The liberalisation of the energy market's primarily aim is a fully competitive market offering low energy prices to consumers. Climate policy primarily aims at the reduction of emissions. Energy security can be interpreted as basically a reduction in, and a diversification of, energy imports and the strengthening of domestic energy sources – ensuring the existence of a broad mix of energy sources. Renewable energy can increase energy security, can lower emissions and will undoubtedly become increasingly competitive.
The progress of liberalisation is not however uniform across Europe. In Germany, the market was only liberalised in 1999, whereas the markets in Norway, Sweden and the United Kingdom had already been completely opened up by then. Austria and Denmark have liberalised their electricity markets almost completely as well (see Table 1) while Spain, France and Italy and many Eastern European countries only opened up their markets much later, many only in 2007.
In most European countries a few large companies dominate the market, only in the UK and Scandinavia has a satisfactory level of competition been established. There are several reasons for this. One element of interest here is that in most European countries a few large suppliers dominate while the impulse for domestic market protection remains strong. The lack of sufficient infrastructural support can also be an important limiting issue here.
This unequal distribution of full energy market liberalisation across Europe involves some significant competition distortions – some utility companies already face robust competition while others can continue operating in a monopolistic position.
Since utility companies have to compete with each other after the opening of the market, providers need to alter their behaviour in order to survive. In Germany, for example, utility companies reacted very dynamically to the liberalisation of the electricity market in 1999 particularly through firm mergers and other forms of strategic behaviour.
A rise in the market share of certain producers in some countries where competition is limited may however produce a rather uncompetitive market structure thus increasing rather than reducing electricity tariffs. Whether an electricity supplier is able to adjust its strategies in the electricity sector depends on the market situation and in particular on the dominant market conditions. Thus the market entry conditions at the different levels of the current market (production, trade (and selling) play a crucial role.
Furthermore, electricity trading options can offer additional incentives to the practice of market power, unless uniform price structuring for tradeable electricity is created. In Germany until 2006, federal agreements regulated prices in the energy sector. However, it has been observed in the past that due to strategic market behaviour, the market entry of providers with third-party access to surplus electricity was delayed or refused. A regulatory authority now observes these effects and regulates prices.
In its benchmark reports, the European Commission stresses that competition distortions and market power can arise through utilities' strategic behaviour, such as charging net access fees which are too high, thus obstructing the entry of new providers. The different degrees of market opening diminish consumer choice. Therefore, future European electricity policy will try to tackle market distortions and harmonise the market opening processes in all European countries.
European climate policy is dominated by two main challenges: the European emissions trading system and policies designed to increase the use of renewable energy. Europe has reacted to the challenges of climate change by establishing an EU-wide emissions trading system. The idea of emissions trading is very clear, namely, to reach the overall target for emissions at minimal economic cost. However, the success of such a system depends, significantly, on its design, organisation and monitoring process.
The European Union some time ago issued a white paper to support the increased use of renewable energy for electricity production.1 The share of renewable energy in electricity production in Europe should, they claim, reach 12% by 2010 while individual European countries have already committed themselves to meeting concrete targets for the contribution of renewable energy by 2010.
The contribution of each European country to the 20% renewable energy target by 2020 is however still under negotiation. In order to reach these targets the various countries will apply different policy tools.
Belgium, Spain, France and Portugal support a 'feed-in' tariff (similar to that used in Germany) to compensate for the higher costs of electricity production from renewables.
Other countries, such as Finland, the Netherlands and Sweden, support tax breaks to provide incentives for electricity production from renewable resources.
A quota system regulates the share of renewable energy in electricity produc-tion; licences can be traded in a similar way to the emissions trading system. Such a system is favoured by Austria, Italy and the UK.
Germany has implemented a renewable energy law (EEG),2 which specifies the share of renewable energy and supports electricity production from renewable energy through concrete 'feed-in' tariffs. The share of renewable energy in electricity production should be increased by 20% by 2020 and by 50% by 2050.
There is still a long way to go however before a fully competitive energy market is created in Europe and the various emissions reduction and renewable energy goals are met. Full liberalisation may lead to an unbundling of the ownership of nets and energy. Such an unbundling could however increase the insecurities of energy supply and power and infrastructure investments may be either postponed or delayed unless a concrete regulatory structure is guaranteed.
Current climate policy demands CO2-free energy production. A higher share of renewable energy will reduce emissions but this demands a significant financial and compensation effort. The emergence of this new policy and regulatory 'architecture' in the energy field will however have a significant effect on European utility companies. In consequence, only those utilities which can produce electricity with cost-efficient and environmentally friendly technologies will, ultimately, gain comparative market advantage.
Strategic market actors, especially promoted by individual domestic energy policy measures, can contradict not only the liberalisation and competition goal but also influence climate targets negatively. Because of this, all European countries should seek to implement the same goals and avoid market distortions. The main goal should be a unified European energy market without market distortions and a harmonisation of the various goals and measures forwarded in this context.
1 See European Commission (1997).
2 The law supporting renewable energy of March
2000: Gesetz für den Vorrang Erneuerbarer
Energien (Erneuerbare Energien-Gesetz-EEG).
By Prof. Dr. Claudia Kemfert Director of the energy department at the German Institute for Economic Research (DIW) and Professor of energy economics at Humboldt University Berlin.