EU Energy Policy Blog

The internal energy market and the EU Kyoto policy cannot be efficiently and effectively achieved if members-states keep their sovereignty on energy mix.

Unlike EU competition and climate change policy, energy policy remains national. No specific chapter of the Treaty is devoted to energy. Each member state can choose which source of energy to promote or to freeze. At first glance, it does not sound stupid for national citizens’ preferences are heterogeneous. For instance, German inhabitants are keen on wind farms and distributed energy whilst French residents are open to nuclear power generation. The irony is that they both consume the electricity produced in the neighboring member state. In fact, interdependence between member-states in the field of energy is large. As a result, a national decision benefits or harms other European countries. These policy external effects are very costly. They encourage free ridding and result in wrongly allocated investments. Why would a country reinforce its electric grid to ensure a better security of its neighbors in case of emergency? Why investing in renewables where solar and wind are the most abundant if the rate of return is mainly driven by the amount of national subsidies?

National energy policy goes with national champion and national champions slow the achievement of an open and competitive internal energy market. Some member states inherited gas and electricity monopolies. A few countries (e.g., UK) dismantled them, the others (e.g., France) kept them untouched, and countries without flag energy companies (e.g., Spain, Germany) made their best to get their own national champion. It is much easier for national governments to dictate their energy policy objectives to one or two companies that make most revenues locally, to say nothing about those that are publicly owned. As a counterpart, national champion can expect a lax enforcement of competition law and a more favorable regulatory policy. It is not coincidental French and German governments supporting their energy giants have recently voiced the loudest against ownership unbundling as proposed by the European Commission and advocated by the European Parliament.

National energy policy often contradicts with climate change policy. In fact, less carbon emitted is not synonymous with the supplying of affordable and secure energy. Green energy is expensive and final consumers of energy pay the price of carbon as derived from the EU Emission Trading Scheme. No doubt also, that the use of coal to produce electricity or liquid fuel makes energy more affordable and secure but adversely affects the CO2 balance sheet. In the new era of energy high price, some member states might be tempted to free ride on the Kyoto objective they were assigned to. They may reconsider the tradeoff between the purchasing power of their today citizens and the ensuring of a better environment for the future inhabitants of the planet. What will happen if Spain does not comply in 2012 with its C02 reduction target? Will the economic recession be an excuse? What will happen to France if less than 20% of its electricity production comes from renewables in 2020? Will the building of 2 new nuclear power plants be claimed as a defense?

National energy policies also result in formidable knowledge asymmetries between Brussels and member states capitals. National expertise on electricity and gas matters is strong, especially in big countries such as France and Germany, whereas the Commission Directorate General in charge for energy is understaffed. In fact, energy policy needs long-term forecasts and periodic adjustments. This means data, models, hypotheses, thus a lot of experienced and specialized people. Analysis of consumption patterns, surveys of resource availability and economic assessments are undertaken at the national level. The lack of expertise at Brussels explains the common use of magic numbers. The 5 twenties (i.e., 20% less CO2 emissions, 20% energy savings, 20% renewables by 2020) largely come out of the blue. No calculation based on costs and benefits, even with rough numbers, could lead to retain a similar objective for the improvement of energy efficiency and the development of renewables. A European Community for energy would save us from future inefficient or unachievable targets like four threes (3×30% in 2030) or four fours (3×40% in 2040). Note that I do not claim to set modest objectives. The point is that the more ambitious the target the more unacceptable they are not documented by data, and the more costly the choice of inefficient means to achieve it.

In a nutshell and according to law and economics jargon, the EU greatly suffers from a jurisdictional misalignment between energy, competition and climate change policy, the former being national while the latter two being European.

François Lévêque, Mines ParisTech.

This entry was posted on Sunday, August 24th, 2008 at 7:39 pm and is filed under Energy Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.