After more than decade of policy making, legislative decisions and legal wrangling, every European energy consumer is, at least in theory, now free to choose which supplier they buy their electricity and gas from. However, with a high degree of structural diversity in the EU 27 energy markets and widely differing attitudes at a political level, a single internal market remains far from assured, at least in the short to medium term.
Full market opening is a culmination of a very long and convoluted process. The first phases of European energy market reform began in the early 1990s with the passing of Directive 90/377/EC, which aimed to give more transparency to both electricity and gas pricing. This was quickly followed by Directives 91/296/EEC and 90/547/EEC, which were introduced to make energy trading between different EU members more efficient.
The pace towards full market liberalization picked up again in late 1996 when the EU passed the electricity directive (Directive 96/92/EC), which set out common rules for power production, transmission and distribution throughout the EU. The directive also legislated for gradual market opening with a target of 33 per cent of all power markets to be opened to competition by February 2003.
This was followed by the gas directive (Directive 98/30/EC) in August 1998, which established common rules for the operation of gas markets, as well as a schedule for full market opening. Under its terms, all gas fired power plants were immediately able to choose their gas supplier.
By September 2000, most member states had implemented the both the electricity and the gas directives. However, in 2001 the European Commission concluded that further measures were necessary to complete the internal energy market and to realize its benefit. So in June 2003 the EU passed legislation, aimed at accelerating the opening of its energy market. Directive 2003/54/EC for the electricity market and Directive 2003/55/EC for the gas market laid out a timetable to fully open both markets in two phases. Phase I came into force on 1 July 2004 and opened the non-residential market (i.e. industrial consumers), with phase II having come into effect on 1 July, resulting in 100 per cent market opening.
Despite this legislation, Europe’s energy markets remain diverse. At a market level, widely varying consumption patterns, market structures, corporate structures, market dynamics and levels of market concentration all produce large variations in competitive intensity. Recent research by Datamonitor, an independent market analysis company, into the competitive intensity of 20 European electricity and gas markets found that the markets in the UK were the most competitive in the region, with a score of 8.7 out of 10 and 7 out of 10 for its gas and electricity, respectively. The UK liberalized its markets well before the 1 July deadline. In contrast, the Latvian electricity and gas markets were amongst the least competitive, with scores of 0.5 and 1.0 for gas and electricity, respectively. Latvia opened its electricity market on 1 July, but has until 2010 to open its gas.
Attitudes at the political level are similarly diverse, with some governments enthusiastically embracing the liberalization agenda, such as the UK and Germany, while others have been more reticent, having to be cajoled into action with legal proceedings. The EC has criticised some member states, by saying that they had not fully implemented the directives and had kept their national energy champions from facing real competition.
Has the initial objective of liberalization, namely consumers getting more energy at a cheaper price, been achieved? The answer is no. And the main reason behind this is that since Europe’s market opening process began back in the 1990s several new challenges have appeared that have made the attainment of this goal increasingly harder. These challenges include climate change, concerns over security of supply, with fears regarding over-dependence on Russian oil and gas, price of primary fuels (particularly oil and gas, which is widely used in the production of electricity) and the EU CO2 trading scheme, which has also put pressure on prices, particularly for industrial users of electricity.
There are many critics that question the EC’s claim that liberalization helps to lower prices to consumers, certainly in the short-term. Some critics have recommended that the EU adopts a longer term view, where energy pricing incorporates the real costs of energy in terms of both environmental damage and scarcity of supply.
Too much too soon?
Other critics have said that the EU is probably aiming for too many objectives at the same time and should make up its mind. In a policy paper for the French Institute of International Relations, Jan Horst Keppler, a professor at the University of Paris-Dauphine argues that the wish to simultaneously guarantee security of supply, environmental performances and lower consumer prices is “an insolvable equation” that risks leading to “ineffective responses”.
EU decision makers must first decide upon an arrangement between these conflicting objectives before defining a coherent liberalization policy, according to Keppler. “Europe cannot escape the task of rethinking and improving the liberalization of its markets.”
To some extent the EC acknowledges this, with Andris Piebalgs, Energy Commissioner, saying that “some other obstacles to a truly competitive internal market remain – the commission will therefore continue to watch over the correct implementation of the existing rules and is set to propose additional legislative measure soon.”
Although a single European energy market remains a possibility in the longer term, considerable progress and a greater degree of cooperation will be needed, at both the government and corporate level. Thus, the advent of full market opening on 1 July is seen by many as only the beginning, and is a “minor milestone” on the road to the single market, rather than a destination in itself.