The programme to create a single European market without internal frontiers, which was completed in 1992, did not include the EU´s energy sector. As the opening of the energy markets was seen as a key factor in improving Europe's competitiveness and welfare, the Commission and member states agreed to tackle this problem.
As a result, in 1996 and 1998, the first electricity and gas directives were adopted, representing an important step towards the creation of an internal market in these sectors. The objective of the directives was to open up the electricity and gas markets through the gradual introduction of competition, thereby increasing the efficiency of the energy sector and the competitiveness of the European economy as a whole. By September 2000, most member states had implemented the electricity and gas directives.
Nearly ten years after the openingup of Europe's telecommunications market, it's the turn of energy. What is in store for this votal part of our lives?
Issues:
The second gas and electricity directives were adopted in June 2003. These seek to achieve a full opening of the markets while maintaining high standards of public service and a universal-service obligation.
The two directives entered into force on 4 August 2003 and the deadline for transposing them into national law was 1 July 2004. They stipulate an opening of both markets for all non-household gas and electricity customers by July 2004 and for private households by July 2007. After these dates, businesses and private customers should be able to choose their power and gas suppliers freely in a competitive market place.
The most important elements of the directives are:
- Unbundling: Energy transmission networks have to be run independently from the production and supply side. This means that large incumbent companies, state-owned or private, have to split up ('unbundle') the distribution and transmission/transportation sides of their business and have them operated by legally separate entities. This measure is designed to avoid preferential access to transmission systems and gas networks for energy companies.
- Tariffs: Transmission tariffs must also be applicable to all system users on a non-discriminatory basis and third-party access to gas storage facilities must be guaranteed.
- Services of public interest: The directives also set common minimum standards regarding public service requirements, which take into account the objectives of common protection, security of supply, environmental protection and equivalent levels of competition in all member states.
- EU member states are requested to appoint an independent national regulator to monitor market developments and prevent discrimination between operators on the market. The Commission must publish a report on an annual basis analysing the measures taken at national level to achieve public-service objectives and compare their effectiveness.
- The directives are also accompanied by a regulation establishing common rules for cross-border trade in electricity.
However, a competition enquiry in the electricity sector, published in January 2007, revealed some "serious malfunctions" in the market for industrial consumers. Competition Commissioner Neelie Kroes highlighted the following outstanding market flaws:
- Market concentration: still reflects the "old market structure of national or regional monopolies", giving some electricity operators control over prices in the wholesale market. In the gas sector, "incumbents tend to control imports and/or domestic production".
- Vertical foreclosure: from integrated incumbents who operate simultaneously at network, wholesale, and distribution levels, thereby preventing new entrants from entering the market.
- Market integration: gas and electricity markets are still largely national.
- Transparency issues: characterised as "endemic" by Kroes, who considers access to information as "crucial for establishing a level playing field". She says market participants need "more information on technical availability of inter-connectors and transmission networks. They want to know more about generation, about balancing and reserve power, and about load."
- Price formation: although Kroes recognises the many contributing causes for the "dramatic rise in prices for gas and electricity over recent months", she says "anti-competitive practices" may be one of them. "A well-functioning and transparent market mechanism for setting prices is essential," she added.
- "Grandfathering rights": of incumbents, allowing them to reserve capacity on bottlenecks such as pipelines, are a further significant barrier to entry, Kroes said.
- Market bundling: of generation, supply, pipelines or grids, and distribution. "Owners and operators of critical networks often compete with companies that need to have access to these same networks. Can we expect such integrated companies to treat competitors in a fully fair manner? Their own self-interest would suggest not," said Kroes.
Positions:
The European Commission has made clear that it favours splitting up energy firms' production and distribution activities as the best way to ensure fair competition and lower prices for consumers. Speaking in February 2007, Competition Commissioner Neelie Kroes said full 'ownership unbundling' would solve the "inherent conflict of interest" that she says inevitably occurs when incumbents are told to grant access to their network to new competitors entering the market. Their self-interest, she said, is to impede access in order to protect their market share.
However, a majority of member states, led by France and Germany, have so far rejected the Commission calls, saying that splitting up energy firms "is only one of a number of measures for accelerating the dynamics of competition". In particular, unbundling "is not a cure-all", said Germany's economy minister Michael Glos in a statement, following a meeting of EU energy ministers in June 2007 (EurActiv 7/06/07). The UK, Denmark and the Netherlands, on the other hand, are active promoters of 'ownership unbundling'.
