Subsidies in the electricity industry increase final cost for consumers
A market economy in the European energy sector is not a natural. European energy market used to be a centrally planned economy, almost in the style of the former Soviet Union. While Estonia has completely opened up its electricity market to competition and is currently doing the same with the gas market, many European countries have achieved this only partially, hindering competition under the banner of consumer protection. As we know from history, monopolists are the fiercest opponents of a functioning market.
This kind of consumer protection by governments comes at great cost for consumers. They will pay the final bill. Milton Friedman expressed this idea very nicely when he said: “Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.” That is exactly what we are dealing with in Europe today—trying to bring the market economy to the energy sector.
However, now and again I hear voices, primarily from Central and Southern Europe, saying that the market economy works great everywhere else, but not in the electricity. Market economy principles allegedly do not apply to the power industry! We in Estonia have proved that a market economy is possible in the electricity. The electricity market is no different to the markets in other goods and services. Elering differs from most European electricity and gas system operators in that it believes in the efficiency of the market.
Liberalising the Electricity Market in Estonia: A Success Story
Not only do we believe in the efficiency of the market, we have proved it in practice. The opening up of the Estonian electricity market to competition has been a success story. An open market has brought clients a wider choice of services, better service and lower electricity prices. This has not been accidental, but a matter of choice. As Albert Camus said: “Life is the sum of all your choices”. As a society we believed that a working energy market keeps the lights on in homes and keeps them warm most efficiently. We are not alone – a number of societies share the same values. After the completion of [submarine power cable] EstLink 2, Estonia will become a part of the Finnish electricity market. And that is good. Thanks to this, we will be part of the Nordic-Baltic electricity market, which is probably the best functioning electricity market in the world.
The energy industry is not value free. In today’s world, shared values are more important than anything else. Real economic efficiency can only come from shared values. If there are none, even the best intentions are destined to fail.
Europe’s Best Practices
It is a human characteristic to want to offer the best to others based on one’s knowledge, skills and experience. Estonia has established a working wholesale and retail electricity market. In November 2016, the European Commission published a package called Clean Energy for All Europeans, the aim of which is to bring the market economy into European energy supplies, from Gibraltar to Nordkapp. Implementing the clean energy package is Estonia’s chance to offer the best we have to other Europeans: the structure of an efficiently operating electricity market. There is no such thing as an Estonian electricity market, because we are actors in a larger, pan-European electricity market.
New rules provided in the European energy economy must be able to function in the new reality of developing electricity systems. These are changing rapidly. First, energy supply is shifting from the local level to the global. Second, it is moving on from a centralised to a more dispersed system. Third, a digital revolution is taking place in energy industry. Amidst all this, consumers’ security of supply must be guaranteed. If there is no electricity, there is nothing—an idea well described in Marc Elsberg’s thriller Blackout, which is about the tragedy of losing power supplies across Europe.
Challenges to the European Electricity Market
Europe faces several challenges. First, low electricity prices are an issue—subsidies and other administrative measures artificially reduce the price of electricity. Second, today’s consumers are not sufficiently price-sensitive—they do not participate enough in the electricity market. Third, finding the right price is complicated—the performance efficiency of the different time horizons (day-forward, futures, intraday, balance energy) of the electricity market can be improved so that the market finds the right balance. Fourth, a shortage in production capacity may occur in the future. The clean energy package should offer answers to these challenges.
Administrative, i.e. external, measures should be implemented in the energy market only as a last resort. It is important to understand that peak prices are necessary for the functioning of an energy-based electricity market. The alternative would be to pay subsidies to the producer to ensure capacity. That aid would come out of consumers’ pockets, and the amount would be influenced by political decisions. And that is the continuation of a centrally planned economy, not a market economy.
Arming the Consumer with Data
In order to increase consumers’ price sensitivity and thereby bring more consumers into the market, it is important to make market-based dynamic price signals available in the retail market, through network fees as well as other fees and taxes. We must support the integration of flexible services into the market through different measures in the clean energy package, as well as harmonise and regulate the data exchange that facilitates it.
For example, in Estonia the fruits of liberalising the electricity market have reached consumers exactly through a central database created by Elering together with its partners. Now we are taking the next step to increase the value of data by creating the data-exchange platform Estfeed, which enables energy databases and applications to be connected into one digital energy platform—today in Estonia, and in the future hopefully across Europe.
Tallinn e-Energy Declaration
The energy systems of the future will have less energy and more information. If the information belongs to the consumer, he or she will be stronger in the energy market than ever before. The clean energy package must give that opportunity to all European consumers. Through the EU-wide Tallinn e-Energy Declaration signed in September 2017, we want to “arm” consumers with digital tools to bring the fruits of liberalising the electricity wholesale market to every individual consumer in the retail market.
Elering believes that digitising the Estonian energy system will evolve into the vision of governments and businesses in the Baltic Sea region to become the leader in the digitisation of the energy sector. Denmark, Norway and Finland are the next in Europe vigorously trying to (primarily) digitise their electricity systems. Uniting these experiences, abilities and monetary resources, we could be the global leader in this field. The vision of becoming a global leader by digitising the Baltic region’s energy systems is one reason why, following the desynchronisation of the Baltic electricity systems from Russia, they were synchronised with the Nordic countries: this creates more value than doing so with Central Europe.
In conclusion, the important key phrases in shaping the future of the electricity market are market orientation and focus on specific regions so as to foster free competition, minimise costs for the consumer and support entry into the renewable energy market, at the same time guaranteeing sufficient security of supply in the entire region.
This article was written in cooperation with the European Commission Representation in Estonia.
This article was published in ICDS Diplomaatia magazine.