leader on energy policy

European energy

Do you want Putin's paw on the pipe?

Jan 11th 2007
From The Economist print edition

The row with Russia shows how much Europe needs to liberalise its energy markets

Peter Shrank

ENERGY is so important that it must be treated differently. That is the easy and seductive argument of Europe's “national champions”—firms like E.ON of Germany and EDF of France. Only vertically integrated monopolies, they argue, can guarantee secure supply, by investing enough in local grids and capacity, and by using their might to strike advantageous long-term deals with powerful outside suppliers, like Russia.

The European Commission, rightly, sees this argument as not just self-serving but dangerous. Energy monopolies and cartels do not like deep, liquid markets that turn energy into a commodity. They like energy islands, which allow them to extract premium prices from consumers. So they do not invest in the vital interconnectors that allow energy to flow from places where it is cheap and plentiful to where it is costly and scarce. That's why it is so hard for gas-poor Germany to import from the neighbouring, gas-rich Netherlands.

Worse, the supposedly secure long-term deals negotiated by the national champions have proved flimsy. Germany, particularly under its previous left-wing government, cultivated embarrassingly close ties with Vladimir Putin's Russia in the name of energy security. But this did not stop the Kremlin casually cutting off oil supplies to Germany (and other European countries) this week as it tried to bring its errant satellite of Belarus to heel in a row over pipeline transit costs (see article). Last winter in a spat with Ukraine it cut the gas off.

Waiting for the lights to come on

Russia likes to say that it is a reliable partner—and the dispute with Belarus was soon over—but Moscow is reliable only when it wants to be. A combination of political shenanigans and a looming shortage of gas (because of bad management and under-investment) hardly makes Russia look like a dependable partner, especially if you care about consumers, not producers. Cosy deals with Russian energy giants such as Gazprom may suit their Western counterparts; but such murky, inflexible arrangements are bad for customers.

That is why the second leg of the commission's energy strategy, a strategic review also unveiled this week, is so important. It wants to use EU money and political clout to build interconnecting pipelines and power lines, such as electricity hook-ups between Germany, Poland and Lithuania and between France and Spain.

Even more importantly, the commission underlines the need for diversity of supply. One important new route is the Nabucco pipeline which aims to connect Europe with gasfields in the Middle East, Caucasus and Central Asia via the Balkans and Turkey. That bypasses Russia altogether, greatly strengthening Europe's bargaining position, regardless of how much gas it actually carries. Similarly, Europe needs to build more terminals for the import of liquefied natural gas (LNG).

The best way of achieving this is to have a competitive, liberalised market. It is no coincidence that Britain, which has gone furthest in this respect, has the most diverse supply, the strongest infrastructure (including new LNG terminals) and—over the past decade—the lowest prices.

Still, taking on the national energy champions is a formidable task. They represent some of the most powerful interests in the EU's largest countries. They are a rich source of sinecures and other comfort for the political classes. The appointment of a former German chancellor, immediately after leaving office, to the lucrative chairmanship of a Russian-German energy firm would have seemed fancifully scandalous until recently, when it happened. Gerhard Schröder heads the firm building a new undersea gas pipeline linking Russia to Germany.

The commission, to its credit, is pushing for the national champions to be broken up (see article), although it has given them an escape route: they can stay in one piece if they hive off the management of the grid to a third party. That looks a poor second best, because the giants would still own the transmission system, but it is better than nothing. The crucial test would be whether these new “independently managed” arms moved to build interconnectors. That would not just help secure supply for their hapless consumers; it would be a sign that the big utilities are prepared to compete with each other. There is a powerful disincentive for them to invade each other's islands at the moment, because the invader has to queue up to use the incumbent's transmission networks.

When EU ministers consider the commission's proposals in March, they should remember that energy is indeed important and that governments should indeed treat it differently. But that difference should be in using the state's armoury of powers to take on their own champions, not stifling competition in the name of a bogus security. Otherwise, you had better trust Mr Putin.

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