Brussels, 30/04/2001 (Agence Europe) - During the Stockholm Summit on 23 March this year, French Prime Minister Lionel Jospin said the power cuts in California were one reason for challenging the principle of total gas and electricity market liberalisation in the Union according to a pre-established timetable (see EUROPE of 24 March, pp. 5 and 6). The visiting Eurelectric delegation, the European lobby for the electricity sector, accompanied by European Commission energy officials from the Commission's DG on Transport and Energy, prepared a study mission to the United States to determine the reasons behind the Californian crisis. The mission, during which European experts met American officials from the public and private sectors, resulted in a report that concludes that: "the errors and problems which accumulated to cause the blackouts and near-bankruptcies in California are most unlikely to be replicated in the liberalised EU electricity market". Power-generating capacity levels, a well-balanced fuel mix, a meshed transmission grid and the existence of power markets which allow companies to hedge prices, plus the absence of excessive regulation all make a similar crisis extremely unlikely in the near-to-medium term in the European Union, states the report. It also stresses the lessons to be drawn from the Californian experience so that confidence in the efficient working of the EU electricity market remains justified.
The aim of the joint Eurelectric/Commission visit, held from 26 to 30 March, was to clarify the debate on the consequences of liberalisation of the European energy markets in the light of American misfortune. The result reached by this mission is that the main reasons for the crisis that hit California from mid-2000 are: - insufficient supply, due to the lack of production capacity (and hence of investment), given the rising demand throughout the western United States; - fast-rising costs for energy generation because of California's dependency on gas; - a price-cap mechanism to prevent utilities from passing on the higher costs of wholesale electricity to retail customers.
More specifically, the European experts note that the inflexible environmental regulation has discouraged the construction of new production units and that the shortage of transport capacities has made it difficult to import electricity from other States. A poor fuel mix is also cited as a cause of the crisis, for having caused too much reliance on gas-fired power plants, a situation compounded when hydropower levels fell and gas prices rose (partly due to insufficient pipeline infrastructure). The report finally notes that: - utilities were required to sell off their power plants and urged to rely on the wholesale spot power market, and were forbidden to hedge risk via long-term wholesale supply contracts; - opportunities increased to manipulate the market; - residential consumers, buffered against price rises by the cap, had no economic incentive to contribute to alleviating the crisis by moderating their use of electricity.
The joint mission sets out five key lessons in its report, in the prospect of total electricity market liberalisation in the EU: - a good fuel mix is essential to avoid over-reliance on one source; - good market rules will provide the best incentives for constructing new infrastructure; - excessive unbundling can be counter-productive; - it is crucial to maintain grid-stability in any liberalised market; - passing on real costs to customers will help to give customers an incentive to modulate consumption.