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BRUSSELS BATTLES ON WITH INTERNAL MARKET

The European Commission in Brussels is still seeking a formula for creation of a giant Internal Energy Market acceptable to all 15 European Union (EU) member countries. An update of progress in EU countries is included. The outlook for agreement is gloomy and progress frustratingly slow. Moreover, renewables have only a shadowy profile in the ongoing political discussions on deregulation and hardly figure in the recently published White Paper on energy policy.

While the emergence of California's blueprint for deregulation of its electricity market is attracting the interest of the power business around the world, the European Commission in Brussels is bent on a far greater task. After more than four years on the job it is still seeking a formula for creation of a giant Internal Energy Market (IEM) which is acceptable to all fifteen member countries of the European Union (EU). The next Council of Energy Ministers meeting on the dossier takes place on May 7.

The outlook for agreement is gloomy, though. Progress is frustratingly slow, so slow there are now doubts over whether there is any point in continuing discussions. Commission officials, however, are showing dogged, long term commitment. In a recently published White Paper, an Energy Policy for the European Union, the Commission stresses once more that the prime objective for the internal energy market will be "to liberalise the internal market for electricity and natural gas." However, the document sets its sights on future aims still on the horizon, overlooking the haggling between fifteen countries more concerned with protecting their own interests than in long term vision.

Two deregulation models

Meantime, and perhaps surprisingly, a string of individual member countries are making their own way towards free electricity markets (see table page 40), apparently having accepted that competition in the sector must come one day. Four of these -- England and Wales, Sweden, Norway and Finland -- have gone as far as setting up a stock exchange, or bourse as it is known on continental Europe, for trading electricity. Other countries range from those firmly clinging to the starting blocks, to those at various points along the way.

At a European level, two competition models are being discussed -- negotiated Third Party Access (nTPA) and the Single Buyer model. A basic tenet of nTPA is that the owner of a grid is given first priority on the access ladder. Third party users must negotiate to use the grid. They can be barred if the grid owner says no free transmission capacity is available or if the Third Party Access (TPA) leads to an unacceptable impairment of the grid owner's interests. The hitch here is that such claims would be very difficult for a regulatory office or a court to investigate.

Negotiated TPA is sometimes confused with the American open access model, where all competitors have equal access to the grid. This can only be guaranteed when the grid operator is separated from the generation sector. Experts comment that open access offers better potential for a competitive opening of the market. In contrast, nTPA leads to what one commentator has described as an "evolutionary cul-de-sac."

The second model being considered in parallel to nTPA, the Single Buyer approach, is the overwhelming favourite of countries like France which have only one grid company and a highly monopolised electricity sector. The Single Buyer is the operator of the transmission grid. If the grid is part of a vertically integrated utility, then it must be separated from the generation sector. The Single Buyer is also the only purchaser and vendor of electricity in a particular region. Neither end consumers nor distributors have a choice of supplier. New independent generating capacity can either be built following a tender for new power generation from the Single Buyer, or through an independent licensing procedure. Under this model, competition is restricted to the wholesale level and customers have no opportunity for picking and choosing suppliers.

During the Spanish presidency of the Council of Ministers in the second half of 1995, efforts were made by the Spaniards to produce a compromise draft directive combining the two deregulation models. But the Energy Council meeting in December failed to come to any agreement, largely due to differences of opinion between Germany and France on the so-called "distributor issue." France has taken a firm stand against allowing distributor utilities to shop around for power, while Germany and the UK insist distributor utilities must be allowed to compete for retail customers. The French position seems especially esoteric as only 4% of French electricity demand is actually supplied by distributor companies. However, the French position may be influenced by the widespread public sector strikes in the country at the end of last year.

