Marten Ivan

Neighboring Countries Should Harmonize Energy Policies

By Iván Martén

The Wall Street Journal brought together a group of industry and thought leaders—The Experts—to comment on issues raised in Journal Reports. In October 2014, BCG’s Iván Martén weighed in on several issues.

As much as there is no one cure for every pain, no single energy policy is sufficient for every country. The status and challenges of the energy markets are very different worldwide. But countries would benefit if they did more to harmonize their policies with those of their neighbors.

In Europe, having one energy policy—as opposed to the current plethora of often-contradictory national policies—would actually be a huge step forward. Currently, member states of the European Union have very different strategies. For example, France is a nuclear island within Europe, with nuclear energy generating the majority of its electricity. Germany, meanwhile, is an enthusiastic champion of renewable energy. But electricity does not respect borders; rather, it often enters the grids of neighboring nations. French nuclear plants, therefore, need to react when German wind turbines run at maximum capacity. Certainly, more cooperation between national systems and more investment into interconnections to spread the load more evenly would be welcome. Harmonizing regulations related to technical standards, security, and environmental issues would save the industry and society from unnecessary cost and complexity.

One trend that could be called a global challenge is the incorporation of distributed energy sources into the traditional energy ecosystem. Thanks to technological advances, consumer-size generation units—from rooftop solar panels to gas turbines for an individual condominium—are spreading everywhere, in some places even without direct financial support. As a consequence of this paradigm change, utilities are hit hard on at least three fronts. First, they need to invest heavily in their network to accommodate the new units and the changing flow of electricity. Second, they risk losing significant revenues from self-supplied consumers. Third, because their fixed costs are divided among less volume, they have to manage the threat of huge tariff increases in an environment in which regulators and politicians are looking to reduce energy bills. On the other hand, utilities remain essential to the operation of legacy systems and supply households and business with uninterrupted electricity. (See Distributed Energy: A Disruptive Force, BCG Focus, July 2014.)

An energy policy that overcomes this conflict and incentivizes utilities to support decentralized power generation would give a huge boost to more sustainable energy production and usage. Whether it is best to accomplish this by reforming the tariff system or by changing utility strategies to participate actively in the installation of new units depends on the conditions of particular national or regional energy systems.

This blog was originally published by the Wall Street Journal.

Neighboring Countries Should Harmonize Energy Policies