Verberg: Energy market liberalization must not undercut investment

George Verberg, CEO of Dutch gas company NV Nederlandse Gasunie, yesterday warned European governments not to lose sight of crucial longer term issues of security of supply as liberalization of the continent's gas markets gathers pace. Verberg said the risk of loss of security of supply due to underinvestment was 'not an abstract, theoretical risk,' and pointed to the pitfalls encountered in California as it pushed ahead with full electricity liberalization in the last five years.

Oct 13th, 2000


Darius Snieckus
OGJ Online

PARIS�George Verberg, chief executive officer of Dutch gas company NV Nederlandse Gasunie, yesterday warned European governments not to lose sight of crucial longer term issues of security of supply as liberalization of the continent's gas markets gathers pace.

Speaking at the Gas Executives' Summit, Verberg said the risk of loss of security of supply due to underinvestment was "not an abstract, theoretical risk," and pointed to the pitfalls encountered in California as it pushed ahead with full electricity liberalization in the last five years.

"The importance of a well-balanced and expertly judged approach to the liberalization of the energy market is clearly demonstrated by what is happening on the US electricity market," Verberg stated. "Initially, liberalization increases efficiency by fostering competition and bringing down operational cost, [but it should not] turn into an aversion to making essential investment or to postponing necessary maintenance."

The experience of California, Verberg said, where investment in production and transmission fell away as investors lost confidence in their return as market demand swelled, was a "lesson in liberalization."

He said, "At first, there was no problem, since it was only the overcapacity gradually decreasing. But as market demand grew considerably at the same time, suddenly the need for new investments rose at a point in time when the liberalized market had not had the chance to find a new equilibrium and to restore investor confidence in market developments."

The "sharply higher" post-liberalization energy prices not being shouldered by Californians, Verberg suggested, fronts the greater danger presented by a shortage in generating capacity in the state, which has already led to a "serious power outage" in Silicon Valley.

Though Verberg acknowledge that gas and electricity markets were not strictly comparable, he said there were parallels to be drawn "between the investment climates" in the two sectors. "� In both markets there was surplus capacity of between 10-15% at the start of the liberalization process; in both the US and Europe, the pace of liberalization varies from state to state," he said.

With a number of major pipelines in Europe�including those of the Ukraine�currently in a poor state of repair, the problem of security of gas supply in the future, he said, was very real, as liberalization of the gas markets accelerated.

Regulatory policy emerging in Europe that gave preference to short-term markets over long-term take-or-pay contracts, Verberg stated, would weaken security of supply of the continent's energy market.

"On the European level one can hear officials advocating that the strategic storage function can be abolished gradually as the market opens up," he said. "This would have serious implications for countries like Italy and France�and also, Holland would less than in the past be able to play its role as last capacity resort in case of European calamities."

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