Book Club

The Chair read for you Transitions électriques, ce que l’Europe et les marchés n’ont pas su vous dire by Jean-Pierre Hansen and Jacques Percebois.

Published on 13 December 2022

In light of their experience in both industry and academia, the two authors of this work attempt to trace back the history of Europe’s electrical sector. Transitions électriques, ce que l’Europe et les marchés n’ont pas su vous dire [1] aims to help the reader understand the challenges of the energy transition underway in Europe by providing a historical perspective and by presenting the different currents of thought that have structured the evolution of the electricity sector for over a century.

The book is structured chronologically and begins at the end of the Second World War. It first presents the establishment of the large monopolistic structures that dominated the European energy landscape for over half a century. Many political, technical, and economic factors explain the sector’s initial concentration.

Politically, the nationalizations that took place in post-war Europe were associated with the return of a strong State, a planner and initiator of major projects, as was the case with the development of the French nuclear fleet from the 1970s onwards. This omnipresence of the state in the energy sector was notably the consequence of the intellectual context of the time, which was still largely Keynesian and considered that it was the role of the state to steer the economy, a view justified by the years of great instability and strong inequalities at the beginning of the century. Combined with the catastrophic situation of the post-war period and the desire to get the country back on track for reconstruction, these ideas led to the birth of large groups such as EDF and GDF in France. Guided by the strong economic growth of the “thirty glorious years”, the development policies of the electrical systems were able to be carried out through the existence of these monopolies, armed arms of the States, able to manage all the stages from production to distribution of electricity, and evolving in a context of low technical as well as economic uncertainty. The thirty glorious years were thus characterized by the evolution of production plants towards ever larger sizes due to technical progress allowing a constant reduction in production costs. As the necessary investments continued to rise, the monopolistic structure of the sector was also economically justified, as the presence of the State allowed the financing of capital-intensive production facilities with longer lifetimes than in the rest of the economy (a nuclear power plant can operate for more than 60 years). The vertical integration of electricity markets, i.e., the concentration in a single company of the activities of production, transport, distribution and supply of electricity, was justified by the particular physical characteristics of the latter. Unlike more traditional economic goods, electricity cannot be stored (or only to a limited extent), which means that production and consumption must coincide at all times to avoid a blackout. Integration therefore has the advantage of simplifying the management of physical constraints between the different levels of the electricity production chain.

The process of evolution of ideas, helped by certain technical improvements, will however follow its course and the 1980s will initiate a radical change in the European electricity sector. The latter will then begin a transformation towards a market system which remains, even today, one of the major projects of the European community. The reasons for this upheaval are multiple: the oil crisis of 1979 put a brutal brake on European growth and the evolution of electrical demand became more uncertain. At the same time, the process of building the European Union was accompanied by a renewed focus on more liberal economic ideologies. Finally, some of the technical justifications for the monopolistic market structure were shattered by the emergence of smaller, less capital-intensive technologies: gas-steam turbines (GST). At the same time, and independently of the wave of markets that swept across Europe, awareness of ecological issues gradually imposed changes in production methods, with the European Union finding in the ecological cause a field for exercising its supranational legitimacy. The general context is thus set by the authors. The profound changes that have resulted from this have not, however, been implemented without a hitch, and the rest of the book proposes to describe some of the obstacles to these changes.

The process of liberalizing the European electricity sector was launched on December 19, 1996, and was scheduled to take effect in 2007. Between 1996 and 2009, three European texts, known as “energy packages”, were published, gradually abolishing monopolies in the production, supply and import-export of electricity. The transmission and distribution networks were, and still are today, considered natural monopolies, for which competition would be absurd, and thus remained regulated monopolies. All of these measures were intended to improve the integration of the various national networks and to bring about convergence in European electricity prices. This convergence is observed on wholesale prices, but it is important to note that electricity prices (including taxes) still vary greatly between member states, due to divergent national policies in terms of taxes and support for renewable energy. During the 2010 decade, electricity prices for end customers could vary by as much as double between France and Germany, whose massive public support for renewable energies was reflected in the bills in the form of taxes.

Finally, as a last part, the authors propose some ways to improve the European electricity system. According to them, the first observation is that the market competition that has been put in place on the continent has shown its inability to provide the right investment signals to companies and thus poses major problems of energy security. Competition for the market would be preferable to a hybrid system such as the one currently in place. One could thus imagine that the public authorities would be responsible for issuing calls for tender for production capacity installations, according to estimated future needs. Such a solution would abolish production, import and export monopolies while ensuring the continent’s energy security. Next, the authors call for reducing the rents granted to certain renewable producers and in particular to change the support mechanisms for the latter. Finally, the network operators of the different European countries must be able to coordinate themselves more effectively, and standards must converge to avoid the risk of blackouts on the European grid.

The authors conclude the book by reminding us that unlike the post-war period, the current context is very uncertain. The prices of energies such as oil and gas are very volatile, demand is stagnant and its evolution remains subject to debate. In the face of this uncertainty, a liberalized and more flexible electricity market seems at first sight more appropriate than a dirigiste solution of a regulated monopoly. However, we must not forget the specificities of electricity, which is an economic good that is highly constrained by the physics that governs its behavior. Moreover, the eminently political dimension of electricity leaves public authorities unable to turn away from it completely, if only to contain the risk of shortages. These observations seem to explain the evolution of the sector towards hybrid systems, with the presence of state-led capacity markets coupled with an energy market where producers compete.

Ange Blanchard, Research Fellow Low-carbon power system flexibility: modelling and economic analysis.

[1] Hansen, Jean-Pierre & Percebois, Jacques (2017)Transitions électriques, ce que l’Europe et les marchés n’ont pas su vous dire. Edition Odile Jacol, 276 pp.