The single market and green growth: energy, climate change, environment
May 14th, 2010 by Mario Monti, Universita Bocconi di MilanoThe energy sector is one of the late arrivals in the single market. At the same time, it is the sector on which the highest expectations are placed today. 2012 will not be the 20th anniversary of the single market for energy. Rather it will just mark the beginning of the consolidation of a common energy market.
There is no time to waste, however. For electricity and gas, Europe needs the new regulatory architecture created under the third Internal Energy Market Package (Agency for the Cooperation of Energy Regulators (ACER), European Network of Transmission System Operator organisations (ENTSOs), framework guidelines and network codes, 10 Years Network Development Plans, etc.) fully in place by that date. The single market sits at the nexus of all Europe’s energy policy objectives: competitiveness, security of supply, and sustainability. Europe needs a functioning single market for energy to ensure secure and affordable supplies for its consumers and business. It has to harness its potential to turn its political leadership on climate change in a concrete chance for its innovative industries.
1. Enhancing consumers’ welfare
A fully functioning single market for energy benefits consumers with wider choice and lower prices. Since 2007, in almost all Member States, consumers have had the right freely to choose their electricity and gas supplier, while the third Internal Energy Market package recognises the existing public service requirements. More should be done to enable all consumers, especially vulnerable ones to benefit fully from competition and fair prices, starting by strengthening the common minimum standards. The ongoing work on improving the provision of information and ease of contact to consumers must also be actively pursued. The development of smart metering – enabling energy consumers to be completely aware of their consumption patterns and the associated costs- requires further regulatory action to ensure the quick uptake of new technologies and greater efficiency through competition in energy services. In order to ensure transparent pricing, a European regulatory framework needs to be developed for energy wholesale markets, avoiding the riskof diverging national regulatory initiatives.
2. Interconnecting Europe’s energy markets, guaranteeing security of supply
Well integrated markets are crucially important for Europe’s security of supply. They allow Member States to share resources, getting the most out of the diversity of national energy supplies, flexibility of demand and spare capacity. Interconnections and network flexibility make Europe better equipped to withstand supply crises and add leverage to the EU position towards its international partners. There is still much work to do to interconnect Member States capacity and construct new infrastructure, particularly across borders. All the EU’s new regulatory and investment planning tools should be used to mobilise the highest level of private investments. One way to speed up work on major cross-border infrastructure projects – which are often delayed by complex and controversial authorisation procedures – would be to explore the possibility for an EU level consensus building/arbitration mechanism to facilitate the process. Innovative solutions for incentive setting and facilitation at the EU level would help break deadlocks and accelerate the implementation of projects.
3. Greater uptake of low carbon products and technologies
Global markets for eco-friendly and low-carbon products, services and technologies are growing at a rate unparalleled by any other markets. The global market is currently estimated at €1 trillion annually and is projected to reach €3 trillion world-wide by 2020. The EU industry is one of the most competitive–with market shares ranging from 30% to 50% – and is fast growing. It generates already a turnover of €300 billion and provides nearly 3.5 million jobs. However, competitors are moving fast and Europe’s prime mover advantage could be rapidly lost. A single energy market is Europe’s best asset to promote the shift to the low carbon, resource efficient growth outlined by the Europe 2020 Strategy and reap the benefits of the expected growth in ecoindustries.
Only a single market for energy offers the scale necessary for accelerating the uptake of new and young low carbon technologies along the whole energy value chain. There is a need to use the full potential of the single market for energy to lower the costs and speed up the roll-out of such technologies in the EU. This requires delivering a stable regulatory framework for large scale infrastructure products and proactive use of standardisation to promote innovative green products and technologies, exploring the application of the New Approach model in this area. Competition policy should also be used proactively to create the right environment for new technologies to mature and enter the market.
Lead markets must be single markets from the outset. There is a risk that the effort sharing approach on renewable energy, which leaves the choice of policy instruments up to Member States results in the “renationalisation” of energy policy. Renewables support policies will have to become an integral part of the internal energy market in order to avoid market distortion which can lead to wrong pricing signals to investors. Requirements for other low-carbon related technologies and products should continue to be defined at EU level, avoiding proliferation of national approaches. Likewise, the introduction at national level of “green” product labels should be avoided, as this risks fragmenting the
market.
Meeting a €50 billion investment challenge: stepping up EU funding €50 billion in additional public and private investment is needed over the next ten years to implement the necessary energy technologies that will enhance energy security and tackle climate change. As the energy sector is one that requires long lead times for investments and substantial capital investment to ensure returns in the medium to long term, for future investment decisions the competitive energy market needs to send reliable price signals at the wholesale level. At the same time, there is a case for considering the contribution that EU level funding could bring in addition to what the market is already providing.
