Swiss Spooked By Blackout Risks After EU Raises No-Deal Stakes

(Bloomberg) -- The small Swiss town of Laufenburg has been a symbol of Europe's integrated electricity network ever since the grids of Switzerland, Germany and France were linked there in 1958.

For more than 60 years, “the Star of Laufenburg,” as the switching substation is called, has helped ensure a stable supply of power for Switzerland and the rest of Europe as power consumption soared in the post-World War II era.

Now, the shine is wearing off that star as Switzerland confronts the threat of being decoupled from the European electricity market. The power sector has become the latest battleground for the European Union, which is looking to bring the country to heel after it refused in May to sign an agreement governing practically all its relations with the bloc.

With no accord, the Swiss won't be allowed to participate in the region's so-called power-market coupling and, starting July 1, its certificates of origin, showing electricity bought and sold is generated from a renewable source, won't be accepted in the bloc. The increasingly fraught relations with Brussels are beginning to spook the Swiss, prompting gallows humor about national blackouts. While large-scale power outages remain a remote possibility, concerns are mounting that the standoff with the EU will eventually mean higher costs for Switzerland's people and businesses.

Without an electricity agreement with the EU, “there's more effort to ensure network stability,” Martin Baeumle, a Green-Liberal party member of the Swiss parliament's lower house, said in an interview. “Those are costs on the Swiss side.”

The power market fallout is just the latest consequence of Switzerland's failure to sign a framework agreement to replace bilateral deals on everything from immigration to civil aviation. Switzerland says the accord threatens its sovereignty and its ability to protect its labor market. The bloc has said that without an accord there will be no unfettered access to the single market, which brings an annual aggregate welfare benefit to Switzerland of 24 billion euros ($28.5 billion), according to a 2019 calculation by Bertelsmann Stiftung -- greater than for Germany on a per-capita basis.

Losing Privilege

The bloc -- fresh from the Brexit deal -- has increasingly toughened its stance. In 2019, Brussels tried (but failed) to limit trading in Swiss stocks by denying the country's bourse regulatory equivalence. Earlier this year, Swiss railroad operator SBB couldn't participate in an EU research program, and in May, Swiss medical-equipment makers stopped being able to freely export their wares to the bloc like they've been doing for years. Power companies could be dealt one of the biggest blows.

“Switzerland will gradually lose its privileged connection with the EU electricity system,” the European Commission said in an emailed response to questions. “Less connection and less cooperation will make the Swiss energy system less efficient and more costly for Swiss consumers.”

Although it's small, Switzerland plays a key role in the EU's electricity system through the clean energy it produces and the power that passes through its borders. By being excluded from the EU power market and its algorithm for calculating supplies, Swissgrid AG fears that its network -- which connects to those of neighboring countries in 41 places through huge power cables called interconnectors -- will over time become less stable. Key components could become overloaded with power surges as supply unexpectedly crosses the country, it says.

“It's like a body and you're cutting out it's heart,” said Eberhard Roehm-Malcotti, head of EU Energy Policy at Axpo Holding AG, Switzerland's biggest utility.

Also, the country faces the specter of being cut off from the power supply of neighboring countries, on which it relies in winter months, when demand for energy spikes.

Switzerland's energy producers are hoping for a technical accord with the bloc, even if it doesn't settle the broader, thorny matter of market access.

Certificate Woes

“Then we'd have a solution that's sustainable,” said Michael Frank, director of the Swiss Society of Electrical Companies. Having a stable power supply is “key for Switzerland as an economic hub.”

An added aggravation is the non-recognition of the certificates of origin, which means Swiss power producers lose money because the cross-border market for these tradeable records has dried up.

Electricity on the grid could come from non-renewables like coal, gas, or nuclear, so the certificates are used to showcase renewable generation -- key for companies from Alphabet Inc's Google to The Procter & Gamble Co. that have pledged to use 100% clean power for their operations. Swiss Energy and Transport Minister Simonetta Sommaruga told lawmakers in June it was hard to quantify the financial damage from the non-recognition.

Switzerland can still use EU guarantees and the imbalance will create an oversupply of certificates in the Alpine nation, driving down prices, according to Axpo. That in turn could be a disincentive for power producers to invest in renewable technology.

For all the concerns, the interconnectedness of the network means Brussels can't hit Switzerland hard without hurting itself, said Baeumle.

“You can't just flick a switch and then Switzerland is cut out,” he said, adding that “if there's a blackout, that will hit everyone. It's an illusion that Switzerland would go black but that the lights would stay on elsewhere in Europe.”

Switzerland can also take some comfort from the Brexit negotiations. Britain's access to the EU's energy market was part of its divorce discussions, with the threat of disruption used as a bargaining chip in fishing-quota talks. In the end, Britain's power access remained unchanged.

Still, that isn't stopping the Swiss from being preoccupied with the matter. When the lights briefly went out during a Bloomberg interview in Zurich recently, the news-maker only half-jokingly said, “Ah, that's Brussels pulling the plug on us.”