Everything's gonna be alright

In the energy sector many feel that the internal energy market is in crisis. Unilateralism seems rife and the tensions in the system seem to be getting worse. Is the energy market following the path of the Eurozone?

It's a question that is being raised frequently at energy conferences these days: "did anyone calculate how much it will cost to dismantle the nuclear power stations in Germany and build them back up again in the UK?"

This ironic question goes to the heart of the problems in the European energy market: we are supposed to be headed for a common market with a level playing field across the EU – indeed, EU leaders have promised we will reach that goal in 2014 – but in reality national governments still pretty much conduct their own energy policies, often without much regard for their impacts on the wider European market. Germany's Energiewende is a good example, but by no means the only one.

In a "Communication" on the internal energy market released in November, the European Commission says that "progress has been made", but adds that "more needs to be done" to "complete" the internal energy market by 2014. That last seems a bit of an understatement.

European Energy Review last month held a conference in Brussels, together with public affairs agency Interel, devoted to the topic of the internal energy market. At this event, Inge Bernaerts, Head of Unit (Internal Market and Wholesale Markets) at the Directorate-General for Energy, said that the internal market so far had led to "more choice, more security of supply, and the lowest price". But she also indicated that there are still three major challenges to be met: the challenge of enforcement, the challenge of investment, and the challenge of consumer involvement.

Is that a half-empty cup or a half-full one?

At the EER-Interel conference it became clear that the internal market is faced with a number of major problems:

-The first is that there still is a great lack of competition in many countries. The Citizens' Energy Forum, a body set up by the European Commission in 2007 to safeguard the interests of consumers, noted in a comment on the Communication that in 8 EU countries over 80% of generation capacity is still controlled by the incumbents. (This is essentially what Bernaerts meant by "the challenge of enforcement".) One participant at the conference said that the switching rate of Belgian industrial consumers since 2005, to mention just one example, has been zero. There are simply no alternative suppliers.

-The second major problem is that investments in infrastructure are lagging behind. An instructive "Commission Staff Working Document", which was released with the Communication and which presents an overview of "investment projects in energy infrastructure", notes that "although investment is being made in all sectors, it is not reaching the rate needed to meet the policy ambitions."

-The third problem (some say this is the key problem) is that there is still a lack of consumer interest in the energy market. According to the Citizens' Energy Forum, only one out of three consumers in the EU is comparing offers between suppliers. The Forum points out that consumers could save up to €13 billion a year by switching. A complicating factor is that, as the Commission notes, 16 countries in the EU still have regulated consumer prices, which of course does not provide any incentive for consumers to become active in the market.

These are all to some extent familiar problems. But many market participants feel that at this moment the tensions in the system are getting worse rather than better. Thus, for example, many member states are considering setting up national backup capacity schemes to organize backup capacity for their growing supplies of renewable energy. These schemes would further undermine competition in the market.

And there are many other examples of malfunctioning. Some governments have forbidden the exploration of shale gas. Many are refusing to support carbon capture and storage schemes. The Emission Trading Scheme (ETS) has for the moment collapsed completely.

One of the worst hit market segments at this moment is gas-fired power production. The relatively high gas prices in Europe and the failure of the ETS have led to substitution of gas by coal – which is pushing up CO2 emissions and undermining the EU's decarbonisation policy in the process.

All in all there seem to be plenty of reasons to fear that the energy market is going the way of that other great EU project started in the 1990s: the Eurozone.

Still, I am glad to report that the mood at the Directorate-General of Energy of the European Commission is by no means despondent. EER's Brussels correspondent Sonja van Renssen and I had an in-depth interview recently with Philip Lowe, the top civil servant in the EU energy bureaucracy, and we found him surprisingly upbeat. He attributes many of the problems in the internal energy market, such as the lack of investments, to the economic crisis. Other problems, he says, are transitional in nature, such as the gas-to-coal shift.

And Lowe rejects any kind of analogy with the Eurozone crisis. He notes that the financial crisis is divisive, whereas the challenges in the energy sector unite rather than divide: "Every single politician in Europe is under pressure to make sure the lights stay on and prices stay low." Energy, he notes, is part of the solution to economic recovery, not part of the problem.

It's good to know that there are still policymakers who take the long, optimistic view. We have had enough bad news lately. I do believe that there are days when you just have to believe that everything will be alright. This is going to be one of them.