The IoD's View

Britain has enjoyed the benefits of liberalised energy markets for many years, but the same degree of competition does not exist in the rest of Europe. With growing UK dependence on continental European networks for the delivery of energy supplies, the need for a more competitive European energy market is vital to UK interests. The IoD supports the European Commission's liberalisation objectives, but would like to see more being done to reduce the pervasive use of long-term contracts which hinder free competition. Proposed targets for use of renewable energy sources are unrealistic and potentially damaging to competitiveness by unnecessarily raising the cost of energy.

Key Points

• We support the Commission's objectives of seeking greater liberalisation through 'unbundling' - the separation of energy production from distribution by breaking up suppliers that also manage transmission networks of grids and pipelines. This should boost investment in the transmission networks and help to ensure that energy flows freely throughout Europe according to the demands of the market.
• The Commission has persisted with this 'unbundling' proposal despite strong opposition from several countries, led by France and Germany. an alternative approach is offered to countries that resist full unbundling, allowing energy companies to retain ownership of networks provided that commercial and investment decisions are taken by an Independent System Operator. This weaker option is a poor substitute for full unbundling. But with strict governance arrangements, it is probably better than nothing.
• The Commission intends relying on competition policy as the main tool for acting against the anti-competitive use of long term energy contracts. The IoD is concerned that this approach will prove inadequate, continuing to limit the competitiveness of EU energy markets and preventing the free flow of gas to the UK in response to market price signals.
• The Commission wants to beef up national energy regulators and to reinforce their independence from respective national governments. This is a worthwhile aim which should start to bring the quality of European energy regulation up to high UK standards. a new European agency is to be created to oversee cooperation between network operators and to resolve cross-border issues. We broadly support this as long as it does not entail further increases in bureaucracy and regulation.
• The IoD supports the principle of a pan-European approach to EU energy policy. as its indigenous energy generation declines, the UK is increasingly dependent on imported energy from volatile monopoly suppliers such as Russia and the Middle East. Russia has successfully agreed favourable bilateral deals with several European countries, and the EU may carry more clout bargaining on behalf of Europe as a whole.
• The Commission has proposed an accelerated shift to a low carbon economy, including a binding target for 20% of the EU's total energy needs to be met from renewable sources by 2020 (currently about 7%). For the UK, this means 15% of total energy consumption, which could require as much as 40% of UK electricity generation to come from renewables This is an extremely challenging target, and one that prescribes that a huge chunk of the UK's future electricity generation should come from a relatively high-cost energy source. The UK Government should not sign up to it.