Although there are many potential benefits to be derived from a common EU-wide approach to energy policy, any EU such policy – and its effectiveness – is limited in two key respects.

First, it is limited in terms of scope by the constitutional limits imposed by the EU treaties.

Second, it is limited in terms of effectiveness by the practical challenges posed by global energy markets.

Any debate about the implementation of an EU energy policy (and indeed the framing of such a policy) needs to proceed on the basis of a clear understanding of these limits and the complementary role of other policy makers (whether local, regional, national or international) in delivering common goals.

In the final analysis, these limits should lead to the focussing of EU energy policy on the promotion of effective competition in EU energy markets.

Constitutional constraints

The powers devolved from the Member States to the EU are subject to explicit limitations imposed by the treaties, such as the well-known and overarching principle of subsidiarity. There is some impact on EU energy policy, with the EU treaties not conferring any explicit authority for the development of an EU energy policy. The – as yet stalled – Constitutional Treaty did contain a clear mandate for EU action in this area, authorising the EU to develop an energy policy based on:-

  • ensuring the functioning of the energy market;
  • ensuring security of energy supply in the Union; and
  • promoting energy efficiency and energy saving and the development of new and renewable forms of energy.

These are already familiar areas of EU activity in the energy context and, while the absence of an explicit treaty provision does not prevent the Commission and other institutions from taking action in this area, achieving consensus amongst Member States will be a necessary precursor to securing progress.

Bundling

The Commission has identified the vertical integration of incumbent electricity players ('bundling') as a problem. Its proposed solution is to force the incumbents to 'unbundle', i.e., divest, their network assets.

However, any attempt to force unbundling would have to face up to a significant treaty constraint - Article 295 - which reserves to the Member States the authority to choose for themselves between public or private ownership of key areas of economic activity. Given significant public sector involvement in the electricity sector in a number of Member States, it is difficult to see how a consistent approach to unbundling across the EU could avoid transferring ownership of key network assets out of the public sector and, thus, breaching the limits imposed by Article 295.

Merger control
Efforts to build a functioning – and open – internal energy market are also hampered in the context of merger control. In particular, the EU Merger Regulation places significant limits on the ability of the Commission to discourage the creation of so-called 'national champions' in the energy context.

Generally, the level of the parties' turnover will determine whether the deal is examined by Brussels or the national competition authority. But if both parties achieve more than two-thirds of their turnover in the same member state, then Brussels does not have jurisdiction, even if the deals are very large (e.g. GasNatural/Endesa).

This allows national deals to benefit from 'political benevolence' where a final decision of a merger is taken by a minister (e.g. GasNatural/Endesa - Spain) or where a minister can step in and clear a case on public interest considerations (e.g. E.On/Ruhrgas – Germany). The Commission has in the past suggested tackling this potential gap by abolishing the two-thirds rule, but for the moment it remains in place.

Security of supply

Member States very much retain the initiative in the area of energy security and it seems that for as long as national politicians remain primarily accountable to taxpayers and energy customers for the costs of investing in a secure energy supply, it will be difficult for the EU to implement Union-wide security policies.

That notwithstanding, the EU has adopted a Directive (due to be implemented by February of next year) on Security of Electricity Supply and Infrastructure Investment. However, the core provisions of the Directive, on creating a stable investment climate and maintaining a balance between demand and generation, appear to be little more than a restatement of the objectives of any credible national energy policy.

Renewables

The EU is active in the area of the promotion of renewables, having taken steps, in pursuit of its environmental agenda, to create severe disincentives to the continued use of traditional fossil fuel generation plant.

The introduction and continued development of an EU wide emissions trading regime will also contribute significantly to the encouragement of low carbon sources of generation. The regime is designed to operate by imposing a cap on Member State emissions levels and then allowing them to allocate permits to businesses that allow the production of a certain amount of carbon dioxide (or other polluting gas). Businesses can then trade the permits on a liquid market. The benefit of this approach over regulation is that it rewards businesses that can reduce their emissions at the lowest cost.

However, the pricing signals emerging from such a regime may continue to be distorted by national or indeed local political preferences which may distort otherwise 'rational' investment decisions.

Summary

At an EU level, implementation of an energy policy is constrained by the constitutional limits imposed by the EU treaties and the absence of an explicit authority for the development of energy policy following the stalling of the constitutional treaty.

The Commission's desire to create a more competitive environment through unbundling is constrained by Aritcle 295 and the desire of national governments to retain public sector champions and the consequent ability of private sector oligopolies to similarly resist such unbundling.

Competition policy is constrained by the two-thirds rule under the EU merger regulation which again plays into the hands of national champions. The ability of the EU to take control of the energy agenda as a shared responsibility will be constrained for so long as national politicians remain primarily accountable to their electorates.

Finally, in the promotion of renewable energy, some progress has been made through the EU-wide emissions trading regime. While the new Scottish government appears to be resolutely opposed to any development in the role of nuclear power, there is a strong sense that the new administration will push renewables as an alternative. Here, at least, the wider EU policy drive towards development of renewables may correspond with policy at a regional and national level.