European energy market integration needs an action agenda

by Inline Policy on 25 Jun 2014

The EU needs to make the single European energy market a reality. But to achieve this, it will need to concentrate more on incentivising investment, infrastructure and technical issues rather than on grand political gestures.

On Thursday and Friday of this week, European heads of government will meet in Ypres and Brussels. Inevitably Iraq/ Syria and the European Commission Presidency will demand much of their attention. However, political leaders will also consider a communication, published in late May, from the Commission, which contained a range of proposals on how to reduce the EU's dependence on Russia for its sources of energy, especially gas.

European energy security at this week's European Council

The Commission communication makes a number of sensible, if not particularly innovative, proposals on energy diversification, viz:

  • increasing indigenous energy production, both from fossil fuels (e.g. shale gas) and low-carbon (renewables, nuclear) sources;
  • facilitating supplies from more diverse sources overseas, e.g. Caspian pipelines or LNG from the Gulf;
  • improved energy efficiency, especially from the buildings and industrial sectors;
  • that the EU should speak with "one voice" on external energy security matters; and
  • further improvements to emergency mechanisms and contingency planning.

At their European Council meeting in Brussels, leaders will be only too aware about the sort of signals they send to President Putin which backs up their rhetoric on Ukraine. They can therefore be expected to endorse the Commission energy security communication, and the points of detailed interest will be more about what diversification alternatives they may choose to prioritise. For example, the Commission communication is quite lukewarm about the potential of shale gas as a transformative energy source; but political leaders, led perhaps by the UK and Poland, may decide to be more positive about shale's future potential.

Beyond the immediate horizon, on integration and infrastructure

However, it might be prudent to look beyond the political rhetoric and consider another aspect where Europe very much holds the power in its own hands: making internal energy market integration a reality - with all the benefits to security of supply, competitiveness and prices that should bring.

The Commission communication to be considered in Brussels talks about completing the internal energy market though improved infrastructure, and grid and pipeline interconnectivity. Seasoned energy market participants could be forgiven for glazing over a little when they read this, since they know that internal market integration is an objective which the Commission has been promoting for years. The First Energy Package, targeting liberalisation, was adopted in the late 1990s. Agreed, the authorities have made progress, e.g. the stand-out measure in the Third Energy Package which promulgated ownership unbundling - the separation of power generation from power transmission networks. Nevertheless, more could be done on integration, especially to align it with the economic realities facing Europe from 2015 and beyond. What is seemingly required is a stronger political drive, combined with imaginative ideas which can promote a stronger and more joined-up regional infrastructure.

How political commitment drives action on the ground

Political will is never easy to catalyse, particularly when governments have a variety of priorities they have to contend with. It's therefore encouraging to see that the forthcoming Italian Presidency of the EU, which will run from 1 July to the end of December, is intending to make the single energy market their number one energy policy priority. The Italians have also highlighted energy infrastructure and projects of common interest for their presidency programme, and they appear committed to pushing these two tracks along. Their challenge will be to galvanise other decision-makers into joining behind them in the collective endeavour and, crucially, into implementing the relevant directives at national level.

A specific piece of regulation still to be implemented across member states is the Gas Directive. Inter alia, this created a new legal framework to promote cross-border trade in gas. A measure in the directive set out the establishment of a number of legally binding network codes designed to facilitate a more liquid and integrated European gas market through the efficient use of cross-border transmission capacity. These codes came into force in November 2013 and are meant to apply from November 2015. It is now up to the regulatory authorities at national level (e.g. OFGEM is running a UK consultation on this in respect of the Bacton gas interconnector in Norfolk) to ensure that these network codes take effect. This is an example of how market integration will be undermined if action is not taken by the regulator. And in this regard it's always worth recalling that regulatory action doesn't happen in a vacuum: it has to be enforced by national governments and, if it doesn't materialise, be policed and possibly be the subject of infringement proceedings by the European Commission.

Fresh thinking is also required - a priority for the new European Commission

As hinted above, the economic challenges from 2015 - notably, in this context, the impact of higher energy prices on European consumers and business - may require a fresh look at what more can be done to deliver a properly integrated EU energy market. The London-based think-tank Policy Exchange recently published a report on electricity interconnectors, which can enable electricity, like gas, to be traded across borders. The thrust of this report was that:

a) such interconnectors are a good thing because they can join up markets (addressing the energy security objective) and enable markets to access both cheaper (the competitiveness objective) and lower-carbon (the climate change objective which is the third element of the EU "trilemma") sources of energy; but

b) there are significant policy barriers in the way of electricity interconnectors reinforcing the single market. The barriers identified by Policy Exchange, drawing on substantive analytical evidence and business feedback, relate to investment and risk, and suggest that the current EU rules are deterring interconnector project developers from coming forward.

Reflecting on this, another idea to supplement the interconnectors theme would be to allow member states to help fulfil their national renewables targets through investment in low-carbon (and lower cost) projects from elsewhere, e.g. in the EU neighbourhood like North Africa. This idea, first mooted when the existing Renewables Directive was passed in 2009, has never really come to pass. But some fresh thinking from the new European Commission as it takes up office in the autumn, concentrating on how best to incentivise infrastructure investment, would be timely and address some key objectives, as suggested above.

policy-regulation-tech-sector-guide

(Photo by Trey Ratcliff/CC BY)

Topics: Energy and environment, UK business

Inline Policy

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