"The energy sector is still in the dark ages when it comes to satisfying consumers"

Interview Philip Lowe, DG Energy

"The energy sector is still in the dark ages"

By Karel Beckman and Sonja van Renssen

Philip Lowe, the highest energy official in the EU, is impatient. The internal energy market, whose creation he is supposed to oversee, is still meeting with skepticism all around. Financial institutions are reluctant to invest because they don't believe the market will be free of political interference. Member States tend to pursue their own short-term policies even if they conflict with market principles. And the energy companies? 'They don't seem to be too eager to compete', says Lowe, in an interview with European Energy Review. 'They are focused more on regulations than on their customers. The energy sector is still in the dark ages when it comes to satisfying consumers.'

Philip Lowe: 'The energy companies don't seem to be too eager to compete'

More than ten years after the EU made the momentous decision to integrate and liberalise its energy markets, this great European project is still struggling to become a reality. No less than three “liberalisation packages” have ground through the bureaucratic mills of Brussels, yet, the energy market is still mired in reluctance and controversy. In February, a special, first-ever energy summit was held at which the EU Heads of State made a clarion call for the ‘speedy and full implementation’ of energy market liberalisation – by 2014.

Philip Lowe, Director-General for Energy at the European Commission, who came over last year from the heavyweight Competition office to undertake the Herculean task of completing the EU energy market, does not attempt to hide his frustration at the lack of progress he is witnessing. In a candid interview with EER, the veteran public servant coolly notes that ‘the energy market is lamentable’. The energy companies, he says, ‘are still in the dark ages when it comes to satisfying their customers’. They are still ‘primarily focused on regulation rather than on behaving like normal market-oriented players’. But politicians in the member states can be just as unreliable, adds Lowe. ‘They are pushing regulators for lower prices instead of letting supply and demand do their work.’

The upshot of this is that players in the financial market are still not convinced the energy market will happen. ‘They tell me they are still betting on national markets controlled by politicians.’ Yet the Englishman is convinced that this is a bad bet. ‘This market is going to happen’, he declares. How? Not by more regulation. ‘There will be no Fourth Liberalisation Package.’ What has to be done, according to Lowe, is, in the end, fairly simple: ‘Remove the obstacles, build the interconnections, get people to compete. Start focusing on what the consumer wants, like in any normal market.’

European Energy Review talks with the Director-General for Energy in his office in Brussels on a Friday afternoon in March, which, coincidentally or not, is showing the first signs of spring after a long European winter.

EER: It seems that many people still have doubts about the desirability of liberalised energy markets. Critics say that given the very ambitious environmental targets of the EU and the importance of security of supply, the market will just not deliver the desired outcomes. Even in your own country, the UK, the cradle of energy competition, there are serious discussions about setting up a government body to buy up “green” electricity and re-sell it to the market, what is called a ‘single-buyer model’. The Oxford Institute for Energy Studies published a book recently in which they called for an ‘end to market fundamentalism’. How do you look at this?

Lowe: When it comes to competition, I was never of the belief that markets should be completely free. If that is what market fundamentalism means, I am not a market fundamentalist and this is not what we are trying to achieve. Clearly there are many situations in which markets fail, either because the

The market is not distorted because of subsidies. It was distorted because we have not been internalizing the costs of climate change

objective which are you trying to achieve just isn’t incorporated into the costs and benefits which markets assess, as in the case of climate change, or because the market works too slowly, leading to social costs. When it comes to climate change and security of supply it is inevitable that there are certain areas in which the market won’t deliver. The question is, how do you factor in those elements? Does it mean you have to abandon the market model altogether? I don’t think it does. You don’t abandon competition simply because of a failure of the market to deliver a particular result. What you do is you adapt the rules of the market so that you maintain competition but set certain goals that you want to achieve.

EER: But you could argue that the European Commission is hardly consistent in its own policies. You introduced a market scheme, the Emission Trading Scheme (ETS), that is intended to create the framework in which the market is supposed to deliver the desired outcome of lower carbon emissions. Yet you also have targets and policies for renewable energy, energy efficiency, carbon capture and storage. Aren’t you then distorting the market?

Lowe: To reach our climate change objectives, we have chosen a market-based system, the ETS, but yes, we have also opted for quite heavy subsidies initially for renewable energy. You will hear electricity producers complain bitterly about the market distortions as a result of those subsidies. But I say to them whenever I have to debate this – which is almost every day – that the market is not distorted because of the subsidies. It was distorted because we have not been internalizing the costs of climate change, and we try to repair this by introducing at least temporarily subsidies for new technologies which will hopefully become competitive with fossil fuels in the future.

EER: But then every member state has its own national support scheme for renewable energy. That hardly makes for a level playing field or a stable investment framework.

