By Gero Di Piazza

The idea of a single European electricity market seems the perfect long-term solution for unifying competition and electricity tariffs. But is this just a pipe dream or is Europe getting closer to that reality? PEi gets an insight into the tasks ahead.


More transmission capacity across Europe is essential in developing a single European power market ©Western Europe transmission imports and exports (GWh)
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A single European electricity market is the ultimate goal of the Community Directive, a body that was chosen by European Union countries to bring about this change.

For the European power industry, February 19, 1999 was the groundbreaking day for the start of the creation of a single market, as competition became the norm, not the exception, for electricity trade and production. Before this, not much attention was paid to price competition as the comfort of monopolization was well established throughout the region. Countries like the UK and parts of Scandinavia were among the first to implement change.

Although the concept of a single European market is widely accepted in many EU states, two countries – Germany and France – have had differing ideas on the process. France in particular has proved a tricky contender, as its liberalization plans are, to put it mildly, not as forthcoming as other European efforts. This has been frustrating for Electricit√© de France’s European competitors as the French utility continues its mission of global dominance. Germany, on the other hand, although keen to maximize competition, has disputed the need for an independent electricity market regulator.

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European officials are concerned that competing with powerful former national and regional monopolies could become unrewarding as the companies often have control of transmission networks. The competition commission is currently considering whether to seek further liberalization of Germany’s tightly controlled transmission network in return for granting approval for proposed mergers between large German regional suppliers. The EC identified areas where it believes progress could be made in reforming these fears of potential foreign investors (See Table 2).

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Countries like Britain, Sweden, Finland and Germany have lead the way and have even become role models for countries outside Europe. Consumers are able to choose supplier, and this applies to all consumers from commercial to industry and domestic. As a result, prices in those countries have fallen, with the biggest drop in price coming from Germany, where bills have been reduced by 40 per cent.

Choice and duration

Many have identified the underlying problem of introducing real choice for customers as being that the former monopolies still have the upper hand and hold leading market positions. Customers also tend to be put off switching by the hassle of changing supplier. But more needs to be achieved to ensure easy access to transmission networks if genuine unfettered competition is to develop.

The idea of a single European electricity market has been looked at from all angles by many industry officials and scholars. Dr Michael Pollit, an economics lecturer at the UK’s Cambridge University, based his thesis on the subject and believes the current liberalization in European countries is a formidable start but the one stumbling block is the capacity of the transmission links between countries. He said: “The key thing is how to construct transmission links between countries. You have to remove life on a closed national market to a genuine international market where it is possible for stations generating electricity from one end of the European Union to be selling it. We’re already seeing the beginnings of something happening. The European Directive has had an impact on those countries that are committed to it. But the two biggest markets in Europe, France and Germany, are to a certain extent black holes as Germany lacks an effective central independent regulator and France has not fully liberalized.”

Speculating on the time frame of an eventual implementation of the single market, Pollit adds: “The Commission is likely to be moving into the directive in 2003. So its a question of negotiating another directive and a period they’ll expect to offer it. So we’re possibly looking at three years from 2003 then two years to implement it and further for progression authorization phases. So a rough guess would be three plus two plus four [nine] years.”

Drawbacks

European electricity traders look forward to the eventual implementation of a single electricity market as trades would come in at a furious pace as more choice would be available for all consumers. But traders are not holding their breath for this to happen any time soon. Colin Cooper, head of energy trading and risk management at Cap Gemini Ernst & Young, UK, explains: “Some countries have obviously gone a lot further in liberalizing their markets, like the UK and the Nordic countries. Despite the fact that the recent summit in Barcelona suggested a single market in place by 2004, that may just be the beginning of it rather than the end. So I don’t really see a single European electricity market happening before five to ten years.”

Cooper goes on to explain the problems that could surround the implementation of a unified market: “Part of the conundrum on timing is because of subsidiarity each country can put in place whatever options or alternatives for the introduction of legislation for competition that it wants, which means that, that in itself may be a barrier, because you’re not going to have an homogeneous whole market due to different regulations in each market.

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“All the infrastructure in terms of the pipe and the wires has been created on a regional basis and the biggest impediment is the lack of interconnecting infrastructure with access, combined with the lack of homogeneity of the market means that there is a difference between having competition in each country and a single market.”

