In your memo to Commissioner Oettinger, you say functioning energy markets are the most powerful tool to address investments, price volatility and security of supply. However, the third energy liberalisation package has already been passed, in 2008. Does that mean there is nothing left for Oettinger to do but monitor implementation?
Making sure that the package is implemented will not be an easy task because many member states are still reluctant. In Germany we have seen a recent study commissioned by RWE stating that the single market works and that we don't need any more unbundling or building new international electricity transmission lines. So, some big companies are opposing this and it will be a tough fight for the Commission to really deliver on the objectives of the third package.
Fulfilling the third package will already be hard but I think the Commission needs to go beyond that.
How can it go beyond the third package? Is there enough political will to do it?
In the electricity market, I clearly see a point for strengthening the institutions that have been established with the third package, which have very limited powers at the moment.
So the Agency for the Cooperation of Energy Regulators (ACER) doesn't have enough teeth then, in your view?
It certainly has not. Take for example the infrastructure perspective. What will be important in creating a single market is to have a network development plan that is not only the compilation of national interests and networks but really looks at the European network and the challenges that it will have to cope with in the coming years in an integrated way.
Here, ACER and ENTSO-E still lack the tools and the funds to identify the transmission lines of European interest and to enable the network operator to build them.
But we have seen with the energy infrastructure projects under the EU recovery plan that these national interests still dominate! What could make member states change their attitudes?
Actually, all these projects that should be implemented on a European basis have to be beneficial from a European welfare perspective. The question is that some countries may not have the benefit in their own countries even though they have invested money. You then have to assure by redistribution measures that they also get their fair share in the benefits that these new investments bring.
But having this new agency and adequately empowering it might enable that such a redistribution scheme is developed.
On cross-border links, member states do not always have an interest in strengthening them because it may create more competition from foreign competitors…
It is not the member states themselves that are for or against, it is separate groups within the member states. Consumers, for instance, would like to import cheaper electricity and producers would prefer exporting more to countries where prices are higher.
So the question is not really that member states are for or against more interlinking, but how the different interest groups in a country are affected by it. If you have a European agency that really has the power to implement certain transmission lines, and if they are beneficial from an efficiency standpoint, then you should theoretically be able to redistribute the rents of this new line so that all stakeholders benefit.
If there was one single political initiative that Oettinger could take during his mandate to improve the integration of energy markets, which one would it be? The previous Commission did the third energy liberalisation package, what could this Commission do?
Well, implementing the third package surely, although there would be room for a fourth package, for example pushing for the introduction of market signals for the location of power plant investments and physical generation according to the network topography.
Within the current package, certainly empowering ENTSO and ACER integrated network planning would be the single most important thing but it would be hard to achieve against the interests inside the member states.
Coming back to the third liberalisation package, its most emblematic measure was the so-called 'ownership unbundling' of energy-producing companies, who were told to sell their networks. And during the negotiations, E.ON made the surprise move of selling its network. How do you see this?
For E.ON, the reason for selling might also have been pressure from the Commission due to the inquiry into its activities and may have not only been linked to the third package.
Is this something you would expect to be repeated in other countries in the coming years?
I anticipate with the third package that integrated companies will really think about selling the networks and that those pure network companies in turn might consider merging. Especially in Germany, it would really make sense to have the existing four network companies together – I think they calculated benefits of around 400 million euro a year for having a single network company. It means there would be less need for balancing and reserve energy, for example.
So that's for Germany and what could be the next step at the European level is of course having cross-border mergers of network companies. Because certainly there are countries with network companies that are smaller than each German transmission zone.
The Baltic countries, for instance, would clearly profit from such a move. And we have seen with the market coupling between France, Belgium and the Netherlands that prices are now equal 70% of the time. These kinds of initiatives help in creating a European electricity market.
And why not have also the balancing and reserve markets joined together and maybe even envision a joint regional network company that really can build the lines that are most needed irrespective of national borders.
How would that help?
The electricity market usually happens on a day-ahead basis, so you know at 12am today what you expect the demand would be and what power plant should run to fulfil the demand at the best price.
And the next day, you may have less wind power coming in and more demand coming in because it is colder… So many things might change. Thus you need to rebalance the system in real time for which three different types of reserves are held that are used to bring the system into balance.
The problem is that national situations might differ and that one country needs to reduce cheap electricity production while another one has to call expensive and possibly more polluting reserve power plants even though cross-border transmission capacities between both countries would be available to balance both systems at no cost.
In the longer term a joint market for reserves would finally allow to do without certain investments that are today motivated by keeping the balance in purely national electricity systems.
One of the contentious elements in the third liberalisation package was whether to treat the market for gas and electricity identically. The Commission supported this view, but certain countries opposed it. What do you make of this argument?
The market would greatly benefit in terms of efficiency if the same principles were applied. This would be especially important for the gas market, which is not as functional as the electricity market. The market in France and Germany is divided into zones and you lack a national price for gas, so the situation is not transparent enough and detrimental to consumers.
This is really hindering the flow of gas from one market to the other. This has been particularly problematic during the crisis in 2009. In Poland, for example, it was difficult to choose the market from which gas should have been bought since there was no price transparency in neighbouring countries.
The underdevelopment of the gas market also has to do with infrastructures. The network of gas pipelines is characterised by much less capillarity compared to electricity. Is this the crux of the problem?
