Interview Philip Lowe, DG Energy
"The energy sector is still in the dark ages"
Philip Lowe, the highest energy official in the EU, is impatient. The internal energy market, whose creation he is supposed to oversee, is still meeting with skepticism all around. Financial institutions are reluctant to invest because they don't believe the market will be free of political interference. Member States tend to pursue their own short-term policies even if they conflict with market principles. And the energy companies? 'They don't seem to be too eager to compete', says Lowe, in an interview with European Energy Review. 'They are focused more on regulations than on their customers. The energy sector is still in the dark ages when it comes to satisfying consumers.'
|Philip Lowe: 'The energy companies don't seem to be too eager to compete'|
More than ten years after the EU made the momentous decision to integrate and liberalise its energy markets, this great European project is still struggling to become a reality. No less than three “liberalisation packages” have ground through the bureaucratic mills of Brussels, yet, the energy market is still mired in reluctance and controversy. In February, a special, first-ever energy summit was held at which the EU Heads of State made a clarion call for the ‘speedy and full implementation’ of energy market liberalisation – by 2014.
Philip Lowe, Director-General for Energy at the European Commission, who came over last year from the heavyweight Competition office to undertake the Herculean task of completing the EU energy market, does not attempt to hide his frustration at the lack of progress he is witnessing. In a candid interview with EER, the veteran public servant coolly notes that ‘the energy market is lamentable’. The energy companies, he says, ‘are still in the dark ages when it comes to satisfying their customers’. They are still ‘primarily focused on regulation rather than on behaving like normal market-oriented players’. But politicians in the member states can be just as unreliable, adds Lowe. ‘They are pushing regulators for lower prices instead of letting supply and demand do their work.’
The upshot of this is that players in the financial market are still not convinced the energy market will happen. ‘They tell me they are still betting on national markets controlled by politicians.’ Yet the Englishman is convinced that this is a bad bet. ‘This market is going to happen’, he declares. How? Not by more regulation. ‘There will be no Fourth Liberalisation Package.’ What has to be done, according to Lowe, is, in the end, fairly simple: ‘Remove the obstacles, build the interconnections, get people to compete. Start focusing on what the consumer wants, like in any normal market.’
European Energy Review talks with the Director-General for Energy in his office in Brussels on a Friday afternoon in March, which, coincidentally or not, is showing the first signs of spring after a long European winter.
EER: It seems that many people still have doubts about the desirability of liberalised energy markets. Critics say that given the very ambitious environmental targets of the EU and the importance of security of supply, the market will just not deliver the desired outcomes. Even in your own country, the UK, the cradle of energy competition, there are serious discussions about setting up a government body to buy up “green” electricity and re-sell it to the market, what is called a ‘single-buyer model’. The Oxford Institute for Energy Studies published a book recently in which they called for an ‘end to market fundamentalism’. How do you look at this?
Lowe: When it comes to competition, I was never of the belief that markets should be completely free. If that is what market fundamentalism means, I am not a market fundamentalist and this is not what we are trying to achieve. Clearly there are many situations in which markets fail, either because the
|The market is not distorted because of subsidies. It was distorted because we have not been internalizing the costs of climate change|
EER: But you could argue that the European Commission is hardly consistent in its own policies. You introduced a market scheme, the Emission Trading Scheme (ETS), that is intended to create the framework in which the market is supposed to deliver the desired outcome of lower carbon emissions. Yet you also have targets and policies for renewable energy, energy efficiency, carbon capture and storage. Aren’t you then distorting the market?
Lowe: To reach our climate change objectives, we have chosen a market-based system, the ETS, but yes, we have also opted for quite heavy subsidies initially for renewable energy. You will hear electricity producers complain bitterly about the market distortions as a result of those subsidies. But I say to them whenever I have to debate this – which is almost every day – that the market is not distorted because of the subsidies. It was distorted because we have not been internalizing the costs of climate change, and we try to repair this by introducing at least temporarily subsidies for new technologies which will hopefully become competitive with fossil fuels in the future.
EER: But then every member state has its own national support scheme for renewable energy. That hardly makes for a level playing field or a stable investment framework.
Lowe: It is a political question how much money you can expect taxpayers to pay for renewable energy without there being a direct link between what they pay and what they get as consumers. Persuading German taxpayers to support solar power by saying, don’t worry, this is for the benefit of Spanish consumers, is a bit of problem. I can fully understand why the European Parliament and Member States
|The problem is not that market players are unable to act or invest because the market is distorted. The problem is that energy companies don't seem too eager to compete.|
EER: In the meantime the ETS market is floundering.