Lowe: It is a political question how much money you can expect taxpayers to pay for renewable energy without there being a direct link between what they pay and what they get as consumers. Persuading German taxpayers to support solar power by saying, don’t worry, this is for the benefit of Spanish consumers, is a bit of problem. I can fully understand why the European Parliament and Member States

The problem is not that market players are unable to act or invest because the market is distorted. The problem is that energy companies don't seem too eager to compete.

put an end to the debate on harmonisation of national support schemes. They said we are at the beginning of this process, let’s start with national support schemes and see what will result. But it is true that there are two disadvantages to national support schemes. First, they can create market distortions because competitors in different Member States get different incentives. And secondly they might lead to renewables being stimulated in the wrong place. As my Commissioner, Mr Oettinger, has pointed out – for example, solar power in Germany rather than Spain. Still, it was necessary from a political point of view to begin at the national level. I think this will change when we reach the 20% target for renewable energy. Then the critical mass will be there and the distortions will get bigger.

EER: In the meantime the ETS market is floundering.

Lowe: Obviously if you make progress on renewable energy, and energy efficiency, you exert a negative pressure on the carbon price. Yet we know that the carbon price is a major incentive for industry to change to renewables. So there is a conflict between trying to get renewable energy going and the ETS. This is a temporary situation that will last until renewable energy can be offered at competitive prices. Still, it is hardly a reason to revert to central planning of energy needs. The problem is not that market players are unable to act or invest because the market is distorted. The problem is that energy companies don’t seem too eager to compete. The market for energy is just not up to scratch. For example, if you talk to energy companies about energy efficiency, they will say, oh, that’s not in our interest to stimulate this, we try to sell energy. If you go into any sector of the economy – if you want to buy an air ticket, or a mobile phone – suppliers will ask, how much do you want, what do you want to pay, we will make an offer that is exactly according to your wishes. But the energy companies don’t behave like that. They say – you buy what we want you to buy. Companies like Microsoft and Google make a good attempt at pleasing their customers. The energy sector is still in the dark ages when it comes to satisfying customers. When will they start behaving like normal market-oriented people?

EER: Can you compare the energy sector with the telecoms industry?

Lowe: In the energy sector there will have to be regulations about security of supply, about what to do in the event of interruptions. But there is no reason to give up on the basic precept of competition, which is not market fundamentalism, but common sense, namely the idea that consumers and businesses get

The last major technological revolutions in energy happened mostly in the early 20th century. Since then energy technology has not changed a great deal

a better deal in price, choice, and quality of innovation if there is more than one supplier. The history of monopoly over centuries is very bad. It won’t do for utilities to say, oh well, market mechanisms don’t work, give us back our monopoly. Their own monopoly has never delivered a good result for society. Consider technological innovation. The last major technological revolutions in energy happened mostly in the early 20th century. Since then energy technology has not changed a great deal. Storage is still a problem. State utilities had no challenge in the market. They were publicly owned, and were intended to provide a public service. Now the market is beginning to measure their performance.

EER: Do we detect impatience with the energy industry? You even compare them unfavourably with Microsoft!

Lowe: Let’s be serious about this. We have had three so-called liberalisation packages. Since when has a market become more efficient by more regulation? Since when is more regulation a good idea? Normally you liberalise the market by allowing people to compete to provide the best deal for consumers. The energy market despite more and more regulation does not do it. That is why I am impatient. This is the only sector in the European economy where it seems that the focus is not on consumers. Compare this for example to the car sector. This sector is faced with environmental constraints, but there is no doubt about the focus of every car manufacturer on what the consumer wants. That is their business. Energy companies should shift their focus from regulations to the consumer. Now is the time for them to compete against each other to provide the best deals for their business and household customers.

EER: So there will be no fourth Liberalisation Package?

Lowe: I said this recently at a conference: only over my dead body. I can’t see in a thousand years what more regulation could do in a fourth package to make the market work.

EER: Are companies the only ones that need to put customers first? What about the governments of member states?

Lowe: There has been an overemphasis in member states on the issue of short-term price. On keeping prices low. The reason market fundamentalism has become an issue in the UK is the emphasis on short-term prices. The regulators were criticised by the politicians – they said, oh, no, you’re letting prices go up. No one explained that prices also have to reflect investment in generation and pipelines. Selling energy liberalisation like airline tickets with the argument that by liberalising you get lower prices is a completely wrong way to go about it, particularly after 20 years of underinvestment

Selling energy liberalisation like airline tickets with the argument that by liberalising you get lower prices is a completely wrong way to go about it, particularly after 20 years of underinvestment in the energy sector

in the energy sector. If there was any distortion, it was that prices were held artificially low – they should have reflected the full cost of the investment cycle. This would have given incentives to companies to come in and invest. If companies were convinced that governments would let the market work, they would not argue for more regulation. They would argue for less regulation. Fortunately, there is a growing number of companies that realise that. We are winning some of them over, although it takes time. If there is a stable framework of investment, suppliers will come in and invest. Nobody in the telecoms industry or other technological sectors grumbles about a lack of return. What made me say this, about a fourth Package happening only over my dead body, is that when I talk to people from financial institutions, they say, oh, yes, it’s interesting, this energy market, but we don’t think it will ever happen. We are betting on national markets. They think regulators will continue to control markets because politicians will continue to control regulators. Everywhere I talk about it in the EU, I get this same reaction.

