RAPIDLY rising energy prices are causing pain for businesses and consumers across the European Union. It is harder for industry to compete globally and householders face higher bills for an essential service.
We are into a new paradigm for energy markets: indigenous sources of gas are dwindling, notably in the UK, and markets are becoming global due to shipped liquefied natural gas, as easily delivered to North America as to South Wales.
Yet there is a well-proven way of mitigating the impact of these changes. It is called market liberalisation.
Despite UK wholesale gas prices now being among the world’s highest — up 200 per cent on 2003 — domestic prices from British Gas and its rivals remain among the cheapest in Europe.
This is no coincidence. The UK liberalised its energy markets in the 1990s, with big benefits for all energy-users. New suppliers flooded into the gas market and the component parts of the industry were separated — supply, long-distance transmission pipelines, production and exploration. All this drove out inefficiencies and prices fell. Continental European countries have not followed suit, ignoring EU directives, but have preferred a dangerous cocktail of vertically integrated national champions and monopoly suppliers.
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Change is now on its way, backed by an ever more determined European Commission. But it has taken some stark numbers to ram the message home.
Research by Global Insight has shown that malfunctioning of energy markets on the Continent will cost UK consumers £10 billion more in 2006, by restricting our access to supplies.
Centrica has widened this research to show that the benefits to EU consumers and industry of liberalisation could be £40 billion a year. Given the competitive pressure being put on EU industry by growing industrial regions such as China, that is a huge incentive. Later this week I will be joining the European Commission’s competition directorate for the launch in Brussels of the preliminary findings from their ongoing EU energy sector inquiry.
Given Centrica’s robust stance on promoting competition, we are pleased to support the Commission. The inquiry has unearthed various areas of market malfunctioning.
This comes when member states are starting to realise that the status quo is hurting them. In particular, Germany has seen vocal calls for change from industry, consumers, politicians and civil servants.
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There is a growing recognition that with 60 per cent of the world’s gas in an arc surrounding Europe — from Norway to Algeria — the factors preventing it getting to market efficiently are largely political.
So what changes are needed to allow this gas to flow and for EU-wide competition to begin? The first step to a competitive market is access. New suppliers need capacity on long-distance pipelines and in storage on the same basis as incumbents.
In many countries, that is almost impossible. For example, on key transit routes for Russian gas, all capacity westward to Belgium appears to be taken. Even more seriously, a lack of transparency by the owners means that nobody is sure how much gas is actually flowing, what capacity is left, what is the price paid or what space there is in storage.
We also need a separation of supply businesses from storage, transmission and distribution, together with a proper traded gas market, tough regulation and a robust mechanism to allow customer switching. Those trying to preserve the status quo will argue that competition would threaten security of supply. They are wrong: security of supply is not the same as security of incumbent suppliers.
In the UK, we are witnessing a wave of inward investment in infrastructure to import gas. Over the next five years £10 billion is being invested by 24 players from 11 countries in pipelines, LNG import terminals and storage. That is what happens in a liberalised market.
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It is diversity that brings security, and not entrenched long-term contracts, as the Russia-Ukraine issue has demonstrated and which the German energy market noted with alarm, given its heavy reliance on Russian gas.
This week, the Commission will lay out a tough approach to member states to start driving through the necessary changes. If the EU is not to be a lame duck in the global economy, this must happen. Customers will judge them not on their good intentions, but on their determination to end the closed shop of European energy markets.