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Industry Perspectives: Let the market deliver

Dr. Rolf Bierhoff
President, Union of the Electricity Industry-EURELECTRIC

The liberalization of European electricity markets is proceeding apace. Already some 70 per cent of the market is open to competition – far ahead of what was envisaged in the 1996 EU Electricity Directive – and this thriving competition is helping to deliver lower power prices to almost all categories of customer in almost all regions. Several EU Member States have already achieved 100 per cent liberalization, several more countries are now planning to open their market fully within a couple of years, and the European Commission has recently tabled a new package that would fully liberalize electricity and gas markets by 2005.

Bierhoff: markets can deliver important benefits to all players and stakeholders
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The Union of the Electricity Industry-Eurelectric fully supports the process of accelerated liberalization. Our association represents the European electricity industry plus its affiliates and associates across the globe – and is therefore the biggest single natural gas customer. We have repeatedly urged the EU lawmaking bodies to bring gas market liberalization into step with the requirements in the power sector, and also to agree swiftly on practical, flexible measures for power transmission operations that will facilitate transboundary power trade within the EU. These measures would help deliver the full benefits of free markets to our industrial clients and retail customers. Practicality and flexibility: these are key to allowing markets to deliver benefits.

Recently we have seen from the other side of the Atlantic a clear example of what can happen when markets are hamstrung and not allowed to work freely to deliver the benefits of liberalization. Contrary to what some commentators in Europe as well as in the USA have alleged, the California crisis is not the result of liberalizing markets, but rather the result of an ill-thought-out approach to liberalization.

By denying utilities the right to pass wholesale price rises on to their customers, California’s policy makers severed an important link in the market chain and prevented users basing their economic behaviour on a key signal: price. In a nutshell, consumers were neither encouraged nor provided with adequate information to enable them to modulate their use of electricity as prices rose. At the same time, while the local electricity utilities were obliged to sell power generation plant and rely entirely on the wholesale spot market for supplies, heavy environmental regulation discouraged generating companies from building the necessary new plant to meet the rising demand. It is, we believe, chiefly this lack of practicality and flexibility that has produced such extreme effects.

Secure supplies

Even as EU energy markets are opening up to competition, two other requirements of major importance are forcing themselves towards the top of the political agenda, both in Europe and across the globe: securing reliable, affordable energy supplies; and ensuring sustainable economic development. As a major energy provider, the electricity industry is profoundly involved in addressing these two closely-linked issues, often summed up in the headlines “energy security” and “global climate change”. In society’s bid to break the link between economic development and the release of greenhouse gases into the atmosphere, choice of fuel becomes a central point of the debate. Thus coal, plentiful and affordable, becomes in this context what the European Commission in its Green Paper on Energy Supply Security describes as an “undesirable” fuel. However, advances in clean coal technology mean that it can be cost-effective – where CO2 abatement is the specific goal – to apply these technologies rather than turn to other options which may be both expensive and limited.

The supply security/sustainable development debate has brought into the spotlight two power sources with widely differing images: nuclear power and the range of renewable energy sources (RES). Several countries have opted to withdraw from nuclear power, while in one Member State – Finland – the process of planning a new reactor to meet energy needs in the medium term has begun. Those large energy consumers who will use the output of the new unit have calculated that nuclear generation is the best and most cost-stable economic option available, given the market’s prospects for the relevant timescale and plant lifetime. While arguments – often emotional and decoupled from factual information – swirl back and forth, the fact remains that nuclear power currently provides over one third of total EU electricity production.

Today, the main debate centres on the safe disposal of radioactive waste. Despite many uninformed assertions to the contrary, the technology exists today that will allow safe and economic storage and final disposal of such wastes – a tiny volume compared with hazardous wastes produced by some other industries – and awaits only the political will to set the necessary projects in motion.

Green issues

This question will not simply go away and must be addressed rationally by those who determine European energy policy. Any retreat from nuclear power – a CO2 neutral technology – would entail replacement of that generating capacity. Pro-rata replacement by current alternatives would result in a 50 per cent increase in power sector CO2 emissions and an overall 17 per cent increase in total EU carbon dioxide emissions. Even if the EU’s ambitious target of 22 per cent of total electricity by 2010 were put in place tomorrow, the determined promotion of RES-based electricity would still not be able to deliver sufficient power and would raise the costs of generating electricity.

However, it is unhelpful to formulate such decisions on the energy mix as an “either-or” question. Our association takes the view that a full range of energy options, including clean solid fuel technologies; nuclear power; RES and good-quality combined heat-and-power installations; plus greater energy efficiency and energy savings, will be required to face the challenge of global climate change. In this context, we should not deny ourselves any useful option.

The European Commission has recently tabled a new package that would fully liberalize electricity and gas markets in Europe by 2005
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Eurelectric supports the development of RES as a useful contributor to sustainable power supplies and we have clearly outlined for the European Commission and other EU legislators our firm view that market-based instruments, rather than expensive and distorting schemes without any competitive element, are the key to establishing these indigenous technologies.

One promising avenue for promoting renewable-sourced electricity is via “Green Certificates”. This method creates a market in certificates which will reward the efforts of RES-producers, helping to offset the higher costs of investment and running, without distorting the overall electricity market by imposing higher costs on electricity suppliers and ultimately the end-customer. Eurelectric members are closely involved in the efforts of the RECS Group, which brings together utilities, government authorities, renewables producers and market experts, to develop a market in tradable RES-Certificates or Tradable Green Certificates (TGCs).

Regarding electricity security specifically, our considered opinion is that market mechanisms, when properly designed and allowed to operate in the right manner – inter alia removing barriers to needed investment – will deliver many of the desired results: supply security; necessary infrastructure investments; integration of RES; and wider environmental goals.

The electricity industry is playing its part in a number of areas linked to environmentally sustainable development. Eurelectric welcomes the emphasis placed in the European Commission’s draft 6th Environmental Action Programme for 2002-2010 on stakeholder consultation, sound science and working in partnership with business. Current moves by individual Commissioners to bring forward changes in the regulatory approach – again based on industry-involvement and self-regulatory systems – also represent an important step forward in fully harnessing the expertise of industry in formulating regulations which will help to deliver the desired societal goals in the most cost-effective manner.

One example of such industry-led action is the current Eurelectric-led project to explore the use of CO2 emissions trading in helping energy producers and users to ensure compliance with emissions reduction targets in the most cost-effective way. The GETS (Greenhouse Gas and Energy Trading Simulation) exercises I and II have clearly shown that companies’ investments drive environmental compliance. Equally, these exercises – involving some 38 companies from seven major energy-providing and -using sectors – demonstrated that a well-designed emissions trading market allows companies to fully integrate environmental goals (e.g. reductions in industrial emissions of greenhouse gases) into their business strategies and decision-making processes, and to optimize the timing of their investments. This is another clear example of how markets can, if allowed to do so, deliver important benefits to all players and stakeholders while avoiding the distorting effects that heavy-handed regulation often causes.

The message to legislators, policy makers and regulators is clear: the market – for which you yourselves have opted – is there to help deliver benefits to all. Allow market mechanisms to do their job properly and you will be doing yours more effectively.