The backwardness of the gas market is both about infrastructures and rules. Infrastructure links are missing, but not to the extent one would have thought before the crisis. During the crisis we actually saw that it was possible to switch the direction of the energy flow and that the problem of interconnectivity was not as daunting as expected.
One problem was old destination clauses whereby operators are not allowed to sell in certain areas, and a lack of liquid markets in all European regions.
How can we clearly get to a true European market for energy?
I would claim that there are four key elements: a consistent European energy infrastructure, elimination of long-term contracts, clear rules and monitoring of these rules.
Can you see this happening or is there too much resistance at the political level?
That it is difficult to say. The solutions that I have described are not new, they have been there for twenty years now and yet full-fledged liberalisation in this respect has not taken place yet.
Whether resistance to liberalisation will be stronger than opposition to the status quo is something that cannot be predicted. It depends on interest groups and politics.
Liquefied Natural Gas is often touted as the way forward for greater market integration and much political capital has been spent pushing for greater usage of LNG. Do you think that this push was justified, and are we reaping the fruits of these investments?
My personal belief is that LNG will increase its volume and share as a marginal supplier, which affects the price, because it is more flexible and the terms of the contracts can be more flexible and more easily defined.
The big obstacle remains the European energy market, where contracts are defined on a longer time scale and the intermediate supplier is hence compelled to abide to its pipeline supplier even if the LNG option were cheaper. This can be seen a bit as a chicken-and-egg problem.
Do you expect Oettinger to break the stalemate on long-term gas contracts, even if he comes from Germany, a country that imports massively from pipelines?
This is also difficult to predict, but considering the responses he gave at the hearings he seems more inclined towards conservatism than revolutionary options.
But do you share the argument in favour of long-term contracts, which says that they ensure greater predictability for business and security of supply?
No, I do not agree. I believe you have to allow for different supply options and then let the market decide.
I believe that the objective of the EU should not be to create unrealistically stable prices for energy, but creating a single market for energy.
In addition, having a geographic segmentation of markets at a time where we have single objectives in respect to emissions and green targets makes the prospect of success at a reasonable cost look bleak.
On climate change, you recommend making use of BATs (best available technologies) for energy generation and conservation. How do you see this happening?
You need to require that when new investments are made, priority is given to the most advanced energy-efficient techniques and as you go along, you phase in more and more requirements. Thus, almost cost-effective technologies become marketable faster as their enforced deployment depresses cost, which will have positive spill-over effects beyond Europe.
When new member states joined, they had a hard time following BAT requirements in the large industrial sector. Poland is an example of a gradual phase-in of such requirements. There, the Commission and the relevant authorities brokered an agreement whereby Poland could still produce and export electricity and other products, but following realistic European rules on emissions.
Industry often complains about the fact that costs of adaptation are too high and the process is unfeasible. But the successful case of Poland shows that making use of the BATs increases the learning curve of catching-up countries and finally makes them more competitive.
Yet, this type of command and control strategy, where the EU tells investors 'this is the best technology, make use of it,' might be a little tricky. In the end technology is evolving continuously. We are in a state of flux, where the BATs of today might be the worst available technologies of tomorrow. And investments usually require much longer-term horizons. Is it really possible to synchronise the pace of progress with that of investment?
I believe benchmarks might be more functional than precise binding guidelines. Rather than saying exactly which kind of light bulb you should use, it would be wiser to indicate - as in the Eco-Design Directive - how many photons should be emitted within a certain amount of electricity.
You also mention R&D in your memo and the fact that spending levels in research are a major hurdle in the development of an efficient energy supply. What would you recommend in this respect?
What is clear is that we cannot expect from all the countries the same level of expenditure in research, so it might be of interest to develop a certain division of labour in this respect, setting out credible and feasible targets according to the existing level.
Another huge topic which we did not touch upon is carbon tariffs. The EU's incoming trade commissioner, Karel De Gucht, opposes them. What is your position? What are the advantages and disadvantages of such a measure?
One problem is represented by carbon leakage: this means that a tangible risk exists when introducing carbon tariffs of reducing the competitiveness of European industries without altering the pace of climate change. This would happen as an effect of delocalisation in areas where legislation is more lax.
A carbon tariff based on factual emissions in the entire value chain for producing a certain foreign good, say aluminium, would certainly be opposed by the Chinese and could lead to trade wars detrimental both for China and the EU.
But there might be a continuum of possibilities between the described European import tax based on a foreign product's carbon footprint and no border adjustment at all.
For example, you might require China to levy an export tax on certain products weighted in reference to the corresponding European product's emissions.
The difference would be that Europe’s emission reduction efforts would remain largely effective, the status quo for Chinese exports would remain mainly unaltered and the tax benefits would go into Chinese pockets.
To conclude, what do you see as the biggest threat and the biggest opportunity for Commissioner Oettinger in the next five years?
There are a number of plans, especially infrastructures, that will be laid out this year and next year: the guidelines for the Trans-European Network for Energy, the network development plan published by ACER and ENTSO, then the transport network plan, where he will have to consult on this subject with Commissioner Kallas. These forward-looking network initiatives are great opportunities that should not be missed.
One threat, arguably the biggest one, would be failure to implement the existing energy packages.