Europe’s plans to liberate energy market risk running out of steam

Date: 05/09/02

The EU is looking to tackle the issue of a single energy market while bickering over the pros and cons of nuclear power. Martin Banks gives an overview of the push for cheaper, sustainable fuels by citing the differing standpoints of stakeholders and politicians.

THE clock is rapidly ticking on the proposed revolution in the European Union's energy markets.

Despite an initial round of liberalisation in the early 1990s, the market remains fragmented, with European Commission proposals for further reform aired last year failing to make much progress.

The Commission has proposed legislation to open up non-domestic supplies to competition by 2003 for electricity and 2004 for gas, with both markets being opened completely by 2005.

But efforts to provide cheaper domestic energy for the single market have so far foundered on opposition from France.

The EU now faces a fast-approaching deadline.

The key to French opposition is Electricité de France (EdF) - a veritable dinosaur to free-market thinkers as it is both state-owned and a monopoly. EdF has about 20 million customers abroad, including, ironically, the Downing Street residence of Tony Blair (even though the UK premier complains his nation's firms can't operate in France).

Plans are now in the pipeline for the partial privatisation of EdF, Europe's biggest electricity producer, although investment bankers say it will take between 18 months to two years to prepare a sell-off.

However, the French trade union movement opposes the plan, claiming it would result in huge job losses. Any sell-off is also clouded by difficulties over the energy giant's huge pension liabilities.

The EU's efforts to establish a single market in energy depends on a level playing field for all: only when every member state is on board will the rules guaranteeing fair access to all customers be able to be enforced.

Significantly, while the EU's reform plans progress painfully slowly, Europe's largest energy firms are busy carving out positions to suit themselves.

Critics fear that by the time energy ministers finally get around to opening the market to full cross-border competition, they could find it dominated by a small number of companies, making a mockery of the legislation.

It's a prospect that worries the giant German utility RWE, which is critical of the lack of action by member states to make reform a reality. It says the market remains 'seriously distorted', with 100 million customers not yet free to choose their supplier.

This, says RWE, has led to a situation in which some companies are employing profits from their 'protected monopolies' to reinforce their position.

The company, Europe's third biggest electricity supplier, says it 'regrets' the failure of EU leaders to agree a firm date for the complete opening of the markets.

The Commission has received two letters in the past six weeks pushing for further reform of the sector, from UK Energy Minister Brian Wilson and the Council of European energy regulators.

For now, though, a chunk of France's energy business is closed to competition and that threatens to further delay the reform timetable.

Mindful of the EU's pledge to make its economy more competititive and strike a deal on cheaper energy, Commission President Romano Prodi has tried to inject a sense of urgency into the process by warning that the executive could legally force open gas and electricity markets if Paris does not bow to peer pressure.

However, France was party to an agreement - during the March summit in Barcelona - to liberalise the EU's electricity and gas markets for business customers by 2004. Prodi also wants to see that pledge become reality.

Failure to secure the minimum changes could cost the EU economy €15bn per year, according to the Commission president. 'We cannot afford to continue imposing this burden on our firms and consumers,' he warns.

A softening in Paris' stance could be on the way, however, with Energy Minister Nicole Fontaine, former European Parliament president, indicating that the new centre-right government will adopt a more conciliatory approach than its centre-left predecessor.

Her spokesman Chrisophe Beulinet said: 'The new administration is taking a more open position to liberalisation of the energy markets than has been the case in the past.' Beulinet also points out that around 30 of the French energy market has already been liberalised (albeit compared with near-100 liberalisation in member states such as Finland, Sweden, Germany and UK).

However, he accepts that France remains wedded to the concept of public service, with consumers treated equally from Lille to Perpignan.

For now, though, the Commission remains quietly confident that its reform plans remain on track. Energy chief Loyola de Palacio hopes the 15 member states will reach agreement by the end of the year and warns that failure to do so could seriously delay the reform timetable.

She said: 'We are not satisfied merely with liberalisation in each member state, we want a single energy market whereby, for instance, UK companies can operate in Spain. This creates more competition, which is good for consumers, and a sense of solidarity between EU member states.'

The Danes, who currently hold the EU's rotating presidency, have echoed that view, saying it is vital for the Union to complete its reform discussions over energy liberalisation before Denmark's six-month term ends in December.

The country's Deputy Prime Minister, Bent Bendtsen, who is responsible for the energy portfolio, said: 'Liberalisation of the energy markets has now been on the EU agenda for many years. The time is now ripe to secure a new breakthrough and I will attach great importance to ensuring that a decision is taken.'

