The European Commission’s proposed reform of the electricity market would be a sticking plaster for a failing system.
The energy-price crisis in 2022 highlighted structural shortcomings in the European Union energy system—beyond our fatal dependence on largely imported fossil fuels. Last June, the European Commission president, Ursula von der Leyen, announcing a ‘huge reform’, said: ‘This market system does not work anymore.’ Several EU member states have echoed such opinions.
The commission’s draft proposal to reform the EU’s electricity market, issued last month, however falls far short of such promise. While measures aimed at vulnerable households—such as a ban on disconnections—are commendable, it will likely only serve as a temporary fix for an ailing market. Rather than addressing the underlying issues and systemic challenges, the proposal risks offering only a sticking plaster.
The European Federation of Public Service Unions (EPSU) has consistently argued that energy liberalisation has been a failure. Market liberalisation has been based on two misconceptions: the belief that unregulated markets are inherently superior to planned systems and the notion that a critical public service such as electricity can be effectively delivered solely via market mechanisms.
Front and centre
Energy efficiency should be front and centre in our efforts to decarbonise our economies and support households. From a consumer’s perspective, however, there is a structural imbalance in supply and demand measures. Large generation companies can take a long-term view of investment, which they can afford to amortise over the lifetime of a plant—usually 30 years or more. By contrast, households, especially vulnerable ones, often do not have the means to pay for attractive energy-efficiency measures and in many cases remain trapped in decrepit housing.
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A philosophy of ‘least-cost planning’ would put demand and supply measures on an equal footing. That planning should be carried out by publicly owned energy providers with the mandate, and the capacity, to roll out energy-efficiency improvements to homes, significantly reducing bills. Such public companies would also be able to set energy prices to optimise affordability for households, rather than maximising profits for shareholders.
Public energy providers so mandated would do much more to support households than retail competition. In fact, when providers go bust in times of crises, households suffer additional costs, directly or through their taxes as governments have to step in. The Trades Union Congress published a report last year showing that in the United Kingdom the cost of bailouts of energy retail companies, amounting to £2.7 billion, was close to the estimated price tag for taking the big five energy retail firms (back) into public ownership (£2.85 billion).
Shielded from markets
Nor has the expansion of renewable energy sources (RES), such as wind and solar, been a consequence of liberalisation. On the contrary, RES projects have largely developed in domains shielded from market forces, whether via state aid or alternative mechanisms, such as feed-in tariffs or contracts for difference (CfD).
This is due to the cost structure of RES, which entails significant upfront investment yet relatively low operating costs, making investment inherently risky. This structural problem is most evident in the under-investment in wind energy. Despite increased ambition regarding the share of RES in final energy consumption under the RePower EU plan, last year investment in wind dropped to its lowest since 2009—reflected in nine leaders from near the North Sea meeting in a summit on wind yesterday in Ostend, also attended by von der Leyen.
The slowdown in RES deployment and the uncontrolled price spikes of 2022 are unacceptable. As a consequence, the future energy market may be dominated by non-market prices set by government, reflected in the strengthened role of CfDs in the commission’s reform proposals.
Instead of just patching a failing market, however, we should acknowledge that energy, as a public good, cannot be left solely to market forces. One option is to establish a publicly owned, single-buyer entity which would purchase energy from producers through long-term power agreements, allowing a planned approach to the energy transition and stable prices for consumers.
The first EU electricity directive in 1996 (96/92/EC) allowed for the possibility of such a single-buyer model, as an alternative to wholesale markets. That was however rescinded when the directive was replaced seven years later (2003/54/EC). EPSU explored this option and its implications in a report written by one of us, published last December.
Over the past two decades, energy liberalisation has not only led to massive job losses but also changed the nature of work. Commercial incentives have favoured a general decline in technical and maintenance jobs, often facilitated and exacerbated by outsourcing. Meanwhile, the associated transaction costs have required more legal, marketing and sales staff, with energy companies prioritising winning customers in a liberalised market. We are now thus facing a coming lack of technical experts in driving forward the energy transition.
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Skilled workers are essential for this to be successful. To increase clean energy capacity and upgrade the grid, a robust workforce strategy is needed. Workers in fossil-fuel sectors, who possess valuable skills in this regard, should be prioritised for new jobs as part of a just transition.
In sum, the EU electricity market does not live up to the urgent need for affordable, clean energy for households, public services and industry. We need to move on to an open and broad discussion of the alternatives.