– E&C blog –

Belgian television on the electricity market: a missed opportunity

By Benedict De Meulemeester

By Benedict De Meulemeester on 8/03/2011

This weekend, Flanders was in an uproar over the energy policy. On Sunday evening, the program Panorama broadcasted a report, titled "Watt a mess”. The program was thoroughly hyped throughout the weekend with contributions on news programs on  TV, radio and a debate in de “Zevende dag” ( a Belgian political debate program). As an energy procurement consultant, I am obviously pleased with so much attention for the theme that we deal with in our professional lives. Moreover, the report talked about an issue that we have put under the microscope for a long time: namely, the lack of investment in Belgian electricity production.

However, I was also dissatisfied afterwards. I believe that the whole program was a missed opportunity to put the issue of grid companies under the microscope. Instead, the show ended in a predictable round of Electrabel-bashing. The public view of energy is very short-sighted. Just looking at our home market will not help us to see the bigger picture and broader issues.

Over the past twenty years, there have been very little investment in power production sites  in Belgium. The reason for that is very simple. In the Belgian market, Electrabel controls 90% of the production capacity, of which the majority consists of depreciated nuclear power plants. Those who want to invest in a new plant will almost definitely build a gas plant. In the report, they also discussed plans for building coal plants, but what the documentary maker failed to mention is that coal prices are rising and are therefore not really profitable. A gas plant will always have much higher fuel costs than a nuclear plant. In other words, the marginal costs are much higher. If you build such a plant, then from Electrabel's dominant point of view, they will lower the electricity prices in Belgium below the marginal cost level. This creates a huge risk for everybody who wants to invest in power production in Belgium. Only a strong protection by the government can help to make the risk bearable.

And - as the report rightly mentioned- that is the main problem in Belgium. Our decision-makers demonstrated this with their own reactions during the broadcast. Paul Magnette, Federal Minister of Energy and Freya Vandenbossche, Minister of Energy in Flanders, were working hard to contradict one another. Mr. Magnette made the broadcast completely embarrassing by saying that he regards the liberalization to be a failure. The socialist parties were part of every federal government since the liberalization of the energy market in Belgium. Can you do anything else than blaming the failure on yourself? How can a minister without hesitating talk about the bankruptcy of his own policy? Should such a person not be made aware of his responsibility?

The failure of the policy has a number of different causes:
1. A minister such as Paul Magnette should take the leading position in liberalizing the market but he does not believe in liberalization altogether.
2. Politicians populate since many years the boards of municipal energy corporations. This close relationship between politics and the energy sector creates - not only for us but also in other countries - a lack of political willingness to tackle energy market issues.
3. The energy market is complex and policy makers do not always seem able to understand the complexity of things.
4. The federal government has lost over the past three years its power over the industry by begging several times to Electrabel for money. Instead of taking structural measures to enforce our position, politicians were repeatedly satisfied with some pocket money to cover the hole in the budget gap.
5. The fragmentation of responsibilities certainly doesn’t make things easier.
6. There is insufficient distinction between the problem of the free energy market and the problem of the grid companies.

The electricity cost consists of three main components: 1. Commodity, the cost for the power itself, 2. The grid costs, the cost to bring power to the consumer, 3. The taxes and contributions. The report stated that electricity costs are higher in Belgium than in neighbouring countries. E & C has a clear view of the current energy costs of industrial users in 23 countries in Europe. We certainly do not see or notice that the costs in Belgium are structurally higher. Germany clearly has much higher costs than we, Dutch customers also often pay a little bit more than Belgians. But furthermore, costs may be higher due to each of those three components. And it is particularly unfortunate that the Panorama broadcast failed to investigate this.

With regards to the price of electricity itself, to this day, the price is not structurally higher in Belgium. The report talked about high spot prices in late November to support the thesis that the lack of power would now lead to higher prices. They failed to mention that this was only a temporary phenomenon. And, worse still, they also concealed the fact that the problem actually originated from France, where spot prices were as high as in Belgium. If we take a look at the average spot prices for 2010, we notice a price of 48.96 euros per MWh in Belgium, which is more expensive than the 47.78 euros per MWh in the Netherlands, but cheaper than the 50.11 euros per MWh for France.

Using spot prices of 1 day or even a few hours, to showcase or to determine that a given market is more expensive than another, is very poor in terms of analysis. A lack of production capacity in the future may indeed lead to rising prices. The Panorama report warning on that subject is correct. But until now, this has not been the case in the wholesale market for electricity, not in the spot market and even less in the forward market where the price for the average consumer is created. The prices for electricity itself are not structurally more expensive in Belgium. This means that Electrabel is not abusing its dominant market position. And yes, Electrabel is making big profits with its nuclear power, but so do other owners of nuclear plants in liberalized markets

Yet the average consumer complains about rising energy costs. This is due to the increase of grid charges, which consist of more than half of the costs that residential consumers find on their invoice. These grid costs are being charged by monopolies, Elia for the transport in Belgium and local distribution networks in Flanders that are brought together under the organisation of Eandis and Infrax. The fact that the names of the two latter are not even mentioned in the report, shows yet again, the inadequate analysis. Yet again, they consist of half of the bill for the individual consumer, and you do not even need to accuse them of market dominance, they are just legal monopolies.

When you talk about a monopoly, you have to mention that a regulator is needed, to limit the rates that the monopolies charge. In Belgium, the regulator is CREG, also mentioned several times in the report. However, in 2007, the Brussels Court of Appeal stated that the CREG, the regulator, actually has no jurisdiction with regard to regulating the tariffs of the grid companies. Therefore, CREG cannot limit the rates of monopolies when they charge rates that are too high. Ever since that particular ruling, the grid network companies are actually allowed to charge whatever they want. As a result, there has been a significant increase in grid costs. In essence, there is actually a quite easy way to solve this. The federal government must simply ensure that the CREG has a solid legal mandate to regulate network grid tariffs. Three and a half years have passed since the court ruling and still nothing has happened. Maybe after this report it will at last be seen as urgent? Because that is certainly the case.

What are the reasons for this lack of political goodwill? Well I must be careful that I do not sound too cynical. But take a look at the composition of the Board of Directors of Eandis. How many politicians do you count? And who is the new Chairman of the Board of Directors of Infrax? Indeed, Steve Stevaert. Politicians can hardly claim that they do not have enough knowledge with regards to the energy markets. Because, this would mean that everyone is asleep during all these board meetings. My toes curl when I think at all those expensive commercials of grid companies. Eandis who advertises so that I would know which company has the sole right to transport electricity into my home. And I have to pay the bill for that ad ...

And what do the people get? A grid company that refuses to connect when solar panels or windmills have to return power to the grid. A grid company that sticks its head in the sand when there is a power failure. A transportation net operator that for some unclear reason refuses to create a connection to the German power net. If we are not able to provide a good energy policy ourselves, then we will have to put our hope in a further internationalization of our markets. No, I will not absolve Electrabel from sins. But for once they are not the bogeyman.

Keep up to date with E&C