Energy union ties the knot

Frederik Dahlmann examines the European Commission’s vision for an energy union and asks what it means for member states’ ability to pursue national energy policies.

The European Commission’s announcement on the promotion of an energy union strategy has prompted both praise and criticism.

For some, the communications statement reflects a welcome step towards refocusing the EU’s efforts on a policy area where significant progress and impact can be achieved for the benefit of all European consumers. Others doubt whether the Commission really has the power, institutional arrangements and legislative tools to deliver on its promises.

In fact, the idea behind the energy union is nothing new. From the early treaties on common markets for coal and nuclear energy, energy has been central to the European project. Since the 1990s, we have seen increasing EU attention on developing the internal energy market, which was originally scheduled to be completed by 2014. So what is new about the energy union and how will it affect utilities in the UK?

For starters, the concept of the energy union reflects a growing understanding that the EU needs to concentrate on those areas where it has the greatest potential for positively affecting people’s lives. In times of volatile energy prices, geopolitical challenges along its borders, and Europe’s self-styled leadership role in targeting climate change, the energy union symbolises renewed impetus within the Commission to find better ways to integrate and co-ordinate different national energy policies.

Against this argument stands the observation that member states have historically been rather reluctant to cede power on energy issues. Many doubt that the Commission can counteract this tension where governments prefer to set energy policy at national levels.

Others again believe the only way to address affordability, inefficiencies, and environmental concerns is by transforming the individual power and gas markets across the 28 member states and beyond. Importantly, the energy union is viewed as the best means of overcoming the energy industry’s challenges of making long-term investments and operational decisions in the face of constant market interference and changing policies by national governments. In the best case scenario, the union could re-inject the level of long-term perspective into energy policy planning that investors and utilities desperately need.

One promising example is the involvement of both the vice president for the energy union and the EU commissioner for climate change in developing the detail of the energy union. This marks a significant improvement to previous efforts, which were characterised by a lack of co-ordination between different directorates and often unintended consequences. At the same time, however, there are questions about how the implementation will be driven forwards.

For example, interconnectors play a critical role in the process of implementing the energy union. Yet the decision to include more modest targets for interconnectors in the strategy represents a hurdle that could become a challenge to many other aims and ambitions set out by the Commission. As a result, much will depend on the work of the revamped European energy regulator Acer and the interaction with the wider investment community.

If Acer is indeed given greater powers of decision making, this could potentially be a positive development. But it also requires clear guidelines and governance arrangements, as well as transparent communications, to avoid a constant battle between national and EU policy-makers, regulators and the industry over who is responsible. Ideally, Acer should intensify its work on the promising regional market arrangements and engage in an exchange of best practice with national regulatory bodies. Inevitably, this could lead towards greater regulation by principles rather than overly restrictive rules.

One potential area of dispute may be the Commission’s proposal to assess capacity mechanisms on a regional adequacy basis. For the UK, this would suggest that the capacity market introduced under Electricity Market Reform may be evaluated on the basis of supply and demand needs in the Republic of Ireland and France too, and potentially also against other countries affected by existing or new interconnectors (such as the Netherlands, Belgium and Norway).

Without any detailed information on proposed legislation, we are likely to be only in the first of many stages of a complex political negotiation process. This makes it difficult to predict how the Commission’s strategy will actually affect the chances of achieving its targets and the future of the industry.

The process of further market integration is likely to challenge established companies and their business strategies, but it also opens up possibilities for innovation and new competitors. For instance, a reformed market design should particularly encourage new business models and services designed to improve energy efficiency and offer demand response solutions. These are sorely needed to translate the high-level policy efforts into tangible benefits for European consumers, economies and the environment. But without swift agreement and action, the energy union strategy risks ending up as merely another set of good intentions.

Frederik Dahlmann PhD, assistant professor of global energy, Warwick Business School