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Energising Europe: A real market with secure supply

Commission Européenne - MEMO/07/361   19/09/2007

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MEMO/07/361

Brussels, 19 September 2007

Energising Europe: A real market with secure supply

Electricity and gas are the lifeblood of our day to day lives and our economy. By opening up the European energy markets to competition - a process which started 10 years ago - Europe's citizens have been able to benefit from more choice and more competition to keep prices down, even in times of spiralling global energy prices. Competition opens up the possibility for the different expectation of consumers to be met. Some consumers will be mainly interested in prices, others may want the choice of renewable energy, while others still may seek a higher level of service.

Although progress has certainly been made in establishing a truly competitive energy market, the European Commission has found that customers in Europe are not necessarily getting the best deal. And there are other serious challenges regarding all aspects of energy provision and use. If the current energy consumption trends in Europe continue, we will need to import 70% of our energy by 2030. Due to the progressive increase in energy consumption, CO2 emissions are expected to rise by some 60% by 2030, which will in turn lead to irreversible climate change. These numerous challenges need to be addressed and our best option is to tackle them together.

All of these challenges will benefit from an efficient internal market for gas and electricity. Existing rules in this field therefore need to be completed to ensure that all EU citizens will have a real and effective choice of high quality suppliers capable of satisfying their differing expectations.

Why is the current legislation on the electricity and gas markets not sufficient?

The proposed new legislation is needed in order to resolve the structural failing of the electricity and gas market in a number of areas. For example, the current rules on separation of sometimes monopolistic network activities from the supply and production of energy do not effectively prevent a large number of network operators to discriminate against new users of the network in favour of related supply and production companies. Consequently, new companies entering the gas and electricity markets, who have no choice but to use the existing networks - as building their own network would be too expensive - have a hard time securing a market position due to discriminatory access conditions, lack of available network capacity, lack of transparency on network data and low investment levels. Simply put, vertically integrated companies – that is companies that deal with supply, production and the operation of the electricity and gas networks – have an interest to remain dominant in their national supply markets, while their networks help them retain this position.

Furthermore, the national regulators for these energy markets do not have sufficient independence to carry out their duties properly, while regulators in different Member States have different powers and cannot deal with cross-border issues. This means that there is a regulatory "gap" for cross-border transactions in gas and electricity. These cross-border inconsistencies make it difficult for new electricity and gas companies to supply customers in other countries, again reinforcing the stronghold of national incumbent suppliers.

Without proper separation of network and supply, incumbent companies also have little motivation to make new investments into the network to let their competitors in, although these are necessary to cover new demand, to replace the ageing network and to connect Europe to new sources, or, in the case of existing sources, new transportation routes.

What is being proposed?

The proposed package of measures seeks to resolve all the structural failings outlined above as well as to improve a number of new areas. The list of measures is highly technical, due to the complex and technical nature of energy markets and networks. However, the measures broadly cover five main areas: unbundling, regulatory oversight and cooperation, network cooperation, transparency and record keeping and finally, access to storage and LNG facilities.

Unbundling

Unbundling refers to the effective separation between the operation of electricity and gas transmission networks from supply and generation activities. The proposals are aimed at transmission networks, which are the high voltage or high pressure main lines connected to other Member States. By contrast, distribution networks consist of local grids which operate at lower voltages and pressures, which typically do not have cross border connections. The operator of the transmission network will be required to actually own and control the network. If a person or company has direct or indirect control over a network operator, then this person or company may not have any interest or control in a supply undertaking and vice versa. Consequently, network operators of electricity and gas grids would no longer be affiliated or be part of a group which is also active in supply, generation and production.

However, this does not mean that a person or company cannot hold shares in both a network operator and a supply undertaking. This is possible as long as these shares represent a non-controlling minority interest. For example, an individual investor or an institutional investor such as a pension fund could still have a minority stake in both supply undertakings and network operators.

