As the first anniversary of the initial phase of electricity market opening in the EU approaches, Europe’s power markets remain as diverse as ever in almost every respect, despite the aims of the EU Directive.
Andrew Hill, Datamonitor, UK
As of July 1, 2004 the majority of non-residential power and gas consumers in the EU became eligible to choose their supplier. However almost a year later, the competitive nature and market structure of the EU 25 markets remains highly diverse, as does the appetite for and progress towards market liberalization.
The fact that the energy markets are at widely differing stages of development and maturity is one of the main barriers to bringing about a truly liberalized and competitive single European energy market.
The progress made so far towards adopting and complying with EU market opening legislation has been highly diverse across the EU. This varied progress in implementing the EU directives reflects a broad spectrum of willingness, at both a political and corporate level, towards the concept of market opening. At the pro-liberalization end of the spectrum are markets such as Denmark (full market opening took place in January 2003, four and a half years ahead of the EU timetable). Similarly Germany (at least theoretically) fully opened its power market as far back as 1998, while Austria, Ireland and Spain fully liberalized their markets well ahead of the EU’s July 2007 deadline.
Conversely, France has lagged behind the requirements of the EU regarding the opening of both its power and gas markets. The ongoing monopoly status previously enjoyed by EDF was criticized in many quarters because the company was aggressively pursuing an internationalization strategy aimed at capitalizing on market opening elsewhere in the EU (and to a lesser extent in South America), while at the same time seeking to prevent new entrants entering its home market.
Similarly, Belgium’s official rubber stamping of the appointment of Elia as Transmission System Operator took place three years behind the EU deadline, only occurring following pressure from the EU. Germany still does not officially have an energy regulator in place, although one is due to become operational in July 2005.
The EU has made various attempts to ensure full compliance with the terms of both the gas and power directives, the most recent being in March when infringement proceedings were escalated against ten member states who had not fully transposed the terms of the directives into national law.
Supply and demand conditions vary widely between markets, and as a consequence, so does security of supply.
Absolute levels of demand and demand growth rates vary widely. While a wide degree of diversity could reasonably be expected to exist given the obvious differences in population size between markets, there are still wide variations in per capita demand. These differences reflect a number of economic factors, though one of the issues is the availability of other fuel sources.
By far the largest per capita electricity consumption in Europe takes place in Sweden and Finland, where levels are around two and a half times the EU average. Although the extreme winter climate seen in these markets account for part of this, there are also other factors driving these high demand levels. In the case of Sweden, a key issue is the widespread availability of hydro power, the use of which has long been extensively harnessed given its cost and environmental advantages. This, combined with a lack of indigenous gas resources has led to electricity becoming the main element of end use energy consumption. The demand levels in Finland and Sweden are also driven by the fact that these economies are heavily dependent on energy intensive industries.
Conversely the markets with lower levels of per capita consumption are either where demand is growing rapidly such as Greece and Portugal or in the more mature markets of Central Eastern and Eastern Europe. There, demand growth has stagnated in recent years but has grown over the past decade, largely as a result of economic growth.
The ability of the EU 25 markets to meet their demand levels through indigenous production, and hence the level of import dependency, is another key area of difference and varies widely.
With the ability to produce over 160 per cent of demand, and hence make significant exports, Lithuania is the most self sufficient power market (at least in percentage terms) within the EU. The vast majority of Lithuanian power production comes from just one facility, the Ignalina nuclear plant. Until the end of 2004, Ignalina had a rated capacity of 3000 MW, though one of the plant’s reactors had to be shut down as one of the conditions imposed by the EU for Lithuania’s accession to the EU in May 2004. The significant impact of effectively eliminating 40 per cent of the country’s rated capacity quickly became clear. Recent figures indicated that Lithuanian electricity exports fell nearly 60 per cent year on year in the first quarter of 2005. Another condition of EU entry was that Ignalina be completely closed down by 2009. As such, a race against time is now underway to replace this capacity and to prevent a radical shift in import dependency and supply security. Efforts have been made to develop an interconnection with Poland, though at the time of writing, development of the project has shown minimal progress.
At the other end of the self sufficiency scale is Luxembourg which, in 2003, produced just over half of its power requirements. This lack of production capacity created a significant import dependency which was filled by Belgium and Germany.
Figure 1. There remains a high level of diversity among the EU’s electricity markets
The types of plant the EU 25 markets use to produce power is heavily dependent on resource endowments and the historical development of individual markets. These range from high users of gas such as the UK, Denmark and the Netherlands to the coal based energy economies of Germany and Central and Eastern Europe. Oil remains dominant in Malta, Cyprus and Estonia while France, Sweden and Lithuania are all significant users of nuclear power.
The level of wholesale and retail concentration in the EU 25 markets also varies widely. Despite the on-going process of liberalization and unbundling, the former national monopolies still exert considerable influence in some markets.
Both the generation and retail markets across the EU have varying levels of market concentration. One extreme example of this is in Germany where the retail market is in the hands of around 800 municipal utilities, known as Stadtwerke. The net result of this is a very diluted retail market structure where market shares are generally in single figures and often fractions of a percentage point. Less well developed markets such as Cyprus, Malta, Latvia and Greece still have near monopoly influences in both the retail and wholesale markets.
Figure 3. Markets such as France, Cyprus, Malta, Sweden, Lithuania and Estonia have very low levels of both gas and coal fired electricity production
With such widely divergent market characteristics and sometimes reluctant and conflicting political attitudes towards market liberalization across the EU, it is not surprising that progress towards a single European energy market has been somewhat sporadic and disjointed. Even as political willingness at a national level becomes more attuned to the concept of market opening and new market entrants continue to emerge throughout the EU, it is still likely to be some considerable time before a truly single European market can hope to be achieved.
The theoretical 100 per cent market opening that will arise from the second phase of the electricity directive in July 2007 will in itself not be a guarantee of full market liberalization on an EU-wide basis. Considerable progress still needs to be made, possibly catalysed by further legislation and action from the European Commission against those still not yet in full compliance with the terms of the directive, to bring about its aim of a harmonised single European energy market. Whilst there is little the EU can do in the short term about the differences in market characteristics across EU member states with regard to factors such as generation mix, import dependency and consumption patterns, there is a considerable amount that can be done with regard to structural and regulatory factors. The onus must now be on the EU to ensure that the remaining aspects of the electricity directive not yet implemented at a national and corporate level are put in place to ensure that the liberalization process continues to progress as agreed by the member states.