Energy liberalisation: A communication gaffe?

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.”

Industrial consumers of gas and electricity have in theory been able to choose their supplier freely since July 2004, with the entry into force of new EU directives aimed at completing a liberalisation process started in the early nineties.

However, the Commission has admitted that its strategy has so far failed to bring the desired lower prices for consumers. In a sector enquiry completed in February last year, it put the blame firmly on member states for this, saying they have not fully implemented the directives and kept their national champions from facing real competition.

• 5 July 2007: Commission to present energy consumer charter to protect financially vulnerable customers from “misleading, unfair or non-transparent practices”.

EU official documents

• |FR
• |DE(10 Jan. 2007)
• Commission (Press release):All EU Citizens free to choose their electricity and gas supplier as of 1 July FR FR DE
• Commission (Press release):Q&A on the opening of the energy markets and the European Energy Consumers’ Charter
• Commission:Brochure on internal energy market
• Commission (DG TREN):Electricity legislation
• Commission (DG TREN):Gas legislation
• Commission:Memo on the situation of the internal energy market(10 Jan. 2007) FR FR DE
• Commission:Report on Prospects for the internal gas and electricity market

EU Actors positions

• Fondation Schuman:The Opening of the European Electricity Markets to Competition: genesis and perspectives of an ambitious project(July 2007)
• Eur-Ifri:La sécurité des approvisionnements énergétiques en Europe : principes et mesures(April 2007)
• Bruegel:Energy: Choices for Europe(March 2007)