The Commission has also suggested a possible derogation to this form of unbundling. In this approach, the network assets would remain with the company which is also active in supply, but the technical and commercial operation of those assets would be put in an independent company, to be designated by the Member State. This is the so-called Independent System Operator model. The independent network operator will need to comply with the same unbundling requirements as other network operators. This means that, for example, the independent network operator cannot have any interest in a supply undertaking. The Independent System Operator obviously entails increased regulatory control and specific additional rules. For example:

  • The owner of the network which is still active in supply or production will have to legally and functionally unbundle the part of its company which owns the network;
  • The owner will be required to finance the investments decided by the independent operator;
  • The independent system operator will have to commit to complying with a ten year network investment plan proposed by the regulatory authority;
  • The designation of the independent system operator will have to be approved by the Commission.

What are the benefits of unbundling?

First of all, ownership unbundling solves the inherent conflict of interest, which leads to discriminatory behaviour. Network operators will no longer have related supply or production companies which they could treat differently from competing companies. It also guarantees non-discriminatory access to network information and provides unbiased incentives for investments, which will guarantee security of supply. The Independent System Operator solution will ensure similar results, provided that it is applied in full and provided it is combined with strong regulatory oversight.

Third country aspects. The EU considers that electricity and gas networks are essential for the competitiveness of the economy and for the well-being of the citizens of the European Community.

The package contains safeguards to ensure that in the event that companies from third countries wish to acquire a significant interest or even control over an EU network, they will have to demonstrably and unequivocally comply with the same unbundling requirements as EU companies. The Commission can intervene where a purchaser cannot demonstrate both its direct and indirect independence from supply and generation activities.

The goal of the current proposal is to promote competition in the European energy markets and to promote the proper functioning of these markets. In this light it is imperative - without prejudice to the international obligations of the Community and in particular WTO rules – to ensure that all economic operators active on European energy markets respect and act in accordance with market investor principles. Therefore, the Commission also proposes a requirement that third country individuals and countries cannot acquire control over a Community transmission system or transmission system operator unless this is permitted by an agreement between the EU and the third country. The aim is guarantee that companies from third countries respect the same rules that apply to EU based undertakings in both letter and spirit - not to discriminate against them. The Commission will also hold a rapid and in-depth review of the wider aspects of the EU’s external policy in energy, and will make the results of that work public.

Regulation

The current rules already require Member States to have a regulator. However, the new rules will make a number of significant changes. First of all, the legislative proposals aim to ensure that all regulators are truly independent, not only from industry interests but - with respect to their day-to-day operational decisions - also governments. For example each Member State must ensure that the regulator is an independent legal entity, which has authority over its own budget and which has sufficient human and financial resources to carry out its tasks. Furthermore, the regulator must have a management which is appointed for a non-renewable term of at least five years and there are strict rules on the conditions under which management may be removed from office.

Secondly, regulators' statutory powers and duties will be strengthened. They will be able to issue binding decisions on companies, to take appropriate measures in cases where the functioning of the gas and electricity markets is insufficient including gas and electricity release programmes and to impose penalties on companies that do not comply with their legal obligations or with decisions from the regulator.

The legislation also introduces record keeping obligations. At the moment regulators cannot effectively assess allegations of market abuse. For regulators to be able to act they must be able to study the behavior of market participants in the past, to investigate if their operational decisions where based on sound economic reasoning or if their decisions tried to manipulate market prices. Electricity generators, gas network operators, and supply undertakings will therefore be required to keep record of all data relating to operational decisions and trades.

Thirdly, regulators will be required to cooperate with regulators from other Member States and all regulators will have the same clear objective of promoting competition, effective market opening and an efficient and secure network system.

These more detailed requirements for national regulators in combination with the mandate to cooperate at the European level will help resolve the European patchwork we see today as regards the powers of regulators, their responsibility and their independence. A functioning internal market for electricity and gas can not exist without independent regulators who cooperate with each other.

European Agency

This is why a fourth change covers the setting up of a European Agency for the cooperation of Energy Regulators. The establishment of such an Agency will complement at the European level the regulatory tasks performed at the national level. In other words, the very real barriers to trade caused by the regulatory gap between Member States can only be resolved by having a decision making power at the European level.

