INTERNAL ENERGY MARKET
Filip Černoch
FSS MU
Traditional vs liberal paradigm
 Is energy a „special“ commodity?
 A crucial imput to the economy
 A limited number of suppliers
 A highly capital intensive
 Dependency on fixed networks
 Tendency to monopolisation – substantial economies of scale,
benefits of co-ordination of production, transmission and
distribution.
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Traditional vs liberal paradigm
 Traditional paradigm emphasizes stability, reliability of supply,
and public service, it is a model of technical organization
involving the central control over a synchronized network.
 = the certain way of organizing government relations with
electricity and gas industries, a set of ideas about the scope of
competition and the appropriate legal and institutional methods
to achieve public policy aims.
 = role of a consumer is limited
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Traditional vs liberal paradigm
 Liberal paradigm stresses a greater reliance on markets. It sought to
introduce competition whenever possible, encouraging openness,
decentralized production with network access, and profit based on the
market prices, not costs. (regulation for competition).
 Some basic characteristic:
 Separation of activities to facilitate the competition (unbundling)
 Freedom of entry and investment into competitive activities, instead of a
centrally-planned approach
 Freedom of contract and competitive formation of prices
 Access to the network and infrastructure
 Supervision of the model by an independent regulator
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Internal energy market
 IEM: trade area with common policies on product regulation
and free movement of energy, where the maximum competition
between suppliers and providers of different types of energy is
essential. The barriers among the MS are, therefore, removed to
maximum.

 1) Market liberalisation + common management of the market
 2) Interconnections
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Liberalization
 Economic liberalization: refers to fewer govt. regulations and
restrictions in the economy in exchange for greater participation
of private entities. Arguments for economic liberalization
include greater efficiency and effectiveness that would provide
greater profit for everybody. Thus, liberalization in short refers
to the removal of controls, to encourage economic
development.
 Advantages of liberalized (= competitive) market:
 Allocative efficiency – the resources invested in direction preferred by
consumers. To reduce the risk of low or non-existend demand.
 Innovation - adjustment to changes of consumer preferences.
 Cost reduction – to keep the costs and prices down.
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Liberalisation – pros and cons in en. sector
 Prices are set by the market and competition drives prices lower
vs market pricing (manipulations with prices)
 Prices are ´real´, reflects the costs, demand and supply vs.
inability of some customers to buy them (public service
obligation)
 Stress on profit (effective alocation of sources) may weaken the
incentives to some investments vs. long-term stability, reliability
and security of supply
 Sources are not wasted on non-profitable projects vs. private
utilities don´t reflects the interests (social, environmental) of
state.
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Specific features of gas and electricity industry
 Network (grid) = natural monopoly
 Some specific characteristic of electricity:
 Lack of storage potential
 High cost of outages
 Fluctuation
 Lack of import dependence (in the EU) – but interconnectors are poor
and missing
 Some specific characteristic of gas:
 Geopolitics
 Gas chain
 Storage and timing of actions
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Conditions of internal energy market
 Liberalisation and competition
– withdrawal of the state from
the energy sector
 But also regulation – to limit
the power of (natural)
monopolies and to remove the
legacy of tradition (pre-liberal)
paradigm – regulation to
competition (to enforce
competition)
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Specifics of energy
• A crucial imput to the
economy
• A limited number of
suppliers
• A highly capital intensive
• Dependency on fixed
networks
• Tendency to monopolisation
Building of the internal energy market
 European economic downturn in the 80s, free market
atmosphere of the UK under Mrs Thather.
 Fall in energy prices of commodities in the mid-80s not
followed by prices of energy (elektricity) – local or national
obligations. Questioning of the realisation of political goals via
state-controlled industry.
 Overinvestment in production capacities due to the expected
demand. High costs of new plants = the performance of the
(state-runned) industry was suffering.
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First initiatives
 1988 Working Document on the Internal Energy Market
 „…the greatest possible transparency with regard to potential
obstacles“.
 First activities of the Commission date from 1989.
 Communication from the Commission: Transparency of consumer energy
prices. COM (89)123, 1989
 Towards completion of the internal market for natural gas. Communication
from the Commission. Proposal for a Council Directive on the transit of
natural gas through the major systems. COM (89) 334, 1989
 Increased intra-Community electricity exchanges: a fundamental step
towards completing the internal energy market. Proposal for a Council
Directive on the transit of electricity through transmission grids. COM (89)
336, 1989.
 And the others …
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First initiatives for IEM
 Since 1988, the Commission focused on:
 Harmonization of indirect taxation
 Price and investment transparency
 Competition for public procurement
 TPA
 Integration of electricity and gas grids
 Application of competition legislation to the upstream part
of oil and gas exploration and production.
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First liberalization package
 Directive 96/92/EC of the European Parliament and of the Council
of 19 December 1996 concerning common rules for the internal
market in electricity
 Directive 98/30/EC of the European Parliament and of the Council
of 22 June 1998 concerning common rules for the internal market in
natural gas
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Unbundling
of networks
Access to
networks
Market
opening
National
regulation
First
legislative
package
Separate
management
and accounts
Negotiated
or
regulated
terms of
access
Power:
35% open
by 2003
Gas: 33%
open by
2018
Mechanism
for
regulation
EU regulatory framework: a summary
 Differentiation between competitive parts of the industry (=
supply) and non-competitive parts (= operation of the networks).
