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The reality and the hype

Andrew Evans,Consultant, Datamonitor, UK

While some European countries have embraced competition, others have shied away from it. This lack of parity in the development of a competitive European electricity market is compounded by other obstacles, such as restrictive grid access agreements. Is Europe as liberalized as we thought?

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In 19 February 1999, nine EU countries joined Finland, Sweden and the UK in opening up their electricity markets to competition. Norway, although not an EU member, has also liberalized its electricity market.

The EU electricity directive stipulated that the over-40 GWh market should have opened across Europe in 1999, with the next step being the opening of the 20 GWh market a year later and the over-9 GWh market opening in 2003. This means that if every country in the EU had opened their markets to the minimum set by the directive, roughly 33 per cent of the European electricity market would be presently open to competition.

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But this is not the case, since some countries, such as Finland, Sweden, Norway and the UK, were already open to competition by the time the directive originally came into force. Other countries, notably Germany, the Netherlands and Spain, have been opening their markets ahead of the stipulations laid down by the directive. Also, some countries have also been allowed a derogation, such as Greece, due to the particulars of their individual electricity markets.

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This divergence from the EU Directive is allowed through the subsidiarity principle (preliminary dispositions 10 and 11, directive 96/92/EC), which leaves every national government free to decide which legal instruments to use in order to reach the objectives set by the directive itself. Moreover, the timetable provided by the directive for deregulation sets only a minimum threshold, allowing those member states who wish to deregulate at a faster pace to do so. As a consequence, in the year that has elapsed from the moment the directive came into force in February 1997, the European electricity market has evolved heterogeneously, in a way that can perhaps be defined as ‘multi-geared’: while the three Scandinavian countries and the UK have been open to competition since the directive was first implemented, other countries across Europe have been opening up at very different timescales and many markets are not as open in practice as they would appear to be in theory.

The bulk of obstacles in the way of liberalization lie principally in the wide range of secondary legislation which was issued to enforce the directive and in the lack of clarity regarding the rules on market access. The main obstacles to an effective deregulation include the following:

  • Limited interconnection capacity and lack of rules regarding the allocation of capacity among competitors.
  • Lack of clarity as regards rules and tariffs for Third Party Access (TPA) to the national grids.
  • The problem of stranded assets and its repercussions on competition.

Capacity reservation at strategic bottlenecks can produce significant advantages which, in a vertically integrated company, could benefit those parts of the company anxious to minimize trade. On the other hand, where substantial investments have been undertaken by a company in interconnectors, the right to free access to the system clashes with the right of the investor to be guaranteed a fair rate of return on its investment, which could take the form of priority rights and capacity reservation. In this case, the electricity directive is of little use and the competition rules contained in the EC Treaty seem to be the right starting point for a potential solution.

In most of the cases the application of competition rules to cases of restricted access to interconnectors falls under the competence of national authorities as provided by article 20/3 of the directive. Therefore, each body could potentially elaborate a different way of solving the problem. Italy provides a clear and useful example of how this can happen. In the case of some countries, such as Austria, Belgium and Ireland, the implementation of competition has been delayed due to the lack of a grid access code and the consequent lack of tariffs. For some of the larger markets, however, the reasons for the disparity between competition on paper and competition in reality are a little more complex.

The front runners

Germany was one of the countries that embraced the principles of the directive most enthusiastically, with a 100 per cent opening of its electricity and gas markets as of 29 April 1998. This legislation gave all electricity consumers the freedom to switch supplier, provided for Third Party Access (TPA) to the transmission and distribution networks, eliminated demarcation contracts and opened the generation sector to competition. It should be noted that the opening of the German market has already resulted in fierce competition for customers, with some industrial customers experiencing tariff cuts of up to 50 per cent in late 1999, when compared to late 1998 benchmarks.

In August 1999, RWE kicked off a price war for domestic customers by launching its ‘Avanza’ tariff, which was then the cheapest electricity in Germany. It is interesting to note that, although the German market has opened quickly and strong competition has already developed, there still exist some barriers to competition, even in this market. For example, the April 1998 Electricity Act did not create an independent regulator for the market, which means that it is more difficult to rapidly impose restrictions on those companies who participate in anti-competitive behaviour. There have also been complications with foreign companies trying to access German transmission grids. An example of this has been Enron’s criticism of restrictive grid access agreements and obstruction by local municipally owned utilities that, the company claims, have curbed the development of ‘real’ competition.

