Energy cowboys and green mountebanks

The failed strategy of energy liberalisation that brought rolling blackouts and the financial high jinks of Enron to the United States is now being tried by the European Union, writes Westby Swift
January 2008

In the American old west, mountebanks would travel from town to town selling fake cures for every known ailment. When they were eventually chased out of town they'd simply move to another in search of suckers eager to buy their counterfeit spirits, unguents and ointments. With Europe suffering from a bad case of climate change fever, some energy insecurity sniffles and increasingly regular bouts of high energy-price dizziness, a new generation of green mountebanks has emerged.

The ailments themselves are real enough. Europe is almost entirely dependent on foreign sources of fossil energy - 60 per cent of our gas is imported, along with 70 per cent of our oil, and from unstable or undemocratic regions and countries to boot. EU member states are afraid that energy can be used as a political weapon, as happened when Russia shut off gas flowing to Ukraine in January 2006. Public pressure is forcing the Commission to at least look as though it is doing something about climate change, and energy prices are at near-record levels.

However, the quack remedy we're being prescribed by our own green mountebanks is a robust vaccinating jab of nuclear energy, along with a wee dose of energy liberalisation laxative.

The return of nuclear power
In early October, the Commission encouraged member states to make greater use of nuclear energy in order to improve the Union's energy security and as one path to reducing carbon emissions. 'Member states cannot avoid the question of nuclear energy,' Commission president Jose Manuel Barroso told a Madrid energy conference. Gordon Brown's government recently obliged, endorsing a new generation of nuclear power stations in the UK.

Baroso's voice was not a lone one. Energy commissioner Andris Piebalgs told El Pais, the Spanish newspaper, that the EU should try to generate 30 per cent of its electricity from nuclear sources, and the competition commissioner, Neelie Kroes, in a curiously honest spell of anti-competitive favouritism, told the same Madrid conference that she was personally 'completely in favour of nuclear power.'

In response, the Green group in the European Parliament sent an open letter to president Barroso calling for the competences of commissioner Kroes in the area of nuclear energy to be withdrawn - demanding essentially that she not be allowed to work in this area any more. 'Imagine if commissioner Kroes were to state she was "completely in favour" of Linux, following the competition case with Microsoft,' says the Greens' energy spokesperson, MEP Claude Turmes.

'The idea that nuclear energy will solve our energy security problems is false,' argues Turmes. Nuclear energy will exacerbate European energy insecurity, not ameliorate it. 'Although most of our gas and oil is imported, some 99 per cent of our uranium is imported, and because of the enormous dangers of uranium mining, there will never be any uranium mines opened up in Europe.'

Yet despite the Greens' energetic fight against this nuclear revival, Turmes isn't optimistic. 'There simply aren't enough campaigns across Europe taking place. NGOs and civil society thought they had won on the issue of nuclear energy and stopped campaigning, underestimating the lobbying of the nuclear industry and its ability to use the climate debate to make a come-back.'

The deregulation
Curiously, however, while the Greens can see this ersatz nuclear remedy for the sop to the nuclear industry that it is, they are much more willing to swallow the energy deregulation lozenge.

Energy deregulation was first sold to the American people in the mid-1970s, for almost identical reasons to those the Commission uses to argue for similar proposals today. Following the oil shocks of 1973, the US government hoped to prevent high prices in the future by easing reliance on foreign energy sources and encouraging the development of domestic alternative fuels for generating electricity, requiring that utilities buy power from independent power producers and others employing renewable energy sources.

A series of federal deregulatory actions over the following years culminated in the Energy Policy Act of 1992, a product essentially of the heavy lobbying work of Enron, under which utilities were ordered to allow independent power producers equal access to the transmission grid. After more of Enron's lobbying in the mid-1990s, dozens of states adopted a deregulatory approach.

Advocates at the time, as they do today in Europe, argued that deregulation would prevent the large utilities from using their control of the transmission networks to arrest the entry of competing companies producing energy at lower prices. Instead, the product of deregulation was a gross concentration of the energy firms, profiteering, much higher prices, network decline, and regular black-outs.

The separation of power plants from the wires that transmitted the energy they produced had a catastrophic impact on network reliability, ultimately playing a direct role in the massive multi-state black-out of August 2003. This is because reliable planning and operation of energy supply requires full co-ordination between generation and transmission. The separation of these two roles makes co-ordination not only more difficult, but, in the most extreme cases, can make the two roles non-complementary or even competing. The interests of the energy producer selling energy to the highest bidder far away can override what was previously an obligation to transmit and distribute energy to local users, undeserving individual citizens and putting enormous strain on a network not designed for such long-distance activity.