Bendtsen added: 'Significant economic interests are at stake and, in a globalised world, European enterprises must fight for market share with competitors.

'EU energy ministers should, therefore, conclude the task of creating effective competition on the electricity and gas markets as soon as possible.'

Ria Kemper, secretary-general of the Energy Charter secretariat, also supports moves towards full-blown liberalisation. She said: 'Wherever it has been introduced it has forced down prices to the benefit of consumers.'

In Germany, 1,600 firms compete for a share in the domestic market for gas and electricity. Free marketeers argue that French consumers have been robbed of the benefits that competition has brought to Germans and others in the form of lower prices and better service.

But Wolfgang Muelkens, senior energy advisor to the Federation of German Industries, said that public reaction to opening of the energy markets in Germany has been mixed.

He said: 'A lot of Germans are still reluctant to change their suppliers even though they are able to do so. Yes, electricity prices have fallen since liberalisation but the changeover in the gas sector has not been quite so successful.'

Despite the absence of any immediate threat to security of supply, experts believe the world could be rushing towards a serious downturn as reserves of oil and gas continue to shrink. What is certainly accepted is that an energy revolution is on the way and that this may well mean that traditional sources of power - such as oil and coal - will have to be replaced within the next few years. The question is; with what?

The EU and US consume around half of the world's oil, while producing only some 21. All major world economies display some dependency on the Middle East for oil supplies, ranging from some 12 for the US to 24 for the EU and 75 for Japan. These levels are set to rise if current trends in diminished indigenous production and lack of energy restructuring continue.

World oil production is expected to peak around 2006-2008, with a widening gap opening between the projected world demand and supply forecast after 2010.

This could lead to substantial shortages and prices hikes.

So what can be done to stave off yet another energy crisis? Should we remain 'addicted' to oil and other fossil fuels or look for alternative sources of power?

For some, 'renewable' sources of power offer the only viable way forward. Last month, what will become Britain's biggest offshore wind farm was given the go-ahead. A site near the north coast of Wales will be home to 30 wind turbines, producing enough energy for 50,000 homes. The UK government's ambitions go well beyond that, though - it wants electricity from renewable sources to supply more than 10 of the country's power by 2010.

Campaign groups such as Friends of the Earth say many renewables can already compete with conventional power sources both in terms of the initial investment and price per kilowatt hour.

They insist the EU has all but exhausted its energy options based on fossil fuels. We have no option but to work with nature, rather than against it, so the argument goes.

But others say little has been heard of the environmental and economic disadvantages of solar and wind power.

Peter Haug, secretary-general of the nuclear industry's trade association, European Atomic Forum, estimates that if all the Union's nuclear plants were replaced by wind turbines they would cover an area of 32,000 square kilometres - the equivalent of a ten kilometre-wide coastal area stretching from the northernmost point in Denmark to the north west tip of Spain.

'Installing solar cells to replace a nuclear power plant would require an investment of about €92 billion.

'The cells involved would cover 150 square kilometres, a surface equivalent to the whole of the Brussels urban area,' he says.

UK Socialist MEP Gordon Adam, an ex-mining engineer, backs nuclear energy, despite the Chernobyl disaster 16 years ago. 'Nuclear electricity is by far the safest of the power industries,' he insists.

There are more than 140 power reactors in the EU, producing about 35 of the community's electricity. Nuclear is the EU's largest single energy source for power generation, ahead of coal at 29 and gas at 15. The industry, though, remains dogged by safety concerns.

But, as the sector finds itself under pressure to maximise production and minimise costs to offset the effect of increased liberalisation, is it realistic to assume that action to improve safety beyond the minimum will be taken?

Anthony Capp, director of the World Association of Nuclear Operators, said: 'We're not looking to ensure minimum standards. Rather we aim to improve standards overall, well beyond the minimum.'

Certainly, the industry will enjoy a real boost if pro-nuclear Edmund Stoiber's centre-right party is successful in Germany's upcoming general election.

Gerhard Schröder's governing Social Democrats, particularly their Green partners, want the country's existing nuclear capacity to be phased out over the next 20 years. But this will be overturned if Stoiber wins the 22 September poll.

The EU is looking to tackle the issue of a single energy market while bickering over the pros and cons of nuclear power. Author gives an overview of the push for cheaper, sustainable fuels by citing the differing standpoints of stakeholders and politicians. Article is part of a European Voice survey on energy.