How energy subsidies are teaching the EU an invaluable lesson in competition

Diego Zuluaga
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Government policy has distorted European energy markets (Source: Getty)
Of all the functions performed by the EU, competition policy is arguably the most important – and where it could stand to do the most good. Unfortunately, many of the Commission’s attempts at trust-busting have been misguided. Last month, for instance, its authorities issued formal charges against Google. And last week, we found out that it may be significantly widening its unnecessary and potentially damaging probe into the digital economy.

For energy markets, there is no let up from state intervention. A 2014 report for the European Commission estimated that the total cost of interventions at national and EU level at €120bn – and that excludes transport subsidies.

But on 29 April, the Commission set its sights on a truly harmful and anti-competitive energy practice. The head of the EU’s competition watchdog launched an inquiry into public subsidies for energy utilities. This will look at governments’ use of capacity mechanisms, which aim to ensure adequate supply of electricity at peak times. In operation or under consideration in many EU countries already, including the UK, these can range from subsidising new power plants to paying to maintain idle capacity when demand outstrips regular supply. And on the demand side, such mechanisms might offer financial incentives to consumers, encouraging them to use less energy at peak times.

At first sight, the need for such state intervention looks necessary: it is claimed that market forces cannot bring about sufficient supply to customers at all times and in all circumstances, so governments must step in. Yet it quickly becomes apparent that the heavy hand of the state actually lies at the heart of the problem.

Hefty renewables subsidies (as in Spain and Italy) have encouraged the growth of intermittent energy sources like wind and solar energy. Strict emissions targets and air quality regulations have made some (especially coal-fired) thermal plants unviable. And in Germany, the phasing out of nuclear plants poses a considerable challenge to its electricity production.

In countless ways, government policy has distorted European energy markets and raised the cost of providing electricity in exceptional circumstances. That’s why the need for capacity mechanisms arises. State intervention begets yet more state intervention.

Fortunately, EU state aid rules do limit these measures to the purpose of emergency supply. And they must meet strict conditions: they cannot unduly distort energy markets, and they must tackle the problem in the most economically efficient way. And mechanisms that would constitute a barrier to cross-border energy trade, or undermine competition in the sector, are discouraged.

These kinds of considerations are critical, because member states may use capacity mechanisms to favour certain providers at the expense of others, and even to shield domestic energy producers from competition. Capacity schemes might also hinder competition by artificially sustaining less efficient providers. And crucially, they could form a barrier to market integration in the energy sector, hampering efficiency and increasing costs for consumers.

The inquiry is an opportunity to tackle energy protectionism in member states – and remove barriers to pan-EU trade that make electricity more expensive and endanger the security of supply. State aid considerations are just one among many factors driving EU energy policy (environmental targets being another notable one), so it’s likely that members will be given more leeway than the rules imply. But the Commission’s impulse to question the reasoning behind state intervention into national energy markets should be welcomed.

As Carlo Stagnaro convincingly argues in a recent EpiCenter briefing, capacity problems are best tackled by letting prices fluctuate and making energy providers responsible for intermittent supply. To the extent that support schemes are used, they should be technology neutral, and driven by market forces to ensure efficiency. Finally, efforts to boost security of supply and reduce emissions must be accompanied by greater liberalisation, which is painfully lacking in many energy markets across the EU.

Open markets and free trade must be at the heart of any attempt to integrate European energy markets. That is the kind of competition policy the EU needs.

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