European Commissioner for Competition Policy
Tischgespräch - Industrie-Club e.V.
Ladies and Gentlemen,
I'm delighted to be here with you in Dusseldorf today, to discuss Europe's energy policy - a subject that is absolutely critical for every business and citizen in Europe. Secure, sustainable and affordable energy supplies are key to creating jobs and growth and meeting our environmental goals.
With this in mind, two months ago the Commission presented a comprehensive package of measures to establish a new Energy Policy for Europe, to combat climate change and boost the EU's energy security and competitiveness. This included a sector inquiry into competition in electricity and gas markets. It has been clear for some time that there was no such thing as a competitive, well-functioning Single Market for energy in Europe. Even after ten years of liberalisation, and applying EC competition law, we weren't seeing the consumer benefits expected. Instead of lower prices and better choice of services, we saw, and are still seeing, high prices, black-outs and anxiety about security of supply. This is bad for every citizen and every business in Europe, and is holding back European competitiveness.
Today I'll talk about the findings of the sector inquiry, and how the Commission is taking forward the European Council's conclusions on what we must do to improve how our energy markets work.
Sector Inquiry findings and recommendations
The headline finding of the sector inquiry report was that despite two waves of European liberalisation Directives, historic incumbents remain dominant on their traditional markets throughout the supply chain. To enter a market, and provide real competition, new players need access to energy supplies, to the network and to customers. Three interlinked structural problems are preventing this from happening.
1. Market concentration
First, many energy markets are too highly concentrated.
In general, energy markets remain national in scope, and with a level of concentration similar to before liberalisation. Here in Germany the market is characterised by regional fragmentation, with one dominant supplier capturing most consumers in a given region. Consistent with what one would expect, the absence of real competition doesn't seem to be delivering a good service to consumers; German consumers are paying some of the highest energy prices in the European Union.
2. Lack of cross-border integration
The second, related, problem identified by the sector inquiry is that there is an absence of cross-border integration and cross-border competition. This is both a symptom and a cause of the persistence of country-based energy markets. Insufficient powers for some national energy regulators, and a lack of coordination between them have created a 'regulatory gap', undermining cross-border supplies and investment. Limited cross-border cooperation between Transmission System Operators, or TSOs, has also slowed the development of a true EU energy market.
Here in Nordrhein-Westfalen, it's easy to see why this is a problem. Cars, trains, and people all flow easily, and in both directions, across the borders to Belgium and the Netherlands. Why should it not be the same for energy? Especially when this would raise German security of supply, and bring down energy bills!
3. Vertically-integrated companies
Last but not least, this situation is also aggravated by the third fundamental problem identified by the sector inquiry – the insufficient unbundling of network and supply activities.
The EU's liberalisation directives introduced a system of legal unbundling. This was intended to ensure that the incumbent supplier would not use its ownership of distribution and transmission networks to prevent new entrants from gaining access to the market. But when companies control energy networks as well as production or sales, there is a fundamental conflict of interest inside a company. Enabling non-discriminatory third party access to the network is absolutely key for a competitive market. But this may not always be compatible with optimising the return of other parts of such a vertically-integrated business.
Indeed, the sector inquiry uncovered some practices by vertically-integrated companies which seemed to be aimed at making it difficult for new entrants to establish a credible presence in an energy market. Examples include:
Legally unbundled companies are supposed to put in place information barriers between their transmission and their commercial activities. Despite this, information leakage through these 'Chinese walls' is all too common, giving the company's supply business an advantage over its competitors.
Undermining competition in this manner pushes up prices for consumers and reduces security of supply. I can't say I'm surprised that retail energy prices for small users are higher here in Germany, where the market is dominated by vertically-integrated companies, than in countries where energy companies have been unbundled, such as the UK. German electricity wholesale prices were on average 10% cheaper compared to UK prices in the time period 2004 to 2006. But still, industrial customers paid on average between 25 and 30 % more for their electricity. For households the difference is even larger, with German consumers paying 31 % more. Let me be clear that all these figures are before tax, but they show that the network charges and distribution margins in Germany must be significantly higher than in the UK.
