Regulators claim role in combating climate change

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The climate change imperative has radically changed the energy regulation environment, shooting up the priority list alongside energy security and fuel poverty, EURACTIV heard yesterday (19 October) at the fourth World Forum on Energy Regulation in Athens.

While regulation was previously aimed at securing competitive markets, the challenge now is to cut emissions from the power sector cost-effectively in anticipation of climate legislation, participants in the three-day conference said.

“Originally, liberalised energy markets were seeking competition, efficiency and reliability. Now they have a very different focus, which is to lower carbon emissions with efficiency and energy security,” said John Tamblyn, chair of the Australian Energy Market Commission.

The EU is the first region to set up a cap-and-trade system as the basis of its transition to a low-carbon future (see EURACTIV LinksDossier on the EU’s emissions trading scheme). By obliging power utilities to buy pollution permits, it hopes to force the largest emitting sector into cutting greenhouse gases drastically by investing in efficiency and alternative sources of energy.

A similar scheme is now in the making in the US Congress, and several other countries are considering their options. The EU is eyeing a link-up of national schemes to form an OECD-wide carbon market by 2015.

However, a poorly-regulated transition could lead to an increase in consumer prices that is much greater than the actual cost of avoiding emissions, several participants warned. This would give rise to concerns that vulnerable consumers might fall into fuel poverty.

“When the cost of abatement is relatively small and customers are asked to pay a lot, we are entering a system which raises equity questions and it also raises serious political risks that the system is not sustainable,” said Richard Cowart, director of the Regulatory Assistance Project (RAP) and former chair of the Vermont Public Service Board.

“So we need to design a system where the consumer cost is a lot closer to the cost of abatement,” Cowart added.

Energy regulators see an important role for themselves in designing market rules that will make the transition as painless as possible.

“How the energy market adapts will significantly influence the total cost of reducing global emissions. Changes to the design of energy markets can help minimise transition costs – and this should be a key focus for energy market rulemakers and regulators,” Tamblyn stated.

Energy efficiency in demand

Exactly how energy markets should be restructured remains a matter of debate. Many ideas where put on the table, but particular consensus formed around the idea of complementing cap-and trade schemes with efficiency and renewable energy standards.

Considering the great volatility of carbon prices in the past, many regulators pointed out that carbon prices have only triggered a limited amount of cost-effective investment in energy efficiency. They argued that this needs to be addressed with a portfolio of government measures to increase energy efficiency and promote renewable energies.

According to Cowart, the American experience of the Regional Greenhouse Gas Initiative (RGGI) shows that the cost of cutting emissions will be significantly higher if the efforts rely solely on carbon trading. He argued that the most cost-effective option would be to channel a sizeable share of carbon revenues towards efficiency and renewables programmes.

“National governments and regulators alike will need to coordinate that suit of policies and market mechanisms to advance those policies,” he added.

The EU has adopted a binding target to increase the share of renewables in its energy mix to 20% by 2020, but its energy efficiency goal is merely aspirational. This might be changing now, however, as a Commission plan proposes to make this a binding obligation (EURACTIV 13/10/09).

At the conference, world regulators pledged to step up cooperation on defining their role in responding to climate change. They announced the creation of the International Confederation of Energy Regulators (ICER), a voluntary forum for exchanging information and developing the role of energy regulation in addressing “a wide spectrum of socio-economic, environmental and market issues”.

The role of national energy regulators, a concept virtually unknown before the 1980s, has concentrated on energy market liberalisation.

In the EU, the European Commission presented on 19 September 2007 its 'third package' of proposals to further liberalise the EU's energy market (see EURACTIV LinksDossier).

The proposals sparked much controversy, particularly over the issue of 'ownership unbundling' - meaning the break-up of large vertically-integrated energy firms like France's EDF, which simultaneously control electricity production and distribution assets.

France, Germany and six other member states led resistance to the unbundling plans. Together, they tabled an alternative proposal in February 2008, which they argued would guarantee a similar result without forcing energy firms to split their energy production and transmission businesses (EURACTIV 01/02/08).

Energy ministers finally clinched a deal in November 2008, agreeing that energy producers from countries which are not fully open to competition would be forbidden to buy up the transmission businesses of energy companies in European countries where full unbundling has been introduced (EURACTIV 13/10/08).

The measure was directed at France, which had opposed unbundling while EDF, the state-owned energy firm, went on a shopping spree across Europe.

Trialogue negotiations - which began between the EU institutions in January 2009 - were slow to make progress, with the Parliament and EU member states refusing to budge from their initial positions (EURACTIV 12/02/09). 

On 23 March, EU lawmakers finally clinched a deal on the legislation. Parliament caved in to member states' insistence that ownership unbundling must only be one of the options on the table, but received provisions to strengthen consumer rights in return (EURACTIV 25/03/09).

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