The Europeanization of Electricity Markets. Old Wine in New Bottles. Case Studies: Germany & France

The Europeaniza.on of the Electricity Market.

Old Wine in New Bo=les? -‐ Case Studies: FRANCE & GERMANY -‐

2 December 2010 Course: E-‐1049 Compara6ve Europeaniza6on

Instructor: Prof. Alina Mungiu – Pippidi Researcher: Corina Murafa

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Agenda

I.  The Policy Area at Stake II.  Technicali6es in a Nutshell III.  The Evolu6on of the Policy Area IV.  Research Design/ The Model V.  Case Study Selec6on – Similar Cases VI.  Case Study Selec6on – Different Outcomes VII. Process Tracing VIII.  Assessing Goodness of Fit IX.  Pressure – Actors – Media6ng Factors X.  Conclusion XI.  Cri6que

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WHAT do we talk about?

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Strands in EU Energy Policy

Internal Energy Market (compe66on, liberaliza6on, SEM)

Energy Security ("the pipes")

Low-‐carbon Economy (climate change)

Technicali.es in a Nutshell

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The four magic components of an electricity system are genera.on, transmission distribu.on and retail.

Why does it ma=er?

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The key is unbundling: separate genera.on/ retail from transmission/ distribu.on.

  the process is interdependent and ver6cally integrated   tradi6onally, supply of energy was seen as a state task   historically, energy markets were considered to be natural monopolies: because electricity cannot be stored, its transmission and retail depend on the grid   19th century, early 20th century: ver6cally integrated corpora6ons in US and Europe were given monopoly over a certain geographic area, to manage the en6re value chain   later, it was acknowledged that only transmission (including Transmission System Operator) and distribu6on are natural monopolies (large sunk capital costs)   however, in order for compe66on in genera6on and retail to be effec6ve, companies involved in these area must have indiscriminate access to the grid at fair prices => need for regula6on & unbundling

HOW did it evolve?

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1986: Single

European Act

• Recogni.on of increased economic importance of Energy for the crea.on of the single market

1992: Maastricht Treaty

• EU gains competence to improve cross-‐border energy infrastructure

1996: 1st Package*/ Electricity Direc.ve 1996/92/

EC

• “Management & Accoun/ng unbundling” of supply networks from energy genera.on • Nego.ated OR Regulated Terms of Access OR Single Buyer • 35% of market open by 2003 (whichever segment) • Mechanism for regula.on • Guaranteed right to access exis.ng network (Third Party Access, TPA)

2003: 2nd Package/ Electricity Direc.ve 2003/54/

EC

• “Legal unbundling” • Nego.ated Terms of Access • 100% open by 2007 (ader 2007 – ALL customers to choose supplier freely) • Specific regulator for energy • Fundamental objec.ves: consumer protec.on + security of supply

2005: DG

COMP Inves.ga

.on

• An.trust abuses in ver.cally integrated companies found => Commission becomes even more determined to pursue structural remedy, not isolated ac.ons

2009: 3rd Package/ Electricity Direc.ve 2009/ 72/

EC

• “Ownership unbundling” • Nego.ated Terms of Access • 100% open • Upgraded and harmonized powers for na.onal energy regulators (ACER)

*Obs: Timing of first direc6ves did not coincide for electricity (1996) and gas (1998). Because of geopoli6cal importance of infrastructure, gas was seen as a less likely candidate for liberaliza6on.

Source: Own compila.on (Wallace, Wallace, Pollack, 2005; Von Danwitz, 2006)

For 20 years, the European Commission has been exer.ng the “main push” for the ongoing, incremental process of electricity market liberaliza.on.

Research Design I

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The first step was to select the independent and dependent variables and to think of media.ng factors.

•  EU legisla6on in the electricity

sector

INDEPENDENT VARIABLE

• Primary energy mix • Type of poli6cal system (no of

veto points) • Degree of unioniza6on

• Economic and legisla6ve history in energy markets/ policy

legacies • Economic vulnerability

• Poli6cal ins6tu6onal capacity • Discourse

• Policy preferences • Poli6cal orienta6on of na6onal

governments

MEDIATING FACTORS

•  Degree of liberaliza6on of

na6onal electricity market

DEPENDENT VARIABLE

Source: Own model, by re-‐interpre.ng Borzel, Risse, 2000; van Danwitz, 2006; Schmidt, 2001 for media.ng factors.