Power plants also regularly now engage in what is termed 'capacity withholding', where an energy producer intentionally cuts off production temporarily in order to raise prices for power from other power plants they own. And rather than profits providing incentives to build new or alternative generation, these profits have instead been invested in bidding wars for existing power plants, which are then 'flipped' for a higher price, as if the plant were some celebrity's Malibu llama and alpaca ranch.

By 2000, some 24 states has passed deregulation legislation, but only six years later, following the repeated black-outs, price hikes and the California energy crisis of 2000-1, eight states repealed or delayed these laws, and California has begun to order its utilities re-acquire power plants. Where deregulation is still on the books, consumers face average annual price hikes of over 5 per cent and, across America, alternative energy production remains a negligible proportion of the market.

Having been chased out of town in many parts of the US, the green energy mountebanks have trotted into Europe. Energy liberalisation in Europe has been underway for about ten years now, at a cost of some 250,000 jobs, but the Commission feels that the process has not gone far enough.

Europe's energy giants
European energy liberalisation and privatisation has allowed a few giants - in particular France's EDF and Germany's RWE and Eon - to gobble up much of the market throughout the Union. Ostensibly set in play to increase competition, liberalisation has actually replaced democratically controlled public monopolies with unaccountable regional oligopolies whose profits are larger than some member states' entire GDP.

Last September, the Commission released a new energy package proposing a series of directives and regulations that, as with similar legislation in the US, would see the energy companies split off power plants from the wires or pipelines that transmit electricity or gas. Identical to the arguments used by the American proponents of deregulation in the 1970s and 1990s, this 'unbundling' of production from transmission, believes the Commission, will 'generate more investment in clean, sustainable technologies and renewable energy', reduce greenhouse gas emissions and 'stimulate fair energy prices and savings.' It will do this by forcing the energy companies to widen access to the transmission grid to more market entrants and alternative energy producers.

The Commission's original plan was to order complete ownership separation of suppliers from transmitters, but under pressure from the French and German governments, acting on behalf of their native energy giants, the Commission has backed off slightly, and offered an opt-out clause. Under this alternative plan, the energy company is allowed to retain ownership of the transmission network, but these network assets must be managed by an independent system operator (ISO). In order to ensure the ISO truly acts independently of the parent company, new regulation and monitoring is to be put in place.

The Commission would like to see the democratic accountability of the national energy regulatory authorities removed as well. They are to become 'legally distinct and functionally independent from government, neither seeking nor taking instruction from government'. Much like the independent central banks. The Commission also proposes the creation of a new super-agency to co-ordinate the activities of all the national regulators and ensure effective competition. This agency too should not have any democratic accountability, with the Commission explicitly arguing that it should model itself on the system of European Central Banks.

'This compromise, done to appease the energy lobby in France and Germany, doesn't make much sense,' argues Sahra Wagenknecht, co-ordinator for the European United Left/Nordic Green Left on the Committee on Economic and Monetary affairs. 'Instead of creating additional bureaucracy by establishing extra regulatory agencies, it would make more sense to take the whole energy distribution network back into public hands.'

Meanwhile, the symbol of the Greens, remember, is the sturdy sunflower, not the shrinking violet. They think the Commission should have stuck to its strictly-unbundling Smith & Wessons.

'Only full and unequivocal unbundling of energy production from distribution will guarantee true market liberalisation,' argues Claude Turmes. 'It is unfortunate that [the Commission] has given in to pressure from the French and German governments and failed to insist on full unbundling.'

Why public energy matters
Public service campaigners argue that all the arguments the Commission mounts in favour of further energy deregulation, from the prospect of lower prices to new investment in renewables are, quite literally, a pipe dream.

'In Germany, deregulation of the energy market has led to a number of mergers and acquisitions. This rapid concentration has contributed to a steep rise in energy prices,' notes Wagenknecht. 'The German statistical office has calculated that in the last five years, energy prices have risen 31 per cent, and now the big energy companies, Eon, Vattenfall and RWE have just announced further price increases that will force an average German household of four people to pay an additional 100-200 euros more for energy and electricity this year.'

