Power & Politics Hub

The subsequent series of articles on this blog will focus on the recent report of Mario Draghi, former head of the European Central Bank (ECB) and Italian Prime Minister, on the EU’s competitiveness, the current shortcomings and proposals on how to fix the problems. The report focuses on ten key industries, as well as five horizontal economic and political indicators. The following six articles on the blog, starting with this one, will synthesise Draghi’s assessments on four of the ten industries, and two of the horizontal indicators.

These articles will be informative, rather than an outright endorsement of everything said in the report, which in fact has caused some controversy in the eyes of European politicians such as German finance minister Christian Lindner having expressed doubts about some proposals such as ‘common debt’, as well with more left-wing politicians who believe the proposals do not go far enough.

This first article will focus on the energy industry.

The current issues

In the very beginning of the report, page 5, Draghi makes a claim that in comparison with its trade partners, as well as other major economic players such as the USA and China, the EU and its businesses currently suffer from a major competitiveness gap due to volatile energy prices, which also often greatly differ between various EU member states, with the situation having worsened as a result of the recent energy crisis. Energy prices had exceeded EUR 250/MWh in some states, while being below EUR 100/MWh in others. There are several reasons, apart from Russia’s weaponisation of fossil fuel deliveries that the EU suffers which Draghi mentions. In terms of natural gas, for example, the EU remains significantly more dependent on spot markets, than its competitors, and this is while natural gas maintains a higher share of the EU’s energy mix, whereas a domestic source like coal is decreasing. While Draghi does not advocate for an increased use of coal, it is to be noted that while polluting, coal would not make the EU more dependent on imports. Even with liquified natural gas (LNG) in which the EU can rely less on states like Russia, a major problem remains that the EU has so far not chosen to adequately leverage its collective bargaining power.

Draghi notes on page 14 of his report that integration of electricity and gas markets across Europe has proven to reduce price variation amongst member states and provide significant savings for both consumers and industry at approximately EUR 34 billion/year for electricity alone. Nonetheless, physical bottlenecks have caused problems like congestion in natural gas pipelines preventing a Single energy market from truly emerging. Grid investments would obviously be very important to that end, however they are currently far below than ideal. Draghi does recognise that even in the future the bulk of grid investments, both at the transmission and distribution levels, will be within borders, however more attention should be paid to interconnectors as well, as cross-border energy trade will improve security of supply and lead to an increased generation from renewables essentially dealing with diverse weather patterns across the continent. 

The solutions Draghi offers

Draghi offers three sets of solution proposals- for natural gas, for electricity, and horizontal proposals.

1. Natural Gas solutions

An obvious solution related to natural gas, which Draghi offers is to establish more partnerships with reliable and diversified trade partners. Trade partners who, unlike Russia, would not weaponise natural gas deliveries, and by having many potential suppliers, the EU would have more leverage. Draghi also proposes more long-term contracts, and reducing reliance on spot markets.

Another way in which Draghi offers the EU to increase its leverage is by engaging in joint purchasing.

Draghi further offers the introduction of price comparison tools in EU member states, by different retailers in order to have a more competitive market. 

In regards to the transition to hydrogen and green gases in industry, Draghi proposes Member states using the revenues from the Emissions Trading System (ETS) for support.

2. Electricity proposals

An evident way in which the former head of the ECB advocates to accelerate renewables deployment, as well as flexibility infrastructure and work on the grid, is by reducing administrative burdens, most notably permitting procedures in some Member states where these procedures are more lengthy.

To avoid bottlenecks, it is proposed that network updates and investments in grids are fostered.

The report is strongly supportive of keeping nuclear energy facilities, and accelerating the development of ‘new nuclear’, as stated on page 38. A further proposal worth noting is that energy-intensive users, according to Draghi, should be encouraged to self-generate.

3. Horizontal proposals

As per the report, the energy taxation playing field (including the different taxes, levies and network charges across the EU) should be lowered and levelled. These expenses should be harmonised across the entire Bloc.

More central planning is also encouraged in regards to the Single market for energy- decisions and market functions of cross-border relevance should be taken centrally so that the governing mechanisms are in place for an Energy Union.