One of the more controversial measures within the expansive ‘Winter
Package’ proposal – the blueprint for the Energy Union and meshing of
climate and energy policy that will drive Europe’s clean economy
transition – is its hardline position on regulated power markets.
While climate policy is defined by market intervening legislation, it
is to be kept at a minimum, and as technology develops, costs fall, and
best practices are refined, interventions become less necessary and
obtuse. It is not necessarily disingenuous that on the energy side of
the equation the European Commission (EC) is staunchly free market,
working to unleash competitive efficiencies that increase overall social
welfare.
Consequently, the EC’s position on retail price regulation (along
with capacity markets) calling o the Member States to limit and
eventually abolish them altogether should not come as a surprise. The
core argument is that regulated prices tend to be artificially low,
reducing the scope of market competition and consumer switching, and
dissuading private investment. Furthermore, the EC believes that
elimination will open consumer participation in the retail segment and
increase flexibility in the form of storage and demand-side measures.
Several countries oppose this unbridled market philosophy, especially
in Central and Eastern Europe (CEE) where, in the name of energy
security, governments traditionally are more active in shaping energy
markets and treat the provision of affordable electricity for citizens
as a state social service (and re-election strategy). End consumer
prices tend to be politicised and – as demonstrated by Hungary and
Slovakia – interventions are becoming more overt and pervasive.
The European Price Breakdown
Unlike wholesale electricity markets, which have been near
unanimously liberalised and integrated onto dynamic trading platforms
across Europe, retail markets remain protected and segmented in several
European countries and parts of the United States. Yet, the practice is
more deeply hardwired in CEE where end-user prices are treated as more
of a social policy tool with political stakes.
The EC proposal would extend a five-year window for vulnerable
consumers while the bulk of households would be immediately exposed to
market forces. It would establish dynamic pricing through smart metering
systems, aggregators (groups of consumers) and local energy
communities/associations within a geographically confined network to buy
and sell electricity.
These measures are meant to maximize demand-side flexibility for
system balancing by allowing the direct participation of consumers in
the market that can capitalize on savings opportunities from price
volatility.
Price volatility is still precisely what many governments want to
protect their citizens from. Price regulation caps prices to shield
defined segments of consumers from sharp spikes, which similarly to peak
load prices that are being eroded by renewable energy sources on
wholesale markets, are essential for utilities to recoup investment
costs.
The inability to pass higher prices onto customers in times of high
demand or low supply discourages prospective investors, which have to be
incentivised by nonmarket methods – subsidies – in the form of capacity
payments to ensure sufficient future capacity.
Politicians certainly don’t prioritize twenty or thirty-year time
horizons like energy investors must, so policies and regulations that
manipulate markets for short-term benefits can come at a long-term cost
to ratepayers and/or taxpayers.
Several factors determine electricity prices at the national level,
the supply-demand balance, national energy mix, import diversification,
network and environmental costs, levels of excise and taxation, etc. The
retail price is typically broken into four broad categories that
account for all associated cost inputs: energy-only, network fees,
energy taxes (i.e. renewable subsidies) and VAT. The balance of these
categories can vary substantially from country to country, but on
average less than half of end-user prices are market driven with
national fiscal and regulatory settings determining the rest.
‘Soft’ regulation allows suppliers to adjust their tariffs according
to an established price setting methodology or price index, which has
scope to pass through market-based energy-only prices. Conversely,
‘hard’ regulation is effectively an extension of state social policy
whereby the relevant ministry sets an agreeable end user price.
The problem across Europe with non-transparent regulated fees and
taxes comprising more than half of end user price is that falling
wholesale energy prices, which have reached record lows in recent years,
are not passed onto households. In fact, for many Europeans, bills are
increasing.
CEE continuing hard regulation for now
Retail markets are especially sensitive in CEE where interference
from Brussels will continue to be met with resistance. With lower
incomes and higher energy poverty rates, cheap and stable prices have
become a cornerstone of election campaigns. In what is a rare sign of
unity in recent times, the V4 issued a joint response to the Winter
Package in February 2017, expressing broad concerns over its
implications for the right of national self-determination over the
domestic energy sector.
This is emblematic of a region where the state remains, directly and
indirectly, involved in highly concentrated domestic markets and
Brussels’ renewable-based energy transition has yet to be embraced.
In Hungary, Prime Minister
Viktor Orban’s Fidesz
party has prioritized the retail market and price regulation on its
agenda as a key part of his populist strategy. Orban declared that
energy utilities should operate as not-for-profit entities before
systematically renationalizing them and slashing retail prices by 10%
three successive times. With elections in Hungary scheduled for April,
energy prices will again move into the spotlight as part of the
re-election campaign.
Meanwhile, in late November Slovakia’s Regulatory Office for Network Industries (URSO) chief
Lubomir Jahnatek notified
news agencies that end-user household electricity prices would rise
2.71% year-on-year in 2018 without much further elaboration.
The announcement was somewhat unexpected given the pretext from just a
year before, when higher 2017 tariffs requested by regulated
distribution companies (reportedly up to 14%) caused a political uproar
leading to the resignation of then URSO chairman
Jozef Holjencik and
a restructuring of the office that brings its leadership selection
under more direct political influence. The chief is now selected by the
government rather than the President, and Jahnatek, a former Minister of
Economy and Agriculture under two of Prime Minister
Robert Fico’s previous governments, was handpicked by him.
Fico has stated repeatedly that stable electricity prices are a
cornerstone of his government’s policy. In absolute terms, Slovakian
citizens have paid the highest absolute prices for electricity among the
Visegrad Group most of this decade, and in terms of purchasing price
parity, the amount paid relative to income is among the highest in the
EU.
These high prices can be attributed more broadly to Slovakia’s
conservative political and regulatory attitude that continues to shape
the energy mix. Rather than embracing the integration of increasingly
competitive renewable energy sources leadership has pursued a
pro-nuclear policy, a technology that essentially cannot compete in
today’s energy market without state support, while subsidizing coal
plants to protect jobs.
This can be ascribed to all Visegrad countries to varying degrees.
Slovak household prices have been tempered by more populist policies
that played out in 2017, and although not nearly as interventionist as
Orban. Fico is following a similar script. Some of the burden shifts to
Slovakia’s industry as a form of cross-subsidisation, which consequently
also pays among the highest prices in the region.
Moving ahead with standardisation and compromise
The outlook for a trilateral agreement will be a loose compromise
resting somewhere in the middle of the current polarity, not the naked
market of pure price signals but redefined and refined regulations of
consumer classes subjectively interpreted and gradually adapted. Member
States are still finalising the implementation of the 2009 Third Energy
Package well beyond the initial 2014 ‘deadline’ and are still able to
suspend and manipulate compliance in certain areas.
The EU directive that emerges on price regulation will have to allow
Member States scope for interpretation and time for implementation to
avoid clashing with the national prerogative enshrined in Article 7 of
the Lisbon treaty. In the meantime, the EC will continue to make its
case to persuade the Member States with further studies and
communications that demonstrate the efficacy of market-based solutions
and consumer activism.
https://www.neweurope.eu/article/amid-debate-eu-consumer-price-regulation-visegrad-group-staying-course/