Liberalising the EU energy sector


Industries and private households are in theory able to freely choose their energy supplier following the entry into force of EU directives in 2004 and 2007, but many obstacles remain, with a single European energy market still far from reality. To make up for the shortcomings, the European Commission has made further legislative proposals, including controversial plans to separate the production and distribution arms of large integrated energy firms such as France’s EDF and Germany’s E.ON.

The first electricity and gas directives were adopted in the late 1990s, with the objective of opening up the electricity and gas markets by gradually introducing competition. The Commission has consistently argued that liberalisation increases the efficiency of the energy sector and the competitiveness of the European economy as a whole. But a number of stakeholders and member states, notably France and Germany, vehemently disagree with this assessment. 

While most member states had implemented the electricity and gas directives by September 2000, a 2001 Commission inquiry concluded that further measures were necessary in order to complete the internal energy market and to reap its benefits.

The second gas and electricity directives, adopted in June 2003, include 'un

bundling', whereby energy transmission networks have to be run independently from the production and supply side.

According to the directives, markets for all non-household gas and electricity customers are to be liberalised by July 2004. For private households, the deadline is July 2007. After these dates, businesses and private customers would theoretically have been able to choose their power and gas suppliers freely in a competitive marketplace.

But a competition enquiry in the electricity sector, published in January 2007, revealed some "serious malfunctions" in the market for industrial consumers (EURACTIV 11/01/07). 

For example, market concentration still reflects the 'old' market structure, characterised by national or regional monopolies - usually dominated by vertically integrated companies - which control electricity prices in the wholesale market and block new entrants to the market. In the gas sector, "incumbents tend to control imports and/or domestic production," according to the Commission.

Corrective action was promised by the EU executive, which tabled a further package of proposals in September 2007. After long negotiations, the Parliament and the Czech Presidency struck a compromise deal on the legislative package on 23 March 2009.

The Commission put forward its 'third energy package' on 19 September 2007. The package provided companies in the member states with two options for separating gas and electricity production from supply provision. A third option was later added at the insistence of France and Germany.

During the negotiations, the issue of unbundling emerged as the biggest bone of contention between the Parliament and governments, as MEPs insisted on full separation of production and transmission assets as the only option for the electricity market. The final compromise offers companies all three options.

1. Ownership unbundling

Under the Commission's preferred option, companies that control both energy generation and transmission would be obliged to sell part of their assets. Investors would be able to keep their participation in the dismantled groups via a system of 'share-splitting', whereby two new shares are offered for each existing share.

"This does not mean that a person or company cannot hold shares in both a network operator and a supply undertaking," the Commission explained. "For example, an individual investor […] could still have a minority stake in both supply undertakings and network operators." However, this would be only allowed "as long as these shares represent a non-controlling minority interest".

2. Independent System Operator (ISO)

The ISO option was a Commission compromise proposal whereby 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.

Regarding the question of ownership, the ISO option was also designed to fend off criticism that the Commission is trying to privatise energy utilities such as EDF. "It is up to each country to decide if the transmission network is privately or state-owned," said a Commission official, "but they have to prove that they are completely independent from the state".

During the negotiations, it emerged that the ISO option was unattractive to many member states, with most opting for full unbundling or the 'third option' (see below).

3. Independent Transmission Operator (ITO)

EU ministers introduced the so-called 'third way' in response to the successful efforts of 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 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.

More powers for national regulators and new EU agency

A lack of coherence in the powers and remits of national energy regulators was identified as one of the biggest hurdles in creating a functioning EU energy market. The third liberalisation package aims to resolve this by:

  • Harmonising and strengthening the powers and duties of national regulators so that they are able to issue binding decisions on companies and impose penalties on those that fail to comply;
  • ensuring that all national regulators are truly independent of industry interests and government intervention, meaning that they will have authority over their own budgets and that strict rules apply for management appointments, and;
  • mandating all national regulators with a binding requirement to co-operate with each other. 

Co-operation between national transmission system operators (TSOs) for gas and electricity, which currently only takes place on a voluntary basis, will be formalised through the establishment of a European Network for Transmission System Operators. The purpose of the network is to harmonise standards for pipeline and grid access, and co-ordinate and ensure proper network planning and investments in order to prevent blackouts.

new European agency will also be created to oversee and improve cross-border regulatory cooperation for gas and electricity transmission between member states. The agency would not have any direct regulatory authority at national or European level, but it would have the power to intervene in the event that national regulators fail to cooperate effectively. 

Reciprocity clause

Under the agreed text, all non-EU countries will be required to comply with the same unbundling requirements as EU companies before they are certified to operate in the common market. Moreover, member states must refuse certification if it is deemed to "put at risk the security of energy supply of the member state and the Community".

When introduced by the Commission, this so-called 'reciprocity clause' was widely interpreted as being directed at the Russian state-controlled energy giant Gazprom, which is seeking to increase its share of the EU market (EURACTIV 20/09/07).

The clause gives sufficient scope for member states to decide whether to let a third-country company enter its market, acknowledging that member states have the right to "national legal controls to protect legitimate public security interests".

The clause has caused consternation in Moscow, and the EU and Russia have agreed to set up a new expert group to discuss the matter.

The European Commission has made clear that it favours splitting up energy firms' production and distribution activities as the best way to ensure fair competition and lower prices for consumers. Speaking in February 2007Competition Commissioner Neelie Kroes said full 'ownership unbundling' would solve the "inherent conflict of interest" that she says inevitably occurs when incumbents are told to grant access to their network to new competitors entering the market. Their self-interest, she said, is to impede access in order to protect their market share.