Spain is also opening up to competition far ahead of the stipulations of the EU directive, with the market opening to all consumers who are connected to the high voltage grid in July 2000. However, this market is an excellent example of a country where, even though it appears to be opening to competition very rapidly, actual opportunities are more limited. The small number of local players, the country’s relative geographic isolation and scarce interconnection capacity, all appear to have limited real competition.

Seeing as Spain is essentially on the ‘edge’ of Europe, most of the electricity the country could import would arrive across the Pyrenees from France. However, the current line between these two countries is already full to capacity and it would be difficult, for both political and environmental reasons, to either reinforce the existing line or build a new one. It is also significant that a large amount of the industrial switching that has already taken place in Spain has been between Iberdrola and Endesa, who have been swapping customers between them. This is representative of the presently low level of competition in the Spanish market.

Enel’s delay

The Italian electricity market was partly liberalized in February 1999, when the ‘Decreto Bersani’, a government decree, translated the electricity directive into national law. With regards to the share of the market opened to competition, the decree went ahead of the minimum threshold set by the directive, opening a 35 per cent share of the market, as opposed to a minimum required of 26 per cent. Notwithstanding the changes witnessed by the Italian market during 1999, among which were the start of Enel S.p.A.’s privatization in November, it is debatable whether this has brought about much actual competition.

The main reason appears to be that although more than one third of the market is open to competition in theory, in practice non-Enel electricity supply is scarce. Therefore, since the demand for electricity is greater than supply, the obvious consequence has been a dramatic increase in the demand for electricity imports from other European countries. Such increased demand for imports, in turn, could not be totally satisfied, because of the limited physical capacity of the high voltage lines linking the Italian transmission network to other systems. Moreover, until November 1999, Enel was using up nearly the entire capacity.

The solution envisaged by the Italian Energy Authority consists of the following points:

  • Maximum share of interconnection capacity per single importer. The Energy Authority established a maximum quota of 15 per cent of interconnection capacity per importer on each frontier. Moreover, on a national aggregated basis, each importer can not reserve more than 20 per cent of total interconnection capacity.
  • Capacity reservation for importers for the eligible market. The Energy Authority has reserved 2800 MW of interconnection capacity (2400 MW in the summer period) for the free market.

All the applicants have been satisfied in their requests, except for a few large importers. However, the solution envisaged by the Italian regulator seems a second best solution because such an allocation procedure does not favour the most efficient operators in the market, since each one is provided with the same amount of interconnection capacity.

L’exception Francaise

While in some countries, such as Italy or Spain, competition is more advanced in theory than in practice, France is an example of a country that has been slow to implement competition under the directive. France did not transpose the EU electricity directive into French law until February 2000, a year after it was originally due.

From February 2000, customers in France with an annual consumption level in excess of 40 GWh/year (some 440 firms) have been allowed to choose their supplier. It is likely that this threshold will fall to 20 GWh/year in May-June 2000 (circa 800 customers) and to 9 GWh/year in January 2002 (some 3000 firms). However, even though competition is now theoretically in place in the French market, there remain several potential barriers to entry. Not least is EdF’s position, which is extremely dominant, coupled with the fact that its large nuclear generation assets allow it to provide cheap electricity to the bulk of the market.

The law passed on 1 February 2000 also contains amendments that may violate the EU directive. Examples include an amendment requiring all electricity companies operating in France to abide by public service salary and benefit requirements and a rule that any company importing electricity into France must have a proportion of its electricity generation in the country.

A competitive Europe?

Although most electricity markets in Europe are undoubtedly more competitive at present than a decade ago, significant barriers to competition still exist across Europe. Even in those markets that have been open longer, such as Sweden, true competition had been hampered with a law which required customers to purchase a new meter in order to switch supplier. Unsurprisingly, the extra cost involved in switching supplier meant that true domestic competition could not take place until the law was rescinded in November 1999.

Across Europe, the issue of stranded assets is also affecting the implementation of competition, with the EU still to decide on a fair system of reimbursement. It should be borne in mind, therefore, that although significant steps have been taken in the direction of electricity competition and it is undoubtedly gaining in momentum across the continent, there still remains a long way to go before we arrive at a position of major competition for most countries.

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