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EU restructuring plan: Cheaper, cleaner, more secure energy

It may not be as leak-proof as the steel bubble now being built over the Chernobyl nuclear reactor, but the EU plan for energy supply restructuring will help insulate the sector from externally-owned suppliers, even if it cannot yet do without externally-sourced supplies.

Cheaper, cleaner, more secure energy promised under EU restructuring plan
It may not be as leak-proof as the steel bubble now being built over the Chernobyl nuclear reactor, but the EU plan for energy supply restructuring will help insulate the sector from externally-owned suppliers, even if it cannot yet do without externally-sourced supplies.

European Union energy policy, increasingly distanced from the rest or the world’s on the treatment of carbon emissions, took another big step towards self-containment with new reform proposals unveiled in Brussels this week.

The independent generation
The new strategy’s centerpiece is a ‘vertical separation’ of the electricity industry, with generators required either to sell off their distribution networks or to transfer them to independently managed companies that give rival producers equal access to them. Several member states, including the UK, have already done this, but others have clung to vertical integration, for a variety of motives including:
    * Ensuring that relatively expensive generating plants – especially nuclear – can cover their costs without state subsidy
    * Internalizing the profits that separate distributors would make, so narrowing the mark-up of retail over wholesale power prices
    * Ensuring a single powerful purchasing organization that can drive competitive deals when electricity must be imported – especially important for smaller member states facing a generation deficit, such as Latvia and Estonia

The same vertical separation will be pursued for gas, which is set to become a more popular input to power generation as coal runs into stiffer emissions curbs, and which has seen sharp price spikes over the past year in countries (including the UK) where producers are also major commercial and residential suppliers.
The Commission’s energy competition plans are endorsed in an OECD report published yesterday - the first of its Economic Surveys to treat the EU as a single entity, addressing its overall external trade, capital flow and geopolitical challenges.

Efficiency with ecology
The EU Commission believes that a ‘purchaser-provider’ split between distribution and generation is the only best way to ensure efficiency and deliver power to customers at the lowest sustainable cost. Purchasers and providers would compete vertically over best-priced supply deals, with horizontal competition among them ensuring there is no collusion.

The accusation that competition is bad for the environment, encouraging users to waste electricity and producers to avoid the pollution bill in order to keep costs down, will be addressed by the EU’s tougher carbon quota regime from 2008. A tougher challenge has been to persuade larger member states, especially France and Germany, to break up ‘national champions’ that currently operate all down the gas and electricity supply chains.

Germany still shows signs of resisting, and may yet form a blocking coalition with France and smaller eastern member states, who fear that a competitively divided distribution industry would be less able to bargain with powerful suppliers. The EU intends to put down such opposition by showing that the new scheme would make EU energy supply more independent as well as more competitive.

Barring the Bear
Although intended to “to combat climate change, to achieve greater energy security and provide abundant energy at a fair price,” according to Commission president Jose Manuel Barroso, the new policy will also have the politically useful result of protecting EU energy assets from non-resident acquisitions. External suppliers of electricity and gas will have to be bound by the new rules, and win explicit approval from Brussels, before they can buy generators or suppliers within the EU.

This will prevent the external sources of primary energy, on which the EU is increasingly dependent, from extending their power downstream. It could particularly impact Gazprom, the Russian gas giant whose share of EU gas consumption is 25% and rising, and which has been acquiring domestic gas pipelines in Russia’s former Soviet neighbors; and Algerian oil and gas supplier Sonatrach.

Under Barroso, the Commission has made clear that it will not let EU assets be acquired by companies whose home countries have not made their energy sector open and competitive in a similar way. Russia has begun to break up its electricity industry, but is committed to keeping Gazprom vertically integrated, and has not opened either sector to foreign acquisition.

The UK is expected to support the new proposals, which would mean little change to its current industry structure, and strengthen its recently launched attempt to create a more competitive electricity market. The present government has been happy to attract Russian private companies to list on its stock exchanges, but shares continental misgivings about allowing the state-owned ones to make acquisitions there. (financeweek.co.uk)