Energy Market Liberalisation – European Commission Sector Inquiry 2005 - 2007
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The document summarizes the findings of the European Commission's 2005-2007 sector inquiry into the European gas and electricity sectors. The inquiry identified several dysfunctions in the markets including high market concentration, vertical foreclosure due to inadequate unbundling, low market integration across member states, lack of transparency, and chronic lack of liquidity. The inquiry suggested remedies including stronger competition law enforcement, regulatory measures like mandatory ownership unbundling, and incentives for new market entrants to address the structural issues and lack of a pro-competitive regulatory environment. These findings and recommendations helped form the basis for the Third Energy Package adopted in 2009.
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Energy Market Liberalisation – European Commission Sector Inquiry 2005 - 2007
- 1. Energy Market Liberalisation – European Commission Sector Inquiry 2005 - 2007 Anaïs Alle / Zih-Min Huang 20th Feb 2017 1European Law and Energy Policies – Exposé pour la Séance 4
- 4. Background: Dysfunctions of the market 4 1. Prices Rise – Gas Hub Prices Source: Preliminary Report – Annexes (16 February 2006)
- 6. Background: Dysfunctions of the market 6 2. Barriers to Entry (France) Shares in available installed capacity and effective generation for a selection of countries, 2004 86.6% 2.5% 2.2% 0.5% 8.2% France available installed capacity Undertaking A Undertaking B Undertaking C Undertaking D Other undertakings Source: Preliminary Report – Annexes (16 February 2006) Charts redrawn by presenters 75.4% 1.5% 7.8% 7.4% 7.9% France Y2004 Effective generation Undertaking A Undertaking B VPP Undertaking drawing rights of undertaking A Other undertakings
- 7. Background: Organization of the inquiry Ø Claims from consumers and new entrants Ø An inquiry from 2005 to 2007 Ø A public consultation: Contributions from 60 stakeholders: Ø European and national participants in the energy industry: EUROGAS, EURELECTRIC, Royal Dutch Shell, EDF… Ø Governments and national institutions: Ministerie Van Economische Zaken (Nederland), Portuguese Competition Authority, UK Government… Ø Industrial Consumers: Metal Industries Association, Chemical industries association… Ø Study: “Structure and performances of six wholesale electricity markets in 2003,04,05”: Germany, Spain, Netherlands, UK, Belgium, France 7Source: Structure and Performance of Six European Wholesale Electricity Markets in 2003, 2004 and 2005 - Executive Summary
- 10. 1. Opening up Europe’s gas and electricity markets to competition 2. Creating a single European energy market Objectives Tactics Well functioning energy markets that ensure secure energy supplies at competitive prices are key for achieving growth and consumer welfare in the European Union Aims 1. Assessing the prevailing competitive conditions 2. Building the causes of the perceived market malfunctioning Key areas (1) market concentration (2) vertical foreclosure (3) lack of mkt integration (4) lack of transparency (5) price formation (6) downstream markets (7) balancing markets (8) liquefied natural gas (LNG) 10 (1) 8 key areas identified need to be addressed the most rapidly in order for liberalisation to bear fruit
- 11. “Market concentration” has been identified as a major concern for the success of the liberalisation process • At the wholesale level: competition remains national in scope and maintains the high level of concentration of the pre-liberalisation period • Wholesale: reflect significant level of concentration in generation Gas è With little new entry in retail markets, customer choice is limited and competitive pressure constrained Up-stream gas Domestic gas production Incumbents New entrants Small portion on “hubs” Electricity è The existing level of interconnection capacity is not sufficient to significantly reduce concentration • Forward: depend on few suppliers with long positions SituationResult 11
- 12. • A type of anti-competitive behavior. A company purchases a supplier that supplies both the company and several competitors with raw materials “Vertical foreclosure”, most prominently inadequate unbundling of network and supply, damages the market 12 1. The operators of the network/ infrastructure favor their own affiliates 2. Operational and investment decisions are on the basis of the supply interests of the integrated company Highly damaging to security of supply 1. This form reduces the incentives for incumbents to trade on wholesale markets 2. Gas: LT supply contracts on the upstream 3. Electricity: LT power purchase agreements Low levels of liquidity are an entry barrier to both gas and electricity markets Discrimination towards new entrants Integration within the same group Source: Vertical Foreclosure and Specific Investment
- 13. “Market integration” across Member States is too low to currently impose any significant competitive constraint • Incumbents rarely enter other national markets as competitors. è Insufficient or unavailable cross-border capacity and different market designs hamper market integration. è Market partitioning still serves as an anti-competitive issue. Electricity • Available capacity on cross-border import pipelines is limited • Pre-lib legacy contracts not subjected to normal third party access rules • Reinforced by ineffective congestion management mechanisms • Insufficient interconnector capacity • Few adequate incentives to invest in additional capacity to eliminate long- established bottlenecks • LT pre-lib capacity reservations still exist in certain boarders Gas Improve access to existing interconnectors & Implement better congestion management 13
- 14. “Transparency” and “price information” are crucial and indispensable for effective market competition 1. Require more data relating to network availability, and on the operation of generation capacity and gas storage 2. Improve transparency and ensure no collusion for published information Transparency • Lack of reliable and timely information on the markets • An information asymmetry between the vertically integrated incumbents and their competitors 1. Ensure liquidity is crucial to improve confidence in price formation on gas hubs 2. Decrease “adverse effects” generated by regulated tariffs Price information • Limited trust in the price formation mechanisms • Gas import contracts use price indices linked to oil derivatives • Regulated supply tariffs below market prices discourage new entry Issue Findings Suggestions 14
