The Commission presents it report on progress in creating the internal gas and electricity market. It states that the financial crisis of 2008 and 2009 had a direct impact on the demand for energy, causing unpredicted falls in the price of oil on the international markets. This, in turn, impacted on gas and electricity prices. A dispute between two companies outside the EU (Gazprom of Russia and Naftogaz of Ukraine) led to an unprecedented crisis in the EU's gas supply, affecting several Member States. 2009 was also an important year because the third internal energy market package was adopted on 13 July 2009.

This report discusses how these developments have affected the EU electricity and gas markets over the past year and how they are likely to affect market developments in the future.

Implementation of legislation: in June 2009, the Commission initiated infringement procedures against 25 Member States for electricity and against 21 Member States for gas. The key violations identified lack of transparency, insufficient coordination efforts by transmission system operators to make maximum interconnection capacity available, absence of regional cooperation, lack of enforcement action by the competent authorities in Member1 States and the lack of adequate dispute settlement procedures4. In October 2009, the Commission launched further infringement proceedings against two Member States; these proceedings related to gas transit and storage.

Impact of the crisis: the financial crisis had a significant impact on the internal energy market during the reporting period. Year on year, the EU-27 electricity consumption remained relatively stable, but fell by 12% and 7% in April and May, respectively. The decline in gas consumption was even more significant. Between January and March 2009, gas consumption (in EU-27) dropped by around one fourth. This drop is partly due to the interruption of gas supplies from Russia via Ukraine, but even after the crisis in March 2009 EU-27 gas consumption was still more than 16% down on the March 2008 level.

The financial crisis has had a serious impact on the internal market for energy during the reporting period:

on the one hand, it puts pressure on planned investments – due to possible financing difficulties and uncertainties affecting the supply side – and has resulted in a fall in demand, which is more pronounced for gas than for electricity; on the other hand, it has created new opportunities for competition, since more gas is available at lower prices on liquid hubs; furthermore, the situation with excess supply in gas markets may pave the way for final consumers to see gas prices that are based on the supply and demand for gas rather than on the price of oil.

Price trends: although reduced gas and electricity consumption has had an impact on end-user prices, the fall witnessed in wholesale energy costs has not been entirely reflected in end user prices. Overall, prices in the first half of 2009 were still higher than in the first half of 2008. The trend in retail prices was quite diverse, suggesting perhaps an insufficient level of market integration at retail level.

Customer dimension : the information available for the number of consumers having switched supplier makes it difficult to gain an overall picture of the changes that have occurred across Member States. There are significant differences between the member states with more mature markets, such as the UK, which have relatively high switching rates, and a number of others showing little or no activity. At the level of small industry and households, the reported figures suggest that electricity consumers tend to be more active than gas consumers.

National regulatory authorities: the work of national regulatory authorities tends to shift the focus towards the consumer, including the roll-out of smart meters as the key to smart grids in the internal energy market. This is a welcome trend for the deployment of active participation by customers in the internal energy market and increased energy efficiency and large-scale integration of renewables, as well as additional energy services, increased market transparency and easier supplier switching.

Additionally, cooperation between European power exchanges, as well as the ongoing trend of increasing trade, is a promising sign of functioning markets. However, even if there are positive signs on the retail and wholesale level, the degree of market concentration has not changed very much . On gas wholesale markets, the concentration remains high. In 10 Member States, the three largest wholesalers have a market share of 90% or more. In the electricity retail market, the market share of the three largest companies in the retail market as a whole was above 80% in 14 Member States.

Security of supply : a major challenge in the context of the economic crisis is to maintain the investments in energy infrastructure . The financial crisis risk resulting in postponed or annulled energy infrastructure investments and as a result the EU faces an increased risk of lack of or delay in construction of infrastructure to meet future supply needs. This is a particular concern in a situation where the energy sector needs to be reshaped to address the challenges of climate change and energy security. In order to help to address this risk and to help economic recovery, the EU is facilitating the financing of energy infrastructure projects via the Economic Recovery Plan. In particular, the Plan includes 2 365 billion to support a number of key electricity and gas interconnection projects. The Commission's commitment to encourage infrastructure investments will continue with the adoption, at the end of 2010, of an infrastructure package.

Internal market: the third package adopted in 2009 also provides for clearer sector specific rules and thus for incentives to invest. The Commission is preparing for the application of the third package in developing, together with ERGEG and ENTSO-E and ENTSO-G, pilot framework guidelines and codes. The Commission will assist Member States in implementing the third package and will continue to pursue the full and correct implementation of the second package, including through formal infringement procedures.

