In theory, the freedoms of the European Union’s single market allow workers, goods, money and services to flow across national borders. In practice, the market is imperfect, and one of the services that still face major roadblocks at national frontiers is the provision of energy.
To date, three packages of EU law have been passed with the specific aim of moving towards a true internal market for energy – in 1996, 2003 and 2009. Member states committed themselves to implementing these packages by 2014. But in a review of the market last year, the European Commission recognised that this deadline would not be met, after years of slow, unsatisfactory implementation.
Nine member states had not even begun to transpose the 2009 package into national law by the deadline of 2011. The Commission has opened 18 infringement cases against member states for not adopting the requirements that it says are necessary to create an internal market.
In practice, the EU still has 28 national energy markets, so energy is generated and transported inefficiently. Grid networks and power plants are still predicated on national boundaries, which have no logic in terms of geography or source. So, for instance, northern and southern Germany make up one theoretical market with one set of prices, even though their power sources are entirely different. Northern Germany gets power largely from wind and gas, whereas the south gets more power from solar and, for the moment, nuclear.
“These grids are cut up according to political borders, but technically a completely different set of price zones would be much more efficient,” says Laurens de Vries, an expert on European energy markets at Delft University. “The Netherlands should be in the same price zone as northern Germany and perhaps even Poland. But north and south Germany should have different prices. Politically people don’t like to have different prices within one country. Which is strange because other prices, like property prices, do vary.”
Inside the EU institutions, frustration is growing. “We have the right policies, but implementation is too slow,” said Herman Van Rompuy, president of the European Council, shortly after a summit of national leaders in May that discussed the issue. “Using the tools we have agreed would bring down prices and could save Europeans collectively each year up to €30 billion in both gas and electricity. Why isn’t this happening faster?”
In their summit conclusions, the leaders agreed to an “urgent completion of a fully functioning and interconnected internal energy market,” and in particular vowed to speed up the adoption and implementation of remaining network codes that would match up grids at national borders. The European Parliament has a vote scheduled for September at which it is expected to give its backing to urgent implementation. A draft report along these lines has already been unanimously approved by the Parliament’s energy committee.
But European energy analysts remain sceptical. “There’s a lot of lip- service,” says Georg Zachmann, a research fellow at Bruegel, a Brussels-based think-tank. “You will be unable to find anybody to say he doesn’t want the internal energy market. But when it comes to implementation of the whole thing, I think many people rest on the idea of a shallow energy market, where you just enable energy to move across borders. But this is what Europe has been doing since the 1920s; we didn’t need the EU for that.”
Zachmann says the problem is that, far from “having the tools in place”, as the Commission insists, the EU is working off a half-hearted plan. He suggests that making only half-steps may do more harm than good.
The EU’s legislation envisages a network of nationally operating systems that link in a meshed electricity grid. But as long as decision-making is un- co-ordinated and national, this arrangement may cause more problems than it solves.
Overwhelming German power
The case of Germany and its neighbours provides a salutary example. The country’s generous subsidy regime for solar power (see page 18), combined with partial coupling to markets in neighbouring states, has distorted those markets without truly linking them up. “Cheap German renewable energy entered neighbouring countries and depressed electricity prices,” says Zachmann. “Those countries are now having trouble in financing power plants that they deem necessary for security of supply.”
Neighbouring countries have at times been overwhelmed by peak supplies of German power. One day in March, German wind and solar generation was so high that, for the first time in the German energy market’s history, there were negative hourly electricity prices. Similarly, Spain has at times had prices close to zero.
These low or negative prices might sound like a good thing, but they actually trigger operating losses for power generating units, while at the same time the excess energy goes to waste if there is not the grid to distribute it properly. Such ‘unplanned power flows’ can overwhelm and damage neighbouring markets.
These problems have prompted many countries unilaterally to adopt their own ‘capacity mechanisms’ – government payments to increase generation capacity in order to address security of supply or load issues. They are generally a response to concerns that the energy market itself will not deliver sufficient investment in generation.
But the Commission says that such action can be harmful if it is not well-designed or is not co- ordinated across the EU. That has not stopped member states from making such interventions, sometimes out of confusion.
“It may be tempting for politicians to seek quick solutions for possible problems that at first sight may seem purely national in nature, but that in practice almost always have a cross-border impact,” said Günther Oettinger, the European commissioner for energy, in May. “It is however an expensive solution. If every country, or every region, or every consumer, were to solve his or her energy supply on his or her own, it would become very costly. The internal market is there to benefit from economies of scale and synergies.”
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In its assessment of the internal energy market released last year, the Commission said that member states would in future need to demonstrate the need for such mechanisms over alternative approaches such as peak-shaving measures (shifting the time of use of electricity from peak periods to times of lower demand), increased imports or more feed-in power from users.
To this end, the Commission is setting up an Electricity Co-ordination Group to assist co-operation and to stop member states from adopting their own capacity mechanisms.
But Zachmann says more is needed to co-ordinate these policies better. “The big problem with this kind of implicit re-nationalisation policy, through renewables schemes and capacity mechanisms, combined with some half-hearted EU approaches to unify the system, is that we are in a world of complete regulatory uncertainty,” he says. “There’s been a lot of political involvement in the sector, with good intentions, but now you have all these layers of national and political involvement and nobody knows where the whole thing will end up.”