Power Cut?

How the EU Is Pulling the Plug on Electricity Markets

Carlo Stagnaro

• Editorial: London Publishing Partnership
• Año: 2015
• ISBN:
  9780255367189
• Edición: 1

By any measure, the privatisation and liberalisation of the UK energy industry was an enromous success. And yet the public are not convinced. As energy expert Carlo Stagnaro shows in this important book, the re-regulation of the market in the UK, together with policy developed at the EU level, has undermined all the important developments of the 1990s and early 2000s. The result has not only been poorer outcomes in the energy market but a very inefficient approach to reduce carbon dioxide emissions. The EU has also only been partially successful in promoting liberalisation and competition in electricity markets and the time is ripe for change. The author shows how the EU must learn the lessons from the UK's successful recent past – and the UK must re-learn them. Therein lies the route to a competitive energy market that serves the ends of consumers rather than the ends of politicians and other interest groups.

1. Introduction

Electricity is a defining mark – possibly the defining mark – of modern societies. Try a little thought experiment. Imagine that you travel into the past with a time machine. As you step out of it, you do not know into which era you have moved; you are just in the middle of nowhere. You look around. It may be very hard to tell whether you are, for example, in Roman times, or in the Middle Ages. But if you see electric lights everywhere around you, there can be no doubt: you are in the twentieth century or later. The revolution of electricity has been so deep, wide and pervasive that, as economic historian Vaclav Smil (2005: 13) argues:

[T]his was the first advance in nearly 4.5 billion years of the planet’s evolution that led to the generation of cosmically detectable signals of intelligent life on Earth: a new civilisation was born, one based on synergy of scientific advances, technical innovation, aggressive commercialization, and intensifying, and increasingly efficient, conversions of energy.

Electricity is ubiquitous in our societies. And, of course, electricity is the fundamental input of our digital societies: without electricity, there would be no smartphones, computers, internet and so on.

To put it in the most straightforward way, electricity is so simple to use and so widespread – at least in the developed world, but to a growing extent in the developing world too – that we take it for granted. We can survive one or more days if natural gas is cut off, or if it is not possible to find petrol for our cars; perhaps we can even deal with water being cut off for some time. But if electricity were unavailable for a prolonged period of time, we would be nearly paralysed. In fact, the notion that one billion or more people worldwide lack reliable access to electricity is perceived as a serious problem. Energy poverty is one of the main challenges our world must face. Access to reliable, cheap energy is the key to prosperity (Goklany 2007).

The production and delivery of electrical power is, however, complex – and it is especially complex for the consumer to understand its production and delivery. The best definition for it was possibly provided by a non-scientist, singer Ray Charles:

Soul [music] is when you take a song and make it a part of you – a part that’s so true, so real, people think it must have happened to you … It’s like electricity – we don’t really know what it is, do we? But it’s a force that can light a room. Soul is like electricity, like a spirit, a drive, a power.

In a way, this quotation can be reversed: electricity is like soul. A relevant feature of electricity is that it is not a thing – a good that you may or may not own. Electricity is a physical phenomenon, which is due to the flow of electrons (actually, a wave of electrons) through a conductor. Every material is, to some extent, a conductor, but some materials are better than others. In fact, some materials are such bad conductors that we use them for the opposite task – that is, to isolate things from electricity.

Most people, however, are not interested in the physics of electricity. They have never heard of Gustav R. Kirchhoff or Georg Ohm, after whom are named the fundamental laws that govern electricity flow through circuits. People simply want the current to flow when they push a button. And, of course, people want cheap energy that is easily accessible.

Complex supply chains and state monopolies

In order to have cheap, reliable electricity, there has to be a complex supply chain. Each segment of the supply chain requires large investments and very specific know-how. Firstly, electricity must be generated. Primary sources of energy such as coal, oil, natural gas, solar radiation, wind, etc., must be found, and technologies need to be deployed that can transform them into electricity. Then electricity needs to be moved from the place where it is generated to the place where it is to be consumed. Electricity moves through networks, and, given the present state of technology, it cannot be economically stored on a large scale. Transmission networks operate over long distances; distribution networks are designed to deliver electricity to end consumers. There is no difference, in principle, between transmission and distribution infrastructure, except that the former is high voltage and the latter is low voltage. Finally, electricity must be measured (metered) and consumed.

The electricity industry is heavily regulated. In most countries, and for most of the ‘age of electricity’, there has been no market at all for electricity. It has been provided by vertically integrated, state monopolies, only subject to political control rather than to economic incentives – though there are important exceptions to this general rule.