Consistent and targeted EU funding can make the difference in terms of accelerating the build-up of critical interconnection capacity, realising critical back-up capacities for security of supply reasons and shortening lead times for bringing new low carbon technologies into the market. Part of the discussion on investment should cover the issue of support measures for renewable energy technologies across the Member States.
My key recommendations are thus as follows:
⇒ Establish new EU regulatory frameworks for the large scale deployment
of renewable sources, smart metering, smart grids and transparent
wholesale energy markets;
⇒ Establish a single market for green products, by developing EU-wide
standards for measuring and auditing carbon footprints and for energy
efficient products, including trade certificates for renewable energy
products;
⇒ Step up targeted EU funding for energy infrastructure
Mario Monti, Dean of Bocconi University
P.S. This post is an excerpt of my recent report to Jose Manuel Barroso: ‘A new strategy for the single market‘.
May 24th, 2010 at 6:34 pm
Prof. Monti is owed thanks for the effort he has expended in compiling this report for the President of the European Commission and for highlighting key recommendations in this post. Not surprisingly, perhaps, it shares much with the consultation paper “Towards a New Energy Strategy for Europe 2011-2020″ recently issued by the Commission:
http://ec.europa.eu/energy/strategies/consultations/doc/2010_07_02/2010_07_02_energy_strategy.pdf
In the time-hallowed manner of public consultations of this nature, either at the EU or at the member-state level, it is likely that any submissions that do not dove-tail precisely with the “gospel” emanating from Brussels will be ignored and the policy-makers and politicians will carry on their merry way pursuing their “project”.
It would be wonderful if this forum were to provide an opportunity to debate some of the issues that arise before the EU’s energy policy strategy is set in stone for the next decade.
There are numerous grounds on which the overall thrust of EU energy policy could be critiqued, but, for the sake of brevity – and with the hope of encouraging some response and debate, I will focus on a limited number.
Firstly, energy seems to be associated with electricity and gas; much less attention is paid to petroleum products. Is it assumed that there is a single market in petroleum products and that this market is genuinely competitive? Secondly, the focus on electricity and gas encourages broadly similar policy and regulatory arrangements for both. This ignores the fact that there are no network externalities in a gas pipeline (unlike high voltage electricity networks) and that, therefore, pipeline capacity may be quantified, defined in long term contracts, provided by competing investors and traded. The wilful ignoring of this significant, and distinguishing, feature of gas pipelines has contributed in a big way to the current failure to establish a genuinely competitive single market in gas.
And thirdly, there are some “myths” which seem to infuse the thinking of both Prof. Monti and Commission staff.
1. There is a belief that the larger the number of suppliers, traders and shippers the more competitive the market is. Accompanying this is:
2. All new entry is efficient and should be encouraged. This leads to:
3. Incumbents and, ultimately, consumers should bear the cost of new entry.
4. More competition will reduce and eliminate monopoly profits.
5. The market will not, willingly, ensure financing of all of the investment policy-makers believe is required. Therefore, direct (or indirect) government (or EU) financing is required.
It would take some time to debunk these myths, but some limited refection should reveal how nonsensical they are. For example, short term markets with volatile prices will never provide the assurance of investment recovery required by investors in specific, long-lived assets. Genuinely competitive markets in the provision of electricity generation capacity and of gas pipeline capacity are capable of providing this, but the long term, almost indefinite, commitment of small volume final consumers of electricity and gas needs to be converted into long term contracts for the energy production and delivery capacity. Full retail competition, with its focus on consumer-switching and customer-churn, has obliterated this commitment.
There is probably nothing more ridiculous than prices being raised to facilitate new entry. Consumer surplus is being eroded without any guarantee that the new entry will be efficient. It is a charter for rent-seekers and not a process that will generate efficiency benefits. In addition, the “burden of choice” is being imposed on consumers who, in the main, would prefer a secure, affordable and reliable supply. Consumers were never directly asked for their consent to introduce full retail competition. It was decided as a high level that it would be a “good thing”. They are now burdened with the costs and effort of choosing among competing suppliers who have little basis for differentiating their products and services, of fending off unsolicited mail, telephone calls and calls at their doors, of the difficulties that inevitably arise when switching supplier and, the ultimate horror, dealing with call centres.
Furthermore, it is for sector regulators and/or competition authorities to deal with monopoly profits; by definition, this should not be an issue for genuinely competitive markets.
And finally, the idea that government, or EU, officials are better equipped to allocate finance and deal with the risk and uncertainty associated with long term investments than are competitive markets with clearly defined property rights should encourage laughter once it is expressed.