To buttress its case that unbundling produces lower prices, the Commission regularly cites the experience of the UK, and the alleged success of price reductions of 50 per cent in its gas market. Yet, as Steve Thomas, of the Public Services International Research Unit at the University of Greenwich, points out in a report published last July, these reductions were actually a result of the fire-sale of British Gas. When it was privatised, the company was sold for much less than its asset value, permitting sizeable price drops for consumers. These price reductions are thus only temporary, as the pre-privatisation assets will have to be replaced at their full cost eventually. And when they do, real price rises will return, and likely wipe out any savings from the recent period. In any case, British Gas was privatised as a fully integrated company, and nearly 85 per cent of the price reductions occurred before it was broken up in 2000.

Thomas is also worried that the transmission networks will now see an instability of ownership, handicapping the ability to engage in the long-term planning necessary for network reliability. Worse still, Thomas is concerned that, like the power plants in the US that are constantly being 'flipped', European networks will be 'sweated' by their new owners, possibly by private equity firms or hedge funds, and then rapidly sold on before any problems in the network begin to show.

Furthermore, research from Thomas's colleagues, David Hall and Antony Froggatt, has shown that where new investment has taken place, energy companies don't actually use very much of their own capital, preferrring overwhelmingly to use local finance or that of the World Bank. The public sector, of course, can borrow from these sources too, but at much lower borrowing costs.

Private energy companies spend millions on advertising, creating what economists call 'gratuitous differentiation', marketing something in superficial ways to create a false distinction in the product. Public energy monopolies, on the other hand, do not need to engage in advertising. They're the only game in town. What do they need to advertise for? Instead, the public service provider can simply be legislated to develop awareness raising campaigns about reducing energy consumption and ways in which households can be more energy efficient.

Similarly, advocates of liberalisation hope that incentives will create new markets for renewable energy production. They believe this will happen, but they can't know for sure. Maybe it won't work out. Whereas, so long as the public votes in a government committed to renewables, publicly owned energy providers can simply be ordered to develop them - to whatever percentage of energy production is so stated in the legislation.

Lastly, and perhaps the simplest argument of all, no private company wants to sell less of its product, whereas for a public service, producing less of its product is a cost saving. And aren't we all supposed to be using less energy?

Green deregulation?
With all the problems created by energy deregulation, why would the Greens support it? When they've been strong elsewhere in defence of public education, public healthcare and other public infrastucture and services, what makes energy different?

'Greens do want public infrastructure in public hands,' says Turmes, 'and we're in favour of the renationalisation that happened in Denmark. However, we're not sure if every wind and gas turbine should be run by the government.

'France's monopoly system and other state monopoly systems have provided bad results. This isn't democratic control of the energy utility, but rather a massive public company that co-opts energy ministries. We can either have a democratically controlled monopoly, which we would prefer, or a well-regulated market system.

A half-deregulated energy market is the worst of all worlds, where the French and German energy oligarchs have their fingers in every pie, swallowing up whole most of Eastern Europe's energy companies, concentrating electricity and gas and other utilities such as water distribution and waste management. They have even branched out into chemicals and telecommunications.

But the Greens do not see any prospect for returning to the days of democratically controlled public energy providers. 'At the moment, there is no political majority for the re-nationalisation of the whole system,' concludes Turmes, 'so we want to see strict regulation and real unbundling instead.'

And yet, there is at least some hope. Both Denmark and the Netherlands have recently taken their transmission networks back into public hands. 'All energy corporations need to be transferred into public hands,' says Wagenknecht. 'Energy supply should be a human right: everyone, regardless of her income, should be provided with enough energy as is necessary to live a decent life.' Her own party in Germany, the Left Party, as well as Attac, are campaigning against their own big energy corporations while opposing greater unbundling and pushing for just such renationalisation. Although even here, she recognises that they are very far off from a joint campaign across Europe.

Maybe it's not too late for the Greens though. They do currently support energy deregulation, but they are stong campaigners against biofuels now - in a marked shift from the position set out in their November 2006 'Vision Scenario' strategy document, in which biofuels played a significant role (as did railway liberalisation and emissions trading).

It's not quite high noon for the principles of public-service energy provision yet, but if the likes of the Wagenknecht and Attac don't rustle up a few more anti-deregulation desperadoes and energy-activist gunslingers, then all that is left of public power really will be the cliche of a tumbleweed rolling by while the wind whistles a sweet but sad tune of how it once was.


 

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