Not only investments but also the implementation of more active transmission and distribution systems in the form of smart meters and smart grids are central to the development of the internal market for energy. If needed, the Commission will not limit its action to energy regulation and will not hesitate to use its powers under competition law.

COM(2010)0084
EUR-Lex

SEC(2010)0251
EUR-Lex

The Commission presents a Staff Working Document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity.

Directive No 2003/55/EC and Regulation (EC) No 1228/2003 are based on the general principle of a regulated access regime to gas and electricity infrastructure. Both legal acts, however, allow for exemptions from provisions enshrining this overall rule, as well as from provisions establishing ex ante and ex post tariff regulation.

This document provides information on the Commission's assessment of exemption decisions taken by national authorities according to Article 22 of the Gas Directive and Article 7 of the Electricity Regulation. It explains the general framework and analyses the assessment criteria, the information to be provided by the relevant authorities and conditions that may be imposed.

The experience with granting exemptions for new major infrastructure has shown that the conditions of Article 22 of the Gas Directive and of Article 7 of the Electricity Regulation are not always sufficiently clear to the national authorities and market participants, in particular the interpretation of the assessment criteria, the information that needs to be submitted and the conditions that may be imposed to meet the criteria. The Commission services have therefore decided to revise the interpretative note issued in 2004, and replace it by the current one.

The present document does not modify the general exemption policy regarding Article 7 of the Electricity Regulation and Article 22 of the Gas Directive but gives better guidance in the light of the practical experience gained since the publication of the previous note. The objective is to provide transparency and guidance to national authorities and market participants and to facilitate the procedures for assessing exemptions.

This document is not intended to restrict or change the criteria for awarding exemptions. Nor is it intended to give an exhaustive interpretation of the various assessment criteria that are applied in the light of the facts and circumstances of each individual case. It applies to all types of infrastructure eligible for an exemption according to Article 22 of the Gas Directive and Article 7 of the Electricity Regulation.

SEC(2009)0642
EUR-Lex

The Commission presents its report on progress in creating the internal gas and electricity market. The liberalisation of the EU's electricity and gas markets, which began several years ago, has contributed to the rejuvenation of the energy sector. It has helped to develop entrepreneurial potential in this sector, with beneficial effects on a variety of energy-related activities ranging from the production of diverse forms of renewable energy to the creation of financial markets for energy derivatives. Market participants are now better prepared to adapt to the rapid economic and environmental changes – particularly in dealing with the specific challenges that climate change poses to the energy sector.

The present reports bears witness to the fact that, over the past five years, significant improvements have taken place in the EU electricity and gas market.

While these developments are encouraging, the full potential of liberalisation has not yet been realised .

The Commission is taking action to ensure the correct implementation of EU legislation at national level through the application of infringement procedures and complementing the internal market legislation with the third internal energy market package (see COD/2007/0196 and COD/2007/0199 ). In June and July 2008, the package passed its first reading in the European Parliament; in October 2008, a political agreement was reached in the Council. The second reading started in January 2009, and is on course to be adopted by mid-2009. Thereafter, the third internal market package will need to be implemented in national law.

One of the purposes of the present report, therefore, is to identify the shortcomings of the current situation and to indicate the areas in which further action is needed.

More than four years after the deadline (1 July 2004), implementation of the second Electricity and Gas Directives is still not entirely complete. Several Member States, including Denmark, Luxembourg and the Netherlands, have now correctly implemented both Directives through appropriate national legislation. There has also been progress in other Member States: the Czech Republic, Finland, Germany, Greece, Latvia, Lithuania, Slovenia and the United Kingdom brought their national laws into line with EU legislation after a reasoned opinion was issued by the European Commission. In the case of some other Member States, the Commission has had to take legal steps to ensure the full and correct implementation of certain provisions.

In 2007 and 2008 a great deal of effort was put into enhancing competition on the wholesale market; significant progress was made through the regional initiatives. There also seems to be a new trend towards building new energy infrastructure . This is crucial to overcoming the longstanding fragmentation of EU energy markets. The trend is set to continue but it may take some time because the planning and building of such infrastructure requires long time horizons.

