This article is part of our special report Electricity prices.
The European Commission has renewed its push to phase out regulated electricity prices, arguing they distort the market and slow down the transition to clean energy. But faced with reluctance from EU countries, the executive has now tabled a compromise based on a common EU definition of energy poverty.
As part of its clean energy package of legislation, tabled in November 2016, the European Commission agreed to phase-out regulated energy prices set below production costs and “to encourage member states to establish a roadmap for the phasing-out of all regulated prices”.
Its proposed new market design for electricity “aims at ensuring that supply prices are free of any public intervention, and only with duly justified exceptions,” such as helping the poorest households pay their energy bills.
The Commission’s reasoning is straightforward: “Price regulation can limit the development of effective competition, discourage investments and the emergence of new market players,” eventually putting pressure on electricity bills.
In addition, rapidly falling technology costs means more and more consumers are now able to reduce their energy bills by other means – with rooftop solar panels, batteries, or by doing energy efficiency renovation of their houses, it argued.
But the subject can be politically explosive. In 2013, the Bulgarian government was forced to resign following mass protests over electricity bills. Across the EU, thirteen countries still have regulated electricity prices in place, mostly justified on consumer concerns about high energy bills, or to address energy poverty.
For sure, abolishing regulated prices will be no easy task. Last time the Commission tried to eradicate them – more than a decade ago – it faced a barrage of opposition from countries led by France, which established a fixed price for all consumers across the board after World War II.
“Regulated energy prices were introduced when the electricity system started to be organised as a monopoly,” says Pellerin-Carlin, who heads the energy centre at the Jacques Delors Institute, a think-tank based in Paris.
“And when you have a monopoly, like was the case in Europe in the 50s and the 60s, you have a possibility that the monopoly abuses its power and imposes higher prices on consumers,” he told EURACTIV in an interview.
Nowadays, Pellerin-Carlin says regulated prices mostly favour incumbent players by keeping competitors out of the electricity market.
“What regulated prices do essentially is to maintain the status quo,” he argues, saying they depress investments in a sector which is going through a period of deep transformation, led by the renewable energy revolution and decentralised production of electricity.
But the paradox is that regulated prices can also be a poisoned gift for the energy companies involved. “When prices are regulated below production cost, it means that the energy company loses money. And the fact that regulated prices in France are so low is one of the reasons why EDF has a massive debt,” Pellerin-Carlin said.
“So it’s not even good for EDF in the end,” he said.
Contacted by EURACTIV, EDF’s EU office in Brussels declined to comment.
Vulnerable consumers in the spotlight
The Commission’s initial proposal was to phase-out regulated electricity prices over a 5-year period for all consumers, subject to a possible extension under specific conditions.
But EU member states flatly rejected this and deleted all forms of time-limits on price regulation in their “general approach” to the Commission’s proposal, adopted in December 2017.
The European Parliament, for its part, voted in favour of a 5-year time-limit as a general rule, and a 10-year deadline for vulnerable consumers.
Three-way talks on the proposed electricity market reform are now underway between EU institutions. In order to find a compromise, the Commission has put two options on the table: either a new 7-year deadline for regulated prices targeted at “vulnerable consumers” only or no time limitation at all for regulated prices applicable to vulnerable consumers.
“A common time limit for all member states to phase-out all price regulation would ensure predictability for businesses and speed-up the completion of the internal energy market,” the European Commission argues in a compromise paper, obtained by EURACTIV.
The Commission’s move on energy poverty is aimed at placating both defenders of regulated tariffs and those like Sweden, who are leading the group of countries campaigning to abolish them (Sweden even tabled its own paper, saying they “should be abolished as soon as possible”).
However, that would require an EU-wide definition of vulnerable consumers, based on a “common indicator” which currently does not exist, the Commission says.
“Using clearly quantifiable indicators is the only way to grasp the important differences across the EU member states in terms of energy poverty levels,” it argues.
Energy expenditures ranged from €500 to €2,300 per household in 2015, the Commission says in its paper, saying the poorest households spent on average €870 on electricity, gas, or heating fuel in the EU, representing around 10.4% of their total consumption expenditure.
The poorest households in Sweden spent only 3% of total expenditure on energy, while in Slovakia this share was more than 23%.
The debate at the European level is complicated by the fact that social policy is a member state competence, where the EU has almost no say. EU countries have come up with their own definitions of energy poverty to identify which households are eligible for social benefits. Any changes to the definition could create social upheavals that no government would easily sign up to.
But “additional quantitative criteria defined at an EU level is necessary,” the Commission argues, suggesting “low income” combined with “high energy expenditure and poor energy efficiency” as possible indicators.
Resistance to the abolition of regulated prices is expected chiefly in France, Hungary and Bulgaria, which for different reasons support a bigger role for the government in energy matters.
“France is more committed to the principle of public service than other states,” says Christine Revault D’Allonnes Bonnefoy, a French MEP from the Socialist and Democrats (S&D) group in the European Parliament, suggesting the defence of regulated energy prices is a matter of principle for Paris.
Behind the debate on regulated energy prices, she says the bigger issue is defining what should constitute a public service, she explains. As soon as regulated tariffs disappear, there won’t be any safeguards against rising prices anymore, she warns.
“It may be a view that is not shared everywhere in Europe, but in France, you will continue to find supporters of this principle of public service,” Bonnefoy said, adding the French socialists will reject any form of time-limit on the protection of vulnerable consumers.
However, the phase-out of regulated energy tariffs is no longer taboo among the French conservatives, which used to stand united with their socialist colleagues on the matter.
“The disappearance of regulated tariffs will eventually allow more attractive prices for our fellow citizens and meets the need for flexibility in the electricity market,” says Françoise Grossetête, a French MEP from the conservative Les Républicains party in the European Parliament.
“But this must be done gradually,” she told EURACTIV in emailed comments, giving no detail about her preferred timeline for doing that.
To be sure, French politicians look with anxiety at the public debate on energy prices. In a recent interview, President Emmanuel Macron said he understood the “anger” of French people who complained recently about the rising cost of diesel at the pump.
He expressed sympathy for poor households who cannot “heat themselves properly,” announcing an upward revision of the “chèque énergie” targeted at the energy poor.
But moving forward at European level will require some kind of EU definition of vulnerable consumers and energy poverty.
“We must look into this,” says Bonnefoy. “Access to energy and energy poverty is an issue on which we have to demonstrate that we have identical definitions at the European level. Reaching a definition on these questions is indispensable,” she told EURACTIV.
Others, meanwhile, warn about the temptation to use energy poverty as a smokescreen to preserve the status quo and postpone the end of price regulation.
“Member states are hiding behind regulated tariffs to avoid debate on other issues related to subsidies,” said Clémence Hutin, a clean energy campaigner at Friends of the Earth Europe. “Pure prices do not exist: there is still a myriad of subsidies for fossil fuels, nuclear power, etc.,” she pointed out.
Pierre Tardieu, chief policy officer at trade association WindEurope, was less diplomatic: “Vulnerable consumers should not be used as a smokescreen to maintain regulated prices across the board. There are other ways of dealing with that problem,” he told EURACTIV.
Pellerin-Carlin, from the Delors institute in Paris, was equally clear. “Regulated tariffs applicable to the entire population are not the way to address energy poverty,” he insisted, saying that energy efficiency renovation of buildings, combined with renewables production on site, is a much more effective way of lowering energy bills.
“Energy poverty should not be manipulated to serve the short-term interests of incumbent utilities,” he said.
Energy industry observers in Brussels say the issue has become so political that an agreement might not be found until the last trilogue on the electricity market design, scheduled on 5 December. This is likely to be another all-nighter.