This article is part of our special report Electricity in transition.
Policymakers from the member states have praised the European Commission’s Energy Union initiative. But this unanimous assent has raised eyebrows at a time when the idea of the EU itself is under attack, writes Dr Nikolas Wölfing.
Dr Nikolas Wölfing is a researcher at the Centre for European Economic Research (ZEW).
The Energy Union has gained seemingly undivided support in the political sphere and the Commission’s vice president is set to deliver a “jumbo package”, as he likes to phrase it.
Europe’s energy policy has worked for decades under the premise of a strict division of competencies: the Union acts on the harmonisation and reform of regulation, while member states are free in their choice of the fuel mix, the system, and the technologies employed.
Targets for renewable energies are somewhat the exception proving the rule. Article 194 of the Lisbon treaty has set this principle in stone.
In practice, this arrangement has provided the framework for ground-breaking achievements on the one hand, but also for a steady evolution towards energy systems and policies foiling just these very achievements on the other.
To explain, let me take a small detour to a very basic economic insight. Economists consider most energy carriers to be almost perfect examples for the concept of homogenous goods.
And what we know about such goods is that well-designed markets can bring up extremely efficient allocations. In most cases, the European energy policy has put this lesson into practice.
Take the internal market for electricity as an example: we have seen the emergence of a coupled market spanning from Portugal to Finland. The principles of market coupling are just a one-to-one implementation of what economists describe as a welfare maximising solution to a trading problem.
These welfare gains are real and they are large. And they are distributed across generators, consumers and nations.
Unfortunately, this achievement largely lost its economic relevance just shortly after being installed. Looking at Germany alone, wholesale prices for electric power amount to 2 to 3 cents per kilowatt hour.
Timely variations of such prices do not matter much when surcharges for renewables, capacity payments or grid charges amount to multiples. The big turnover is not in the wholesale market anymore, but in a multi-layer system of administered and regulated charges.
The signal a price can provide to coordinate demand and supply on short notice is buried under these levies which are applied independently of actual scarcities.
Moreover, with changes in the installed generation capacities but no adjustment of the high voltage grid, there are increasing locational scarcities in the system which are yet not priced.
Loop flows destabilise the grids of neighbouring countries. Poland and the Czech Republic decided to install phase shifters on their borders as barriers against inflows from the German grid – not what a well-working integrated market should look like, right?
And Germany is not alone with its energy policy, inconsiderate of any European framework. In the rest of Europe, we see the implementation of capacity markets with various designs on the national level in a largely uncoordinated manner.
The proposals and implementations of these markets cannot hide their intention to implement instruments that give power and money to national actors in a very national setting.
So in brief, while wholesale markets have become more European, energy policies have become more national and money is being shifted away from the European markets towards national systems.
As a result, actual problems increasingly arise on a regional or even local level. This is not the right track towards the Energy Union.
My concern is that policy makers in the member states will only realise the importance of the Energy Union beyond being a topic for emphatic speeches when it is too late.
Take a look at the gas market where progress on integration has been smaller compared to the electricity sector. To ensure energy security, it is key to coordinate actions, to create flexible markets providing timely and relevant price signals, and to install infrastructure which creates liquidity in these markets, even in times of import disruptions.
A well working Energy Union could be a strong argument for the benefits of the European Union, when voters see that gas supply in times of crisis is secured by the links to neighbouring member states.
But to this end, the union has to be operational before we are in crisis. Thus, it is more than urgent that national governments start taking the European framework more seriously, than they have done lately with regard to the electricity and the carbon market.