This report presents a mixed picture of the progress of completing the internal energy market. There are still a number of areas and Member States where significant obstacles to the efficient functioning of the electricity and gas market persist. A major concern is the incomplete implementation of European electricity and gas legislation. The recent experience of rising energy prices underlines the need to make market integration and the enhancement of cross-border trade the top priorities . It is therefore essential that the Electricity and Gas Regulations are properly implemented by all Member States. The Commission urges Member States, regulators and industry to take the appropriate steps as quickly as possible . The European Commission will consider initiating infringement proceedings for non-compliance with provisions in the gas and electricity Directives and Regulations.

With respect to market concentration , progress has generally been slow. A number of wholesale markets, in particular, still suffer from limited competition and the lack of liquidity.

On the electricity wholesale market, the three biggest generators still control more than 70% of generation capacity in 15 Member States. In the gas wholesale market, the concentration is even greater. The three largest wholesalers have a market share of 90% or more in 12 Member States.

There are signs that the situation on the retail market is about to improve. Member States should put even more effort into providing comprehensive data for supplier switching. Switching levels vary considerably across Member States, with some mature markets – such as the UK - experiencing relatively high rates and a number of others showing little or no activity. At the level of small industry and households, the reported figures suggest that electricity consumers tend to be more active than gas consumers

A major issue in the reporting period was the increase in energy prices , in part due to the rising price of oil on the international market. This triggered major increases in energy end-prices. Industrial consumers in some Member States were faced with more severe price increases than in others. Prices for primary energy sources have fallen significantly since the summer of 2008. Competition and market opening should ensure that these lower prices are passed on to the end consumers.

While short-term solutions, such as regulated prices , might appear to be advantageous in the light of rapidly increasing energy prices, the present report has stressed the likely consequences of such measures: investor confidence is undermined, market entry is deterred and the full benefits of the internal energy market are placed at risk.

Lastly, if the EU is to continue to have a secure energy supply , major investments are needed over the next two decades. This is confirmed in the Commission's Second Strategic Energy Review and by the International Energy Agency (IEA).

Over the coming two decades, the EU - like other parts of the world - has to address the need for major investments in infrastructure. In the long term only a properly functioning internal electricity and gas market can send the right price signals to encourage investment.

COM(2009)0115
EUR-Lex

SEC(2009)0287
EUR-Lex

In the course of 2006, the Commission has continued to monitor the internal market for electricity and gas which, since 1999, has been subject to a number of EU regulatory initiatives.

Positive results of competition: The Commission notes that liberalisation of the electricity and gas market has clearly led to some efficiency in energy supply – although that liberalisation is not being implemented quickly enough. The report, therefore suggests that it is questionable whether gas and electricity prices are the result of a truly competitive process rather than being the direct result of companies leading the market. On the matter of “Security of Supply” the report proposes that the pan-European black out in November 2006 can be prevented through: adopting a proposal on legally binding operational security rules; the development of a framework for the electricity network as part of its energy strategy; and improving co-operation between EU electricity grid operators.

Improper implementation of the current legal framework: The report cautions that unless European legislation is properly implemented the markets will not be able to ensure that they are in a position to be fully opened up to all consumers as from 1 July 2007. The Commission has launched 34 infringement procedures against 20 Member States for violation and non-transposition of existing Directives. Sixteen Member States (including all of the largest) have been sent 26 reasoned opinions. The main infringements relate to the transposition of the new internal market Directives including: regulating prices and thereby preventing the entry of new market players; the insufficient unbundling of transmission and distribution system operators; discriminating against third party access to the network, in particular as far as preferential access being granted to incumbents for historical long term contracts is concerned; the non-transmission of information to the Commission on public service obligations – especially as far as regulated supply tariffs are concerned; and an insufficient indication of the origin of electricity.

Obstacles to competition: Concerning the issue of market entry, both the sector inquiry and the country reviews conducted by the Commission in 2006 have unearthed a variety of specific examples, demonstrating the shortcomings of the existing regulatory structure. Some of the shortcomings are as follows: Large companies have an advantage in terms of the information they have access to. For smaller companies they often receive information to late to be able to adjust their positions; TSO’s often maintain localised separate balancing zones rather than facilitating the integration of national and cross border level; low TSO investment in cross-border capacity; an emphasis on short term national concerns rather than the development of integrated markets; the inability of smaller Member States to introduce competition in isolation of their neighbours; and lastly distribution system operators appear to be poorly prepared for the opening of competition to households as from July 2007. As a result of these widespread shortcomings incumbent electricity and gas companies largely maintain their dominant positions on “their” national markets.

