Market fragmentation and concentration
In its September 2007 proposal, the Commission cited the following problems as being "at the root of the lack of a truly internal market" for gas:
- A high concentration rate with a few large firms dominating the market;
- a high degree of "vertical integration" whereby a single company controls all stages of the production and distribution of gas, and;
- market fragmentation along national lines.
The lack of market integration at EU level was partially addressed in April 2006 when the European Regulators' Group for electricity and gas (ERGEG) launched an initiative to create four regional markets for gas as a first step towards a single EU-wide market. The four regions were defined as follows:
||Belgium, France, United Kingdom, Ireland, Netherlands
||Denmark, Germany, Netherlands, Sweden
||Spain, Portugal, Southern France
|South - South East
||Italy, Austria, Greece, Slovakia, Hungary, Slovenia, Poland, Czech Republic
||Italy and Austria (co-chairs)
In order to move to a truly common market, the compromise agreement on the third legislative package settled on giving member states a choice of three options to foster more competition in energy markets.
1) Main regulatory option: 'Ownership unbundling'
The most far-reaching remedy was a Commission proposal to break up big energy companies altogether, referred to as 'ownership unbundling'. Under this option, member states can choose to force large integrated energy firms to sell transmission assets, such as pipelines, as a way of ensuring that competitors gain fair access to the network.
EU Competition Commissioner Neelie Kroes explained: "Owners and operators of critical networks often compete with companies that need to have access to these same networks. Can we expect such integrated companies to treat competitors in a fully fair manner? Their own self-interest would suggest not."
Under the current system of 'legal unbundling', transmission networks may still be owned by an integrated firm but need to be managed by a different legal entity. However, according to the Commission, legal unbundling is insufficient for the following reasons:
Network access: Legal unbundling does not solve the "fundamental conflict of interest" which arises when large integrated groups compete with companies that need access to their own networks (pipelines of gas storage facilities);
Information flows: Network managers will be tempted to issue sensitive information about pipeline or gas storage capacity first to the generation or supply branch of the integrated firm rather than to competitors.
Investments: Incumbents have an inherent interest in limiting investments in new network capacity if it brings new competition to their home market.
2) Alternative option: Drastic regulation
Faced with opposition from France and Germany - both home to national energy champions that would likely suffer from full unbundling - the Commission came up with an alternative. Under this option, vertically-integrated firms are allowed to retain ownership of their pipelines and storage assets, but will have to hand over their management to an 'Independent System Operator' (ISO) to be established in each member state.
During the negotiations, it emerged that the ISO option was unattractive to most member states, which opted for full unbundling or the ‘third option’.
3) The third way
EU ministers introduced the "third way" in response to the successful efforts by France and Germany to build a coalition against full unbundling. They obtained the right for former state monopolies – such as EDF and GDF in France and E.ON and RWE in Germany – to retain ownership of their gas and electricity grids, provided that they are subjected to outside supervision.
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 can retain control of commercial and investment decisions, but will have to ensure the independent operation of the transmission network by complying to certain rules, such as setting up a supervisory body and compliance programme to prevent discrimination against suppliers using the grid.
Long-term supply contracts under EU scrutiny
Long-term sales contracts between European firms and foreign suppliers of natural gas have come under intense scrutiny by the Commission which argues they act as a barrier to new market entrants buying their gas at more volatile market prices.
Integrated firms such as France's GDF have retorted that long-term contracts are essential to guarantee stable prices for consumers. Moreover, they argue that breaking up their transport and production activities will only weaken their negotiating position towards large suppliers, such as Russia's Gazprom, and eventually weaken Europe's security of supply.
However, these arguments are rejected by the Commission, which says the key to concluding long-term supply deals is "not the ownership of the network but the existence of a strong customer base". Once they are fully unbundled from the network, all gas purchasing companies will be able to compete for gas on an equal footing, it says.
A possible 'blueprint' deal was reached in 2007 when Belgium's Distrigas agreed to limit its long-term gas supply contracts. The Commission told energy firms they can avoid future antitrust cases by following Distrigas's example (EURACTIV 12/10/07).
Investment reciprocity: The 'Gazprom clause'
A reciprocity clause - quickly dubbed the 'Gazprom clause' - was inserted into the Commission proposal in response to fears that ownership unbundling would lead to the acquisition of strategic EU energy transmission assets by foreign companies (EURACTIV 20/09/07).
Under the clause, foreign companies would need to comply with the same unbundling requirements at home before making acquisitions in the EU. The conditions would be laid down in a bilateral agreement, a move which could help relaunch negotiations with Russia over a wide-ranging Partnership and Cooperation Agreement (PCA) which remains stalled for now.
The final agreement states that member states must refuse to certify a company from a non-EU country if it is deemed to "put at risk the security of supply of the member state and the Community". The text gives sufficient scope for the individual countries to decide whether to let a third-country company onto their market, citing their right to protect public security interests.
Gas: A geopolitical commodity
According to estimations from Eurogas, the European natural gas trade association, the EU 27 covered 38% of its gas needs with its own production, mainly from the UK and the Netherlands (2007 figures). The EU's principal external suppliers are Russia (23% of final EU consumption), Norway (18%) and Algeria (10%).
However, the situation varies widely throughout the EU, with Central and Eastern European member states often heavily dependent on Russian imports. This is the case for Austria, Bulgaria, Slovakia and Greece, but also the Baltic states and Finland, where Russian dependency can reach 100%. Others, on the other hand, import no Russian gas at all. These include Belgium, Ireland, Portugal, Spain, Sweden and the UK (see BBC overview).
Diversifying supply: New LNG terminals and pipelines
Unlike oil, which can be transported easily in tankers, gas is still transported mainly via pipelines, making Europe dependent on existing supply and transit routes.
The need for Europe to diversify supplies was underlined by a dispute between Ukraine and Russia in January 2006, which led to interruptions to supplies of Russian gas for some EU states (EURACTIV 18/01/06). Some 80% of Russian gas is transited through Ukraine. In the wake of the dispute, EU states agreed to speed up a number of projects, including:
- The Nabucco pipeline, which will give Europe access to large gas fields in the Caspian region and the Middle East.
- Building new terminals for Liquified Natural Gas (LNG) that can be transported by ship to regions where pipeline connections are not feasible.
The dangers of insufficient grid connections were again highlighted in January 2009, when Russian energy giant Gazprom cut supplies to Ukraine over a payment dispute (EURACTIV 14/01/09).
Access to gas storage
Finally, the Commission insists that information transparency rules on pipeline availability should be extended to gas storage facilities as well in order to guarantee better access to all competitors on the market.
In an impact assessment accompanying its September 2007 proposal, the EU executive noted that "competition in the gas sector is limited by the availability of storage, which is often in the hands of the incumbent companies". Although the Commission considers that gas storage facilities, unlike pipelines, are "not a natural monopoly," it says specific rules should apply to that market. These, it said, should strike the right balance between "the need for effective access [while] maintaining incentives for new storage developments".
However, it considered that building up strategic gas stocks to deal with potential supply disruptions, as is the case for oil, would be too expensive and technically difficult at the moment.