Amongst all the debate on climate change and global emission agreements, with some tangible progress being made at last month’s G8 Summit in Germany, the European Commission’s 1 July deadline for full EU gas and electricity market competition has seemingly gone un-noticed. But ignoring competition issues is the last thing the EU should be doing if it desires an effective and efficient emission trading scheme, as energy market competition is essential if emissions trading is to succeed in reducing emissions at the lowest energy cost.
The competition debate quietly resurfaced last month when, as expected, EU energy ministers rejected the Commission’s proposal, presented at the European Council in March, to legislate for ownership unbundling. The rationale presented by Brussels is that separating ownership of supply and distribution will increase competition because grid access will be become more competitive if it is not in the ownership of supply companies. The Commission is right to take this view, but by delaying its proposals until now has seriously weakened its chances of success because its actions are seen as too retrospective.
Since the EU market was “liberalised”, starting with the electricity competition directive in February 1999 and the gas competition directive in August 2000, the Commission has allowed the EU market to slowly consolidate, first through vertical integration of generation and supply, then the creation of so-called national champion utility groups, and now through the creation of European champion utility groups. Indeed the EU competition commissioner, Neelie Kroes, said in January following the conclusion of its lengthy sector inquiry into competition, that the creation of European champions was the path to increased market competition. She is wrong.
The fundamental principle of competition is choice, and by allowing the market to consolidate into dominant European utility groups simply reduces the choice available. So if the Commission now accepts that ownership unbundling is essential to increase choice, and thereby competition, why is it blind to the likely negative competition outcome of dominant pan-European utility groups?
None of the policies put in place by the Commission with respect to competition has really been successful, and its policing of the market in allowing successive consolidations has only served to constrain the potential of competition to evolve within the infrastructure it has put in place. This is most evident when considering the unbundling debate.
When the Commission outlined its strategy for market competition it introduced legislation for legal unbundling. That is to say that supply and distribution must be operated as different businesses. Such a policy was always going to be ineffective, as although supply and distribution are legally separated they are still owned by the same company. Consider the dominant German utilities. Each of the big four owns a grid and the result is that the opportunity for new entrants to effectively and efficiently compete in Europe’s largest energy market has been limited. Not only that, but these highly integrated businesses have financially benefited from their dominance and used their increased capitalisation to acquire other utilities outside of Germany which further reduces the prospects for European competition.
It is hardly surprising then that the most vocal opponents to ownership unbundling are those dominant European champions that have most to lose. The argument put forward by member states against ownership unbundling, and in particular France, is that such a process would undermine security, as the unbundled assets would likely be acquired by non-EU companies. This really is a facile argument. If these member states that oppose ownership unbundling were honest about it, they would concede that their opposition has little or nothing to do with supply security and everything to do with a fear of competition.
But even if member states were to embrace ownership unbundling it is doubtful that competition would actually benefit proportionately as there just seems to be little appetite for progressive market competition in Europe at the moment. Eight years on from the first directive the market appears have found a comfort level that is difficult to break out of. Some also believe the market has now reached a level of competition maturity.
It is convenient to place the blame with member states for this competition malaise, and while some member states have been particularly resilient to progressing competition they have still largely operated within the market guidelines set by the Commission. Responsibility for lack of competition progress therefore has to rest with the Commission and it is about time it accepted its failings.
When the Commission outlined its vision for a single EU energy market it believed it would form a role model for other economic regions, with the ASEAN market also keen to embody a regional approach to energy markets. There have been some successes with the EU approach but in general it has more failings than successes and cannot be readily accepted as viable role model.
As with energy the Commission has sought to develop its climate change market as a pattern for other regions. But as with energy this now looks to have faltered. Ever since the US rejected the Kyoto Protocol in 2001 the EU has set itself as the model for other nations to follow. Central to the EU model is emission trading and for the past six years the EU has been lobbying the US to embrace the concept of a carbon cap-and-trade structure. This lobbying intensified this year when it became clear that most of the US presidential candidates supported a cap-and-trade approach. But in Germany last month the self-proclaimed climate leadership of the EU began to weaken.
Following the strong rebuke from the US to Germany’s draft G8 communique calling for strict carbon caps and timetables to limit warming to 2 °C, president Bush caught Germany and the EU napping by saying the US would take the lead in tackling climate change, and would convene a meeting in the autumn of the world’s largest emitters including India and China. But more importantly Bush would not commit to the EU cap or timetable and argued strongly in favour of clean energy technology as the methodology to achieve emission reductions.
The EU has long aspired to be a world economic leader, but both with its energy and climate models its leadership credentials are now being questioned. It has failed to develop a truly competitive energy market, it has been unable to reach agreement with Russia to secure long-term energy supply security, and its emission trading scheme has not been effective in reducing emissions. It may be premature to make such an observation, but there are early signs that the EU’s energy and climate models are slowly unbundling.
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