Tackling environmental concerns

Even when and where the monopoly is broken up, regulations still dictate a number of details related to how electricity should be produced, dispatched, consumed and priced. The EU, for example, has promoted a number of environmental policies aimed at reducing carbon emissions. The most relevant of such policies is hugely subsidising renewable energy sources, particularly solar and wind power. The technical and economic problems created by renewables (especially their intermittency) are being addressed in a way that further reduces the scope of competition in power markets. The central thesis of this book is that EU climate policies have jeopardised competitive energy markets. It is also argued that, from a purely environmental point of view, green subsidies are both ineffective and inefficient. Finally, it is argued that the environmental goal of cutting carbon emissions may well be achieved (and to some extent has been achieved) by relying on competitive markets, which may be complemented by technology-neutral environmental policies. Regulations are often badly designed, and, while aiming at a specific target (for example, low prices or high reliability), they result in a number of undesirable consequences, such as scarcity or lower levels of technological innovation (Van den Bergh and Pacces 2010).

Environmental regulations (particularly those relating to decarbonisation) have a major impact on how electricity is generated, exchanged and consumed. Below we examine whether the EU has the most effective and efficient carbon-reduction policies, assuming that such policies are appropriate. We also consider how the EU’s climate policies interact with the (mostly) liberalised framework that has been developed for the electricity industry.

Summary

This book is divided into five parts. The first part considers the theoretical framework that is adopted to analyse the regulation of electricity markets, the impact of regulation on the industry’s organisation and the relevant externalities that regulation is often developed to address. The most important of such externalities is climate change, and the most relevant policies in the EU are those aimed at reducing carbon emissions and promoting renewables and other carbon-free sources of energy.

The second part details the EU legal framework that is related to electricity and climate regulation. It shows that the former has by and large followed the example set by the UK with its policy of privatisation and liberalisation, even though some defining features of that model are missing in the EU directives. As far as climate regulation is concerned, however, the EU has taken a much more interventionist stance, though its aims are not always clear, and environmental goals and policy tools are mixed with old-style ‘industrial policies’.

The third part looks at the interaction of liberalisation ­policies with climate policies, and argues that they inevitably come to contradict one another. This endangers European liberalisation and explains the anti-liberalisation backlash in Great Britain. In other words, if electricity liberalisation is pursued consistently, it will make it harder for the EU to meet its environmental goals through the policy instruments it has adopted. More specifically, EU climate policies have introduced a number of distortions in electricity markets that need to be tackled.

The fourth part looks at those distortions and envisages two possible approaches, which are developed in the fifth part. One approach sets as a priority the maintenance of current environmental policies and implies more government intervention and centralisation of electricity markets. The other, which is market oriented, requires the EU’s environmental policies to be fundamentally revised – even if its goals are not revised. Policies would have to change at the national level too, as many nation states – including the UK – operate policies that are more distortionary than EU climate policies ought to be.

At the time of writing, there are confusing messages both at the EU and national level. On the one hand, there are signs of a shift towards a more market-friendly approach; on the other hand, there are also signs of a governmental backlash. This may be the most crucial time for the future of Europe’s energy policies since the 1980s. Choices that are being made now may be ­irreversible in the short-to-medium run. If market-­oriented policies are implemented, the EU has a chance to develop well-functioning markets that also make it possible to achieve environmental goals. If, on the contrary, the push back to state control prevails, the ghost of the past – when electricity systems were plagued with inefficiencies and risks were socialised – may be back haunting Europe.

PART 1

The Theoretical Framework

The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.

Friedrich Hayek (1988: 76)

2. The climate–energy nexus

Carbon emissions and energy

Most of the energy we consume comes from fossil ­fuels, such as coal, oil and natural gas. For example, the EU’s gross ­inland consumption was as much as 1,665 Mtoe (million tonnes of oil equivalent) in 2013. Of this, 73 per cent came from fossil fuels (Figure 1).

Fossil fuels are used because they are either cheaper or more efficient (or both) compared with alternatives (Epstein 2014; Smil 2010, 2014). Unfortunately, the process of burning fossil fuels generates a number of by-products. Some of these are pollutants, though energy-producing and energy-consuming technologies are regulated in order to maintain such pollutants below the thresholds that are believed to be safe for human health and the environment. Not only regulation, but also – and possibly foremost – market forces promote the adoption of cleaner technologies as they become available (Anderson and Leal 2001).

‘Traditional’ pollutants, such as particulates, NOx and SOx, cause rapid and localised harm: for example, particulates are correlated with serious illnesses, such as lung cancer and an increase in cardiopulmonary mortality. Other by-products act in a more subtle way. ...

Índice

• The author
• Foreword
• Acknowledgment
• Summary
• 1. Introduction
• PART 1
• 2. The climate–energy nexus
• 3. Electricity – from power station to household
• 4. The natural monopoly problem in electricity
• 5. Market clearing and the problem of renewables
• PART 2
• 6. The EU before the ‘liberalisation’ of electricity
• 7. Liberalising electricity markets the British way
• PART 3
• 8. Liberalising electricity markets the EU way
• 9. Environmental regulation: the empire strikes back
• 10. Environmental regulation – achieving carbon reduction at a high cost
• PART 4
• 11. Distortions from subsidies for renewables
• 12. The new world of overcapacity
• 13. Capacity support schemes: the wrong answer
• PART 5
• 14. The EU 2030 climate and energy policy framework: one step forward, one step back
• 15. The way forward: laissez-faire
• 16. Conclusion
• About the IEA