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Internal energy market II.
Filip Černoch
cernoch@mail.muni.cz
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 MSs are, therefore, removed to
maximum.
Prerequisites for IEM
• Liberalisation and competition – withdrawal of the state from
the energy sector, removing the barriers.
• But also regulation – to limit the power of (natural) monopolies
and to remove the legacy of pre-liberal paradigm – regulation to
competition.
• Interconnectors.
Incentives
• 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 (electricity) – local or national
obligations. Questioning of the realisation of political goals via
state-controlled industries.
• Over-investments in production capacities due to the expected
demand. High costs of new plants = the performance of the
(state-runned) industry was suffering.
Initial goals of the EC
• 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.
First legal acts
• 1988 Working Document on the Internal Energy Market.
• 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 …
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
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: basic principles
• 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.
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 policymaker
in the EU
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“ (2001).
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
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
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.
Functional Unbundling: where the network operator is part of
a vertically integrated undertaking, it shall be independent in
terms of its organization (management separation) and decision
making rights from the other activities not related to that
network.
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).
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 (e.g. limited common
auctioning).
• 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.
Non-functioning market: Utilities’ 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.
• Market segmentation (LTC in gas, physical interconnectors in
electricity)
EC enforcing new rules
• Just in 2006 EC court proceedings against 17 states for
inadequate transposition of the 2003 directives.
• In 2007 anti-trust investigations against Eni, RWE
(underivestments, capacity hoarding, high prices for access to
network etc.).
• Unexpected inspections of 25 companies in Austria, Belgium,
France, Germany, Hungary, Italy.
• 2/2008 E.ON to sell-off its grid (€1bn/y) to settle EU
antitrust inquiries.
• 6/2008 RWE to sell off its gas grid to avoid anti-trust actions
by Commission.
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.
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?
Ownership unbundling
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
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 Upgraded and
harmonized powers
for national energy
regulators
Unbundling
Ownership unbundling - OU means separating the ownership or
the operation of gas and power networks from other parts of the
energy business
ISO – energy supply companies may still formally own gas or
electricity transmission networks but must leave the entire
operation, maintenance, and investment in the grid to an
independent company.
ITO model – energy supply companies may still own and operate
gas or electricity networks but must do so through a subsidiary.
All important decisions must be taken independent of the parent
company.
ENTSO-E + ENTSO-G
• Developing of standards and draft network codes to help
harmonise the flow of electricity and gas across defferent
transmission systems
• Coordinating of the planning of new network investments and
monitor the development of new transmission capabilities.
Europe-wide 10 year investment plan to help identify gas every
two years