The prevailing themes in the energy market this year have been consolidation, climate and security. In Europe, which still aspires to a single competitive energy market, this consolidation has largely been in the utility sector. But more recently there has been increased momentum behind regional market consolidation, with the Single Electricity Market (SEM) in Ireland, which came into effect 1 November, being hailed by EU energy commissioner Andris Piebalgs as ”a significant contribution to the construction of the internal energy market”. Piebalgs believes regional initiatives like SEM deserve to be widely copied. In this way, he says, a European grid will gradually take form, and with it, a European Energy policy.
Following on from the consolidation of utilities and now regions, with the European Regulators Group for Electricity and Gas believing that the development of a series of intra-EU gas and electricity regions is the best approach to creating market competition, it would make sense to also consolidate the trading platforms. And with the proposed merger of Powernext and the European Energy Exchange a third phase of consolidation is likely to commence.
There is considerable logic behind exchange mergers if the underlying utility market is also consolidating, as fewer exchange platforms reduce the risk of trading liquidity being fragmented. And also, if regional markets are to be created it makes sense to have a single exchange meeting the trading needs of that region.
So it comes as a surprise that the European Commission has expressed some reservations over the Powernext/EEX merger. Its two areas of concern are that the merged exchange may be less open to other EU areas and thus may pose difficulties for further market coupling, and that transmission system operators should be part of any spot market development.
But these concerns are unfounded. The rationale behind the merger is to sew the seeds of an actual European exchange with the France-Germany axis providing the platform to attract other exchanges, such as those in Spain and Italy. As such the exchange consolidation is pro, not anti, further market coupling. And as regards the TSOs, it is in the interests of an exchange to tailor its services to the needs of the market otherwise it will not attract any business.
As the “competitive” EU energy market developed a number of exchange platforms emerged, yet there is little point in a large number of platforms as they either fragment liquidity on contracts that are traded on more than one exchange, or traders have to use more than one exchange to trade an EU portfolio of contracts. It’s about time that some logic prevailed and the exchanges consolidate to reflect the underlying consolidation in the utilities and markets.
... and the potential link between climate change and oil supply security
The International Energy Agency’s latest annual World Energy Outlook report warns of a potential supply-side crunch by 2015 due to the unrelenting energy demand of India and China. Not surprisingly the report led to a flurry of calls, both from the IEA and major consuming nations, for Opec to increase its production. Opec declined the requests, insisting there was not a shortage of oil and pointed to a lack of refinery investment in the US for undermining oil supplies and a weak US dollar as the main reasons why oil prices are at notional record highs.
These short-term supply differences of opinion between the West and Opec are nothing new. There seems to be a general lack of agreement between the two sides on what constitutes both adequate oil supplies and the reasons for price increases. And as these events become more common, which is likely, the position of Opec as the market’s self-appointed supply saviour can only be further empowered.
It is partly because of the West’s concerns over Opec supply reliability that it has been looking to wean itself off oil. Both the EU and the US have ambitious plans to develop more alternative energy sources, both for electricity generation and transportation, with the EU setting a 20% target for renewable energy’s share of energy use by 2020.
Understandably, Opec has reacted with alarm to these developments as it sees this as reducing demand certainty for oil. And if Opec feels its long-term demand is compromised it will feel less inclined to invest in production expansion, which in turn exacerbates long-term supply security concerns.
For all the disagreements between the West and Opec there has to be some give on both sides, and climate change may just provide the input to strike a balance between the two.
After years of presenting a sceptical attitude to climate change Opec is now taking more of an interest in the environment and the measures needed to reduce emissions. Significantly, Saudi Arabia says it is now interested in participating in technology development to reduce emissions and in particular the development of carbon sequestration. Opec has even floated the idea of a fund to which the oil producing countries could contribute $1bn. And with carbon sequestration research conducted by Statoil showing that pumping sequestered CO2 emissions into underground oil fields could help recover more oil from the reservoirs there is a greater incentive for producing countries to invest in sequestration technology.
There is significant potential promise in these developments. If Opec accepts the need to address environmental issues then it can no longer view the development of alternative energies by the major consuming countries as being anti-oil. Similarly major consuming countries, and in particular the US, will have to accept that the development of alternative energies should not threaten oil demand security, but extend it.
If producers and consumers are able to develop long-term energy policy thinking on the premise that the development of alternative energies is not anti-oil, but anti-emissions, then it is possible that a more harmonious approach to long-term oil security can replace the more vitriolic relationship associated with short-term supply issues. And somewhat ironically, this long-term oil security may be down to climate change.
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