April 22, 2024
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EU: The European electricity market should be more integrated

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Europe needs massive investment in electricity generation, storage and distribution as well as in electricity-consuming appliances that operate in a system-friendly way. The European Commission’s most recent scenario underpinning a 90% emission cut entails a supply-side investment to more than triple, from half a percent of GDP in the last decade to 1.8% in the next decade.

While 1.8% of GDP seems abstract, it includes scarce resources such as workers laying foundations to build new wind turbines and engineers designing new storage systems; it also refers to substantial amounts of steel and concrete (the production of which is hard to decarbonise) and the import of certain raw materials that are in high global demand. Europe cannot afford to waste resources on building too much of the wrong infrastructure in the wrong places.

Even worse, Europe might lose what has been achieved already. The 2022 energy crisis highlighted the resilience and security benefits of relatively well-integrated EU electricity markets. But paradoxically, the crisis accelerated pre-existing fragmentation, rather than leading to more coordinated solutions. Without European markets that can deliver the required investments, EU countries might be forced to take back more control to safeguard their energy-policy objectives, potentially setting in motion a ‘death spiral’ for the EU internal energy market.

Not leveraging the benefits of integrating power systems across the European Union would be a drastic loss in terms of the efficiency and resilience of the power system. When done together, substantially less capital would be needed for additional power plants and less fuel would need to be burned than if each EU country optimises only its system. Moreover, the cost of the invested capital will be lower in a consistently regulated and predictable European market and consumers would reap more of its benefits.

Hence, the choice is between letting go and accepting increasing fragmentation, or forcefully pursuing further market integration to reap the benefits of more coordinated investment decisions. The latter requires substantial political investment, namely that governments tackle the significant distributional effects within and between countries.

Experience has shown that such domestic political constraints often are numerous and rather entrenched. Europe needs to develop a high-level vision of what degree of integration is feasible and desirable and how it can be properly implemented and governed.

Source: bruegel.org

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