However, a majority of member states, led by France and Germany, have so far rejected the Commission's calls, saying that splitting up energy firms "is only one of a number of measures for accelerating the dynamics of competition". In particular, unbundling "is not a cure-all", said Germany's Economy Minister Michael Glos in a statement following a meeting of EU energy ministers in June 2007 (EURACTIV 7/06/07). The UKDenmark and the Netherlands, on the other hand, are active promoters of 'ownership unbundling'.

Eurelectric, the union for the EU electricity industry, says the liberalisation process has brought "considerable benefits" to Europe in terms of price and cost reductions as well as labour productivity gains. However, Eurelectric believes that it is vital to maintain the momentum and reinforce trust in the liberalisation process. 

In particular, the power industry calls for the full and effective implementation of the liberalisation package by member states. Moreover, it says that regulation should be completed with guidelines on congestion management, harmonisation of transmission tariffs and a compensation mechanism for transmission system operators (TSOs).

The association of European Transmission System Operators (ETSO) has also called on member states to fully implement the electricity directive. In addition, ETSO says member states should ensure the provision of adequate electricity generating capacity to meet demand. 

ETSO argues for consistent (although not necessarily identical) regulatory principles and practice between member states in order to promote the development of the internal market and economic efficiency. It also encourages the Commission to put in place draft guidelines on cross-border trade and congestion management. 

The European Chemical Industry Council (Cefic), which claims to be the largest energy consumer in the EU manufacturing sector, said: "Progress in opening up markets […] since the entry into force of the liberalisation directives has been disappointing and small." 

Cefic thus calls for "rigid and coordinated actions from the European Commission, member states, regulators and producers" to remedy the situation. It also points out that lack of liberalisation in the electricity market allows power utilities to pass on the additional costs entailed by compliance with the EU CO2 emissions trading scheme (ETS). 

It says the scheme offers electricity utilities the potential to pass on all or part of the 'market price' of [CO2] allowances to electricity consumers by increasing power prices. Cefic warns that this unintended consequence of the ETS is damaging the EU's international competitiveness, especially for energy-intensive industries.

The metal industry trade association Eurometaux also says liberalisation has not prevented electricity prices from rising. As a consequence, Eurometaux says that the metal industry, which is a heavy consumer of electricity, has experienced a sharp deterioration in its competitiveness. "Plant closures and disinvestments have already been announced, attributable primarily to this unaffordable cost of electricity," it points out.

In Eurometaux's opinion, this situation is caused by distortions in the ill-functioning European electricity market. Electricity producers, it says, have adopted commercial practices allowing them to indicate prices that do not reflect cost fundamentals. Producers, it argues, have created the illusion of competition through wholesale trading, but in reality, the large producers continue to dominate the market. 

"The current power-exchange model should be replaced by a true market design that allows cost fundamentals to be properly reflected and gives equal weight to all market participants," it says. Eurometaux also stresses the importance of freeing up existing capacity and opening markets to new entrants. 

The European Federation of Public Service Unions (EPSU)  says that the Commission's approach to energy liberalisation "contradicts the need for an energy policy that ensures more independence and is focused on achieving sustainable development." 

EPSU Deputy Secretary-General Jan Willem Goudriaan notes that "serious issues of employment loss (300,000 over the last ten years), the emergence of a lack of qualified staff or the impact of competition on vulnerable users have not been addressed. More competition will not bring more investment to a sector that needs a very stable framework, not a policy that has a yo-yo effect. The result will be higher prices and a serious impact on all users."

The European Renewable Energy Council (EREC) calls effective competition in the European power markets a "myth". According to EREC, unless the existing distortions in the conventional energy markets are overcome, there will be no effective internal market for renewables to compete in. In addition, EREC criticises current unfair market conditions which favour conventional energies, such as through the Euratom treaty or failure to apply the 'polluter pays' principle. 

In April 2005, Greenpeace published a report analysing the market shares of Europe's ten largest electricity utilities (EdF, E.ON, RWE, ENEL, Vattenfall, Electrabel, EnBW, Endesa, Iberdrola and British Energy). According to the environmental pressure group, the liberalisation process has worked in favour of these large established utilities as demonstrated by the wave of takeovers that ensued after the opening of the market. 

New, green utilities, Greenpeace pointed out, have little chance of competing on an equal footing as the 'big ten' have enough influence in the sector to control prices. It said the situation is likely to continue, "because there is still no fair access to the [electricity] grid".

For specific stakeholder reactions to the Commission's 19 September 2007 proposals, please see our 
related coverage

  • July 2004: Industrial market opens up to competition.
  • 10 Jan. 2007: Commission issues progress report on the internal energy market and final results of a competition enquiry which confirmed "serious problems" in the liberalised gas and electricity markets.
  • 8-9 March 2007: EU Summit adopts conclusions on energy liberalisation, calling for:

    • Full implementation "in letter and spirit" of existing EU directives, and;
    • "effective separation of supply and distribution activities from network operations (unbundling)".
  • July 2007: Household market opens up to competition.
  • 19 Sept. 2007: Commission presented its 'third liberalisation package' (EURACTIV 20/09/07)
  • 23 Nov.: Commission delivers impact assessment on the Internal Energy Market package. 
  • May 2008: Vote in Parliament's Industry (ITRE) and Internal Market (IMCO) Committees (EURACTIV 07/05/08).
  • 6 June 2008: Energy Council reached broad political agreement on the Commission's third liberalisation package.
  • Mid-June 2008: Vote in Parliament 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.

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