As the clock continues to tick on the consultation phase of the EU’s ‘Strategic Energy Review’, which is due on January 10th, the debate continues over the degree of liberalisation that should occur within the European internal energy market. Two recent statements set out the continuing positions but also show a wavering on the part of the protectionist camp. In the red corner, Neelie Kroes, EU Competition Commissioner, spoke at an economic forum in Italy on September 2nd and made the Commission’s point very clear:
“Let’s not allow ourselves to be sidetracked by the out-dated rhetoric of protectionism, artificially created national champions may have short-term appeal but this is often to the long-term detriment of European competitiveness and European consumers.”Meanwhile, in the blue corner, Dominique de Villepin pushed his theory of ‘European economic patriotism’ at a speech for the Bertelsmann Foundation on September 22nd, saying that energy mergers should be
“the result of a deliberate industrial policy that is approved by all parties, with due respect to the cultures of each enterprise and each country.”In tone if not in content, this is a clear step down from the man who in February revealed with the Suez-GDF merger an “ambition to create one of the top energy groups in the world”.
Earlier this year, two energy mergers highlighted the debate on liberalisation: France’s controversial marriage of Suez and Gaz de France, which was a shameless attempt to keep out the influence of Italian company ENEL, and Spain’s attempt to merge Gas Natural with Endessa to prevent a takeover bid from German giant E.ON. However now, six months later, the playing field has changed. The Commission has ruled the Spain broke EU law in placing nineteen separate restrictions on the E.ON merger and has required the Spanish National Energy Commission to withdraw them in a ruling that is legally binding in Spanish courts. France, in an effort to get clearance for their much-trumpeted merger, has offered many concessions including the sale and redistribution of many divisions of the two companies that threatened the greatest monopolisation. Whether or not the Commission accepts these is still to be seen, however it is clear that Kroes is determined to enforce energy liberalisation and that the practice of creating national champions is no longer going to be tolerated within the EU.
In order to defend his position on energy in the face of this drive for liberalisation, de Villepin raised the spectre of the Russian bear once again in his speech, defending the merger in principle as a means of reinforcing Europe’s independence from Russian gas imports. He also proposed the creation of an EU High Representative for Energy to give the EU better negotiating clout with Russia on supply in the future. The latter position has already been rebuffed by Jose Manuel Barroso as irrelevant with an EU Commissioner already in existence, but it is interesting the de Villepin has chosen to use the Gazprom threat once again and this gets to the fears that underpin the discussion. His timing is good: Vladimir Putin this week once again rebuffed the idea that Russia would ratify the Energy Charter Treaty in its current guise. Gazprom is making headway in the Caspian Region and has recently ratified its memorandum of cooperation with Algerian State Gas monopoly Sonatrach. Also UK/Dutch giant Royal Dutch-Shell is facing Kremlin resistance over drilling for LNG in its Sakhalin II fields, resistance that derives directly from the Kremlin’s efforts to increase Gazprom’s influence in the project.
It is clear the Russia is not in the mood to be cooperative, although Putin has guaranteed the security of EU supply this winter, but the way to resist the threat of over-dependence isn’t protectionism, on the contrary it is the very liberalisation that de Villepin is so frightened of. In the UK, for example, Gazprom has a clearly stated ambition to own 20% of the UK gas market by 2020, a figure that has raised concerns amongst many commentators. It already owns several small companies and has a stake in Interconnector (UK) Limited that will lead to it supplying gas to the UK once it opens its controversial North European Gas Pipeline. Britain, despite our belief to the contrary, will start using Russian gas and it is entirely possible that Gazprom will succeed in amalgamating the 20% of supply that it is aiming for. But in a British market, access even at this scale doesn’t equate to control. Our supply sources are diverse and will include pipelined gas from the EU, Norway and Russia and LNG from Qatar, Algeria and Malaysia, as well as our own domestic production. We have a liberalised market that means that the three largest national gas suppliers only operate 36% of the market – in France they operate 97%! This low number means higher competition and high supplier switching, both of which resist monopolisation. If Gazprom was to buy Centrica as was feared earlier this year then it would still have very little dominance over our market.
The French model of national champions, whilst it offers some protection, is exclusivist and denies Gazprom any access to the national market, which also denies them any interest in its success. It restricts competition, improvement and customer options. It is hard to imagine consumer groups in the French market being able to advise consumers, as they are in the UK, to avoid being locked into long-term high-price deals at the moment but to be alert for switching in the face of fresh winter gas supplies from Norway. It also ensures that gas prices are not related to supply and demand but are tied to the aggregate price of oil, something that is ensuring the artificially high prices that led to UK shortages last winter and that is leading to the threat of cartelisation between Russian and Algeria to dominate the LNG supply market.
Liberalisation of the internal energy market is the centrepiece of the proposed ‘Energy Plan for Europe’ and it is a real necessity. Liberalisation will improve security of supply, prices, service and transmission and give the internal energy market a chance of success. The steps seen recently are promising but further measures must be taken. This week the laying of the Langaled Pipeline between the UK and Norway will be completed, further diversifying our natural gas supply and ensuring future energy security in coming winters. However if this security is to be guaranteed and secured then not only the UK but France and the rest of Europe must take longer steps along the liberalising path. For as Kroes herself warned about Villepin-esque ‘economic patriotism’
“We should be vigilant – because if a protectionist trend continues or intensifies one thing is certain: all of us here in Europe will suffer.”