Anyone who has seen the “World’s Strongest Man” competition will know how competitive (or crazy) the Finns are. And it’s a competitive spirit which they take into all aspects of society – be it strong men, car racing or electricity. Finland, along with the other Scandinavian countries, was among the first to liberalize its electricity market. Although the rest of Europe has not yet reached the Finnish “ideal”, it is well on the way and picking up speed.
The European Commission is getting its rear into gear and is finally giving some serious attention to the issue of cross-border electricity sales in an attempt to speed up market liberalization. It has concluded that if the industry does not come up with a suitable system of tariffs for cross-border sales, it might have to impose one.
The conclusion, made at last month’s Lisbon summit on improving the EU’s competitiveness, will go a long way to getting the market functioning as it was intended. The problem is that while EU legislation has increased competition within individual countries, it has failed to create a genuine EU-wide marketplace for electricity. Gilles Gantelet, spokesman for EU Energy Commissioner Loyola de Palacio noted: “Sensible rules for cross-border pricing will mean the difference between 15 liberalized markets and a true single market.”
In March, European grid operators agreed a framework for fixing tariffs for cross-border electricity flows, following concerns that the lack of harmonised charging rules had hampered competition across national borders. However, the Commission has since confirmed that it is planning legislation to bolster cross-border trade. As Gantelet explained: “We need new proposals to accelerate liberalization, particularly on pricing for transferring power across borders. If voluntary agreements aren’t enough, we’ll need to take the legal framework further.”
There are many problems to overcome in cross-border trading but they have to be solved. It will not be easy. Even the Nordic pioneers have had their problems. The countries had to work hard to harmonise the rules of competition in the four countries (Sweden, Finland, Norway and Denmark).
Comparing the liberalizing EU with the Nordic market, Arto Lepistö, director and head of the Energy Policy Division at the Finnish Ministry of Trade and Industry said: “It will be difficult to follow the Nordic countries which have a tradition of cooperation.” He does, however, believe Continental Europe is moving in the right direction: “It looked worrying at the beginning but now it’s promising. It should not aim for a perfect solution by trying to solve all the problems at once. The process will go on and speed up a little at a time. There are strong forces pushing the market forward and Europe will have a well-functioning market in a few years.”
Most EU countries have been keen to liberalize their markets but some still have mechanisms in place which favour their national players. Germany has been a high profile country when it comes to border tariffs, with rules that do not sit well with everyone. Although German utilities would argue otherwise, Finnish energy company, Fortum, sees the border tariffs as a restriction to free trade (see PEi Jan/Feb 2000, page 16). Comparing this to what has happened in Scandinavia Lepistö noted: “We have no border tariffs. Germany will have to abolish border tariffs between the north and south if it wants a properly functioning electricity exchange.”
Lepistö also explained that when Finland was liberalizing it had two options: either split up its major players and have domestic competition; or open its borders and have a Scandinavian market where national players could still remain strong in Europe.
It seems to have worked. Wholesale power prices have dropped dramatically, with NordPool prices usually lower than the cheapest coal condensing plant i.e. less than 10 Finnish pennies/kWh. The “down side”(for the generators) is that some coal condensing plant in Finland remains idle. But it does mean that the country has cheap, environmentally friendly electricity. At the same time, both Fortum and Vattenfall have emerged as “strong men” in Europe. They have invested heavily in the Baltics, Germany and Poland to make up for lost revenues resulting from domestic competition.
And so the games continue. Harmonising border tariffs will be a significant step in setting up a pan-European market but we are still a long way from the finish.