Some notes about Europe

The European Energy Union is a great idea. What is there not to like about connecting up Europe’s fragmented electricity and gas networks? Interconnection brings security and it brings competition. Prices converge, portfolios of spare plant can be reduced and external suppliers – like Russia – have much less monopoly power over individual European countries. If there was ever a sensible Europe-wide economic policy, the European Energy Union is it.

Ambitious plans are however only a necessary condition. At least the opportunity has been recognised. But its altogether another matter to implement, especially when energy plays such a key feature in national politics and in the corporate sector. Energy is plagued with lobbyists and interests which have held the promise of the internal energy market back for over a quarter of a century.

These national constraints can be seen in two big power plays at the moment. The first is the Nord Stream 2 pipeline. Companies have been lining up with German politicians to promote this. Yet the key facts are not in dispute: the excess capacity created by the pipeline is enormous. It simply is not needed now or for some time to come. So why do it? There are several overlapping reasons and interests. The Russians see pipelines as political weapons – in this case aimed at Ukraine and the other former Eastern European countries occupied by the Soviet Union. The pipeline weakens the Ukrainian government, and keeps it vulnerable to Russia. That is Putin’s clear aim – to get Ukraine back in his sphere of influence, and keep it away from the EU and NATO. It exposes Poland too, and helps Putin pressurise Slovakia and Hungary. The companies see the pipeline as part of their priority access to Gazprom, and their often “special” relationships with Russia.

The second big power play is over the design of the capacity markets, and the scramble by a number of countries to re-establish central buyers – led by Britain. Common rules for market design are being overtaken by events on the ground. The coming of zero marginal cost renewables has changed the role of wholesale markets, and with them the electricity and gas industrial landscape.

These are not the only challenges, but both need to be overcome if Europe is to realise the great economic advantages of a truly single internal energy market.

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