 Obligation on operators of the non-competitive parts of the
industry to allow third parties to have access to the infrastructure.
 Free up the supply side of the market – removing barriers
preventing alternative suppliers from importing or producing
energy.
 Free choice of consumers to choose their supplier and removal of
restrictions on customers from changing their supplier.
 Creation of independent regulators to monitor the sector and
enforce TPA.
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Increased role of the EC in the energy policy
 TPA implied that EC will supervise and define the
conditions and tariffs for such access
 EC controls the financing of energy projects – TEN - E
 Application of the rules on competition by countering the
existence monopoly companies
 More power regarding the interventions in the subsidizing of
energy (coal) production
 EC is perceived by lobbyists as one of the main energy
policy-maker in the EU
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Second liberalization package
 Unsatisfactory pace as well as targets, new legislation
introduced in 2003.
 „European national gas markets are characterized by high prices
and tariff differentials, a high degree of market concentration,
insufficient unbundling, a lack of market based balancing regimes,
and ex ante regulation to name just a few. The prices of gas and
electricity are especially of concern. In some European countries,
natural gas increases its share in electricity generation. During the
1990’s the European industry was paying 40% more for its
electricity than its American competitors“.
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Second liberalization package
 Directive 2003/54/EC concerning common rules for the internal
market in electricity
 Directive 2003/55/EC concerning common rules for the internal
market in natural gas
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Unbundling of
networks
Access to
networks
Market opening National
regulation
First legislative
package
Separate
management and
accounts
Negotiated or
regulated terms
of access
Power: 35% open
by 2003
Gas: 33% open
by 2018
Mechanism for
regulation
Second
legislative
package
Separate subsidiary Regulated terms
of access (TOP
in gas)
Power and gas
markets 100%
open by July 2007
Specific regulator
for energy
Unbundling in the Second package
 Legal Unbundling: the transmission and distribution
activities have to be done by a separate “network” company;
the network company must not necessarily own the network
assets but must have “effective decision making rights” in
line with the requirements of functional unbundling (no
change of ownership!)
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Unbundling in the Second package
 Functional Unbundling: where the network operator is part of a
vertically integrated undertaking, it shall be independent in terms
of its organisation (management separation) and decision making
rights from the other activities not related to that network
 Accounting Unbundling: relevance for DSOs which are not
legally unbundled (given the new requirement of legal
unbundling); no derogation is possible from accounting
unbundling for smaller DSOs.
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The following steps of the European Commission
 EC sector inquiry (2005 - 2007) highlited some serious shortages.
 The persistence of great market concentration (Vertical foreclosure, just a
few interconection)
 Too little integration between MS markets
 Absence of transparent market information
 Unsatisfactory level of unbundling
 Solution = market transparency and caps on incumbents’ market shares,
closing the gaps between the responsibilities and competences of national
regulators, structural (ownership) unbundling.
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Non-functioning market: Incumbents’ reactions
 Vertical foreclosure - the process where incumbent wittingly or unwittingly
foreclose, or close in advance, the availability of crucial inputs or assets to
potential rivals. Long-term upstream, capacity and downstream contracts.
 2/2008 E.ON to sell-off its grid (€1bn/y) to settle EU antitrust inquiries.
(Deputy Economy Minister P. Hintze: "The timing coincidence of these events, at
a moment when the Commission is trying to force through a very sharp position against a
minority, it's a very questionable game“)
 6/2008 RWE to sell off its gas grid to avoid anti-trust actions by
Commission. („RWE may have abused its dominant position…by raising rivals´costs
and preventing new entrants from getting access to capacity on gas transport infrastructure
in Germany“ – „The intended agreement is not an acknowledgement of guilt“)
 https://www.youtube.com/watch?v=w5y5QuT7ye8
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European Commission vs. companies
 Unexpected inspections of 25 companies in Austria, Belgium,
France, Germany, Hungary, Italy.
 Just in 2006 EC court proceedings against 17 states for
inadequate transposition of the 2003 directives.
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Non-functioning market: Governments’ reactions
 Championing national companies – preventing foreign companies
to buy domestic ones.
 Hungary (Moll) vs OMV, Great Britain (Centrica) vs
Gazprom….
 Regulating the regulators
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Non-functioning market: Governments’ reactions
 Retail market - regulated vs. free pricing in case of energy
 EK objected in case of Slovakia, where PM Fico threatened to renationalize
Slovenske Elektrarne, if they did not stop raising the prices.
 In 2006, EK went after Spain, France, Estonia and Latvia for regulating
tariffs.
 Then EK went after Italy and Ireland for granting on discriminatory basis
the right to an incumbent to supply power at regulated price.
 And again it went after Germany, Czech Republic, Poland, Slovakia,
Lithuania and Italy for failing to provide sufficient information on regulator
tariffs. The same situation repeated in 2007, in case of Commission against
Spain and France.
 When the regulation of prices is legitimate?
