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10/06/2015

One Europe-wide energy system: the Energy Union

As there is a growing need for more coordinated plans for the integration of European gas and electricity markets, the European Commission presented the Energy Union initiative. The Energy Union should save billions per year and increase the security of supply, however, this implies a stronger coordination from Brussels.  There are alternative plans that avoid the increasing control from Brussels. What will be the best way to integrate the European energy markets?

In February 2015 the European Commission presented her plans on creating a robust Energy Union in Europe, as the present European energy grids are outdated, the electricity and gas markets are not very well integrated yet and the energy policy of the member states is uncoordinated. This has led to a situation in which consumers, households and companies cannot optimally benefit from the increased freedom of choice for energy delivery and consequently of lower energy prices. An Energy Union can lead to significant cost reductions (40 billion Euros annually) in the long term by moving away from a fragmented system with uncoordinated national policies, market barriers and energy-isolated areas, towards more competition, higher market efficiency through better use of energy generation facilities across the EU and affordable consumer prices.

Why an Energy Union?

The present political relation between the EU and Russia, and EU Member States taking their own measures for security of supply, created momentum for the launch of the Energy Union initiative. The uncoordinated capacity mechanisms that are implemented by several individual European countries, increase the need for an internationally coordinated energy market. However, the Energy Union is not the first initiative for improving market integration of the European electricity markets, as present initiatives like the CWE (Central Western European) market coupling, the NWE (North-Western European) price coupling and the Price Coupling of Regions (PCR) already contribute to the further integration of the electricity markets. Sia Partners keeps a close eye on the market integration developments, as we have been involved in the European electricity market design and these aforementioned initiatives since many years.

The Energy Union in relation to other initiatives

The establishment of the Energy Union and a common energy strategy is based on five dimensions:

  • Energy security, solidarity and trust (i.e. diversification of supply and more security of supply)
  • Fully integrated European energy market (mainly through interconnections)
  • Energy efficiency in the buildings and transportation sectors
  • Decarbonizing the economy
  • Research, innovation and competitiveness

The commitment of EU institutions, member states and other stakeholders like the European Investment Bank are needed for realizing the Energy Union. The European Commission will have more control on the energy markets and wants to stimulate regional cooperation between Member States, like the North Seas Countries’ Offshore Grid Initiative (NSCOGI), that are key to achieving the targets most cost-effectively. Also the position of ACER (Agency for the Cooperation of Energy Regulators) should be strengthened with regard to the cooperating TSOs (in the ENTSO-E and ENTSO-G), so that the developments can be actively monitored and controlled. However, regional operational centres will help to effectively plan and manage cross-border electricity flows in the transmission systems.

However, safeguarding the energy autonomy of the member states is very important, as the energy dependence is large but different for every country. Some countries have a significant share of renewable energy sources, while others are heavily dependent on fossil fuels, for example on Russian gas as shown in figure 1. The political interests related to energy are therefore different per country and handing the control over to Brussels is therefore not so easy.

Figure 1: The Russian gas dependence is significant, especially for EU Member States in Eastern Europe (source: The Independent, 2014).

One of the initiatives that avoids any central control from Brussels, is the EU Powernet Initiative by Wim Dik. This initiative aims at bringing together the CEOs of energy companies throughout the EU, while having the Ministers of Energy of the EU member states in the supervisory board. This initiative helps to achieve the security of supply, sustainable energy increase and lower dependence on energy imports faster and more efficiently, because it respects the autonomy of the members states with regard to the energy policy. Moreover the Powernet Initiative hopes to achieve that in the future import of 'primary fuels' into the EU for the production of electricity is no longer required.
In order to realise this, a EU-covering High Voltage Direct Current (HVDC) Overlay Network is required, which is a widely accepted and promoted concept. However, as this initiative does not contain any top down plans, there is no certainty for achieving the set energy objectives.

The Netherlands and the Energy Union

Other countries surrounding the Netherlands, like Belgium and the UK, have taken their own measures for improving their security of supply via a capacity reliability mechanism (i.e. capacity market). However, Frontier Economics concluded in a study for the German government that this does not have to mean that neighbouring countries have to follow or cooperate in these initiatives. As there are multiple interconnections in place, the electricity markets already take the available capacity in other countries into account. Effectively, countries like the Netherlands can therefore benefit freely from the capacity mechanisms and the security of supply offered by neighbouring countries.

It is not only security of supply that is on the agenda for the Energy Union, though an important one. Reaching harmonization on this topic would benefit all EU member states, including the Netherlands. It should however not be that countries like the Netherlands, that are frontrunners in the integration for a European power market, should change or slow down their initiatives and agreements on behalf of a dysfunctional harmonization policy that may come from the Energy union. Rules for cross-border participation in capacity mechanisms and a framework for calculating and allocating interconnector capacity are needed for harmonising these initiatives.

The details still have to be filled in…

Since the objectives from the Energy Union have not been detailed, it is hard to qualify the initiative in this moment. It will be interesting to see for example if the initiative also aims to harmonize taxation for power.  This would be a hard nut to crack. 

Soon the Energy Union intends to display the details of its plans, so we wait for this before to make any strong comments to it. We see that all EU Member States, including the Netherlands, could benefit from the Energy Union, if it does make concrete steps into harmonization while leaving Member States with enough room to manoeuvre with its local policies. Clear market-design guidelines are on the other hand essential. It will be a Balancing Act for the Energy Union, ideally resulting on the longer run in a Fourth Package of harmonization measures that is clearly supporting the power market integration initiatives that are already ongoing. Initiatives in which Sia Partners plays its part as a consultancy since many years. So we will follow the Energy Union next steps closely!

 

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