Research Design II

LIBERALIZATION • = (def Levi Faur, 2004) promo.on of a market economy via private ownership and compe..ve alloca.on of resources

• Includes policy measures such as priva6za6on, deregula6on, regula6on of compe66on, regula6on for compe66on, establishment of separate and independent regulatory authori6es

EUROPEANIZATION • = (def Cowles, Caporaso, Risse, 2001) emergence and development at the European level of dis.nct structures of governance

• Can take several forms • No competence (e.g. ownership) • Informal (e.g. independent regulator – with Third Package, has changed)

• Intergovernmental (electricity genera6on, transmission and distribu6on – but all are subject to compe66on law)

• Suprana6onal (networks -‐> compe66on)

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Discussing Europeaniza.on in energy/ economic policy implies defini.onal issues, because both variables are mul.dimensional. “Europeaniza.on is a ma=er of degree not only across sectors but also within sectors” (Levi Faur, 2004)

Research Design III

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Bearing in mind defini.onal difficul.es, we defined the null and the alterna.ve hypotheses.

H0: EU liberaliza6on packages in electricity (Direc6ves 1996/ 92/ EC, 2003/54/EC, 2009/72/EC) have no effect on the degree of liberaliza6on of the na6onal electricity market in France and Germany.

H1: : EU liberaliza6on packages in electricity (Direc6ves 1996/ 92/ EC, 2003/54/EC, 2009/72/EC) determine the degree of liberaliza6on and deregula6on of the na6onal electricity market in France and Germany.

Case Study Selec.on I

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We chose similar cases…

FRANCE GERMANY

con6nental European     founding EU member     comparable GDP/ capita (current US$)

41,051 (2009) 40,873 (2009)

comparable demographics 65,447,374 people (2010)

81,757,600 people (2010)

EURO as currency     Large electricity consump6on

2nd rank (in OECD countries)

1st rank (in OECD countries)

Number of votes in the EU Council

29 29

Case Study Selec.on II

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… with (most?) different outcomes

CRITERION

FRANCE GERMANY

SOURCE

COMPETITION (in general)

Propor6on of market open to compe66on

100% 100% European Commission 2010 Benchmarking

Consumer switching rates 15% (large business), 0% (household)

41% (large business), 7% (small business), 5% (household)

IEA Germany Report 2006

HHI Concentra6on Index Obs: 1800 – 5000 highly concentrated; > 5000 very highly concentrated

6960 (2007) 2008 (2008) European Commission 2010 Benchmarking

COMPETITION (in genera.on)

Number of companies with more than 5 % share of genera6on capacity

1 4 European Commission 2010 Benchmarking

Share of 3 biggest companies (by capacity)

93 (just EDF) 84.7 European Commission 2010 Benchmarking


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CRITERION

FRANCE GERMANY

SOURCE

LIBERALIZATION IN TRANSMISSION AND DISTRIBUTION

Number of transmission system operators (TSOs)


Public ownership of TSO 84.66% 0% European Commission 2010 Benchmarking

Number of TSOs ownership unbundled


Number of distribu6on system operators (DSOs)


Number of DSOs legally unbundled (none OU)



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Criterion

FRANCE GERMANY

Source

COMPETITION (in retail)

Number of na6onwide suppliers 161 (but 1, EDF > 90% market share)

1042 (but 3 have 43% market share))

Eurostat Panorama of Energy 2009

Companies with market share over 5% in the whole retail market


Market share of three largest companies in whole retail market

96% 52% European Commission 2010 Benchmarking


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Criterion

FRANCE GERMANY

Source

LIBERALIZATION OF PRICES

Electricity prices for household consumers (2009)

10th place in EU27 (from cheapest to most expensive)


Eurostat

Electricity prices for industrial consumers (2009)


21st place in EU27 (from cheapest to most expensive)

Eurostat

Regulated end-‐user tariffs YES (in all segments) – FOR 29 million households

NO ERGEG 2010

REGULATOR INDEPENDENCE

Independent regulator Yes, but governments approves/ rejects prices set up by regulator

Yes, since 2006 (last EU member state to implement this)

Various

(DIS)similar Outcome

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A summary of outcome comparison arguably indicates that France and Germany ended up with dissimilar outcomes in terms of figures, but more inves.ga.on is needed.