An alternative option examined by the Commission would be to establish a "full independent system operator" where companies would be allowed to remain owners of the network but would receive a set price for letting competitors use it (EurActiv 23/01/07).
Eurelectric, the union of the EU electricity industry, says the liberalisation process has brought "considerable benefits" to Europe in terms of price and cost reductions as well as labour productivity gains. However, Eurelectric believes that it is vital to maintain the momentum and reinforce trust in the liberalisation process. In particular, the power industry calls for the full and effective implementation of the liberalisation package by member states. Moreover, it says that regulation should be completed with guidelines on congestion management, harmonisation of transmission tariffs and a compensation mechanism for transmission system operators (TSOs).
The association of the European Transmission System Operators (ETSO) has also called on member states to fully implement the electricity directive. In addition, ETSO says member states should ensure the provision of adequate electricity generating capacity to meet demand. ETSO also argues for consistent (although not necessarily identical) regulatory principles and practice between member states in order to promote the development of the internal market and economic efficiency. ETSO also encourages the Commission to put in place the draft guidelines on cross border trade and congestion management.
The European Chemical Industry Council (CEFIC), which claims to be the largest energy consumer in the EU manufacturing sector, says, "Progress in opening up markets […] since the entry into force of the Liberalisation Directives has been disappointing and small." It therefore calls for "rigid and coordinated actions from the European Commission, member states, regulators and producers" to remedy the situation. CEFIC also points out that lack of liberalisation in the electricity market allows power utilities to pass on the additional costs entailed by compliance with the EU CO2 emissions trading scheme (ETS). It says the scheme has a potential for [electricity utilities] to pass on all or part of the 'market price' of the [CO2] allowances onto the electricity consumers by increasing power prices. CEFIC warns that this unintended consequence of the ETS is damaging the EU´s international competitiveness, especially in the energy intensive industries.
The metals industry trade association Eurometaux also says liberalisation has not prevented electricity prices from rising. As a consequence, Eurometaux says that the metal industry, which is a heavy consumer of electricity, has experienced a sharp deterioration in its competitiveness. "Plant closures and disinvestments have already been announced, attributable primarily to this unaffordable cost of electricity," it points out.
In Eurometaux's opinion, this situation is caused by distortions in the ill-functioning European electricity market. Electricity producers, it says, have adopted commercial practices allowing them to indicate prices that do not reflect cost fundamentals. Producers, it argues, have created the illusion of competition through wholesale trading, but in reality, the large producers continue to dominate the market. "The current power-exchange model should be replaced by a true market design that allows cost fundamentals to be properly reflected and gives equal weight to all market participants," it says. Eurometaux also stresses the importance of freeing up existing capacity and opening markets to new entrants.
The European Federation of Public Service Unions (EPSU) says that the Commission's approach on energy liberalisation"contradicts the need for an energy policy that ensures more independence and is focused on achieving sustainable development." EPSU Deputy Secretary General Jan Willem Goudriaan notes that "serious issues of employment loss (300,000 over the last 10 years), the emergence of a lack of qualified staff or the impact of competition on vulnerable users have not been addressed. More competition will not bring more investment to a sector that needs a very stable framework, not a policy that has a yo-yo effect. The result will be higher prices and a serious impact on all users."
The European Renewable Energy Council (EREC) calls effective competition in the European power markets a "myth". According to EREC, unless the existing distortions in the conventional energy markets are overcome, there will be no effective internal market for renewables to compete in. In addition, EREC criticises current unfair market conditions which favour conventional energies, such as through the Euratom Treaty, or by not applying the 'polluter pays' principle.
In April 2005, Greenpeace published a report analysing the market shares of Europe's ten largest electricity utilities (EdF, E.on, RWE, ENEL, Vattenfall, Electrabel, EnBW, Endesa, Iberdrola and British Energy). According to the environmental pressure group, the liberalisation process has worked in favour of these large established utilities as demonstrated by the wave of takeovers that ensued after the opening of the market. New, green utilities, Greenpeace pointed out, have little chance to compete on an equal footing as the 'big ten' have enough influence in the sector to control prices. It said the situation is likely to continue "because there is still no fair access to the [electricity] grid".
