Meant well, tried a little, achieved much?

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Aura Sabadus is an Energy and Cross-Commodity Expert at I.C.I.S.

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Meant well, tried a little, achieved much?

by Aura Sabadus

The establishment in 1999 of the European Federation of Energy Traders, more recently rebranded as Energy Traders Europe, coincided with a period of market opening and great optimism. 

Only a few years earlier, the end of the Cold War and receding security fears that had gripped Europe over the previous decades ushered in a wave of enthusiasm for market liberalisation, greater cross-border trading and privatisation. 

Former communist countries, which had suffered an acute flight of capital and a spike in their cumulative gross debt in the 1980s, faced a pressing need to reform their economies, turning to the IMF and the World Bank for financial assistance.

The answer came in the form of neoliberal ideas that prescribed, among others, trade liberalisation, the privatisation of state assets and property rights guarantees. 

These became the pillars of the Washington Consensus, a term coined by the US economist John Williamson and which established itself as the ideological cornerstone of the economic restructuring programmes initiated at the end of the Cold War. 

The utilities sector was one of the priority areas for deregulation and the first countries to embark on reform were the United Kingdom, followed by Belgium, the Netherlands and Germany. 

Despite initial reluctance to embrace liberalisation and privatisation, the deregulation of wholesale and retail markets began to pay off almost immediately after its introduction. 

For example, in Belgium its French-speaking province, Wallonia, was liberalised four years later than Flanders. 

The interim period allowed for a comparison of price developments in Belgium under liberalised and non-liberalised conditions. Prices for gas in non-liberalised Wallonia were 5-10% higher than the average contract price in the liberalised markets and up to 13% higher than the average lowest price.

With the EU accession of new member states from the former communist bloc in 2004, 2007 and 2013, liberalised markets expanded further East as they were seen as the model of choice for building efficient electricity and gas sectors across the bloc. 

And yet, a cursory glance at the experience of countries that sought to liberalise their markets shows that the process has been uneven and that in recent years the EU itself has adopted interventionist policies, often in sheer contradiction with its founding principles of free trade. 

What, then, accounts for this shift?

Are markets heading for difficult times ahead as the liberal principles that underpinned decades of deregulation are now fraying at the edges?

There are several factors that arguably explain the changes that are now afoot. 

The rise in far-right parties across the EU has pressured centrist groups to take more interventionist measures to rival the economic nationalism promoted by the populists. 

Although radically right-wing with regards to traditionalist social values, populist parties follow a left-wing economic agenda, emphasising greater government intervention and reduced competition. 

Even before the EU hit a period of unprecedented economic turbulence following Russia’s full-scale invasion of Ukraine in 2022, centrist politicians in France sought to emulate anti-establishment manifestoes, capping energy tariffs in a bid to protect consumers. 

The move proved costly and led to a collapse in the share price of the energy state-owned producer, EDF at the time. 

For observers watching central and eastern European energy markets for many years, this was an unsavoury déjà vu.

Even after joining the EU, many central and eastern European countries found it difficult to shake off interventionist instincts inherited from their communist past, seeking to retain control over companies and consumers through oppressive measures such as price caps, taxation or heavy-handed fines on private, typically foreign-owned companies. 

Romania’s successive governments repeatedly spooked markets by introducing policies that penalised private initiative and rendered meaningless any efforts to establish functional electricity or gas markets in the country. 

Exasperated by the constant political interference through price controls, a strident nationalistic discourse and a generally volatile regulatory environment, foreign companies wound down operations, leaving the country struggling to attract much-needed investment to upgrade its antiquated infrastructure and develop its gas reserves. 

In response, the government argued the policies that had been taken were necessary to guarantee energy security although it never really explained what the risks were and what energy security meant in Romania’s specific case. 
In fact, beyond Romania’s case, energy security is repeatedly invoked by governments as a target of energy policy, even though the concept is notoriously hard to define.  

There is a large academic literature showing how slippery the concept is and how governments have been abusing it over the years to promote policies that otherwise cannot be explained through standard economic reasoning. 

Ironically, when security threats really materialised, posing existential threats to countries, governments went in opposite direction, giving greater freedom to markets.

This was the case of Ukraine immediately after the Revolution of Dignity in 2014, when facing the first threats of Russian aggression, the government decided to stop its heavy dependence on Russian gas.

It immediately reversed course, switching from an inefficient centralised market to implementing EU-aligned rules that lay the foundation for the establishment of a competitive free gas market by August 2020. 

The same could be said about neighbouring Moldova, which faced with Russian gas curtailments in 2021, made an impressive U-turn from a centralised market fully-dependent on a single supplier to opening up to more competition internally and regionally.

But let’s look no further than 2022, when Russia’s decision to curtail most of its supplies to Europe to undermine western support for Ukraine, threw Europe’s markets in a spin.

Gas prices soared to record level, but the fact that markets could accurately reflect the severe demand-supply imbalance at the time, enabled companies to secure volumes elsewhere and plug the gaping shortfall. 

Although national governments and the EU itself subsequently shifted the blame on markets and sought to constrain free trading through a raft of politically convenient measures, there is no doubt that the ability of markets to withstand extreme shocks helped Europe to avoid a crisis of unprecedented proportions. 

The fallout of the crisis still rankles as high energy costs have hit Europe’s industrial base and reduced the EU’s economic competitiveness at global level. 

Nevertheless, it would be wrong to blame markets for the damage suffered by the economy. 

The energy crisis was arguably the result of an accumulation of misconceived policies that led to risky dependencies, which ultimately blocked exactly what markets require in order to stay functional – a real competition of resources. 

Right now, the EU faces a variety of challenges ranging from geopolitical volatility, embracing aspiring new members such as Ukraine and Moldova or witnessing the emergence of new markets for cleaner fuels.

To meet these provocations the bloc needs to consolidate its institutions and fully insulate them from political interference.

It also needs to incentivise greater integration of member states and ensure a finely balanced regulatory environment which can limit vulnerabilities while also allowing enough flexibility for European companies to regain global competitiveness.

In hindsight, by deregulating its energy sector, the EU did not only mean well, but by trying a little, it also achieved much, to paraphrase the Scottish novelist Robert Louis Stevenson. 

Its integrated free electricity and gas markets have shown not only their resilience in times of extreme stress but have also stimulated innovation and empowered consumers. 

It is for this reason that looking ahead to the next 25 years, Europe’s free markets should be kept and continued.

Energy Traders Europe is called upon to ensure that legacy is preserved and improved in the years to come.