Key outstanding issues: The report identifies a number of issues that need to be addressed. They are: ensuring non-discriminatory access to networks through unbundling; improving network access at national and EU level through regulation; reducing the scope for unfair competition; enhancing co-ordination between transmission system operators; and providing a clear framework for investment in generation plant/gas import and transmission infrastructure.

Conclusion: The Commission’s assessment, outlined above, is based on experience gathered over the last seven years. The creation of a competitive European market for electricity and gas has, according to the Commission, been an unqualified success. While there are some positive results, the outcome of the inquiry and the country reviews have given the Commission a substantial insight into the current state of the liberalisation process, which has shown, despite significant shortcomings, some progress and considerable further potential benefits. The Commission is of the view that the only way to deliver a secure and sustainable energy future for Europe is to have a coherent electricity and gas market consisting of 500 million consumers, all operating according to the same competition and regulatory framework. As such, the Commission has already initiated an impact assessment procedure to identify the most suitable methods fro implementing those methods. The Commission, therefore, calls on the Council and European Parliament to confirm that the key objectives to be pursued in completing the internal energy market are those identified by the Commission and to endorse further measures.

COM(2006)0841
EUR-Lex

The Commission presented its 2005 progress report on creating the internal gas and electricity market. The main conclusion of this report is that, whilst the initial opening period of energy markets has largely been a success to date, with, for example, electricity prices now being lower in real terms than in 1997 notwithstanding recent price rises for oil, gas and coal, more needs to be done to ensure that industry and citizens receive the full benefits flowing from market opening. This assessment is shared by energy regulators and most interested parties consulted during preparation of this report.

The most important persisting shortcoming is the lack of integration between national markets. Key indicators in this respect are the absence of price convergence across the EU and the low level of cross-border trade. This is generally due to the existence of barriers to entry, inadequate use of existing infrastructure and - in the case of electricity – insufficient interconnection between many Member States, leading to congestion. Moreover, many national markets display a high degree of concentration of the industry, impeding the development of effective competition. The gas market continues to suffer from a lack of liquidity of both gas and transport capacity. In this context, the effects of long-term gas contracts will have to be taken into account, both in terms of competition and the fact that such contracts may be necessary to underpin the financing of major new gas infrastructure. Another indicator of the lack of real competition is that switching by customers remains limited in most Member States and that choosing a new supplier from another Member State remains the exception.

The most important cause of this is the failure of Member States to implement the second electricity Directives on time or with sufficient determination. A large number of Member States were up to a year late in implementing the Directives, others still have not done so, and many have taken a rather “minimalist” approach in implementing the Directives. This approach needs to be re-considered. The Commission opened infringement procedures against Member States for failure to implement the Directives and, in June 2005, took six Member States to the European Court of Justice : Spain (electricity and gas); Luxembourg (electricity and gas); Greece (electricity); Estonia (gas); Portugal (electricity) and Ireland (gas).

This Report shows that in economic terms, with very few exceptions, electricity and gas markets in the EU remain national in economic scope. Sufficient cross-border competition has not yet developed to provide a fully effective constraining influence on the economic power of companies in each national market. This issue needs to be addressed with determination, by the Commission, Member States, Regulators and Industry. The main immediate action that is necessary is the full and complete and effective implementation of the second Gas and Electricity Directives. It is therefore too early to decide whether additional legislative measures at Community level are necessary, such as those suggested by some respondents to the Commission’s enquiries when preparing this report; for example additional unbundling or further powers to Regulators. It is first necessary to see the results of the implementation of the Second Directives in practice. The Commission will therefore, in addition to following-up closely the formal legal compliance with the Directives, carry-out detailed country-by-country reviews of the effectiveness in practice of legislative and regulatory measures, including specific additional national measures. This will lead to a further Report by the end of 2006 and, if necessary, proposals to redress any remaining requirements in 2007.

COM(2005)0568
EUR-Lex

The European Commission has published its Annual Report on the Implementation of the Gas and Electricity Internal Market.

The new electricity and gas Directives were due to be transposed by Member States by July 2004 and the Regulation on cross border electricity exchanges also came into effect. The new rules are aimed at achieving to a competitive electricity and gas sector across the whole European Union as envisaged by the Lisbon Council objectives.

