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Energy Union: Old wine in new bottles or a step into the future?

The European Commission’s announcement on the promotion of an Energy Union strategy is an important move towards refocusing its efforts on a policy area where significant progress and impact can be achieved for the benefit of all European consumers writes Frederik Dahlmann.

Yet the idea behind the “Energy Union” is nothing new. From the early treaties on common markets for coal and nuclear energy, energy has been central to the European project from day one. Since the 1990s, we’ve seen increasing EU attention on developing the Internal Energy Market (IEM) which was originally scheduled to be completed by 2014. So is the Energy Union simply a “rebranding exercise”?

In my view, the concept of the Energy Union reflects a growing understanding that the EU needs to concentrate on those areas where it has the greatest potential for positively affecting people’s lives. In times of volatile energy prices, geopolitical challenges along its borders, and Europe’s self-styled leadership role in targeting climate change, the Energy Union symbolizes renewed impetus within the Commission to find better ways to integrate and coordinate different national energy policies.

Despite member states’ traditional reluctance to cede power on energy issues, the Energy Union aims to drive competition, strengthen security and encourage investment. Transforming the individual power and gas markets across the 28 member states and beyond is seen as an important measure to address affordability, inefficiencies, and environmental concerns.

For example, the intention to prioritize the implementation of the previous Third Energy Package is a first step into that direction. Also this time both the Vice President for the Energy Union and the EU Commissioner for Climate Change Action have been involved in developing the details behind the Energy Union. This marks a significant improvement to previous efforts which were characterized by a lack of coordination between different directorates and unintended consequences. The Energy Union should therefore result in a more coherent approach towards addressing the wide range of important issues affecting Europe’s energy sector.

The process of further market integration will inevitably challenge established companies and their business strategies, but it also opens up the possibilities for innovation and new competitors. These are sorely needed to translate the high-level policy efforts into tangible benefits for European consumers, economies and the environment.

While progress has been made to better link the growing number of generators into the wholesale market price formation process, the translation into retail prices is significantly poorer, hampered by a lack of transparency and a disconnect from (most) energy users. In my opinion, a reformed market design should encourage new business models and services. The would include, for example, those designed to improve energy efficiency and benefit from time-of-day pricing as prices currently don’t accurately reflect the costs of production or a choice of non-consumption. This is an area where greater progress on market integration can be made.

Elsewhere, the proposal to provide the pan-EU regulatory body ACER with greater powers of decision making is potentially a further positive development. However, it requires clear guidelines and governance arrangements as well as transparent communications to avoid a constant battle between policy-makers, regulators and the industry as to who is responsible.

In this context it is important to recognize the different models of capitalism across the different European member states. The role and interpretation of regulatory bodies varies significantly and ACER will need to be cognizant of these interpretations. Close attention should also be paid to the promising regional market (ERIs) arrangements which have been established to coordinate between connected member states. ACER would be well-advised to work with these institutions to help with regulatory development and implementation. In addition, there must be a clear separation in terms of spheres of influence between ACER and national regulatory bodies and at the same time greater opportunities for knowledge exchange of best practices. Inevitably, this will increasingly lead towards (hopefully better) regulation in form of general principles rather than overly restrictive rules.

Finally, the Commission states that EUR 1 trillion needs to be invested into the energy sector in EU by 2020 alone. Finding better ways to increase access to finance will be vital, as the private sector is supposed to bear most of the costs of investments. Here too more integrated thinking may valuable, for example, by linking these efforts to green and social impact bonds as well as other more sustainable forms of finance and investment.

EC Vice-President for the Energy Union Maroš ŠEFČOVIČ used a basketball analogy to promise “full-court pressing” on all its ambitious aims and targets. The Commission needs endurance and a wide range of skills among its team members to deliver.

Frederik Dahlmann, Ph.D. is an Assistant Professor of Global Energy at Warwick Business School, The University of Warwick

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