EU Electricity Market Liberalisation

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The liberalisation of EU electricity markets is part of a wider move towards a common energy policy – EURACTIV takes a closer look at the liberalisation drive, including power trading and challenges specific to the electricity sector.

Background

A debate has long been raging in Brussels over the best way to a create an integrated European energy market in which consumers – both private households and industrial facilities – can purchase power from a wide base of competing suppliers from within or beyond the borders of their own member state.

EU negotiations on the third energy liberalisation package hit deadlock at first over differing views on how to create a common European market for gas and electricity, before a compromise was forged in March 2009 (EURACTIV 25/03/09).

The European Commission is convinced that forcing large electricity-generating firms to cede control over their distribution networks, so-called ownership 'unbundling', is necessary. 

But a number of member states, led by France and Germany, are not convinced that such a manner of liberalisation will truly lead to a better functioning energy market with better prices, greater supply security and environmental sustainability (EURACTIV 09/07/07).

Changing the way power is generated and transmitted also raises important technical and regulatory challenges that are often either overlooked or used to fuel heady political debates, leading to confusion about the best way to proceed with the liberalisation drive.

Issues

Three options

The 'third energy package' provides companies in the EU with three options for separating electricity production from supply provision.

1. Ownership unbundling

Companies that control both energy generation and transmission are obliged to sell part of their assets. Investors are able to retain their participation in the dismantled groups via a system of 'share-splitting', whereby two new shares are offered for each existing share.

2. Independent System Operator (ISO)

Companies involved in energy production and supply are allowed to retain their network assets, but lose control over how they are managed. Crucially, commercial and investment decisions are left to an independent company (ISO) designated by national governments, with the prior approval of the European Commission to ensure a sufficient level of independence.

3. Indepenent Transmission Operator (ITO)

Like the ISO option, the ITO model allows integrated companies to retain ownership of their gas and electricity grids. However, they will have to give up daily management of the grids to an independent transmission operator.

Crucially, companies remain in control of commercial and investment decisions, but will have to set up a framework to ensure the independent operation of the transmission network.

A special commodity

Unlike gas, electricity cannot be stored, at least not in large quantities and not over long periods, given the present state of technology. Electricity must therefore be made available at short notice and in response to sudden changes in demand.

Greater electricity market liberalisation, particularly if it is characterised by a higher number of smaller electricity producers feeding into a large and complex Europe-wide grid, would require significant restructuring of the exisiting electricity transmission infrastructure.

In the long term, grids would need to be highly stable, yet also adaptable and responsive to power input from a wide variety of small and large electricity generators, including households. National transmission system operators (TSOs) play a key role in this process, as they are responsible for managing and overseeing the flow of high volumes of electricity through grids.

Nevertheless, at present, Europe's grids remain largely centralised, and are set up to distribute electricity generated by large coal, nuclear and gas power plants. The EU's energy market is also plagued by under-investment in cross-border power transmission capacity and a lack of coordination between TSOs, which also manage power flows between member states, according to a Commission impact assessment.

Fair access and investments

Proponents of liberalisation argue that in a market where power generation and supply is controlled by a few large firms, there is little incentive to invest in and expand network capacity, since this would pave the way for more competition and bring prices (and thus profits) down.

But not all experts agree that liberalisation would lead to network upgrades, and have instead raised concerns about potential grid instability and even under-investment as a result of a lack of stewardship by the established players.

Opponents and proponents of liberalisation do agree, however, that getting TSOs to cooperate better while stimulating greater investment in networks requires the right regulatory framework. 

The third legislative package gives more power to national regulators and creates a new European Agency for the Cooperation of Energy Regulators (ACER) to ensure that market players act fairly at both national and European level.

The package also creates a European Network for Transmission System Operators (ENTSO) for both gas and electricity. Both measures are designed to give firms and financiers greater certainty when planning network upgrades, and to prevent the kind of market abuse and cartel-like behaviour that has been documented in Germany, for example (EURACTIV 5/11/07). 

But a number of regulatory experts - as well as the EU's two main energy regulatory bodies, the Council of European Energy Regulators (CEER) and the European Regulators Group for Electricity and Gas (ERGEG) - argue that the powers of the new bodies, in particular those of ACER, are too limited and are pushing for its mandate to be strengthened (EURACTIV 25/01/08).

Power quality

Even if the correct regulatory conditions can be created, power transmission technologies and standards must be such that the quality of power flows is ensured. 

While power disruptions or temporary fluctuations in the quality and strength of electricity voltage flows can be a nuisance in households, they can spell disaster for hospitals and other facilities that rely on sensitive equipment.

"An undervoltage as short as ¼ of a cycle (about four milliseconds) is often sufficient to confuse sensitive electronic devices, potentially putting patients' lives at risk," according to Leonardo Energy, an initiative of the European Copper Institute (ECI). 

In addition to safety concerns, poor power quality, notably through sudden voltage decreases or 'dips', costs the EU an estimated €150 billion annually, according to Leonardo Energy, which says that EU standards on power quality are outdated given the current state of technologies. 