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Ownership unbundling
 „This would be the greatest expropriation since the Bolshevik revolution“ – Bruno Wllnofer, Chief
executive of Tiwag, an Austrian utility.
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UK to FR 35
FR to DE 33,3
ES to FR (x) 32,8
PL to CZ 16,1
PR to ES 11,7
FR to BE 11
CZ to PL 10,1
SK to CZ 6,6
CZ to SK 1,1
DE to CH (x) 1
FR to IT 0,8
AT to CZ 0,3
CH to FR 0
IT to FR 0
BE to FR 0
DE to AT 0
Hours with congestion as a percentage of
all hours
Border 2005
SK to HU 100
FR to CH 100
DE to DK 100
NL to BE 100
FR to UK 94
DE to NL (x) 90,1
FR to ES 81,1
CZ to DE 68
NL to DE (x) 63,9
BE to NL 63,1
DE to FR (x) 41,3
CZ to AT 37
DE to CZ (x) 35,7
UK to FR 35
Third liberalization package
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Unbundling of
networks
Access to
networks
Market
opening
National
regulation
First
legislative
package
Separate
management and
accounts
Negotiated or
regulated terms
of access
Power: 35%
open by 2003
Gas: 33% open
by 2018
Mechanism for
regulation
Second
legislative
package
Separate subsidiary Regulated
terms of access
Power and gas
markets 100%
open by July
2007
Specific regulator
for energy
Third
liberalisation
package
Ownership
unbundling, ISO,
ITO.
Regulated
terms of access
Already
achieved
Ungraded and
harmonized
powers for
national energy
regulators
Third liberalization package - unbundling
 Separating networks from generation, production and supply
interests
 Ownership unbundling - OU means separating the ownership or the
operation of gas and power networks from other parts of the energy
business.
 ISO - companies involved in energy production and supply would be
allowed to retain their network assets, but would lose control over how they
are managed. Crucially, commercial and investment decisions would be left
to an independent company (ISO), to be designated by national
governments with the Commission's prior approval, to ensure a sufficient
level of independence.
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Third liberalization package - unbundling
 ITO model allows integrated companies to retain ownership of their gas
and electricity grids. However, they would have to give up daily management
of the grids to an independent transmission operator.
 Crucially, companies can retain commercial and investment decisions,
but will have to set up a framework for ensuring the independent operation
of the transmission network by:
 Setting up a supervisory body made up of company representatives, third-party
shareholders and representatives of the transmission system;
 agreeing a compliance programme setting out measures that prevent the ITO
from discriminating against suppliers using the grid;
 appointing a compliance officer with powers to ensure non-discrimination, and;
 introducing a mandatory cooling-off period for management staff who move
between the supply and generation company and the transmission operator.
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Third liberalization package
 Promotion of an internal energy market and the removal of
restrictions to trade between MS
 Agency for Cooperation of Energy Regulators (ACER) +
European Networks for Transmission System Operators
 The protection of the consumers have to be strenghtened
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Electricity market
 Electricity markets still strongly impacted by national energy
and climate policy decisions (RES, capacity mechanisms, retail
market regulation, carbon prices…).
 Gap between household (EU-28 average of €140MWh) and
industry (€90/ MWh) – different levels of taxation and RES
surchages
 Since 2008 the wholesale prices have been falling by 1/3, retail
prices have increased by 4%/y.
 Due to the persistence of regulated prices and market concentration,
the higher level of levies, taxes and network cost and low
responsiveness of consumers to switch suppliers to better offer.
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Actual situation
 Wholesale (sale for re-sale) market – price coupling (implicit
auctioning of 2 and more exchanges) of CE to NWE,
Nordpool and SE Europe = day-ahead market.
 Retail markets fragmented, regulated, supplier switching at low
leves, consumer awareness and activeness limited.
 New regulatory framework by the end of 2014
 Connect all ´energy islands´ by 2015 (Iberian Penisula, Baltic
states)
 EU generation market still concentraced. In 8 MS more than 70
% of power generation controled by historic incumbent.
 Europe is set to retire a substantial share of its power
generaticon capacity (coal, nuclear) in coming decade.
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Third liberalization package
 Wholesale market – price coupling of CE to NWE, Nordpool
and SE Europe = day-ahead market.
 New regulatory Framework by the end of 2014
 Connect all ´energy island´ by 2015 (Iberian Penisula, Baltic
States)
 EU generation market still concentraced. In 8 MS more than 70
% of power generation controled by historic incumbent.
 Europe is set to retire a substantial share of its power
generaticon capacity (coal, nuclear) in coming decade.
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Third liberalization package
35
Gas market
 More liquid, with increased trading at hubs and short-term
flexibility of gas contracts, lowering the link to oil prices and
moving towards more hub-indexed pricing.
 P2P system being replaced by EE system (mainly central and
western European gas markets) – but still in the transition
phase.
 Despite wholesale market opening and integration, retail
markets show a lack of effective entry and exit of market
players and remain national in scope.
 Prices for household vary from around €30 MWh to €95
MWh. Industrial prices more homogenous around €48 per
MWh.
 Regulated retail prices in 15 MS.
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