However, many aspects of implementation remain disappointing. In October 2004, eighteen Member States had to be sent a letter warning that they had still not fully notified to the Commission the legal measures taken to transpose the latest Directives. This delay is unsatisfactory since it is now clear that the provisions of the previous Directives have not been adequate to achieve the objective of competition, even for larger users. Such customers would normally be expected to negotiate with suppliers on a regular basis. However after five years of competition for electricity and over three years for gas, fewer than 50% have switched supplier in most Member States. In addition, many are unsatisfied with the range of services being offered. In many cases, customers have only been able to change to another domestic supplier with the result that penetration of national markets by foreign

companies is also disappointing in many cases, reflecting a lack of integration of markets and missing infrastructure links. In most cases, foreign suppliers represent less than 20% of market share.

Although electricity prices are lower than 1995 in real terms, they have increased in the last 18 months, partly due to increased prices for primary energy sources. At the same time, gas prices are higher than in 1995 due to the ongoing linkage with oil. Although such price fluctuations are normal, increases are unpalatable to customers where the prospects for changing supplier appear to be limited by regulatory barriers and where the negotiating power of customers is weak due to an unfavourable market structure. Particular concerns exist among the largest users that suppliers are failing to offer an adequate range of contract structures, especially longer term arrangements.

A key issue relates to the failure to fully integrate national energy supply into a wider European market. In this context it is vital for rules on cross border electricity exchanges to continue to be improved to ensure that existing infrastructure is utilised to its maximum possible extent. Likewise for gas, the adoption and implementation of the proposed Regulation is similarly important. New investment in infrastructure is also needed and progress in this regard remains slow, as was also noted in the Commission Communication on Energy Infrastructure and Security of Supply.

Secondly, Member States are still failing to deal with the issue of market structure. As has been highlighted in previous reports, the gas and electricity markets in too many Member States are dominated by one or two companies, and there is often inadequate capacity for cross border competition. It is imperative that solutions are found to such problems.

Thirdly, although much process has already been made in terms of unbundling of network operators and the introduction of regulated third party access, there are still certain aspects which remain unsatisfactory. A fully independent transmission system operator is crucial for a well functioning market. Likewise distribution system operators need to be adequately separated from supply companies to ensure cost reflective tariffs and the removal of any cross subsidies. The independence of regulators is crucial in this respect in order to ensure fair network access in terms of tariff levels and structure. In this respect the gas sector is measurably behind that for electricity.

A final group of issues which may tend to be an obstacle to the internal market is the continued existence of a regulated end user prices for electricity and gas alongside the competitive market and associated long term power purchase arrangements (PPAs). Although such controls are a valuable transitional measure during the initial phase of market opening, there are risks that such an approach will stifle competition, constrain investment and confuse and contradict unbundling measures.

The report states that Member States need to maintain their commitment to this objective in the decisions they make regarding the implementation of the Directives and restructuring of the industry. It is only be doing this that the objective of a competitive and secure market will be achieved. With this in mind, the issue of investment in infrastructure and the sound operation of networks, in support of the competitive market, remains a critical issue. Although some of these issues have been addressed the concerns which were expressed in previous Communications and the proposed Directive on Infrastructure and Security of Supply remain pertinent and progress, in some form or another, is required on this issue. The role of independent regulators remains a crucial component of the introduction of competition and their decisions relating to network tariffs and other important market rules will continue to shape the development of the market. In this context it remains important to ensure that authorities have sufficient resources and competences. Whether the improvements made under the Directives are adequate to achieve the objectives of the internal market remains to be seen, especially if Member States take a minimalist approach to the transposition of the current legislation. One thing that is certain is that in the new global environment of higher primary energy prices it is more important than ever for the Community to live up to its commitment to a competitive market.

COM(2004)0863
EUR-Lex

COM(2003)0428
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Directive 2003/55
OJ L 176 15.07.2003, p. 0057-0078

T5-0243/2003
OJ C 068 18.03.2004, p. 0148-0235 E

T5-0243/2003

Debate in Parliament

A5-0135/2003

A5-0135/2003

SEC(2003)0161
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15531/2/2002
OJ C 050 04.03.2003, p. 0036-0058 E

15531/2/2002

05597/2003

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SEC(2002)1038

COM(2002)0304
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2433

COM(2002)0304
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T5-0106/2002
OJ C 047 27.02.2003, p. 0088-0350 E

T5-0106/2002

Debate in Parliament

A5-0077/2002

A5-0077/2002

CES1311/2001
OJ C 036 08.02.2002, p. 0010

2347

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COM(2001)0125

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SEC(2001)0438

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COM(2001)0125