The EU's energy policy is the worst ever

Throughout the 1990s, the EU developed an ambition to create an internal market for energy in the same way as it did for the internal market for goods and services. The hypothesis was that the energy sector could be organized and managed like any other market, that competition would over time lead to a better-managed system at lower prices, and that cross-border competition would equalize price differentials as a result. It didn't work out that way.

Previously, all countries had complete control over the energy system, and the systems were very different. The common internal energy market requires the transfer of a significant amount of power from member states to Brussels to create common rules and framework conditions, as is the case in other parts of the internal market.

To create competition, it was necessary to distinguish between grid monopolies and the energy market. State aid rules and competition legislation were implemented, a common securities regime and rules for the operation of international communications were created – and, in general, a comprehensive regulatory (and bureaucratic) system was built that was justified by the fact that competition would create significant efficiency gains.

The power law is used as a model

The EU energy market used the Norwegian Energy Act as a model. Our repair was a stroke of genius to the nearly completed hydroelectric power system. The kilowatt-hour price governed short-term operational improvement and served as an investment signal for new capacities.

It has been shown to work well in hydroelectric system, but wrong for thermal systems. Such systems also need a price or market (capacity) that rewards investment in new capabilities. Therefore, in practice, EU member states applied for exemptions from regulations to create such markets, the central network company purchased spare capacity or subsidies or minimum guaranteed prices to investors were used for new investments.

On climate, the European Union has taken a global leadership role. Climate targets assume that the market does not determine the choice of technology or capacity in new energy generation. State aid rules have received a number of exceptions, so that member states can control technology choices and investments in new capabilities.

The EU's climate policy beats the Norwegian model

In fact, the EU's climate policy meant that the Norwegian market model was not possible. The market cannot determine the extent of investment in new capabilities, neither the timing nor the technology. It was necessary at the same time to invest in production technologies with completely different unit costs. With climate ambitions, the instruments that were supposed to create a common internal energy market, where new wind or nuclear power plants in one country compete with new capacity in others, have disappeared.

The energy crisis of 2022 has started a discussion about more fundamental changes in market design. Unfortunately, this ended in completely insignificant amendments to existing regulations. These matters have been dealt with in EU bodies until 2023. The important thing that happened last year was not this, but exceptions to the principles contained in the regulatory system, also when it comes to price for end users.

Energy prices have become a threat

High energy prices have become a threat to energy-intensive industries. In Germany, downsizing and relocation to the USA and China began in large companies such as Basf. France's scheme to provide cheap electricity to industry was an exceptional scheme in the EU that will run until 2025.

A deep dispute has arisen between Germany and France over which exemption arrangements from EU regulations should be allowed. Germany wanted to support industry prices, and France wanted to link prices to the costs of nuclear energy.

The committee eventually accepted both. It remains to be seen how this will be designed in both countries.

The internal energy market with competition between energy producers on equal terms between countries is eliminated because climate policy dictates the management of investments in production. Competitiveness means decoupling end-user prices from the marginal cost of production. Return is an exchange between countries that helps improve processes (the so-called “merit system”).

The main cost problem in the European Union

It seems as if the EU is moving towards a system similar to the one we had in the Nordic countries before the energy law. Countries build their own systems with different costs and technologies, and during operating hours imbalances in the systems are exchanged between countries.

Although fundamental changes occurred in the opposite direction to the vision of an internal energy market with equal competition across national borders, the comprehensive set of instruments and regulations that were essential for a market-driven system was retained.

The international cost problem the EU faces in relation to China and the United States has two components: its global leadership role in climate policy means that the costs of transition are greater and come earlier and in the learning curve for new technology than competitors, and it has maintained a cost-intensive organization created for a market-driven system. .

Choose the worst solution

In the USA and Japan, sector regulation may be more adapted to the needs of rebuilding the sector to achieve climate goals. Their costs, as well as return regulation systems, are adjusted so that authorities manage investments and tariffs are controlled by average costs.

Doing the same thing within a regulatory system aiming to achieve a completely different goal (a common market and equal competition) is complex, bureaucratic and expensive. Crises can be created by complexity.

On the one hand, the EU chose the worst solution of all: creating a comprehensive regulatory system justified by cost savings from competition, but which eliminated competition. Climate and competitiveness are achieved through complex exemption provisions and detailed regulation.