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Conclusions of the 2005 Report on the functioning of the electricity and gas market
Commission Européenne - MEMO/05/427 15/11/2005
Brussels, 14 November 2005
1. – Market integration still insufficient
Although liberalisation has shown some benefits – EU electricity prices are lower now than 1997 levels - much more remains to be done. At present all EU electricity and gas markets, except in Nordic countries, remain national in economic scope. For almost all countries, imports of electricity and gas are not yet sufficiently developed to provide customers with a real alternative to the nationally established suppliers.
Two key indicators lead to this conclusion:
Insufficient interconnection capacity prevents the integration of national markets and puts competitive pressure on imports. Congestion occurs frequently at many borders within the EU. In 2002 the European Council agreed that all Member States must have interconnection capacity equivalent to at least 10% of their national consumption, an objective which has not yet been achieved. Many important projects remain on hold and limited efforts are being made to available additional capacity from the existing infrastructure. Similarly, the European gas grid, although well developed, is not used to its full potential.
2. – Concentration and consolidation characterise industry structure
In the absence of well developed cross-border competition, the structure of national markets requires special attention. The starting point for market opening in many Member States was a monopolistic market structure with only one or a few big companies. The introduction of competition at EU level should put an end to this situation by exposing companies to EU-wide competition. This has not yet been achieved.
With a few exceptions, the largest three national companies have a very large share of the market (over 75%) for both electricity and gas in their countries. Furthermore, the largest companies at European level increasingly have subsidiaries in all Member States and there is growing consolidation at European level. This points to the need for real competition at European level. The high degree of concentration of the industry jeopardizes EU citizens’ right to choose a supplier in a competitive market. The Commission launch in June 2005 an inquiry on the level of competition in the electricity and gas markets whose preliminary results have been presented today.
3. – Several Member States late to implement new directives
A large number of Member States were as much as a year late in implementing the Directives, others still have not done so: Spain (electricity and gas), Luxembourg (electricity and gas), Greece (electricity), Estonia (gas), Portugal (electricity), Ireland (gas) and are now before the European Court of Justice, or will be shortly. A number of Member States have taken a rather “minimalist” approach in implementing the Directives.
Additional measures may well be necessary in certain areas, to take account of the specific characteristics existing in certain countries. Some Member States have already taken such active, additional steps: for example reinforcing the minimum unbundling measures provided in the Directives, strengthening the power and independence of Regulators, freeing up existing and building new interconnection capacity, and taking measures to promote liquidity on gas markets.
4. – Customer response remains underdeveloped
Whereas the switching rates of larger customers continue to rise, small businesses and households remain reluctant or unable to exercise their right to choose, particularly in electricity. Many factors contribute to this. Often competing offers are unavailable, too complicated to understand or are too similar to constitute a genuine choice. Dominant positions and insufficient unbundling, especially at the distribution level, seem to discourage switching, and changing suppliers is often still perceived as risky both for customers and for potential new suppliers.
5. – Commission’s measures
The main reason for the report is first and foremost the failure of Member States to implement the second electricity Directives in time and with sufficient determination. A large number of Member States were as much as a year late in implementing the Directives; others still have not done so. Furthermore, only few Member States have complemented the minimum principles of the directive by additional measures, aimed at making the market work in practice given the specific national circumstances.
Therefore, the ball is now in the hands of Member States. Member States need to quickly and fully implement the Directives, pursuing not only the letter of the Directives, but also their spirit. The European Commission will continue to put pressure on Member States to implement measures that are key to achieving a higher level of growth and competitiveness in Europe.
The Commission will therefore, in addition to following-up closely the formal legal compliance with the Directives, carry-out detailed country-by-country reviews of the effectiveness in practice of legislative and regulatory measures in connection with market opening, including specific additional national measures. This will lead to a further Report by the end of 2006 and, if necessary, proposals to redress any remaining requirements.
A full version of this memo with graphics can be found at http://ec.europa.eu/energy/electricity/report_2005/index_en.htm