But tightening the EU's current power or voltage quality standard EN50160, as established by the European Committee for Electrotechnical Standardisation (CENELEC), is a sensitive issue, as this would require costly upgrades at virtually all points of the electricity supply chain. The standard is currently under review, but details of the process are being kept tightly under wraps, with no clear timeline available.

Traders waiting in the wings

Efforts in Brussels to create a functioning European electricity market are thus complicated not only by political concerns, but also by complex technical and financial issues that affect the entire scope of the EU's electricity infrastructure.

Traders, meanwhile, are pleased that the liberalisation process is moving forward given the enormous potential of wholesale electricity trading within a pan-European power exchange. 

Such wholesale trading, which takes place either through actual physical trading in power or through trading of financial instruments (futures, derivatives, etc.) "is critical in a liberalised market, and is one of the key drivers of liberalisation. It is where liberalisation impacts utilities first," says Eurelectric, which represents the EU's electricity industry in Brussels.

Since 2005, trading volumes in the EU have stabilised following a significant decline in the wake of the 2001 Enron scandal in the US, which rattled the confidence of many market participants in energy trading.

Despite the market's recovery, energy traders worry that a stalled liberalisation process and continued price controls, such as France's regulated energy tariffs and renewable feed-in tariffs, could undermine progress. 

The climate link

The drive to integrate and liberalise the EU's energy sector is inextricably linked with the bloc's wider climate change agenda, notably commitments to achieve a 20% decrease in CO2 emissions by 2020, coupled with a 20% increase in renewable energy use during the same period.

The Commission hopes that efforts to boost renewables and a high carbon price under the EU's emissions trading scheme in particular could act as drivers for the creation of a well-functioning pan-EU electricity and gas market. 

It thus came as no surprise that negotiations were heated throughout 2008 and into 2009, as EU member states had to simultaneously hammer out complicated and sensitive new laws concerning not only the energy sector, but the overall framework of EU efforts to address climate change. 

Positions

"Few Commission proposals have been assessed as well" as the third liberalisation package, EU Energy Commissioner Andris Piebalgs told MEPs during a January hearing of the European Parliament's industry and energy (ITRE) committee in Brussels.

Many stakeholders agree that liberalisation can bring about a well-functioning EU energy market, but only if certain regulatory, infrastructure and market conditions are safeguarded.

"Liberalisation, when properly designed and implemented, and accompanied by regulation, can provide a better combination of efficiency and security of supply," according to the Council of European Energy Regulators (CEER), which fears that "poorly designed liberalisation measures or interventions may have the unintended consequence of undermining rather that strengthening security of supply".

EU public services companies, represented in Brussels by CEEP, are in favour of a European level regulatory body, "but only to complement at European level the regulatory tasks performed at national level".

Meanwhile ETUC, the European Trade Union Confederation, is opposed to ownership unbundling since "experience in some countries has shown that this unbundling does little to reduce prices but, on the contrary, undermines the maintenance of installations and their levels of safety". "Persisting in the drive towards liberalisation weakens Europe's development towards the security of energy provision", ETUC said, reacting to the Commission's third package.

The European Federation of Energy Traders (EFET) is in favour of giving market forces, rather than regulations made in Brussels, a bigger role to play in the development of the EU's energy sector, particularly by allowing existing regional markets to expand to include other member states. 

Regulators "should stimulate liquidity in energy markets, particularly at the wholesale level and throughout Europe, by insisting on a well-coordinated infrastructure and grid services across borders, especially within each normal price zone," according to EFET Chairman Paul van Son.

But regulators should not "try to regulate the operation of the market, by 'designing' or mandating a particular transaction platform, nor even by leaving the discretion to TSOs to set so-called 'market rules', which may lead to harmful distortions," van Son said in a press statement. 

Concerning a revision of the CENELEC power quality standard, the European Information & Communications Technology Industry Association (EICTA) "believes that a wider range of power quality as envisaged by the [standard] is not acceptable because it will require significant numbers of modifications to products in our industries at vast cost".

Timeline

  • 19 Sept. 2007: Commission tables third energy liberalisation package
  • 13-14 March 2008: EU summit agrees to reach political agreement by June 2008
  • May 2008: Vote in Parliament's Industry (ITRE) and Internal Market (IMCO) Committees (EURACTIV 07/05/08).
  • 6 June 2008: Energy Council reaches broad political agreement on the Commission's third liberalisation package.
  • Mid-June 2008: Vote in Parliament’s plenary (first reading) (EURACTIV 19/06/08).
  • 12 Jan. 2009: EU Council of Ministers adopts common position on third energy liberalisation package.
  • 23 March 2009: Parliament and Czech Presidency reach agreement on the third energy package (EURACTIV 25/03/09).
  • 22 Apr. 2009: Parliament endorses compromise agreement (EURACTIV 23/04/09).
  • 25 June 2009: Council adopts internal energy market package. 

Further Reading

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