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A European government caught being protectionist

by Jerome a Paris Mon Apr 17th, 2006 at 04:15:37 AM EST

Gazprom prompted rethink on UK merger rules

The UK considered changing its merger control regime this year to block a potential takeover of Centrica, the UK’s biggest gas supplier, by Gazprom of Russia, a move that remains an option to thwart any bid that threatens energy security.

Alan Johnson, the trade and industry secretary who has been a vocal critic of protectionism in the US and Europe, was briefed with other ministers in February on the legal changes required to allow them to block a rumoured bid by Gazprom for Centrica, the Financial Times has learnt.

(...)

Mr Johnson this month attacked other countries for using as a protectionist “veil” concerns about bids posing a threat to security. But he also said that bids “should be of concern when there is a genuine issue of national security at risk”.

Energy supply, a central criterion in the UK government’s current review of energy policy, “could cross the boundary” between unjustified and genuine security issues and justify political intervention, a government aide said.

Let's restate the rules on takeovers simply:
European company = protectionism = bad
UK company = national security = OK

Other relevant posts:
Article deconstruction (vol. 6): Brown and protectionism
EU Energy reform = give Britain access to the continent's cheap spare capacity


Display:
My message on blogging to David Finkel of the WaPo, to which he has now kindly replied (see at same link).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Apr 17th, 2006 at 04:26:25 AM EST
From the other FT article on Centrica:


Ministers rattled by Gazprom's advances

The standard policy on potential takeovers was clear - the government removed itself from mergers in 2003, when the Enterprise Act came into force, delegating decisions on almost all deals to independent competition authorities.

The UK has made a virtue of this lack of political interference, which has allowed several utilities to be taken over by European Union companies with no political discussion and barely a murmur of public dissent.

Alan Johnson, trade and industry secretary, used a speech to the British Chambers of Commerce this month to boast of Britain's open energy market. "Downing Street's electricity is supplied by a French company, the water is supplied by a German company and there is a choice of four gas suppliers, three of whom are foreign owned," he said.

(...)

Such concerns [geopolitical threats to energy supplies] explain the unusually strong nature of the DTI's formal response to the putative Gazprom bid. Officials at the time warned a takeover would be subject to "robust scrutiny" and said security of supply to UK consumers was "paramount".

This tough talk does not necessarily mean the government would change the law to allow itself to block such a bid. Competition experts warn such a move would be fraught with difficulties, not least as so many foreign takeovers of utilities have already been allowed.

The government may hope the simple fact it would consider such a measure will be sufficient to deter Gazprom from making a move. Chris Bright, a competition lawyer on the Competition Commission's utilities panel, said: "Sometimes you just need to rattle a few sabres. It seems to work for the French."




In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Apr 17th, 2006 at 04:31:00 AM EST
Fran linked to an item by the Independent with that tidbit:


Blair warned of 'energy gap'

Tony Blair was warned about a possible energy "gap" by senior MPs last night, and urged to rethink his plans for a new generation of nuclear power stations to tackle the country's predicted energy crisis.

With almost a quarter of the country's current electricity-generating capacity to be decommissioned by 2016, the Commons Environmental Audit Committee said that there was not time to wait for a new generation of nuclear reactors, which, if built, may not be generating at full capacity until 2030. The committee said that Britain could face the prospect of electricity black-outs within a decade unless there was urgent investment in new gas-fired power stations.

I went to read the report from the Commons Environmental Audit Committee, which can be found here and which states, in its executive summary:


Over the next ten years, nuclear power cannot contribute either to the need for more generating capacity or to carbon reductions as it simply could not be built in time. The potential generating gap during this period will need to be filled--largely by an extensive programme of new gas-fired power stations, supplemented by a significant growth in renewables. Contrary to popular belief, a further 'dash for gas' would result in significant carbon savings. Moreover, it is not clear how much effect the replacement of older coal and nuclear plant by gas will have on the security of total electricity supplies, as we will in any case become highly dependent on foreign imports of fossil fuels for our total energy requirements--including over twice as much natural gas for industrial and domestic uses as we use for electricity generation.

So they do note (i) that renewables should be tapped as well and (ii) that gas will cause security of supply issues.

More interestingly:


 All lower-carbon generating technologies are more expensive than coal and gas, and will require a long-term funding framework in order to reduce investment risk and ensure that the necessary investment takes place. The current highly liberalised UK electricity market structure is too short term and fails to provide such a framework. Indeed, it is not clear whether it will even ensure that enough investment takes place to keep the lights on by 2016.

