California dimming

Nov. 16, 2001
The dimming of the lights in California earlier this year has provided a salutary lesson for European lawmakers now contemplating how to introduce legislation to guarantee security of energy supplies, while at the same time liberalizing the market. They know they have this one chance of getting it right.

The dimming of the lights in California earlier this year has provided a salutary lesson for European lawmakers now contemplating how to introduce legislation to guarantee security of energy supplies, while at the same time liberalizing the market. They know they have this one chance of getting it right.

Advice is flowing in from all sides. Consumer organizations are having their say; the generators are, to use a labored pun, plugging their case; and the oil and gas companies are standing with a foot in each camp.

For the European Commission in Brussels a major issue is the increasing dependence on external suppliers to support continued economic growth.

Europe's dependency on imported gas is 40%, projected to rise to 66% by 2020, although that does not necessarily imply vulnerability. Europe has had imported oil and gas for many years and they have proved to be reliable. The reason is that Europe is an economically important market for the exporters. For instance, the gas industry accounts for 21% of Russian export revenues and funds almost a quarter of the Russian Federation budget.

Mutual dependency is a more accurate description of the market. As the secretary general of the Organization of Petroleum Exporting Countries recently said, "Producers need consumers just as much as consumers need producers."

International trade

This is a trend not limited to Europe. Gas trade has been growing by 9%/year for the last 20 years in the shape of international pipelines, and 22% of gas consumed globally now crosses an international border. This is up from 15% in 1990.

Therefore, Europe's regulators must respond to this need with a precise policy that clearly defines the roles of government and the private sector in a liberalized market in a way that guarantees at least as much security as the present system.

In the UK, gas liberalization has delivered a reduction in prices to industrial customers of 25% since 1990, has contributed to an increase in the market of over 80%, and has done this with no discernible reduction in security.

However, it has emerged in the UK that the market system brings with it the prospect of price volatility, as flexible and transparent prices give signals to the players in the market and have led to some making sound investments in storage systems or peak supply contracts.

Advice and fuel flows

So, it is clear that some of the elements required to meet Europe's security of supply are in place.

Others are still needed. The delivery infrastructure is not yet complete, enough long-term supply contracts are not in place, and the market mechanisms that will enable those involved to redistribute risk are not well enough defined.

It is also clear that Europe is not short of energy, and its lawmakers are not going to be short of advice. All they have to do is listen. It really is that simple.