How much Regulation is Acceptable in a Deregulated Energy Market ?

In putting forward the position of his company towards the problems associated with regulating the liberalised electricity market, Otto Majewski, Chairman of the Bayernwerk(*) Board of Directors, assured that the electricity producers, who were initially opposed to the liberalisation of the market, now felt that it has demonstrated to be essential for increased competitiveness and hence better management of their activities. He agreed that with monopolies eliminated in aviation, railroads and telecommunications, there was in fact no good reason to make an exception of the energy industry. He emphasized also that Bayernwerk has very emphatically brought up its open-minded attitude about competition into the political discussion over Germany’s implementation of the internal market directive for electricity.

He considered the positive signals from Siemens and EdF/Framatome regarding the new EPR as very promising even if nuclear power has got a greater social-policy component than ever in a competitive environment.

As a solution to the transnational problem of greenhouse gases, Bayernwerk believes that this form of energy must continue to benefit from major investment at European level, both in the area of research and in the building of new plants.

Finally, Dr. Majewski stressed that the political decision on basic principles in favour of competition and deregulation must not be counteracted now by more government intervention (such as promoting renewable energy sources by giving preferential access to the electricity network). He pronounced himself in favour of “greenpricing” as well as voluntary achievements by the industry but against adding energy taxes on traditional energy sources in order to maintain a level playing field.

Commenting on the debate that followed Otto Majewski’s introductory statement,
Pablo Benavides, Director General for Energy at the European Commission, pointed out that the concept of “liberalisation” should not be mistaken with others such as “deregulation” and “privatisation”.

The purpose of liberalisation was to create an internal market that gave consumers free choice of their supplier for one of the services offered by the electricity industry : production, transport and distribution, which would be presented to them separately under the notion of unbundling – the separation of these three activities being necessary to avoid any kind of cross subsidisation.

Liberalisation, as it takes place within the EU, aims at encouraging the setting up of an internal market with its obligations, such as market opening, as well as its rights, such as community preference on specific issues.

Today we are confronted with situations remote from the concept of liberalisation. Coal which, in the years to come, will remain essential in the fuel mix of the Community, is more expensive to produce in the EU than to import from outside. However, closing down coal plants would have dramatic socio-economical costs which the EU is not ready to face fully yet. The recent turmoil on the oil market, which revealed the lack of proper management notably of the national and European stocks, also goes to show that the EU cannot rely only on market forces to shape the evolution of its energy sector.

Liberalisation should also be implemented in accordance with certain common European goals such as the target agreed in Kyoto – 8% reduction on 1990 levels by 2008-2012 for 6 greenhouse gases.

If we really are to reach this objective, we need to accept that nuclear energy, which today accounts for 35% of the electricity production in Europe, has a key role to play. In this context, it should be pointed out that it is not a matter of being in favour or against nuclear energy, it is rather a mere fact : the environmental consequences deriving from the closure of a nuclear power plant in the EU without putting another one on stream will prevent it from being consistent with the commitment made in Kyoto.

Renewable energies sources (RES) have their part to play too. This is indeed acknowledged by the European Commission which has adopted a directive aiming at doubling their share of electricity production to 12%. In reality, the percentage is unlikely to go higher and hence RES cannot be considered as the only substitute. Furthermore, the European Commission, while it promotes RES, will only do so in the take-off phase and has no intention to subsidise them on a permanent basis.

The Directive should not prevent us from taking into account the essential nature of energy for which the European Union is – and will increasingly be – heavily dependent on imports and on the way it shapes economic and social life.

Against this background, it should be understood that liberalisation and regulation are not incompatible. The system requiring the least regulation is precisely the monopoly where everything is already planned for at the beginning and dictated by the monopoly owner – or by the monopoly itself, whereas a liberalised market is by definition open and requires therefore safeguards to be put in place and operated to stick to the initial purpose.
The European Directive, which kicks off the process of liberalisation, provides a common framework which needs to be completed and implemented, in accordance with the defined objective, at the national level. The European Commission has no plans to take on the role of regulator; it will however ensure that there is a minimum degree of harmonisation between the national regulatory systems required and set up by the States on the basis of the principle of subsidiarity.

(* Bayernwerk generates more than 50% of its power from nuclear sources, some 20% from hydroelectric sources and together with Siemens the company has got an important world marktet position in producing photovoltaic cells)