The Unnoticed Consolidation of EU Energy The Energy Editorial, September 2009

Overshadowed by the March preparations of the G20 London Summit, the EU reached key compromises in its effort to get its act together on a common energy policy.

The first step was the European Council of the 19th and 20th of March in Brussels, where European heads of state and government, while focusing their attention mainly on the response to the economic crisis and on the European recovery plan, made nevertheless some important decisions for the future shaping of the EU energy policy.

Priority was clearly given to security of energy supply over climate change. Disappointingly, European leaders were unable to agree on a common figure on aid to help developing countries finance their mitigation and adaptation measures for climate change. On the other hand, they launched a process that should consolidate the “secure energy” part of the triangle on which the EU has based its energy policy since 2005: sustainability, competitiveness and secure energy. A chapter of the European recovery plan is devoted to the financing of key energy infrastructure (in particular interconnectors), a clear support has been given to the European Commission"s second strategic review, and the Commission has been asked to come forward with a revision of current legislation on security of gas supply. There is no doubt that this new dynamic is the result of the January gas crisis where Ukraine/Russian tensions led to gas across Ukraine to Europe being cut for ten days. The crisis has focused the minds of the European politicians.

Just a few days after the European Summit, on the 23rd of March, another major breakthrough occurred. A long-awaited deal was finally made on the third energy package (the so-called liberalisation package of the internal electricity and gas markets). Strangely enough this agreement did not attract wide media coverage. The Czech EU Presidency managed to convince the members of the European Parliament in charge of the negotiation of the package to agree to an informal compromise, which is now compatible with the position already taken by the Council of Ministers in November 2008. This makes a final adoption of the various pieces of legislation possible. The Parliament was the last EU institution still having to pronounce itself on the package that has to be passed jointly by the Council and the Parliament under the codecision procedure. In the meantime this compromise has been backed both at the member states" level (with the approval of the national Ambassadors to the EU gathered in COREPER on the 27th) and in the European Parliament energy committee (on the 31st). The next step is the vote of the package by the Parliament in plenary session in Strasbourg in April 21-24. But unless a surprise is in store, the third energy package is now sure to be adopted before the renewal of the European Parliament in June.

The package was blocked so far by the Parliament because of one remaining sticking point: the unbundling of European energy firms such as EDF or E.ON. The Parliament insisted on the need for full ownership unbundling - the separation of the management of generating companies from that of transmission network operators - in order both to increase competition in the EU"s energy market and to provide for security of supply. The European Commission favoured ownership unbundling as well but it offered also in its first draft of the energy package in September 2007 a second option, more likely to be supported by member states: the independent system operator ISO, a separate body to which companies are obliged to hand over the operation of their transmission network while still owning them. The member states remained divided on the issue of unbundling, some backing full ownership unbundling while a coalition of eight countries led by France and Germany stood up for a “third way” to protect their national energy champions: the independent transmission operator ITO, a less complete form of unbundling that preserves integrated supply and transmission companies but compels them to abide by certain rules to ensure these two sections of the company operate independently.

In the final compromise, the Parliament gave way on ownership unbundling in return for concessions in other areas covered by the package, notably the reinforcement of powers and independence of national regulators and of a new community-level agency, as well as new rights for consumers. The compromise gives the member states the possibility to choose between the three options mentioned above, for separating supply and production activities from network operations, both for gas and electricity markets. Thus, the EU institutions have decided not to decide on the much debated (and often theoretical) pros and cons of full ownership unbundling and its presumed impact on security of supply. National governments are let free to implement the version of their choice.

It is definitely a good thing that this heated debate on unbundling is now over. Unbundling is not as crucial as increased investments or improved interconnections for an effective policy on energy security. And it is essential to have some legislative certainty for the much needed investments that remain to be made in gas and electricity infrastructure across the EU.

Some observers will say that the EU caved in in front of national interests and attempts to protect big national energy players. In our opinion, this is not the case. The Commission"s proposal of full ownership unbundling should be compared with a first bet in a very difficult gambling game with national states. The Commission probably never thought that full ownership unbundling could be reached. Its proposal was made to increase the offer of the other players, in particular the national states. With the third energy package, the EU institutions hope to see a “thickening of the Chinese walls” between production and transmission functions (according to MEP Eluned Morgan, rapporteur on the internal electricity market). This is what they believe they have achieved already with the second energy package in 2003, which enforced a functional unbundling, that is to say a separation of the operational activities and management from the transmission and generation activities (with an independent organization and decision-making). But the spirit of the second energy package was never really implemented. So the third energy package will help reach a real functional unbundling and a fourth package will be probably necessary in the future to go past the remaining obstacles to the internal energy market.

The EU is familiar with taking small policy steps in the energy field. This is fine as long as the economic players - the ones that in the end make the European gas and electricity markets work - can rely on stable enough a legislative environment to make their long-term business decisions.