Now that a liberalized market has been established, policymakers should ensure the existence of a balanced and coherent regulatory framework.
he new European Commission President José Barroso has vowed to have his five-year tenure at the head of the EU executive body remembered as the ‘Lisbon Commission’. This is not a reference to his Portuguese nationality, but to his intention to elevate to the top of his priority list the 2000 ‘Lisbon Agenda’ of actions designed to boost European competitiveness. Barroso has pledged to chair a group of Commissioners who will seek to boost the process of economic and market reform and give new impetus to the EU economy. Likewise, the Dutch, Luxembourg and UK governments successively occupying the rotating presidency of the Council of Ministers in 2004-2005 have all indicated a desire to see a more market-driven approach to new legislation, and several committees in the European Parliament have also deplored the overly-interventionist approach taken by a number of specific legislative proposals on the table.
Eurelectric applauds this trend. Following a period of ever-increasing legislation, rules, regulations, burdens and charges placed upon the European electricity industry, the association which represents the sector in public affairs is now stressing the need to bring the imperative of competitiveness – a key aim when the energy market liberalization Directives were first drafted in the mid-1990s – back on to the agenda. What is now needed is a consistent, market-oriented approach to legislation and regulation that will enable electricity companies to deliver on their commitments to customers, EU industry and a modern society.
EU lawmakers saw liberalization of electricity and gas markets, creating customer choice and potential for lower power prices, as instrumental to the ‘Lisbon’ drive to boost the competitive strength of the economy. This process has indeed induced a paradigm shift, which will best deliver the desired results if properly supported by all parties concerned. The Electricity Market Directives and the 2003 Regulation have set up a balanced, forward-looking framework for a competitive EU market, with a timetable for market-opening and rules for organizing cross-border trade. Competitive pressures have already brought about substantial cost reductions and productivity improvements. The European Electricity and Gas Forums have nurtured a consensus-building process to deal with outstanding issues.
Meanwhile events over the last few years have brought to the fore the imperative of maintaining a reliable energy supply. Some commentators have expressed doubts that adequate power supplies can be maintained, while others are even predicting an imminent crisis of generation capacity. Ours is an essential industry, for which the boom and bust cycles seen in some sectors would simply not be acceptable. Hence there is a need to ensure overall security of supply in electricity – i.e. the ability of the electricity system to provide power to end-users with a specified level of continuity and quality in a sustainable manner. This implies long-term the operational security of the system as a whole – relating to fuel access and adequate generation, networks and market-structure and short-term security of supply – and its assets, including the ability to overcome short-term failures of individual components.
Legislation from Brussels, home to the EU, has liberalized a market that should be more competitive
As the former central planning model has given way to market-based power supply in Europe, much excess generation capacity kept by utilities to ensure high-level supply security has disappeared. Although electricity consumption continues to grow in Europe, our experts see the pace of increase slowing to around 1.5 per cent per year during the 2000-2020 period, implying EU demand will rise from 2894 TWh in 2000 to 3872 TWh in 2020. Assuming normal reserve margin and availability, total installed capacity needs of the interconnected systems would be 734 GW in 2020, 106 GW more than the installed capacity in 2000. Taking into account the need to replace ageing equipment, Eurelectric estimates that the (pre-2004 enlargement) EU-15 countries will need to install around 520 GW of new generation capacity by 2030 at a cost of some €600 billion ($786 billion).
These investments in generation will henceforth be determined by market forces and commercial decisions taken in an increasingly pan-European market. This requires an attractive investment climate, which in turn depends largely on a greater degree of regulatory stability and consistency than we see today. Electricity industry managers identify regulatory instability as the major hindrance to investment.
As regards transmission and distribution networks, which are managed under a regulated regime, capital investments projected at a further €500 billion will be required within the same timeframe. A fair return on investments and a regulatory regime that enables the period for obtaining authorizations to be shortened are key success factors here. To facilitate such investments, governments and regulators should now focus on allowing the market to develop and creating an attractive business environment and not focus on multiplying market-interventions or rules of behaviour. This means leaving all feasible energy options open, avoiding price interventions, using market mechanisms to pursue environmental objectives, facilitating authorization procedures and providing a consistent regulatory framework. If this favourable climate is created, Eurelectric experts are confident that the projected required generation capacity to meet demand and reserve requirements to 2020 will be put in place.
The European Commission has tabled a proposal for a Directive governing security of supply and infrastructure investment. In this context, we would point out that the existing Electricity Market Directive already provides an array of instruments that governments may use, as a last resort, to address aspects of long-term security of supply, should problems arise and the market fail to provide signals able to stimulate the required investments. Accordingly we at Eurelectric do not believe the new interventionist proposals are justified at this stage. With regard to the roles, responsibilities and obligations of the various actors in ensuring security of supply, Eurelectric does however see a need for clear definition.
The European electricity industry has espoused competition and takes seriously the imperative of supply security. We are no less aware of our obligations under the environmental and social pillars of the Lisbon Agenda. These call for an environmentally-friendly supply mix, progress on both supply-side and demand-side energy efficiency, and the fulfilment of vital public service obligations. A rational approach to environmental and climate issues is a necessary element for ensuring a sustainable energy future and where vital goals cannot be achieved through market forces alone, policymakers are called upon to act. However, we believe the time has now come to restore coherence to the patchwork of measures being applied at EU and national level in pursuit of targets on renewable energies, combined heat & power, CO2 reductions, plus energy taxes etc, marked by inconsistencies and absence of market-integration and a least-cost approach. New policies, burdens and regulations have accumulated without sufficient coherence, balance, or proper economic assessment. As a result, costs have begun to rise again, threatening the efficiency gains already made and rendering electricity prices less competitive.
Climate-change policies are set to have a great effect on energy companies’ core business. Eurelectric has consistently supported emissions trading as a market-based approach to helping to meet CO2emissions reductions targets set by policymakers in a cost-effective manner. We wish to see a similarly market-oriented approach to such desirable goals as promoting renewables – e.g. via ‘green’ certificates – and an end to the double burdens represented by parallel taxation measures.
Eurelectric believe existing supply directives should be defined before new ones are created
Eurelectric works assiduously to promote energy efficiency in Europe – inter alia through the Energy Wisdom Programme and our proposals for an Energy Efficiency Management & Audit Scheme. In this context we advocate that the Commission’s 2003 proposal for a Directive on energy end-use efficiency and energy services be re-shaped to take a market-oriented approach addressing all energy vectors and recognising the key contribution electricity can make to improving overall energy efficiency when electro-technologies replace less efficient energy vectors.
In an attempt to guide EU policy in the right direction, Eurelectric has drawn up a “roadmap”, which calls for a comprehensive assessment of the role of electricity for EU society and its economic development goals, energy security and environmental sustainability; a major re-orientation of the existing and proposed policy framework relating to electricity so as to make it more consistent and least-cost and market-oriented; a thorough economic impact assessment for any new legal measures; and a fresh international approach to climate change action that would encourage joint engagement of the Western world and more advanced developing nations, with the focus on technology-development and energy-efficiency improvements.
This roadmap can only succeed through a comprehensive approach involving policy-makers in the various areas, regulators, the electricity industry and its stakeholders. Competition has become an everyday reality for our industry. It is now time to re-focus on competitiveness. This means creating a framework in which the electricity industry is able to provide high-quality competitively-priced power and services to citizens and to EU industries competing in the global arena to bring prosperity and economic well-being to our society. We hope the EU legislators’ promised new emphasis on the Lisbon Agenda will generate much-needed impetus in this direction.
Paul Bulteel, secretary-general of the Union of the Electricity Industry – Eurelectric