Will the energy gambit work?

When the European Commission announced its latest energy liberalisation package last week (19 September), France and Germany’s energy giants and their governments, the main targets of the Commission’s approach, were quick to attack it.

The main target of the attack is the proposal to force generating companies to sell off their shares in transmission networks, known as ownership unbundling.

French Finance Minister Christine Lagarde pledged to do "everything we can with other opponents to oppose any unbundling". Utz Classen, chief executive of EnBW, said that it was "unacceptable" that the Commission wanted to "break up a functioning sector simply on the basis of supposition and suspicions".

Germany’s Economics Minister Michael Glos was slightly more positive. He said that the Commission’s alternative to ownership unbundling, which is forcing generating companies that do not want to sell off their transmission networks to surrender their control to an independent system operator (ISO), was the "right proposal" although he said that the Commission’s version was "too bureaucratic".

The Commission received predictable support from the UK government and its power companies. Energy Minister Nigel Wicks welcomed the Commission’s proposals, saying that if other EU countries matched the UK’s liberal energy market, "it could save EU consumers billions of euros a year". Nick Winser, director of transmissions at the UK’s transmission operator National Grid, urged the Commission to "hold its nerve and go for complete unbundling" as the ISO option would "only be a small step forward". Full unbundling was needed to create an incentive for the network investment needed, he said.

The Commission also won support from Fulvio Conti, CEO of Italy’s Enel, who said that the "most important thing in electricity is that you have an independent system operator and an independent regulator". Italy has already unbundled its electricity grid.

Despite the strong opposition of the two member states with some of the EU’s most powerful energy companies, the chances of success for the Commission’s approach depend on other influences. First, they depend on the level of support in the Council of Ministers for a twin-track approach of ownership unbundling with a deep ISO model as a second best option. Eight countries, including the UK, Sweden, Denmark and the Netherlands, sent a letter to Andris Piebalgs, the energy commissioner, in June, expressing their support for ownership unbundling. Nine other countries, including France and Germany, responded by insisting that ownership unbundling was unacceptable as the only option. The pro-ownership unbundling camp believes that there are two more countries on their side. Among the antis are a number of smaller countries such as Cyprus, Latvia and Luxembourg. The pro-unbundling camp believes that these countries are ‘ripe’ for getting exemptions from the ownership unbundling rules given their relatively small share of the EU’s total energy market or their remote locations.

In order to win majority support for its proposal, the Commission may need to weaken its proposed ISO model, to address the criticisms of some member states that it is too bureaucratic. The Commission admits that the proposed ISO model is "intrusive" but this is largely deliberate, because it would like governments or the companies themselves to opt for ownership unbundling rather than endure heavy regulatory oversight under an ISO system.

Piebalgs said last week that "companies will decide what is the best option for them". If they did not like the ISO model, they could choose the other alternative, he said. The problem with this approach is that governments and companies opposed to ownership unbundling may go down the route of an ISO and try to water down the restrictions proposed by the Commission in areas such as operational control and separation of management. They might then try to work with the new model for a few years and only later opt for ownership unbundling, meaning that the effects of the new liberalisation package would be delayed.

Another potential ground for compromise is taking a different approach to the electricity and gas sectors when it comes to unbundling rules. French gas giant GdF has been lobbying for separate treatment while members of the European Parliament expressed support for a differentiated approach to the two sectors when it adopted its report on energy markets in June. There are already slightly different provisions for gas, with the possibility of exemptions from rules ensuring access for third parties to infrastructure. But Piebalgs rejected arguments that the gas sector was inherently different, saying that countries that have insisted on ownership unbundling for the gas pipelines had seen an increase in investment for liquefied natural gas and gas storage facilities. Nevertheless, despite the strength of the purists’ arguments, easier rules for the gas sector might be needed to peel away some of the opposition to the Commission’s package.

The Portuguese presidency of the EU has already started work on this very complex dossier, but Piebalgs admitted that, given the political sensitivity of the package, it would have to be dealt with by EU leaders at summit meetings. He predicted that the package would be agreed under the French presidency of the EU in the second half of 2008.

Despite the difficulties, he remained positive about chances of success. "French energy goals are not very different from ours," he said optimistically.

When the European Commission announced its latest energy liberalisation package last week (19 September), France and Germany’s energy giants and their governments, the main targets of the Commission’s approach, were quick to attack it.