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Tom Nicholls: Plus ca change …

European energy policy remains confused and that is good news for Gazprom By Tom Nicholls At least with the French government you know where you stand. It doesn’t much care for the European Commission’s energy-liberalisation programme, especially the part about breaking up national champions in order to allow competition to take root. In fact, instead of splitting up its big, bruising utilities – Gaz de France (GdF) and Electricité de France (EdF) – as Brussels would like, it seems hell-bent on making them bigger and more bruising. The GdF merger with French utility Suez is back on – after 18 months of uncertainty. That uncertainty was largely the result of political opposition. Unions didn’t like it because it would result in the state being reduced from majority to minority shareholder: privatisation, in other words. And it is back on because of political intervention: French president Nicolas Sarkozy has finally decided the merger is in the national interest and has strong-armed the Suez board into a new deal. (He wasn’t always so sure: when GdF was partially privatised in 2005, Sarkozy promised the government would retain 70% of the company, but that will not be possible under the present deal, which will see the state’s stake watered down to under 40%, but above the minimum of a third required by French law). Even the origins of the deal are political: it was conceived, in February 2006, as a blocking tactic against Enel’s attempted swoop for Suez. And executives are duly singing from the government’s hymn sheet: Jean-François Cirelli, GdF’s chief executive, has since described energy as a “strategic sector for all states. Nowhere are governments completely absent from the energy sector.”

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France’s preferred position in the energy hierarchy

The result is undoubtedly a company of impressive size. The deal is worth an estimated 70 billion euros and creates the world’s third-largest listed power firm, Europe’s biggest gas buyer and gas seller, and the continent’s largest LNG importer and buyer. Political motives notwithstanding, there is robust industrial logic to the deal – the two companies’ assets are largely complementary. Competition may even benefit too, even if this is not quite how Brussels would prefer to go about it – GdF will be able to challenge EdF in France’s electricity market by offering power supplies to its 10m customers using Suez’s electricity network. The European Commission would like to see greater unbundling and less state involvement in energy. But it seems that it will have to accept a new politically driven market vision, with more activities being bundled into the portfolios of a small number of energy giants and with states retaining a strategic influence. It is a matter for debate whether the emerging oligopoly serves consumers any better than the monopoly system it replaced, but, for better or for worse, that is the market structure that the liberalisation drive seems to be creating. It may yet prove effective, although, so far, as envisaged under the Commission’s liberalisation programme, competition has largely failed to flourish. Among the Commission’s complaints is that the continued dominance of the big boys – and their inclination to protect their patch – keeps new entrants out of the market. Cross-border trade is minimal, partly because there have not been the investments in infrastructure to enable it to happen and partly because new entrants are struggling to make their mark. For the most part, the vision of a pan-European energy market has failed to emerge. Policy continues to be decided on a national basis and trade is largely restricted to within national borders. There is a possibility that the emergence of Euro-champions may result in a more coherent Europe-wide investment strategy, but, for now, Europe’s energy policy remains largely fragmented along national lines. That market structure plays to Gazprom’s advantage. It can continue to appeal to narrow national interests, as it has done, for example, in Germany and, more recently, in Italy. One solution to Brussels’ lack of clout would be to endow the Commission with the authority to set Europe-wide energy policy. But this is unlikely to go down well with the many governments that see energy as matter of vital national security and not something to give up lightly. Even if the political will existed to support such an idea, it would, given the EU’s famous bureaucracy, take a very long time to implement. But in any case Europe-wide agreement on energy matters seems a distant prospect: the vested interests and energy needs of individual countries vary too widely for a solid consensus to form. There is, for example, no agreement on the role that nuclear energy should play going forward – and the European Commission ducked that very question when it revealed its energy strategy at the start of the year. This is a very big gap. The Commission must now adapt to reality: it will have to drop its vision of a vibrantly competitive, interconnected Europe and do what it can to maximise competition within the constraints of the market structure favoured by the likes of France and Germany. That could, for example, involve finding ways to encourage greater investment in cross-border infrastructure, developing a consensus on nuclear power and encouraging investment in power plants fired by energy sources other than the natural gas that Russia is peddling. But for now, European energy policy remains disjointed, confusing and in disarray, if indeed it can be said to exist at all.