• Propor6on of market open to compe66on (compe66on in theory) • Liberaliza6on of transmission and distribu6on (same low level of unbundling)

SIMILAR OUTCOME

• Consumer switching rates (compe66on in prac6ce) • HHI Concentra6on Index (France – 3 6mes higher than Germany) • Liberaliza6on of transmission and distribu6on (4 TSOs in Germany, 1 in France) • Compe66on in retail • Liberaliza6on of prices • Independence of regulator

DIFFERENT OUTCOME

• Compe66on in genera6on (1st largest 93% market share in France, 3 largest 84% market share in Germany)

HARD TO TELL

Process Tracing France

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Answering to the domes.c rise and fall of EDF and to pressures in internal EU nego.a.ons, France grudgingly went from a fully na.onalized centralized industry to incremental opening. S.ll, “public service” remains the mantra.

1946

• Na6onaliza6on of electricity supply => Electricite de France (EDF)

1989

• French – German joint communique at EU Summit (against third party access, for free transit of electricity, as long as controlled by u6li6es)

1990s

• energy should be exempt from compe66on (“service of general economic interest”)

• Later, EDF decides to export electricity => it lobbies for liberaliza6on

mid-‐1990s

• EDF starts to fear liberaliza6on) • Labour union CGT within EDF is very strong

1995

• French officials at EU realize pressure is very strong • Industrial consumers –upset at EDF (UNIDEN)

1996

• Dilluted French-‐German deal struck

2000 – 2007

• Gradual opening to choose supplier (first industrial, then domes6c consumers)

2005

• From 100% na6onal ownership, French government s6ll owns 84.8% of EDF (opening of EDF capital)

2006

• significant progress (genera6on and retail fully open to compe66on) •  compe66on is limited (regulated end-‐user pricing and dominant role of incumbent u6lity)

2005 – 2006

• Unbundling of transmission and distribu6on (just accoun6ng and legal)

2009

• poli6cians anathema6zed ownership unbundling as “forced priva6za6on” • Non-‐cost reflec6ve regulated prices and market prices coexist; heavy subsidy for industrial consumers persists (TARTAM)

Process Tracing Germany

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Liberalizing more than EU direc.ves demanded, Germany maintained its corpora.st tradi.on, regional carteliza.on and decentralized market.

1935

• German Law on Energy Industry • Private/ mixed u6li6es exclusive franchise

1940 – 1990s

• In return to exemp6on from compe66on, all suppliers must guarantee access and supply • Three-‐6er structure • TSOs (9, now, aser takeovers, 4) • Regional electricity suppliers • Local suppliers

1989

• Joint French – German communique against liberaliza6on

1993 – 1996

• During nego6a6ons, federal government actors and na6onal industries use EU drive to push liberaliza6on • Major turnaround in domes6c interest coali6ons (Min of Econ in favour, local authori6es and u6li6es against)

1996

• 1st Direc6ve: Germany is the only country that opts for nego6ated access => agreement of branches

• Dilluted French-‐German deal

1998

• Liberaliza6on is completed • No end user price regula6on

2005

• Last EU member to install energy regulators (TPA replaced nego6ated access)

2005 – 2006

• Unbundling of transmission and distribu6on (just accoun6ng and legal)

• Very, very slowly “The Big Four” lose 6ny percentages of market dominance in all segments

2006

• Regulator orders Big Four to reduce their grid access fees

2006 – 2009

• Con6nuous fight Bundeskartelamt – u6lity companies on cross-‐ownership

2009

• poli6cians anathema6zed OU as “forced expropria6on” (privately owned energy sector + cons6tu6onally guaranteed property rights)

Ini.al goodness of fit

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Though in totally different direc.ons, both France and Germany display very high original misfit.

