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Obstacles on the road to a European Energy Union

Is Europe heading towards an Energy Union — the ambitious goal announced by the Commission at the beginning of this year? If so, many would say that it is about time. Energy has long been neglected by Europe. Europe did not even have any formal competence in this area until the Lisbon Treaty of 2007. Even then, its reach was strictly circumscribed. Member states retain the right to determine their own energy mix and the conditions for exploiting their national resources. On the face of it, this leaves little for Europe to do.

In practice, of course, things have not been quite so restrictive and Europe has played an increasing role in energy, in response to a growing commonality of interests between member states in three main areas:

  • The single market in energy. This seeks to create a level playing field for energy competition across Europe. It was a late starter, compared with other sectors, but over the past decade or so considerable progress has been made, to the extent that by the end of 2014 the single market in energy was, at least nominally, in place.
  • Climate change. Europe has common goals in this area and shares the burden of meeting climate change targets. All member countries are increasingly investing in low carbon sources, like renewables, and their energy systems are heading towards the same decarbonisation goal.
  • Energy security. In the past different member states have faced fundamentally different circumstances. The UK, for instance, being an energy exporter at the end of the last century, and determined to retain control over the development of its North Sea oil and gas. But all European countries are now increasingly dependent on imports from the same sources, and in particular Russia.
Image credit: Pilsen and Pollution by Señor Codo. CC-BY-SA-2.0
Image credit: Pilsen and Pollution by Señor Codo. CC-BY-SA-2.0 via Flickr.

The proposal for an Energy Union was first put forward by Donald Tusk, then Prime Minister of Poland. He called on the Union to engage in collective purchasing of Russian gas, in an effort to reduce Russian dominance of European gas markets. This proposal never got off the ground — allowing buyers’ cartels would undermine the painful progress towards a single market — but the idea of an Energy Union was eagerly picked up. With Europe facing a series of crises and dissent in other areas, the idea of making progress on energy was particularly attractive and the conditions seemed favourable. But the obstacles are also serious. As the gas example indicates, the three trends outlined above do not necessarily pull in the same direction.

The push for decarbonisation, for instance, creates tensions with the single market and energy security goals. It inevitably involves government intervention in markets, and with each government entitled to intervene in its own way, the risk is of fragmented national markets rather than a level European playing field. In practice, Germany has chosen to close its nuclear fleet and invest heavily in renewables. Since these are inflexible and intermittent, the result has been huge flows of power into neighbouring countries, driven not primarily by market forces but by the German government’s policy preferences. Meanwhile the UK has decided to invest in nuclear and to support that investment by guarantees and payments outside the market under long term contracts, potentially foreclosing a significant proportion of the market from competition (and in practice there was only one bidder for the first plant, at Hinkley). So the single market is at risk of being undermined.

Even more fundamental problems may arise with basic market structures – electricity markets, for instance, are based on marginal prices, yet the new renewable sources generally have zero marginal cost and their introduction into the market creates widespread distortions, making it impossible to finance new plants directly from the market itself. To underpin investment, governments have therefore been introducing new instruments, like capacity mechanisms, on a national basis. Meanwhile, the Commission has been running hard to keep up and to introduce a degree of harmonisation in renewables support and capacity payments, but national priorities tend to dominate.

So the question may be not so much, ‘can Europe make progress towards an Energy Union?’ as ‘can Europe avoid sliding back into nationalised energy policies?’ The challenges are complex and sensitive and so far, despite its ambitious goal, the Commission has been proceeding rather cautiously and seems generally to be following rather than leading the process. Can this be changed? And what new policy initiatives are needed, if Europe is indeed to make progress towards an Energy Union? Without a determined effort by the Commission, the Energy Union goal may turn out to be little more than hot air.

Featured image credit: Untitled by steve p2008. CC-BY-2.0 via Flickr.

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