Esa Hyvärinen
Posted by: Esa Hyvärinen

Competitiveness has become THE word without which it is impossible to discuss energy and climate policy issues in the EU. This is very good and most welcome development. Even without the current economic situation competitiveness is worth looking at. This is the biggest and possibly the only concrete impact the US shale gas development has and will have on the EU.

But whose competitiveness do we mean?

Traditionally, and also today, the attention has been on the competitiveness of energy intensive industries. The share of manufacturing industries is decreasing in Europe, which is bad for the economics and employment. End customer prices of electricity have increased dramatically over the past years. This applies in particular to households but also to industries.

Competitiveness of energy companies has not attracted much attention in the media or by political decision makers. Common perception still is that energy companies make a lot of money regardless of economic cycles. This time the issue of competitiveness is different – it is also the competitiveness of the energy companies that is, or at least should be, an issue of concern. For example in Finland,  energy sector has been responsible for more than 30% of industrial investments. If those investments will not take place, the effect on the employment and economies in general  – and for energy intensive industries – will be massive.

Paradox of high and low electricity price

Paradoxically we have entered into a situation, where electricity is too expensive for consumers having negative effect on their competitiveness. At the same time the price of electricity is so low that it does not really justify any investments. How can it be?

The wholesale price of electricity is currently  at a very low level. In the Nordic market, for example, the market price in real terms is on the lowest level in 15 years. If we compare  the electricity prices between the EU and US, we can see that the there is no difference, if we do not take taxes into account. But when taxes are taken into account, the US prices are lower.

At the same time,  end user prices for example in Germany have doubled. This increase, as we see it, is a result of policy framework. Therefore, it would be too simplistic to conclude that the increasing energy prices hamper the competitiveness of European industries. We must have a closer look and see, which components in the energy prices have increased and why. So, while market price of electricity has  remained flat or decreased, different taxes, levies, fees, etc. have driven the increase of the end-user prices. The effect of the often blamed CO2 cost is hardly visible compared to these other cost drivers.

We need and can fix this

In other words, in order to tackle the increasing energy prices, we must address the right components. Climate change mitigation must continue, but the policies would have to be streamlined considerably. Lessons from the EU 20-20-20 framework, the overlapping and even conflicting nature of targets and measures leading to inefficiency and high cost must be drawn.

This is by and large a problem that we have created ourselves. The good thing is that then we can also fix it ourselves. And how exactly? More on this in my next post.


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