EER: After all these years they still don’t believe it’s going to happen?

Lowe: No. And what we say is, listen this is your last chance to take advantage of a European-wide energy market. It offers you on any analysis better cost structures, better security of supply, better service, better quality. Why do you keep stopping it? And we give out this message to everyone. Don’t forget – 85% of the supply of energy in the EU is delivered by no more than 12 companies. They have international, European strategies. But apparently the EU Member States still hesitate about developing a strategy for a European –wide energy market. We have 27 ministries, 27 regulators, thinking that they

We have 27 ministries, 27 regulators, thinking that they will determine what will go on in the market

will determine what will go on in the market. The 12 CEOs of those 12 companies know much more about how to work in their own interest. They are maximising their performance. And they are exploiting the differences in national policies. You only have to look at a map of gas and power price differentials across the EU to see that energy markets don’t work. And you don’t have to be a market fundamentalist to see why not. We need more open markets, not more regulation.

EER: So what should be done to make the market work?

Lowe: Remove the obstacles, build the interconnections, get people to compete, stop people to focus on regulations and get them to focus on what consumers need.

 

Philip Lowe on renewable energy, energy efficiency, carbon capture and storage and the role of gas in Europe’s energy mix On investments in renewable energy Lowe: The way I see it is that Europe is in a bet. The bet is that by supporting new technologies, whether it’s wind, solar or CCS, over a certain period, these technologies will overcome four hurdles. Firstly, they will become technologically viable in themselves. Secondly, they should become commercially viable without subsidies. Thirdly, this should happen in a relatively limited time, so that people don’t get fed up with paying for them. And fourthly, the public will have to accept the kind of infrastructure needed to support them, whether it’s wind farms, power lines, whatever. Of course if you want to intervene in the market, there must be some basic presumption that after having intervened, you can pull out at a certain point, you will no longer need that transitional subsidy or support, and that the market will have adjusted. The bet is that these technologies will be competitive with conventional fossil technologies by around 2020. That is the timescale that people are more or less aiming at. Maybe we are all wrong. Maybe we are going to find that the whole thing is so expensive that people will be tempted back into fossil fuels, and people can no longer fight climate change but should adapt to it. That is in the scenarios of some companies. But so far things are not as bad as that. On energy efficiency Lowe: We know that using energy more productively, in a situation where energy is scarce – and getting scarcer – is probably the cheapest way of meeting the energy challenge. This is not a negative message. We want economies to grow sustainably, we want people to have jobs, quality of life, but if they can use less energy for every unit of output, that’s better. It’s also good because you will develop technologies that you can try to export. That’s the theory anyway. Europe may think it’s number 1 in energy efficiency, but the whole world is looking at this, and China and India will probably overtake us if we don’t take it seriously, as they have done in renewables already. On the fact that Europe is not on track to deliver its 20% energy efficiency improvement by 2020 – it is only set to deliver 9% Lowe: I am glad you mention this because this is what we have been saying to the Heads of State. We have raised an alarm bell, we have said you should make this a binding target, or at least take it seriously. To which the answer came from most member states: well, this is all very difficult, there are so many people involved, there is not enough money in our budgets to make buildings more energy-efficient, we cannot determine it centrally, and so on. In other words: stop worrying us! We came back and said, you have to take it seriously. You said the target is 20% but with the information you gave us we conclude that the best we can do is 10%. So we got them to agree that we need further measures. One is that you have to tackle existing buildings otherwise it is a waste of time. And we suggested to the Member States that they start with higher public procurement requirements. So this was written into the 4 February Energy Summit statement. On the perceived lack of political support for CCS (carbon capture and storage) Lowe: There isn’t a waning of government support for CCS, but we are concerned that it is taking so long. There were going to be 12 demonstration projects to be offered by the member states and carried out by the industry. We now only have 6. Where are the other 6? Then there is a concern that the public will have as much difficulty with CCS as with nuclear power or high-voltage transmission lines. Because of the importance of CCS to industrial energy consumers and the energy-intensive industry, one would think the commercial case would be strong, but the business community keeps saying, ‘you don’t give us enough incentives’. The Americans are surprised about how much hesitation there is in Europe. So this is not the happiest area at the moment. On the role of gas in Europe’s fuel mix Lowe: The fact that gas is mentioned so little in national debates indicates it is the most attractive alternative both from an economic and an environmental point of view. If you replace coal with gas, you get an immediate reduction in emissions. Gas is very much the elephant in the room. It is least talked about, but in market terms the most important benchmark. It gives investors the most security over the next 10, 15 years. But what is the right market structure for Europe from a political point of view? We need diversification of supplies and routes. But if you want to make sure there is enough gas available at reasonable prices, you can achieve even more by enhancing interconnections, so that no country is an energy island. The fact that some countries are worrying about security of supply in gas while the world is flush with gas is ridiculous. Russia can continue to compete in Europe on the same basis as everyone else. When Gazprom wants to sell gas into Spain or Portugal, they can do it, using the same pipelines as everybody else. The same should apply in the reverse in Central and Eastern Europe.