Internal energy market: The pieces of the puzzle do not fit

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The European Commission's energy market communication, to be published on 15 November, indicates that there are major obstacles to the implementation of the internal energy market by the target date, 2014, writes Georg Zachmann.

Georg Zachmann is a research fellow at the Brussels-based think tank Bruegel.

"The internal energy market is the cornerstone of European energy policy. Most consumers like it because it increases competition and eventually reduces their energy bills. Suppliers are partly released from their dependence on the whims of national politicians.

Climate activists like it because it allows the renewable resources of an entire continent to be used. And energy security enthusiasts appreciate that internal rebalancing within the single market allows individual foreign supplies to be replaced if needed.

The European Commission's energy market communication published on November 15 indicates that there are major obstacles blocking the implementation of the internal energy market by the political target date, 2014.

The communication points frankly to numerous core issues: due to national renewable support schemes and national mechanisms for the remuneration of generation capacities, “regulatory shopping” becomes a key factor behind power plant investment decisions in Europe.

Energy prices in many countries remain regulated for many customers, preventing competition and hampering energy efficiency. And the European Union's energy market rules – the three legislative packages from 1996/98, 2003 and 2009 – have been only partly transposed by a number of member states.

Nevertheless, the communication provides reassurance that the implementation of the “target model” for the energy and gas market is on track. This “target model” defines how cross-border electricity and gas trade will be organised after 2014 through harmonising certain national rules and jointly managing cross-border infrastructure bottlenecks.

The “target model” is considered by the European Commission to be an important step towards the creation of the single energy market.

This story of slow-but-steady progress in the face of opposition from some member states just does not ring true.

The challenges posed to electricity systems by the introduction of commercial cross-border electricity flows, the massive build-up of highly clustered variable renewable energy generation, and the unbundling of the operation of power plants and networks cannot be dealt with by softly imposing harmonisation in line with existing European rules.

Fundamentally, the envisaged market design is in various ways at odds with the physical nature of electricity.

A network of nationally operating systems in a meshed electricity grid with highly volatile electricity flow patterns would be absurd and dangerous. Lack of coordination might bring about situations in which cheap power plants on one side of the border need to be switched off while more expensive ones on the other are ramped-up.

At worst uncoordinated real-time actions by the individual operation centres might cause outages. If member states do not coordinate their network extension decision they can only ensure system stability by overbuilding their domestic systems and shielding it from foreign electricity flows.

Finally, national energy strategies of neighbouring countries that envisage becoming exporters do simply not square.

Without a discretionary step towards real market integration that is full-heartedly backed by the commitment of the member states, the disintegration tendencies in the European energy market will accelerate.

A re-nationalisation of energy policy as currently observed in the United Kingdom – where the Department of Energy and Climate Change will be in charge of defining the power plant park and setting the carbon price – will be the natural consequence.

Abolishing the internal energy market is not in the interest of most stakeholders – whose advocacy of national policies to obtain preferential treatment has added much to the divergence.

The starting point should be a commitment by the major players to support any consistent European market design that prevents a fragmented market, even though it does not meet all their preferences."