Energy Competition: From Commodity to Boutique and Back

Abstract

Energy products such as power, gas, and oil have long been the world’s premier commodities. Consumers demand that power and fuel are available when they want it and they prefer to pay less for it. Few know or care where their fuel or power comes from. So for years energy companies believed that efforts to differentiate their products were mostly ineffective—they were re-signed to compete on price in fierce global commodity markets. But in recent years, a new focus on regulating how energy commodities are produced has begun to splinter previously integrated energy markets, creating markets for boutique fuelsBoutique fuels and power, and allowing energy firms to restrict output and raise prices without fear of competition. This Article documents the causes and effects of this trend toward boutique energy markets. It shows how consumer-driven supply-chain certifications that call for environmentally sound production methods have gradually evolved into government-mandated production standards. These standards take identical commodities—barrels of oil or kilowatt-hours of electricity—and differentiate them based on how they were produced. Most typically, products that were produced using particularly greenhouse gas intensive methods are banned or otherwise penalized. These supply-chain standards have been adopted by countries, but increasingly also by individual provinces, states, and localities. As a result, they are breaking the trade links in global energy supply chainsSupply chain. To sell in each of these markets, energy companies must be able to certify the production methods used by their entire supply chainSupply chain. To do this, they must either control the entire vertical supply chainSupply chain or only deal with the subset of companies that is prepared to meet the regulatory requirements of each jurisdiction that might import fuel or oil. Inevitably, this is increasing concentration of power and fuel markets. The Article suggests how to turn energy back into a commodity without sacrificing the goals of the supply-chain standards. It suggests that jurisdiction specific supply-chain standards be replaced with one or two agreed supply-chain standards that would allow more energy companies to compete across jurisdictions. And it offers recommendations for how competition and energy regulators can work together to ensure that energy standards do not undercut the aims of competition policies.