This is exactly the points I made in other articles:

  • a liberalised energy market structurally encourages investment in coal-fired and gas-fired plants, whose initial investment costs are lower;

  • there are not enough incentives/constraints for even gas-fired plants to be built in sufficient numbers today, thus the fear of brownouts - which can only be compounded by gas shortages;

I'll just add that it's no longer true to say that renewables are more expensive than gas-fired plants. The initial investment is higher per MWh, but as there are no fuel costs, the long term cost is now cheaper, considering natural gas prices.

But at least they are looking at things in the right way.


A Government decision to support a major programme of nuclear new build must also take account of the impacts on investment in other areas--notably energy efficiency, renewables, carbon capture and storage, and the development of distributed generation systems. The potential of these various technologies over the next 20 to 30 years is immense, and any public subsidies for nuclear must be weighed against the substantial progress towards reducing carbon emissions and ensuring a greater degree of security of supply which these alternatives could achieve with similar subsidies. However, as all forms of lower-carbon generation will require financial support, the Government should accept that the shift to a sustainable energy strategy cannot be based--at least in the medium term--on maintaining low energy prices.


If the Energy Review is focussed mainly on electricity generation and, in particular, a decision on nuclear, then it is unclear what the nature of such a decision could be and the Secretary of State himself was unable to explain this. Indeed, the Government has always argued that its role is not to prescribe the fuel mix, and it has invested much effort in developing a fully liberalised market which will determine for itself such investment decisions. The frequent statements that it must make a decision on energy, and specifically on nuclear, fundamentally conflict with such an approach and would therefore represent a major U-turn in energy policy. Moreover, if the Government does indeed come to a decision on nuclear, it is unclear why it should not also come to a decision on off-shore wind, marine, or micro-CHP - let alone the array of possible measures to support energy efficiency. Yet we never hear Government ministers talking in such terms.



In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Apr 17th, 2006 at 04:51:20 AM EST
This is very good stuff, pointing out the contradictions in the liberalized-market line exactly as you have set them out again and again, Jérôme. Congratulations.

I wonder what Blair will do with this. I wonder...

by afew (afew(a in a circle)eurotrib_dot_com) on Mon Apr 17th, 2006 at 01:31:59 PM EST
[ Parent ]
For God's sake, you social-democrats of the worst European bunch... you really are so dumbs as to not realize what is a GENUINE national security problem.

I repeat it again.

Yours: stupid communist scaremongering anticapitalists
Mine: genuine concern

Yours: Coglioni, paralyzed, anti-business regulation that prevents this world from universal happiness.
Mine: genuine concern

Yours:.....
Mine: genuine

And if there is anything genuine in your position is the genuine breakdown is going to produce in your economies if you do not reform and reform and refomm.. and once you are dead reform again.

Genuine Mega Snark of the Best Class

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Apr 17th, 2006 at 06:44:17 AM EST
Or once again:

IOKIFAAS

(It's okay if you're an Anglo-Saxon)

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Apr 17th, 2006 at 07:50:50 AM EST
[ Parent ]
I can't believe you are trying to weigh the political actions of any political entity compared to another one - don't tell me you believe in universal justice?

Be careful! Is it classified?
by darin (dkaloyanov[at]gmail.com) on Mon Apr 17th, 2006 at 06:58:15 AM EST
Not quite, I am comparing the political actions of one political entity to the recommendations it makes to other political entities on a topic of common action...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Apr 17th, 2006 at 07:17:30 AM EST
[ Parent ]
I see what you mean, you are appealing for coherent political action, right? Well, was USA ever coherent, for example? :)

As long as a state holds enough economic and political power, it will do as it wishes, since all the other players have to take in mind its actions.

Be careful! Is it classified?

by darin (dkaloyanov[at]gmail.com) on Tue Apr 18th, 2006 at 03:38:31 AM EST
[ Parent ]
2 questions immediately arise:

1. What is the UK government going to do about it?

Ministerial briefings, comprehensive energy review....I see an about-face (with minimised loss-of-face - it's about National Security, silly) on the way.  New circumstances, modernisation, etc etc.  The UK will still be in a tricky situation in the medium term, but it could, viewed optimistically, be the kick needed to reduce energy consumption.

2. What will the Commission do?  

They've initiated action against 17 of 25 member states for doing essentially what I think we all hope governments will do for their citizens.

Strictly speaking the Commission is not controlled by the governments, but how long will it take for reality to dawn on them?  The free-market paradigm is so last century.

by GreatGame2 (fishy_logic_at_yahoo.co.uk) on Mon Apr 17th, 2006 at 02:42:03 PM EST

Dear Sir

Two apparently unconnected bits of information came to our attention over the week-end: the flurry of panicked activity by the British government when it was learnt that Gazprom was contemplating a take-over of Centrica, as revealed by the Financial Times this Monday, and the most recent report by the Environmental Audit Select Committee of the Commons on British energy policy. Both point to  the contradictions inherent in the liberalisation of the energy markets, whether in Europe or in the UK.