What's more, the negative impact of the conflict of interest within vertically-integrated companies doesn't end there. It also seems to have held back investment in interconnecting capacity. Investing to expand transmission infrastructure should enable more energy to be provided by more suppliers. This would be good news for everybody - apart from the incumbent energy supplier, who will no longer be able to charge high prices for scarce capacity. Let's look at a local example. As you will know, where interconnector capacity is scarce, it is auctioned off to the highest bidder, generating congestion revenues. If you look at our report, you will find that from 2001 to 2005, three German TSOs generated congestion revenues of over 400 million euros. Of these revenues, under 30 million euros were used to build new interconnectors- that's less than 10%! And this is in a country whose size and location offer a wealth of opportunities for interconnection – both to other regions within Germany and other European countries.
Our experience has shown that fully-unbundled operators see clearer incentives for investment in interconnectivity. And they act on those incentives, because they are focused on optimising the use of the network. It's clear that the current system contains an inherent conflict of interest for vertically integrated companies, and offers no clear economic incentive to change their behaviour. This is why the European Commission is advocating "full ownership unbundling" – separating once and for all the monopoly electricity and gas networks from commercial activities elsewhere in the energy value chain. It's clear to me that if we are serious about solving the problems of discrimination, and the distortion of incentives to invest in connecting regional or national networks, this is the model Europe should follow.
Next steps: the European Council and beyond
And I'm pleased to say that the European Council recognises the problems and solutions I have outlined today - and has adopted a comprehensive energy Action Plan for the 2007-2009. Based on the Commission's Communication "An Energy Policy for Europe", the Action Plan sets out the way in which significant progress in the efficient operation and completion of the EU's internal market for gas and electricity and a more interconnected and integrated market can be achieved. I particularly welcome the European Council's call for effective unbundling, which should guarantee equal and open access to transport infrastructures and independence of decisions on investment in infrastructure. The European Commission is now working on the basis of this steer.
Ownership unbundling is the most effective way to achieve these aims. This will encourage more investment in cross-border capacity by allowing for network companies to be given the right incentives. It will reduce the cost of capital for network businesses by giving stable regulated returns. It will bring in new investors by assuring them of fair network access. This will bring the investments needed to diversify Europe's sources of energy supplies, and is of crucial importance for achieving our targeted increase in renewable energy production.
Of course, there are alternative models, such as Independent System Operators or regulatory solutions. But, whilst these could offer an improvement on the status quo, this would be at the cost of heavy regulation, which no-one wants. And we'd still be left with conflicts of interest which are likely to undermine the investments that Europe so badly needs. I am also doubtful that the level of co-operation we need to see at European level can be achieved while certain system operators remain vertically integrated. With full ownership unbundling we can remove the root cause of the problems linked to the current outdated market structure. Any solution short of full ownership bundling will simply leave us trying to treat the problems of the current model. If we are serious about delivering more secure and cheaper energy to Europe's consumers, full ownership unbundling is the most simple and effective way forward.
Today I have focused on why we need to see a strengthening of the regulatory framework in the energy sector. This means permanent structural changes to resolve the problem of vertically integrated supply and network companies, plus stronger regulators, enhanced coordination, and increased transparency. You can be assured that at the same time as working on this, the Commission will continue to watch developments in the energy sector carefully, and apply EC Competition law in the merger control, antitrust and State aid fields where necessary.
Of course, there are other issues to address, such as the lack of transparency, and trust in the pricing mechanisms in wholesale energy markets. This is important - and not just for energy companies and traders - because when prices do not react to changes in actual supply and demand, investment in both infrastructure and alternative energy sources is threatened. I am very glad that both the federal government and some regional governments in Germany are looking at these issues – because 82 million people here in Germany are waiting for more reasonable energy bills!
Ladies and gentlemen, since the founding of the European Coal and Steel Community, this region has always been at the heart of the European project. This weekend we are celebrating the fiftieth anniversary of the Treaty of Rome. I think that cheaper, more sustainable and more secure energy would be a great birthday present for Europe. I very much hope you agree.