While regulation was previously aimed at securing competitive markets, the challenge now is to cut emissions from the power sector cost-effectively in anticipation of climate legislation, participants in the three-day conference said.
"Originally, liberalised energy markets were seeking competition, efficiency and reliability. Now they have a very different focus, which is to lower carbon emissions with efficiency and energy security," said John Tamblyn, chair of the Australian Energy Market Commission.
The EU is the first region to set up a cap-and-trade system as the basis of its transition to a low-carbon future (see EurActiv LinksDossier on the EU's emissions trading scheme). By obliging power utilities to buy pollution permits, it hopes to force the largest emitting sector into cutting greenhouse gases drastically by investing in efficiency and alternative sources of energy.
A similar scheme is now in the making in the US Congress, and several other countries are considering their options. The EU is eyeing a link-up of national schemes to form an OECD-wide carbon market by 2015.
However, a poorly-regulated transition could lead to an increase in consumer prices that is much greater than the actual cost of avoiding emissions, several participants warned. This would give rise to concerns that vulnerable consumers might fall into fuel poverty.
"When the cost of abatement is relatively small and customers are asked to pay a lot, we are entering a system which raises equity questions and it also raises serious political risks that the system is not sustainable," said Richard Cowart, director of the Regulatory Assistance Project (RAP) and former chair of the Vermont Public Service Board.
"So we need to design a system where the consumer cost is a lot closer to the cost of abatement," Cowart added.
Energy regulators see an important role for themselves in designing market rules that will make the transition as painless as possible.
"How the energy market adapts will significantly influence the total cost of reducing global emissions. Changes to the design of energy markets can help minimise transition costs – and this should be a key focus for energy market rulemakers and regulators," Tamblyn stated.
Energy efficiency in demand
Exactly how energy markets should be restructured remains a matter of debate. Many ideas where put on the table, but particular consensus formed around the idea of complementing cap-and trade schemes with efficiency and renewable energy standards.
Considering the great volatility of carbon prices in the past, many regulators pointed out that carbon prices have only triggered a limited amount of cost-effective investment in energy efficiency. They argued that this needs to be addressed with a portfolio of government measures to increase energy efficiency and promote renewable energies.
According to Cowart, the American experience of the Regional Greenhouse Gas Initiative (RGGI) shows that the cost of cutting emissions will be significantly higher if the efforts rely solely on carbon trading. He argued that the most cost-effective option would be to channel a sizeable share of carbon revenues towards efficiency and renewables programmes.
"National governments and regulators alike will need to coordinate that suit of policies and market mechanisms to advance those policies," he added.
The EU has adopted a binding target to increase the share of renewables in its energy mix to 20% by 2020, but its energy efficiency goal is merely aspirational. This might be changing now, however, as a Commission plan proposes to make this a binding obligation (EurActiv 13/10/09).
At the conference, world regulators pledged to step up cooperation on defining their role in responding to climate change. They announced the creation of the International Confederation of Energy Regulators (ICER), a voluntary forum for exchanging information and developing the role of energy regulation in addressing "a wide spectrum of socio-economic, environmental and market issues".