Policy Misd

Poli.cs/ Polity Misfit

Costs Index of overall misfit

The Model (acc. Falkner)…

… and its applica.on

France Germany

Policy misfit (Centralized, na6onal monopoly) +++

(decentralized, private monopolies) ++

Poli.cs/ polity misfit

Public service obliga6on +++

Private property sanc6ty ++

Costs +++ +++

TOTAL +++++++++ +++++++

The pressure

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The liberaliza.on of the internal energy market involves low constraints.

1.   What mechanism of Europeaniza.on are we talking about?

NEGATIVE INTEGRATION (Knill, Lehmkuhl) -‐ the EU demands removal of obstacles, not “posi6ve” addi6ons -‐ internal market-‐making policy (condi6ons for market access and opera6on) -‐ the direct ins6tu6onal impact of nega6ve integra6on is limited (redistribu6on of powers and resources btw domes6c actors, challenging exis6ng equilibria) less demanding requirement

2. How strong is it? (Levi Faur, Wallace, Schmidt)

-‐  Ownership remains untouched (EU doesn’t dictate priva6za6on) -‐  In contract to other economic policies (e.g.: EMU), decision rules are less

specified -‐  Other fundamentals also remain untouched

Treaty of Lisbon – EU Energy Policy shall: a) ensure func6oning of the internal market; b) ensure security of supply in the Union; c) promote energy efficiency […] and renewables […]; d) promote interconnec6on of networks. HOWEVER, “such measures shall not affect a Member State’s right to determine the condi6ons for exploi6ng its resource, its choice btw different energy sources, and the general structure of its energy supply.”

The actors

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The missionary impetus for liberaliza.on of the Commission clashes with dirigiste France and corpora.st Germany, i.e. EU’s largest, most powerful member states.

Other media.ng factors

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Energy mix clearly goes against liberaliza.on in France, while poli.cal system in Germany favours differen.al empowerment. Other factors are less clear.

MEDIATING FACTORS FRANCE GERMANY

Primary domes6c energy mix 85% nuclear, 13% renewables The nuclear rent

No nuclear rent 42% ff, 30% nuclear, 10% RE, 11% gas

Type of poli6cal system Centralized, dominated by execu6ve

Decentralized, federal -‐> many veto points

Unioniza6on (ILO) 33% 19%

Economic and legisla6ve history in energy markets

Public service – see process tracing

Early priva6za6on (cartel) – see process tracing

Economic vulnerability low low

Poli6cal ins6tu6onal capacity EDF as player; high high

Discourse and preferences Against, though some actors empowered

Against, from a different stance

Poli6cal orienta6on of government since 1990

R – L – R R – L – R

Overall…

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… when it comes to energy and “big players”, it is very difficult to dis.nguish the chicken from the egg in the Europeaniza.on cycle.

Internal market in energy has followed a very 6mid incremental pace of liberaliza6on, being driven by the Commission (as champion) going mainly against Germany and France (surprise, our case studies). Both countries display high original misfit (though from totally different direc6ons), and in the end they very gradually get entangled in the game, while trying to dillute it.

“European policies have tended to follow na6onal policy changes as much as lead them, with na6onal policies having shaped those of the EU as oRen as EU policies have shaped those of its member states. Na6onal economy policy adjustments

remains na6onally specific and path-‐dependent”. (Vivien Schmidt, 2001)

Cri.que

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Applying the logic of Europeaniza.on to old EU member states is difficult.

1)  It’s all about original goodness of fit!

2)  When it comes to economic liberaliza6on, it’s not about the EU!

Levi Faur, 2004: Introduces varia6on in the tradi6onal Europeaniza6on model (non-‐EU member states as comparators) and demonstrates that major features of liberaliza6on would have been diffused to most if not all member states even in the absence of the European Commission/ EU-‐level intergovernmental commitment to liberalize. Policy-‐emula6on without EU mechanism. Global pazerns of delega6on and deregula6on.

3) Within the same policy area, various degrees and mechanisms of convergence/ divergence in various areas.

Borzel, Risse – both redistribu6on logic (e.g.: Germany), and socializa6on and learning (e.g.: France giving up). Patching up but also patched-‐up model?

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The Europeanization of Electricity Markets. Old Wine in New Bottles. Case Studies: Germany & France

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