The European Energy Market
The European Energy Market
European Union (EU) member states are aimed at building the biggest energy market that can supply the millions of users throughout the continent. To satisfy the need and demands of the European marketplace, it was necessary to have a sound and competitive energy market. To achieve this goal, the European Union liberalized the energy market sector to out phase the monopoly that negatively affected the region. However, the liberalization process has faced significant setbacks especially from the government of EU member states. The European Commission, which is mandated with the responsibility of overseeing the liberalization process, introduced policies that govern all member states.
Over the recent years, EU’s dependency on energy has been extremely high and is expected to continue rising. This comes at a time when the continent’s oil and gas reserves are gradually decreasing. Thus, member states are continuously becoming dependent on foreign energy suppliers hence becoming economically vulnerable. Furthermore, EU’s balance of trade is affected because money is transferred to countries outside the continent. Liberalizing the energy market is expected to reduce or eliminate the impact of these factors on the region’s economy. A liberalized market will enable Europe-wide energy companies to participate in the competitive market that is currently monopolized by the incumbent dominant actors.
The increase in actors will improve energy security, supply and efficiency. In addition, it will promote the development of cheaper and environmentally friendlier renewable and clean energy such as solar and wind. The increase in diversity and suppliers has increased energy supply in the continent. Furthermore, most of the new actors are listed in the European stock exchange markets. The increased trading in futures, options and shares, is continuously attracting more regional and foreign investors. Collectively, these factors reduce the cost of energy, dependency on foreign suppliers and increase energy production in the European Union. The gainers of the energy markets liberalization in the EU are Denmark and the Netherlands. According to Market Observatory for Energy (2011), these two states are the only energy exporters among the twenty-seven EU states. This means liberalization will reduce the level of competition within these two countries since companies will venture into members states with energy deficits.
Liberalization of the energy market has several implications on producers in the EU. According to Hill (2012), liberalization is aimed at increasing the level of competition in the market. This is because the economic tool will enable foreign and regional producers and retailers penetrate a new market. With new entrants coupled with the existing actors, the level of competition in the EU region is expected to increase drastically. Companies with large economies of scale might not be affected by these changes. This is because they are in better positions to adapt to the changes in the market because of their strong financial ability.
However, small and medium sized companies might be forced to consider acquisition or mergers to strengthen their financial ability. Operating in a competitive market might be financially straining in terms of research, infrastructure development, sales marketing, market penetration and service delivery. Because of liberalization, energy production companies will venture into other countries in the region to tap into the huge market. The increased level of competition in the energy market will promote research and improve the quality and quantity of energy produced for consumption. To have a competitive advantage, all actors will be determined to invest in cheaper clean and renewable energy thereby decreasing the cost of energy.
To realize the success of a liberalized energy market in the EU, it is essential to restructure the entire energy market. The unbundling process is aimed at separating the incumbent producers and retailers from the monopoly associated with energy production, distribution and transmission networks. If these companies are allowed to maintain their control over the energy networks, then they will be able to influence the market prices and undermine emerging companies. To create a fair and effective competitive market in the region, the European Commission should ensure that all member states are committed towards implementing vital reforms in their energy sectors.
Despite the efforts made by the European Commission, the progress towards energy market liberalization has been slow due to a number of reasons. Firstly, many EU member states are less committed and unwilling to embrace a competitive energy market. Governments fear the consequences of a competitive market on public service obligation. To ensure the security of energy in their countries, governments of member states continue to retain significant control of their national energy markets and relations with external energy producers. Moreover, more countries recently joined the European Union making the integration process much slower.
Incumbent companies that own the
energy transmission and distribution networks also fear losing their
competitive advantage. The success of a liberalized energy market is solely
dependent on these networks. Without the cooperation and commitment of these
two actors, all efforts towards a liberalized energy market are completely
thwarted. Secondly, price discrimination is being used to benefit incumbent
companies. In a move to maintain the control of their energy markets and
influence prices, unwilling and uncommitted governments purchased huge shares
in big power companies. Financial might and government support enables
incumbent companies to continue benefiting from the monopoly. Consequently, the
high entrance and operational cost locks out potential investors with small
economies of scale.
Hill, C. W. L. (2012). International business: Competing in the global marketplace. Boston: McGraw-Hill.
Market Observatory for Energy. (2011). Key Figures. Retrieved from http://ec.europa.eu/energy/observatory/countries/doc/key_figures.pdf