Lowe: Obviously if you make progress on renewable energy, and energy efficiency, you exert a negative pressure on the carbon price. Yet we know that the carbon price is a major incentive for industry to change to renewables. So there is a conflict between trying to get renewable energy going and the ETS. This is a temporary situation that will last until renewable energy can be offered at competitive prices. Still, it is hardly a reason to revert to central planning of energy needs. The problem is not that market players are unable to act or invest because the market is distorted. The problem is that energy companies don’t seem too eager to compete. The market for energy is just not up to scratch. For example, if you talk to energy companies about energy efficiency, they will say, oh, that’s not in our interest to stimulate this, we try to sell energy. If you go into any sector of the economy – if you want to buy an air ticket, or a mobile phone – suppliers will ask, how much do you want, what do you want to pay, we will make an offer that is exactly according to your wishes. But the energy companies don’t behave like that. They say – you buy what we want you to buy. Companies like Microsoft and Google make a good attempt at pleasing their customers. The energy sector is still in the dark ages when it comes to satisfying customers. When will they start behaving like normal market-oriented people?
EER: Can you compare the energy sector with the telecoms industry?
Lowe: In the energy sector there will have to be regulations about security of supply, about what to do in the event of interruptions. But there is no reason to give up on the basic precept of competition, which is not market fundamentalism, but common sense, namely the idea that consumers and businesses get
|The last major technological revolutions in energy happened mostly in the early 20th century. Since then energy technology has not changed a great deal|
EER: Do we detect impatience with the energy industry? You even compare them unfavourably with Microsoft!
Lowe: Let’s be serious about this. We have had three so-called liberalisation packages. Since when has a market become more efficient by more regulation? Since when is more regulation a good idea? Normally you liberalise the market by allowing people to compete to provide the best deal for consumers. The energy market despite more and more regulation does not do it. That is why I am impatient. This is the only sector in the European economy where it seems that the focus is not on consumers. Compare this for example to the car sector. This sector is faced with environmental constraints, but there is no doubt about the focus of every car manufacturer on what the consumer wants. That is their business. Energy companies should shift their focus from regulations to the consumer. Now is the time for them to compete against each other to provide the best deals for their business and household customers.
EER: So there will be no fourth Liberalisation Package?
Lowe: I said this recently at a conference: only over my dead body. I can’t see in a thousand years what more regulation could do in a fourth package to make the market work.
EER: Are companies the only ones that need to put customers first? What about the governments of member states?
Lowe: There has been an overemphasis in member states on the issue of short-term price. On keeping prices low. The reason market fundamentalism has become an issue in the UK is the emphasis on short-term prices. The regulators were criticised by the politicians – they said, oh, no, you’re letting prices go up. No one explained that prices also have to reflect investment in generation and pipelines. Selling energy liberalisation like airline tickets with the argument that by liberalising you get lower prices is a completely wrong way to go about it, particularly after 20 years of underinvestment
|Selling energy liberalisation like airline tickets with the argument that by liberalising you get lower prices is a completely wrong way to go about it, particularly after 20 years of underinvestment in the energy sector|
EER: After all these years they still don’t believe it’s going to happen?
Lowe: No. And what we say is, listen this is your last chance to take advantage of a European-wide energy market. It offers you on any analysis better cost structures, better security of supply, better service, better quality. Why do you keep stopping it? And we give out this message to everyone. Don’t forget – 85% of the supply of energy in the EU is delivered by no more than 12 companies. They have international, European strategies. But apparently the EU Member States still hesitate about developing a strategy for a European –wide energy market. We have 27 ministries, 27 regulators, thinking that they
|We have 27 ministries, 27 regulators, thinking that they will determine what will go on in the market|
EER: So what should be done to make the market work?
Lowe: Remove the obstacles, build the interconnections, get people to compete, stop people to focus on regulations and get them to focus on what consumers need.
Philip Lowe on renewable energy, energy efficiency, carbon capture and storage and the role of gas in Europe’s energy mix
On investments in renewable energy
Lowe: The way I see it is that Europe is in a bet. The bet is that by supporting new technologies, whether it’s wind, solar or CCS, over a certain period, these technologies will overcome four hurdles. Firstly, they will become technologically viable in themselves. Secondly, they should become commercially viable without subsidies. Thirdly, this should happen in a relatively limited time, so that people don’t get fed up with paying for them. And fourthly, the public will have to accept the kind of infrastructure needed to support them, whether it’s wind farms, power lines, whatever. Of course if you want to intervene in the market, there must be some basic presumption that after having intervened, you can pull out at a certain point, you will no longer need that transitional subsidy or support, and that the market will have adjusted. The bet is that these technologies will be competitive with conventional fossil technologies by around 2020. That is the timescale that people are more or less aiming at. Maybe we are all wrong. Maybe we are going to find that the whole thing is so expensive that people will be tempted back into fossil fuels, and people can no longer fight climate change but should adapt to it. That is in the scenarios of some companies. But so far things are not as bad as that.