Considering the mysterious gas-like odor permeating Manhattan, New York, and parts of New Jersey, we think it apt to again look at the energy situation. Here we focus on the European Union, where its biggest energy companies face an intensified crackdown by regulators following an inquiry into the sector that has found evidence of severe market failings.

The European Union, the second-largest consumer of energy in the world, after the United States, is also the largest energy importer, looking abroad for just over half the energy it needs.

EU nations generate only 6 percent of their energy from renewable sources and almost all of that is hydropower from dams, according to the European Commission, which wants an agreed target of 15 percent by 2015. Private investment is vital if a to-be-announced energy plan is to gain traction. State subsidies alone are unlikely to meet the challenge of developing alternative energy sources, analysts say, as voters balk at possible tax hikes.

The European Commission envisions biofuels from plants and waste accounting for 8 percent of energy consumption within 10 years — and replacing 20 percent of oil products for road transport by 2020. Intermittent sources such as solar panels and wind turbines remain unreliable, reports The Associated Press, and the public remains jittery about nuclear power stations, which provide about 15 percent of Europe’s electricity and 80 percent in France.

“With current trends and policies, the EU’s energy-import dependence will jump from 50 percent of total energy consumption today to 65 percent in 2030,” the Commission said. By that time, it adds, dependence on gas imports will have increased from 57 percent to 84 percent and oil from 82 percent to 93 percent, making Europe increasingly vulnerable to major oil and gas producers.

Energy in the EU is coming under increasing scrutiny, as Europe’s biggest energy companies face an intensified crackdown by EU regulators following an inquiry into the sector that has found evidence of collusion and other severe market failings.

If there were any doubts that the European Union’s energy market suffers from a lack of competition and negligible cross-border trade in electricity and gas, they are likely to be stunned this week, The Financial Times reported. The European Commission plans to issue a final report inquiring into the energy sector this Wednesday (Jan. 10).

That day, the European Commission is set to unveil measures designed to tackle the current failings — and ensure consumers and businesses can finally reap the rewards of years of efforts to liberalise the market.

To address a number of challenges, the Commission proposes a three-year road map toward a common European energy policy, calling on the European Parliament and on EU leaders to endorse the plan at the forthcoming summit in March. Much attention is certain to focus on whether the Commission will advocate the break-up of Europe’s large, integrated energy groups.

There is a trend for energy companies in Europe to merge. The European Commission is concerned that energy companies are becoming too big and monopolistic. Simultaneously, the Commission is in conflict with Member States, urging them to open up their markets.

A report by EU competition commissioner Neelie Kroes is also said to paint a distinctly gloomy picture of the state of the market. The report is considered crucial because it presents the Commission with the most detailed analysis to date of exactly where things have gone wrong.

The report, a copy of which The Financial Times obtained, identifies a string of problems:

• Market concentration is seen as one of the biggest obstacles. “Gas and electricity markets remain national in scope, and generally maintain the high level of concentration of the [pre-liberalization] period,” the report says. It adds that potential new entrants are dependent on the dominant groups “for services throughout the supply chain,” and suggests that they are often not given fair treatment.

• Competition is also harmed by groups that function both as energy suppliers and as owners of the power grid or other transport infrastructure. “This constitutes a major obstacle to new entry and also threatens security of supply,” the report says, arguing that integrated groups tend not to run their networks in a manner that helps new market entrants.

• Long-term contracts between gas producers and big energy groups stifle competition, because rival companies are unable to obtain sufficient quantities of fuel to challenge the incumbent, the report states. A similar problem exists in the electricity sector, because a small number of groups control the bulk of power stations.

• Access to pipelines and other vital infrastructure is often restricted, thanks again to long-term contracts that were often signed before the EU started liberalizing the sector. The report warns that this problem is mirrored in the power market, where the dearth of inter-connector capacity often leaves new market entrants out in the cold.

• The report also urges greater transparency, for example concerning the availability of pipelines and electricity inter-connectors. Prices in the energy sector must be formed in a “more effective and transparent” manner, the report urges.

Of course, as with everything else that needs to get done in the world, “The big debate is, who is going to pay for it and equally, are people willing to make the modifications that will be needed to do it,” John Loughhead, executive director of the U K Energy Research Center in London, told AP.

In the meantime, the commission wants Europeans to cut back on their energy usage, seeking a 20 percent reduction in consumption by 2020. It recommends some simple steps, such as avoiding use of the standby button on appliances, which, it says, drains away almost 7 percent of Europe’s electricity supply.

Resources:

Financial Times

Associated Press

Finfacts