The creation of the Agency implies a transition from the current structure for international cooperation of regulators in the so-called European Regulators Group for Electricity and Gas (ERGEG). ERGEG was established by the Commission as an advisory body to facilitate the consolidation of the internal market, in particular with respect to the preparation of draft implementing measures. But ERGEG does not have decision making powers.

It should be noted that the Agency is not a substitute for national regulators, nor is it a European regulator. But it will help ensure that:

  • National regulatory authorities have a framework within which they can cooperate and the possibility for the Agency to review, on a case-by-case basis, decisions taken by national regulators that have a direct impact on the internal market;
  • There is appropriate oversight of the cooperation between network operators;
  • Individual decision making powers are established for specific cross-border issues, such as exemption requests for infrastructure projects involving more than one Member State;
  • The current advisory role for regulators towards the Commission through ERGEG is preserved and transferred to the Agency.

The way the Agency will be governed and its institutional setting is based on the standard rules and practices for Community regulatory Agencies. However, to ensure the necessary independence of regulators also at the European level, this Agency will be unique in that it will have a separate board of regulators. This board will be solely responsible for all regulatory matters and decision. It will function beside an Administrative board which will be responsible for administrative and budgetary matters.

More cooperation between Transmission System Operators for a more efficient market

The new legislation proposes the formalisation of cooperation between transmission network operators. This cooperation already exists on a voluntary basis in industry groupings (ETSO, GTE). However, the proposal obliges operators to cooperate in order to ensure an optimal management of the European transmission network through the establishment of a European Network for Transmission System Operators. The latter will be responsible for three core tasks.

First it must develop draft standards and codes that will facilitate the harmonisation or compatibility of operational procedures and access regimes. This will enable the free flow of gas and electricity across the EU on the basis of compatible market rules and will support market integration. For example, current differences in the procedure for booking and allocating network capacity in different countries make it very difficult to secure access for companies across several countries.

There will be a legal obligation to develop these standards and codes by the network of operators, even though the codes will have a voluntary character. However, where the Commission or the European Agency is of the opinion that these codes are either not sufficient or are not implemented, the Commission may make them legally binding.

Second, the network of operators will be responsible for the coordinated operation of the network. This must be done in accordance with the agreed standards and codes and through the development of common operational tools. Especially in electricity, combined operation of the synchronous network will enhance security of supply. However, benefits for gas are also to be expected, for example in the form of coordinated publication of access related information, such as a common transparency platform.

Third, the network of operators will be required to coordinate the planning of network investments and to monitor the development of the transmission network capacities. The network of operators must publish a European-wide and 10 year forward-looking investment plan, every two years. This network development plan will help identify investment gaps, notably with respect to cross-border capacities. It will also serve to enhance the consistency of national network planning and modelling.

All market participants will have an interest in the work of this network of operators. The needs of network users and suppliers must therefore be central in the work of the network operators. For this reason, the proposals contain a rigorous obligation on the operators to consult with industry participants in every step of their work. This includes consultation on their work programme, their priorities and the actual development of standards and codes as well as network planning activities.

We should bear in mind that the network of operators can only cooperate successfully when all operators are on a level playing field. This means that all operators must be effectively unbundled.

Protecting the consumer

The best way in which the new package will deliver a better deal for Europe's citizens is by achieving effective and properly regulated competition. Only this will bring competitive energy prices, improved security of supply and the necessary contribution to meeting the environmental objectives. Moreover the proposed legislation contains specific measures strengthening the position of customers in the market. For example the package requires Member States to clearly define the roles and responsibilities of market actors in order to allow for the emergence of well functioning retail markets. Furthermore, there are increased monitoring and reporting requirements on generation and supply adequacy. Suppliers will be required to ensure that customers get more frequent information on their energy consumption and costs.

Transparency

Whereas current rules on transparency focus on available network capacities, these are to be extended to other facilities such as gas storages. More information also needs to be made available to the market on demand and supply forecasts. The Commission has also considered proposing transparency rules for trading. However, it concluded that more research is needed to identify the problems more closely and to propose the adequate solutions.
For further information please see:

http://ec.europa.eu/energy/energy_policy/index_en.htm


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