Energy liberalisation: A communication gaffe? 

The European Union took a further step in the process of liberalising its energy sector on 1 July 2007 when the household market for gas and electricity was officially opened up to competition.

13 countries - including the UK and Germany - had already opened the household consumers market before the 1 July deadline, while the remainder, including France and Poland, were due to follow on that day.

EU officials insisted that the 1 July deadline only implied a “legal right” for consumers to choose their supplier, not that this would actually happen in practice.

“An ‘open energy market’ brings down any legal or administrative barriers for companies to enter the market and to supply gas and electricity to the public,” the Commission said in a statement. “This means that after the 1st of July new suppliers have the opportunity to provide services to consumers.”

“There is no change apart from the fact that it has now become an obligation under EU law,” one official explained.

However, since the liberalisation process was launched in the nineties, several new challenges have come up that have made the initial objective of liberalisation – more energy at a cheaper price – increasingly difficult to attain: 

• Climate change has become a top political priority, with EU leaders agreeing in March this year to reduce emissions of greenhouse gases from energy and other polluting industries by at least 20% compared to 1990 levels (down from the 8% currently required under the Kyoto Protocol).
• Concerns over security of supply have come to the fore with fears about over-dependence on Russian oil and gas chief among them.
• Meanwhile, the price of primary fuels - oil and gas in particular which is widely used in the production of electricity - has risen sharply on world markets, due in part to surging demand from booming Asian economies.
• The EU CO2 trading scheme has also put pressure on prices, raising concerns among industrial users of electricity who saw their electricity bill soar.

Reflecting these wider concerns, EU leaders agreed at a summit on 8-9 March 2007 that any common European energy policy should pursue three objectives at the same time:

• “increasing security of supply;
• ensuring the competitiveness of European economies and the availability of affordable energy, and;
• promoting environmental sustainability and combating climate change.”

Some critics have started to question the Commission’s claim that liberalisation helps to bring lower prices for consumers, at least in the short run.

In a July policy paper for the Schuman Foundation, Antoine Pellion, a Civil Engineer from the Ecole des Mines in Paris, says that rising oil and gas prices have meant that liberalisation has “not automatically led to the expected price cuts” in electricity.

“Presenting liberalisation as a lever to lower prices was undeniably a communication mistake,” says Pellion. Instead, he recommends that the EU adopts “a longer term vision” where energy pricing incorporates the real costs of energy in terms of environmental damage and scarcity of supply.

Anticipating the criticism, the Commission admitted that “market opening as such cannot guarantee a sufficient degree of supplier choice and competition” which is supposed to push prices down.

Speaking to EurActiv in January, Energy Commissioner Andris Piebalgs said he was confident that liberalisation would eventually pay off for consumers. "We know that markets bring the best prices and the best service," he said. 

But he also admitted that price increases would be “inevitable” in the long run. "What we have calculated is a 5% increase in prices," Piebalgs said, explaining that "if we do not pay this 5% now, we will pay 20 or 50% more later because of the oil prices going up.” 

Business analysts at Datamonitor, a UK-based firm, believe that the benefits of liberalisation will be felt at a later stage: “As such, the EU’s aim of a single European energy market remains a distant possibility rather than an imminent reality.  The advent of full market opening on July 1 was very much only the beginning and is a minor milestone on the road to the single market, rather than a destination in itself.”

But other critics have said that the EU is probably aiming for too many objectives at the same time and should make up its mind.

“As it stands, Europe wants it all,” wrote Jan Horst Keppler, a professor at the Univeristé Paris-Dauphine, in a policy paper for the French Institute of International Relations (IFRI).

In his paper, Keppler argues that the wish to simultaneously guarantee security of supply, environmental performance and low consumer prices is "an unsolvable equation" that risks leading to “ineffective responses”.

EU decision-makers, he argues, must first decide upon an arrangement between these conflicting objectives before defining a coherent liberalisation policy. “Europe cannot escape the task of rethinking and improving the liberalisation of its markets,” Keppler wrote.

Researchers at Bruegel, a Brussels think-tank specialising in international economics, say EU governments are faced with a number of trade-offs in defining national energy policies:

• between competition policy and security of supply (whether large integrated companies are better placed to secure investments and access to primary resources than smaller, albeit more competitive, players).
• between security of supply and the environment (primary energy sources available in large quantities, such as coal, emit more CO2).
• between free-market competition and the environment (incorporating environmental costs into energy tends to push prices up, to the detriment of consumers interests in the short run).

In their view, a common European energy policy can help solve these dilemmas. “Europe’s advantage is that it is capable of relaxing the national trade-offs by enlarging the range of alternative solutions.” 

In particular, they point to new growth opportunities that should increase the influence of European companies on the global stage. “A European market…provides companies with the necessary size to increase their bargaining power in upstream markets while maintaining a sufficiently high level of competition.”