The first item underlines the hypocrisy of a government that lambasts the governments of France or Spain for their "protectionist" instincts while doing essentially the same thing - preventing the take over of a national energy company by a foreign one - under the (very real) argument of security of supply. Acknowledging that the nationality of the owner of such a vital thing as the energy distribution infrastructure matters is a good thing - the next step is to recognise that the policies of countries like France and Spain which, unlike Britain, have had to grapple with high dependence on imported hydrocarbons for a long time, actually make sense and should stop being targetted for domestic political gain (blaming Europe for the current high energy prices).

The second report notes in its executive summary (http://www.publications.parliament.uk/pa/cm200506/cmselect/cmenvaud/584/58403.htm) that  "the current highly liberalised UK electricity market structure is too short term and fails to provide a framework [to ensure that the necessary investment in lower-carbon generating technologies takes place]. Indeed, it is not clear whether it will even ensure that enough investment takes place to keep the lights on by 2016." A regulatory context that does not provide for sufficient incentives to build enough generating capacity, let alone spare capacity of such a vital commodity as electricity can only be called deeply flawed. It can be argued that the current cries by the British government against the "protectionism" of its continental neighbors are nothing but a crude attempt to tap the spare capacity that these countries have built instead of paying the high power prices caused by the government's lack of foresight.

Moreover, the Committee notes the contradiction between a policy framework that is supposedly technology-neutral and the recent attempts by the government to encourage a rebirth of nuclear energy. While it is not correct to say that a liberalised market is technology-neutral (by empowering the private sector, it de facto favors technologies that have the lowest initial investment - and financing - cost, i.e. coal-fired and gas-fired plants rather than nuclear or renewables, which both have high upfront investment costs but low fuel and operating costs), it is right to point out that favoring a techology like nuclear over others, even for the best of reasons like security of supply, goes against market liberalisation and also opens itself to criticism that not enough is done to encourage renewable energy sources.

What both stories show is that liberalisation of the energy sector is definitely not the solution to the 3 issues that all European countries face today, but that Britain faces more urgently than most: how to ensure security of supply, how to limit greenhouse gas emissions, and how to make sure that the necessary investment in the sector is made. Liberalised markets will only invest - moderately - in hydrocarbon-fired power plants, thus making the first two issues worse and only partly solving the third. Nuclear power might solve all 3 issues, but requires heavy public support and creates other problems (how to deal with the waste, how to bring the capacity online in time, how to keep long term costs under control): it is absolutely incompatible with liberalised markets. Renewable energy and conservation are seen as insufficient and too costly even though they are both already cheaper than gas-fired electricity. They do require a strong, stable regulatory framework, public support and R&D, and a long term commitment - thus they are also at odds with the religion of market liberalisation despite providing the only real long term solution to all the above issues.

It's time for the British government to stop blaming the continent for its self-inflicted power woes, and to commit itself to a serious energy policy eschewing pure market mechanisms and explicitly favoring renewable energies on a large scale, starting with wind power. The alternative is increasing carbon emissions, natural gas shortages, and, ultimately, brownouts - or to go beg EDF to sell a few more GWh of cheap nuclear power at exorbitant prices...

We'll see if it gets published...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Apr 17th, 2006 at 04:13:18 PM EST
Great letter, Jerome.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Apr 17th, 2006 at 05:21:19 PM EST
[ Parent ]
Now crossposted on dKos (http://www.dailykos.com/story/2006/4/17/172711/377) to see if I can get them interested in arcane European debates...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Apr 17th, 2006 at 05:32:04 PM EST
[ Parent ]
And—I hope you don't mind me asking—why would you want to try and get them interested in arcane European debates?

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Mon Apr 17th, 2006 at 05:37:16 PM EST
[ Parent ]
because I have neither the energy not the time to write a full diary for them tonight and yet my daily diary quota beckons!

I'm a practical - and lazy - guy. It's my secret, in that people don't want to believe it actually is...

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Apr 17th, 2006 at 05:53:24 PM EST
[ Parent ]
Good work, Jérôme. First-rate.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Apr 18th, 2006 at 02:59:11 AM EST
[ Parent ]
I think we could debate the comma after "and" in the last sentence if we were Pikkunissijas (I'm kidding I'm kidding don't hit me, the comma there is vital!)

Fantastic letter!

by Alex in Toulouse on Tue Apr 18th, 2006 at 03:31:51 AM EST
[ Parent ]


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