The Single European Market for Electricity

Contents

Abbreviations

1. The path towards the Single European Market for Electricity
1.1. EU Legislation
1.2. Regional Initiatives

2. Current Status
2.1. Achievements to Date
2.2. Remaining Deficiencies and Obstacles
2.3. Future Outlook

3. Conclusion

Appendix

References

Abbreviations

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1. The path towards the Single European Market for Electricity

Energy is one of nowadays most frequently discussed issues. It becomes a more and more crucial factor for growth and competitiveness in Europe as well as worldwide. Dependable energy services at reasonable prices for business and household customers are essential elements for the economic and social development in the European Union (EU). In this context, a well-functioning Single European Market (SEM) is Europe’s key to meet today’s three main challenges in the energy sector: competitiveness, sustainability and security of supply.^[1]

As a matter of fact, the way towards a SEM for energy is long and complex. A multitude of aspects play important roles. Outlining all of them would go far beyond the scope of this work. In consequence, this paper focuses on electricity only, leaving out the gas sector. Moreover, emphasis is put on the fundamental EU legislation and the development of the Regional Initiatives as a means to facilitate market integration. Topics of equal importance such as the technical requirements and prerequisites for the general market design had to be excluded from this composition.

1.1. EU Legislation

Due to its special characteristics, electricity was not treated as a good from the outset. Thus, competition law and other EU legislation on economic transactions were not applied to electricity initially. It needed a number of verdicts from the European Court of Justice to clearly define electricity as a good and electricity supply as a service.^[2]

A cornerstone for the creation of an integrated electricity market was laid in 1992. The Treaty of Maastricht stipulates that trans-European networks have to be accessible to all market participants. This was a substantial step to pave the way for market integration and liberalisation.^[3]

The first years of the 1990s have seen some initial attempts to join the European energy markets together by means of e.g. the Price Transparency and the Electricity Transit Directives. However, a real foundation to promote the ultimate goal of replacing separated national energy markets by a pan-European internal market for electricity was not established until December 1996.^[4]

The Directive 96/92/EC “concerning common rules for the internal market in electricity” was the first legislative package to foster liberalisation and integration. It became effective on February 19th, 1997. As a basic principle, the Directive distinguishes between four activities on the electricity market: generation, transmission, distribution and supply. Transmission and distribution are considered to be natural monopolies, which indicates that competition would not stand to reason in these segments. By contrast, the Directive calls for liberalisation and competition in generation and supply. However, the rather general guidelines of this Directive turned out to be insufficient, mainly due to the fact that there was much room for interpretation regarding the implementation by the Member States. Consequently, the European Commission (EC) enacted a second Directive (2003/54/EC) in 2003 to mend the shortcomings. The general framework of both Directives will be summarised in the subsequent paragraphs.^[5]

Generation

Monopolistic structures in the generation sector are to be removed by facilitating competition in that segment. The basic principle is to ensure transparency and non-discrimination. Directive 96/92/EC provides two alternative procedures for building new generation capacity: the authorisation procedure and the tendering procedure.^[6] Directive 2003/54/EC, however, stipulates that the authorisation procedure is to be applied principally. According to this method, the construction of new power plants has to be authorised by a competent authority. Therefore, each Member State establishes authorisation criteria, incorporating the guidelines of the Directive. These are, inter alia, security of supply, environmental protection and energy efficiency.^[7] The tendering procedure is to be considered only in case that security of supply is endangered.^[8]

Transmission and Distribution

The electricity networks are to be operated, managed, maintained and developed by independent system operators. The Transmission System Operator (TSO) and the Distribution System Operator (DSO) are also responsible for advancing interconnections between network systems.^[9] Most notably, the Directive clearly states that TSO and DSO have to assure non-discriminatory access to their networks.^[10] Therefore, guidelines regarding third party access to the power grids are determined.^[11] Whereas Directive 96/92/EC allowed Member States to choose from three options to regulate equal network access, Directive 2003/54/EC restricts it to regulated third party access only as of June 2003. By means of that, predefined access tariffs, approved by a competent authority, are to be charged from all clients equally.^[12]

Furthermore, rules concerning the “conditions for access to the network for cross-border exchanges in electricity” are prescribed in Regulation (EC) 1228/2003. It governs non-discriminatory use of interconnection lines, compensation, developing capacity, congestion management and harmonisation of cross-border flows of electricity.^[13]

Supply

In order to phase in competition in the supply segment, the term eligible customer was introduced by Directive 96/92/EC. The term refers to customers that are able to choose and switch their supplier. Though Member States were free to define the term within certain limits, they had to meet a predetermined schedule to gradually increase the share of eligible customers in overall domestic consumption.^[14] Ultimately, industrial and business customers had to be eligible by 1st January 2004 and all customers, including households, as of 1st July 2007. That indicates that, theoretically, everybody is free to choose their electricity supplier today. Yet in practice, obstacles to supplier switching are still remaining in some EU countries.^[15]