- 15. Downstrea m markets Balancing markets LNG markets • Competition at the retail limited by the “duration of contracts” • Situation differs significantly between Member States • Restrictions of access • Restrictive practices by suppliers • Certain standard contracts contain restrictions • Incumbents are favoured • The size of the current balancing zones is too small • Widen Europe’s upstream supplier base • LNG terminal matters: traditionally LNG are imported by national incumbents • Require strong investment in LNG terminals to foster downstream competition • The complexity and costs of shipping gas within Europe are increased • Concentrated markets for transmission system operators FindingsAreas Gas Electricity 15 Other issues: downstream markets, balancing markets, and liquefied natural gas (LNG)
- 16. • Competition law enforcement can make a significant contribution, but cannot by itself open markets and resolve all the shortcomings identified by the Sector Inquiry: a number of regulatory measures are, therefore, also needed 16 (2) It is essential to apply both competition and regulatory-based remedies Remedies Competition Law Enforcement Structural issues and pro-competitive regulatory environment Market concentration Vertical foreclosure Market integration Unbundling The regulatory environment Chronic lack of liquidity Lack of Transparency
- 18. Enforcing competition law as remedies • Full and combined use of the Commission’s powers under antitrust rules and and State aid control is needed to maximise the impact of the Commission’s enforcement action 18 Market concentration Vertical foreclosure Market integration • Apply “Energy Release Programs” to develop market liquidity and increase entry opportunities: in the merger area and under antitrust laws • Vertical tying of markets by LT downstream contracts as a priority for review of case situations under competition law and for providing guidance • Analyze the competition effects of pre-lib LT contracts and their compatibility with competition rules • Fight against collusion between incumbents with high priority
- 19. • The followings are main fundamental deficiencies in the competitive structure of current electricity and gas markets Structural conflicts of interest • a systemic conflict of interest caused by insufficient unbundling of networks from the competitive parts of the sector • a persistent regulatory gap particularly for cross border issues. The regulatory systems in place have loose ends, which do not meet Gaps in the regulatory environment A chronic lack of liquidity • both in electricity and gas wholesale markets: the lifeblood for our markets is lacking and the market power of pre-lib monopolies persists 19 Issues concerning market structure and the regulatory environment will have to be addressed in parallel
- 20. 1. Increase entry opportunities with Energy Release Programs 2. Investment in new generation and gas import infrastructure 3. Strict application of use-it-or-lose-it provisions for infrastructure and suitable generation sites 20 Liquidity issues in wholesale markets Electricity Gas • Either divesture or asset swaps of power plants on a European scale, Virtual Power Plant auctions • Contract release, contract swaps a/o divesture of domestic production
- 21. Incentives for new entrants: Unbundling • Essential to resolve the systemic conflict of interest inherent in the vertical integration of supply and network activities, which has resulted in a lack of investment in infrastructure and in discrimination 21 Full ownership unbundling The independent system operator • Separate network companies are not influenced by overlapping supply/generation interests as regards investment decisions. • It avoids overly detailed and complex regulation and disproportionate administrative burdens. • It requires more detailed, prescriptive and costly regulation • Less effective in addressing the disincentives to invest in networks
- 22. 22 Control and Regional Cooperation: National Independent Regulators and European Supervision Strengthening of the role of regulators at national and Community level Cooperation of transmission system operators (TSOs) 1 2 1. Improve the present approach, with the disadvantage of continuing to rely on voluntary agreements between 27 national regulators often with different interests 2. Formalize the role of the European Regulators Group for Electricity and Gas (ERGEG) into a European Network of Independent Regulators (ERGEG +) 3. Lastly set up a new single body at Community level Purpose: enable free circulation of gas and electricity within the EU. With means of 1. Establishing compatible technical rules and regular exchange of information 2. Increasing investment in the network and in cross-border interconnections
- 23. Conclusion: Third Energy Package (2009) 23Source: Energising Europe: A real market with secure supply Major orientations • Unbundling energy suppliers from network operators • Strengthening the independence of regulators • Establishing Agency for the Cooperation of Energy Regulators (ACER) • Cross-border cooperation between transmission system operators and the creation of European Networks for Transmission System Operators • Increasing transparency in retail markets to benefit consumers Legal acts • Common Rules for the Internal Market in Electricity Directive (2009/72/EC) • Common Rules for the Internal Market in Natural Gas Directive (2009/73/EC) • Regulation Establishing an Agency for the Cooperation of Energy Regulators (713/2009/EC) • Regulation on Conditions for Access to the Network for Cross-Border Exchanges in Electricity (714/2009/EC) • Regulation on Conditions for Access to the Natural Gas Transmission Networks (714/2009/EC)
- 24. Bibliography • “Sector Inquiry – Final Report”, Energy, Competition, European Commission (10th Jan 2007) http://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:52006DC0851 • “Preliminary report – Annexes”, European Commission (16th February 2006) http://ec.europa.eu/competition/sectors/energy/2005_inquiry/preliminary_report_annexes.pdf • “Prospects for the internal gas and electricity market”, European Commission (9th Sept 2008) http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV%3Al27075 • “Energising Europe: A real market with secure supply”, Press Release Database, European Commission (19th Sept 2007) http://europa.eu/rapid/press-release_IP-07-1361_en.htm?locale=en • “Structure and Performance of Six European Wholesale Electricity Markets in 2003, 2004 and 2005 - Executive Summary”, European Commission http://ec.europa.eu/competition/sectors/energy/2005_inquiry/electricity_final_execsum.pdf 24