Five reasons EC power plan will fail

elec_newsdetail Those of you who know me know that I’m not sold on the idea of new EU electricity legislation. Why is it needed? Would Parliament and Council vote for it? What are the real motives of those who call for it?

Some EC officials have been talking-up the issue since at least 2011 but to my mind none have made a convincing case for any specific changes in the near term. Electricity is changing, for sure, but the third package rules adopted in 2009 are in my view still fit for purpose.

So, here below are my five reasons why I expect and predict that EC consultations launched tomorrow (15 July) will not result in a legislative outcome during this mandate (up to 2019 elections).

First, misplaced priorities. If Russia is our main concern, then our priority must be heat not electricity. Far more imported gas is used for heat than for anything else. Organising less use of that fuel, e.g. though improving building performance, is the most effective way to hedge potential supply disruptions from Russia or indeed anywhere else. Also, our import bills fall, balance of payments improve and we create more jobs at home.

Similarly if climate is our main concern (it is mine) then the priority should be organising steeper cuts in greenhouse gas pollution. Here the EC is at least on the right track, since the ETS legal proposal (amending act) will be adopted tomorrow too, with a further legislative proposal covering non-ETS sectors due early in 2016.

Second, too much generation capacity. The EC says the EU has around 135% of the generation capacity it needs today. In such an over-supplied market, with power demand at best flat and power prices falling, why do we need to invest in even more conventional plant? (Low prices is the main reason the legacy power industry is so grumpy.) Even after allowing for a decent adequacy margin plus improved interconnections, we need to organise targeted closures before pushing investment in conventional new build.

Ongoing application of the 2010 Industrial Emissions Directive will help to ensure the closure or more sub-standard coal plants (those choosing not to upgrade) particularly if the EC stays firm in the soon-to-be-adopted implementation rules.

Third, shared competences. Under the EU treaties, energy, environment and internal market are all shared competences, which means the power to act is divided among the Union’s institutions on the one hand and national administrations on the other. Europe can only act (make rules) when it makes a good case for doing so. The EC must apply the Treaty’s Article-5 principles (conferral, subsidiarity, proportionality) during the preparation of any pre-legislative Impact Assessment to show that EU action is really justified. This will be the point in the process where abstract theories meets political realities.

Fourth, the 3rd package is OK for now: Those advocating for a fourth electricity directive must say specifically what measures are NOT already provided for in the third directive of 2009. So far none have. All previous electricity directives have provided for flexibility by way of system services such as balancing (short-run) and capacity tendering (long-run). Demand-side measures were introduced explicitly in the 2nd electricity directive 12 years ago (now re-cast as Article 8) and strengthened further by the EED in 2012. The 3rd package does not limit the number and type of EU-wide Network Codes (EC-adopted tertiary rules) that can be adopted. Intra-day cross-border trading, an example cited recently by EC officials, is already being set-up within the framework of the 3rd package. It doesn’t need a 4th.

Internal market rules have always been complemented by competition rules. Those countries and companies cheating under existing common rules are already policed by DG Competition using different legal powers, the best example of which is now the state aid sector inquiry opened by Vestager in April. I often wonder how much COMP, ENER, SG and Cabinets really talk to each other. COMP is doing the most important work but often appears to be acting alone.

Finally, horses for courses: The 3rd electricity and the 2nd renewables directives may have been adopted in the same year (2009) but they are not the same thing. They have different purposes and different legal bases (read the long titles and preambles) and so should not be confused one with the other. While it’s not impossible in the future to merge a 4th electricity law with a 3rd renewables law, we must be clear about what goes in them. Only when we are sure what we want should we venture to legislate on it. In any case, news laws (including amendments to existing laws) needs a reasonable expectation of majorities in both legislative houses, which given the vagueness in EC positions today is far from certain.

I’m not against debate, and I’m not in principle against further harmonisation, rather the opposite. The EC consultations will help more people to see issues more clearly, which will help the EC itself to decide in this mandate on proceeding to a new directive/package or not. Given that “energy union” is said to be for the benefit of consumers, it’s a worry that the electricity part seems so far to have been captured by producers, some benevolent and some not. Let’s hope consumers get a proper look in before this debate about EU electricity is over. ❧

One thought on “Five reasons EC power plan will fail

  1. Dear Mark,

    thanks for this excellent food for thought. Let me add some comments to fuel the discussion:
    1) In my view the EU electricity market is at deep risk of re-nationalisation. You might be right that the full compliance with the 3rd package could result in a functioning market. But this requires strong infringement procedures as well as robust state-aid and competition control. If member states are unwilling – this is not going to happen. Hence, the benefit of new legislation – as I see it – would be to see what member states are actually willing to accept in terms of European electricity market. There are shallow versions with limited distributive effects (and limited benefits) and deep version that bring significant savings but entail a loss of sovereignty.
    2) A minor point: I am not sure whether lower gas imports will indeed reduce our economies total ‘import bill’ and increase the number of jobs in the EU. If this were always true we would be better of trading with other nations.
    3) On generation capacity: it indeed looks as if some decommissioning of conventional capacities makes sense. One question would be, whether we organise this with tools that favour emission and fuel efficient plants (IED) even though some of them would not be the best fit for a high-renewables system which would benefit most from conventional plants with low fixed costs and high flexibility.

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