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Cooper draws on previous experiences with his former company British Gas to help indicate future patterns the single market could be heading. He said: “In my days with British Gas, we were forced to give up market share and that created competition. If the incumbent is not forced in some way to give up some of its generation, production or long term supply contracts then it’s very difficult for new entrants to get in. Back in the early days of the gas market in the late 1980s, people were saying ‘five years to bring on a new gas field on stream? Where am I going to get my gas from to supply the customers in the meantime?’ The government imposed the release scheme, which released some of the gas from the contracts in their portfolio. So the point is the customer is not going to buy from me as opposed to you if he hasn’t got confidence that I can deliver the commodity that he wants.”

Constraints

But looking to the short-to-medium term future of the single electricity market in countries like Italy, sources say that the promise that electricity prices for all consumers will lower than today’s standard is false. One power expert in Italy who did not want to be named said: “The declining of prices after integration is an illusion because there is a long term trend in Italy about the replacement of generation plants with new technology. This will be a mid term process around four or five years. And even at the end of this process natural gas prices will probably be a little bit lower than today but not as low as the rest of Europe simply because we do not have nuclear and coal.” The source goes on to predict that five markets – Italy, Spain, UK, Scandinavia and central Europe, will develop a faster pace of integration, because of their openness to the market. “In the future we are going to have these five markets, which will be increasingly integrated but not very quickly. I suspect that big players will still play a big role for [several] years and trading will not be so easy for the new entrants.”

The main issue that seems to be on the power industry’s lips is transmission grids. All agree that more capacity has to be implemented and that no further steps can be introduced unless this major factor is resolved, but no one can agree on who will actually pay for them.

Some insist this should be funded by the power companies which will surely profit from their existence; others claim this should be funded by the independent grids from each country. One solution to this, says the source, would be for a company to be set up to make this its business. The source explains: “It’s not very easy because of environmental constraints. My feeling is that if the part of transmission activity became a business, merchant lines would [ease the process]. With the giants like National Grid in the UK, or GRTN in Italy or RTE in France they will all have a lot of difficulties in developing the many grids that will be needed due to environmental constraints. [Residents] don’t want lines and the infrastructure near them.”

Anxieties

There is much debate about the single European electricity market, most agree it is the only way forward and that problems such as transmission interconnections and grids need to have a complete overhaul before any steps of implementation can be taken seriously. The general feeling among power companies world wide is that they have a certain confidence of the market taking place but are unsure of a precise time frame, quoting anything from five to 15 years. Cooper notes, “I guess I am looking forward to the day that competition occurs. I have seen the benefits of it from the UK experience, I have been on both sides whilst working with British Gas when it was a monopolist and have worked for competing companies that have taken away market share from it.”

If an established single European power market becomes a reality then we could see other regions following suit. Some key figures have pointed towards the heavily populated southern Asian market as being able to integrate grids more closely. But Asian power analysts have dismissed the idea of this happening in the near future. Raymond Woo, utility analyst at Standard & Poor’s in China said: “I have to say that this is really preliminary and many uncertain factors exist, with politics being the major hurdle. If it were going to happen, it wouldn’t be in the next five years.

“Currently only Singapore has started implementing a power pool, Malaysia has suspended such experiments and Thailand is still in the early phase. However, there is a trend to interconnect the different country transmission grids, but that may not necessarily lead to a single electricity market.

“Instead it could merely be cross border sale of limited amount of electricity at certain fixed contract price. But I see the idea of a Southeast Asian single electricity market as being far-fetched at present”

If similar unification events in history are anything to go by, then UK Eurosceptics did not believe the implementation of a single European currency would happen. Some daily national newspapers would not even contemplate the idea of joining, claiming it would be disastrous for the economy and workforce.

But now a different stance is starting to surface, with the Euro outperforming the US dollar and the same papers that once criticized, are now warming to, or at least tinkering with the idea that it is not such a bad idea after all.

Although support for the single European electricity market is stronger from most European countries and there are too many contrasts to compare the two situations, the same fears exist with our French and German counterparts and until those anxieties are eradicated within, we cannot expect the market to flourish, especially in the short term.