Meantime, several meetings on the draft directive, both formal and informal, have taken place to discuss new proposals from the current Italian presidency. Italian industry minister, Alberto Clo, has suggested a simple, broad approach whereby each country opens a certain percentage of its market to competition. The UK and Germany want this figure set at 40%, while France is prepared to open the market to a threshold of 100 GW customer consumption or about 21% of its market. A further moot point is whether -- and to what extent -- an initial opening of the market should then be widened over time. But here the argument goes full circle, with Germany and Britain favouring retail competition and France digging its heels in and demanding liberalisation stop at the wholesale level.

This impasse has set creative minds to work on finding a solution. The Italians have suggested a safeguard clause to ensure that countries which liberalise beyond the wholesale threshold (thus including distributors) are not threatened with unfair competition from countries still regulating prices. In the ears of free market proponents this sounds all too like the heavily regulated markets most of Europe has today.

A sobering thought for the member countries is that if no progress is made in finding common ground, the increasingly impatient EU Commission could take the matter entirely into its own hands. It has the power to make minor changes to current proposals and then put them before the Energy Council -- a qualified majority could then pass the directive. Alternatively, and perhaps more worrying, article 90, paragraph 3, of the EC Treaty gives the Commission the power to pass its own directive autonomously -- without the participation of the Council of Ministers and the European Parliament. So while the politicians are on the verge of abandoning the whole idea of the IEM, officials in the bowels of Brussels continue to work hard on the paperwork.

The White Paper has three main aims: overall competition, followed by security of supply and environmental protection. However, Energy Commissioner Christos Papoutsis acknowledges that to achieve all the aims, a modification of the Treaty of Rome to include energy would be necessary. During the last Maastricht inter-government conference such a suggestion was roundly rejected.

The White Paper and renewables

The purpose of the White Paper is to provide "an indicative work programme for the Commission for the years ahead." On renewable energies, the work programme mentions just two items: the Altener 2 programme and a market strategy for promotion of renewable energy sources. The strategy is due to be proposed in 1997 in the form of a Commission communication .

For the wind industry it can only be hoped that this communication contains more detail on the promotion of renewables. Submissions by the European Wind Energy Association (EWEA), following the publication of a Green Paper before the White Paper, do not seem to have made any impact on the White Paper.

Among its comments, EWEA requested that consideration be given to the creation of a European renewable energy agency with a broad remit to promote a better understanding of the contribution that renewables can make to clean and sustainable power generation. This was not taken on board. Furthermore, EWEA called for the adoption of a target to use 20% of the total readily exploitable wind potential by the year 2030, representing about 10% of the EU's current electricity demand. This, too, is not reflected in the White Paper which, nevertheless, still sees fit to declare that "in the long term, renewable energies will constitute the main sustainable energy source."

EWEA believes a key to the realisation of wind's potential is the internalisation of external costs which would demonstrate that wind energy is one of the cheapest forms of electricity available. But on this issue the White Paper beats about the bush. It refers to the internalisation of external costs in paragraph 107, saying the idea was widely discussed in another White Paper on growth, competitiveness and employment. The major focus was on changing the balance of taxation from labour to scarce resources and the introduction of a CO2/energy tax. But two paragraphs later the reason for lack of movement on this front becomes clear: "É.it may be difficult for member states to shift their fiscal systems in this direction if other major industrial competitors are not prepared to follow suit. The community needs to play a major role to persuade other energy consuming countries to follow the community's policies in this area."

As a summary of the White Paper's wisdom on renewables, the following paragraph says it all: "The Community will make every effort to realise the potential of renewables by supporting research projects, by stimulating co-operation in the development and the dissemination of new and competitive technologies, by introducing appropriate standards for the various equipment and by establishing a Community framework for national, fiscal and other incentives in order to translate technological advances into marketable products. These concerns will be at the centre of the Community's future strategy for renewables and of the Altener 2 programme. However, in the present market situation these actions will only change substantially the contribution of renewables to the security of supply, due to the size of the investments needed, if both national and Community authorities adopt policies that are able to mobilise effectively significant resources."

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