing the present decision-making process on cross-border trade and interconnections. The model of consensus or, should it fail, comitology, is too lengthy and, more often than not, results in deadlocks, blocking the development of crucial projects for the good functioning of the market. The regulators should be forced to take decisions swiftly and the Commission should play a decisive role should negotiations fail.

Third, I consider that the problems of transparency in the markets - or lack of it - should be addressed, as this is one of the main obstacles to competition. In addition, the application of generalised regulated tariffs should be stopped as they distort competition by offering prices that are artificially low and they are often used to push new entrants out of the market.

Finally, the Commission will have to do intensive work if it wants the Council of Ministers to accept any progress on ownership unbundling. For this reason I expect that it will put forward a text with a view to reaching a consensus. Ownership unbundling was adopted with a clear majority in committee, but who knows what the July plenary vote will bring? What is clear is that some steps forward have to be taken in this field and it has to be done in a synchronised way between all member states. The situation as it stands now puts those who have properly transposed the existing directives into national law in a disadvantageous position vis-à-vis those who have not and this has got to stop.

With energy high on the EU’s political agenda, the time has come to take advantage of the favourable winds and sail towards the completion of the internal markets of electricity and gas, as an integral component of a European energy policy based on comp-etitiveness, security of supply and environ-mental protection. My impression is that, on this particular subject, the Parliament has reached consensus. It is now up to the Commission, with our support, to rally the co-legislators around their eagerly expected proposals.

• Spanish centre-right (EPP-ED) MEP Alejo Vidal-Quadras is a member of the industry, research and energy committee and was rapporteur on the prospects for internal energy and gas markets.

Esko Seppänen

There has been much noise around ownership unbundling in gas and electricity markets. The same rules and practices should not, however, be fully applied in both of these markets. The unbundling options are more complicated for gas. Finland, for example, has only one pipeline connecting its market to the Russian grid. Gas is bought at a much cheaper price compared to that of the ‘European’ market price and the lower price should not be jeopardised by any forced unbundling.

Unbundling is not a method by which all inefficiency, secrecy and manipulation of the market can be cured. State ownership of the grids could be, but in the EU it is out of the question. The big players, which own the monopolistic pipelines, have the political power to resist any state-based system.

In these conditions, we must settle for giving more power to independent system operators (ISOs) and pan-European regulators. They may solve the problem of transparency - but not that of new investments.

The problems linked to the electricity market are different in nature.

In the Nordic countries, there is a common regional market - Nord Pool - with the same wholesale reference price.

In these countries (except in Denmark) cheap hydroelectric power and nuclear electricity is produced and the production costs are reflected in retail prices paid by industrial and household consumers. In the coming years, market mechanisms will erode this advantage due to the pricing mechanisms.

The wholesale price is fixed in the market by a system which is based on companies auctioning all the electricity produced for the next day. It is priced at the margin and even low-cost producers get the same high price as the most expensive producers. The emissions trading scheme makes the profits of the hydro and nuclear energy producers even higher.

The big players in the market know each others’ production capacity well, and they act - and speculate - in the market as oligopolies.

Surprisingly, dirty tricks became public in Germany, where the secret market data of the Leipzig EEX was published by an unknown insider. Based on that first hand information, it was concluded that the manipulated market price was up to 30% too high.

This is undisputed evidence that undertakings manipulate wholesale and emissions trading prices and reap windfall profits from the pricing system. The profits are invested in market shares rather than in low carbon dioxide generation or distribution. The EU goal is to harmonise all internal markets.

The way Nord Pool functions as a harmonised market is a lesson for the future: what happens when the price of electricity becomes independent of production costs and is based on the price bid by the most expensive producer? The consumers of low production cost countries see electricity produced nationally go to more expensive markets in pursuit of profit, and cheap electricity prices in high cost countries are subsidised by the consumers in low cost countries.

In Germany, where politicians are dismantling their old nuclear installations and not licensing new ones, electricity is expensive.

When Finland licenses new reactors, the German multinational E.ON will seek to produce nuclear energy in Finland.

In the harmonised market, electricity can be exported out of the country (and even to Germany) through the common Nordic market. In this case, Finland would be a nuclear producer with all the nuclear waste repository problems but without cheaper electricity prices.

And when the EU directive comes into force requiring 20% of the primary energy to come from renewable sources, Finland would be obliged to extend its renewable energy production by an extra 35% (which could be its country quota for renewables) per every new atomic installation. This would have unbearable ecological repercussions for the landscape and woods in Finland.

Thus, market mechanisms or ownership unbundling do not solve all the energy problems.

• Finnish European United Left-Nordic Green Left MEP Esko Seppänen is a substitute member on Parliament’s industry, research and energy committee and was rapporteur for access to the natural gas markets as well as reports on nuclear waste and safety issues.

Two MEPs discuss gas and electricity markets.