Probe exposes serious flaws in EU energy market

Early results of a Commission probe into the liberalised European gas and electricity markets have uncovered restrictive business practices and abuse of dominant positions. Remedies could be adopted as of mid 2006.

“European energy markets are not yet functioning on a competitive basis” and there are still “a number of serious malfunctions” in how gas and electricity is being sold to industrial consumers, the Commission said on Tuesday (15 November). 


Probe

The comments came with the publication of the preliminary findings of a sector enquiry launched by the Commission in June after large industrial consumers of energy complained about ever-increasing prices and lack of competition in gas and electricity markets. 

“If we uncover evidence of competition law infringements we will take action to protect European consumers,” said Competition Commissioner Neelie Kroes in June. In a statement on Tuesday (15 November), she reiterated her determination to use EU competition law to address the issue.

Early findings of the probe highlight that “gas and electricity markets in many member states continue to be concentrated, creating scope for incumbent operators to influence prices” and set them at artificially high levels. 

The probe also notes an “inadequate level of unbundling of network and supply activities” for both gas and electricity. Barriers to the cross-border supply of energy also prevent the development of a truly integrated EU market, the Commission notes. Finally, there is a lack of price transparency which “aggravates the mistrust by industry and consumers” over how these are determined.


Report on the internal market for gas and electricity

The 2005 Commission report on the functioning of the internal market for gas and electricity was published together with the preliminary results of the enquiry. 

The report “confirms that cross-border competition is not yet sufficiently developed to provide customers with a real alternative from the nationally-established suppliers”. The low level of cross-border trade and lack of price convergence are evidence for this, says the Commission.

Member state failure to implement the electricity directives “on time or with sufficient determination” is the most important cause for these shortcomings, says the Commission. In the case of electricity, insufficient interconnection between countries still prevents competition from developing, it notes.

However, the report does not yet draw conclusions regarding the need for additional regulatory measures at EU level as many member states have only recently adopted their national legislations. The Commission indicated it will carry out country-by-country analyses and possibly “redress remaining requirements” at the end of 2006. There will not be a third liberalisation directive for the moment.

Eurelectric, the European association of the electricity utilities, thinks it is vital to maintain momentum in opening up markets and has called for the full and effective implementation of the liberalisation package by all member states.

As one of the largest consumers of electricity, the metals industry has accused electricity utilities of keeping prices at artificially high levels. Trade association Eurometaux has pointed to plant closures and disinvestments in the metal sector to be caused mainly by dubious commercial practices that the current electricity directives cannot address.

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. 

European trade unions in the public service sector (EPSU) have questioned the benefits of liberalisation and estimate that 300,000 jobs will be lost following liberalisation. An academic report completed for EPSU concluded in September 2005 that "competition in electricity will not work due to specific characteristics" of the sector.  Electricity, it is stated, is "a social good" and "an essential service" and cannot be opened up to competition due to its "physical nature" and "economic rationale".

The European markets for gas and electricity were opened up in July 2004 when industrial consumers were in theory able to freely choose their supplier. Since then, governments have been dragging their feet in implementing the directives. In March 2005, the Commission launched legal proceedings against Belgium, Germany, Greece, Latvia, Luxembourg and Spain for failing to fully apply the directive.

On 13 June 2005, the Commission launched a sector enquiry in the liberalised EU gas and electricity markets. The probe followed complaints by market participants about high prices and market malfunctioning.

  • 1 December 2005: Commissioner Kroes to present findings of the probe and the report to energy ministers
  • Second half 2006: completion of the enquiry
  • End 2006: report on the functioning of the Internal Market in electricity and gas
  • July 2007: market liberalisation for all consumers

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