Unbundling

Due to their monopolistic nature, transmission and distribution have critical market power. Moreover, since most companies in the electricity sector are vertically integrated, there was potential for TSOs and DSOs to inhibit competition by treating third parties in a discriminatory way.^[16] Hence, the EC took action to prevent conflict of interests, discrimination, cross-subsidisation and distortion of competition by unbundling activities in the electricity business. Initially, the EC ruled that integrated companies in the electricity business must keep their accounts of generation, transmission, distribution and other activities separately.^[17] Directive 2003/54/EC goes further, requiring legal unbundling of activities. Furthermore, it calls for separated management and a compliance report which is to be published annually.^[18]

Competent Authority on National Level

Member States are to appoint a competent authority which is independent from the electricity sector. This authority is assigned to settling conflicts regarding contracts and negotiations and to assuring non-discrimination.^[19] The responsibilities of the authority were extended in 2003, turning it into a regulator. Its main duties are to set up methodologies for network access conditions and tariffs, to approve tariffs, to specify terms regarding interconnection capacity, market monitoring and further promoting competition.^[20] In Germany, these tasks are delegated to the Federal Network Agency (Bundesnetzagentur).

In order to foster cooperation between national regulators, the EC established the European Regulators’ Group for Electricity and Gas (ERGEG) in 2003 to advise the Commission on energy matters. Moreover, regulators cooperate voluntarily within the Council of European Energy Regulators (CEER).^[21]

Implementing the aforementioned stipulations and transferring them into national legislation, Member States have to take account of securing environmental protection, security of supply, public service obligations and customer protection. This is referred to in multiple Articles of the Directives.

1.2. Regional Initiatives

An important step to spur market integration was the creation of the Regional Initiatives by ERGEG in February 2006. This programme was set up to accelerate the process to finally accomplish a competitive SEM for electricity (and gas). Its purpose is to develop and realise practical solutions to remaining obstacles to trade. The concept is based on the idea to start market integration on a regional level. Accordingly, it is often described as “interim step” or “springboard” towards a SEM.^[22]

The Regional Initiatives subdivide the European electricity sector into seven Regional Energy Markets (REMs). The following Member States cooperate in the respective regions:

Table 1: The seven electricity Regional Energy Markets

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Source: ERGEG (2007)

The participants on the REMs are grouped according to regional concerns, their respective level of progress as well as technical and legal aspects. Nevertheless, all of them share a common overriding goal: “integrating fragmented national electricity markets into regional markets”. This is to be achieved by tackling issues concertedly, involving respective regulators, companies, Member States, the EC and other relevant or interested parties. Cooperation aims at identifying problems and putting corresponding solutions into practice to advance the integration of REMs.^[23]

[...]

^[1] Compare EC (2008), page 2

^[2] See Meeus/Purchala/Belmans (2005), p. 25 f.

^[3] Cp. Linkohr (2006), p. 4

^[4] See Bower (2002), p. 1 f.

^[5] Cp. Coppens/Vivet (2006), p. 1

^[6] See EC (1996), 96/92/EC Art. 4

^[7] See EC (2003), 2003/54/EC Art. 6

^[8] See EC (2003), 2003/54/EC Art. 7

^[9] See EC (1996), 96/92/EC Articles 7-9 (TSO) and Art. 10-12 (DSO)

^[10] See EC (1996), 96/92/EC Art. 7(5) and Art. 11(2)

^[11] See EC (1996), 96/92/EC Art. 16 ff.

^[12] See Coppens/Vivet (2006), p. 2 f.

^[13] See EC (2003), Regulation 1228/2003

^[14] See Coppens/Vivet (2006), p. 2

^[15] Cp. EC (2003), 2003/54/EC Art. 21

^[16] Cp. Bower (2002), p. 8

^[17] See EC (1996), 96/92/EC Art. 13-15, particularly Art. 14(3)

^[18] See EC (2003), 2003/54/EC Art. 10 (TSO) and Art. 15 (DSO)

^[19] See EC (1996), 96/92/EC Art. 20(3)

^[20] See EC (2003), 2003/54/EC Art. 23

^[21] See “About the CEER and ERGEG”,

http://www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_ABOUT (26th Oct. 2008)

^[22] See ERGEG (2007)

^[23] Cp. “Electricity Regional Initiative (ERI)”, http://www.energy-regulators.eu/portal/page/portal/EER_HOME/EER_INITIATIVES/ERI (26th Oct. 2008)