The Electricity Market in Germany regarding the EU Directives to Market Liberalisation

Content

Research Objectives

1. Introduction

2. Theory of the electricity and the electrical energy industry
2.1 Introduction to the electricity itself
2.2 Introduction into the electricity market mechanism
2.3 Electricity market function
2.4 The European electricity market
2.5 The Germany market
2.6 The German power exchange
2.7 The working principles of the EEX Literature review
2.8 The German market structure at the beginning of the liberalisation

3. The liberalisation
3.1 The history of liberalisation
3.2 The process of the Liberalisation in the EU and the German implementation

4. First period the energy trade liberalisation the EU Directives
4.1 The first Directive
4.2 The summary of the legislative regulations
4.3 The electricity prices and the dilemma between liberalisation and price spoiling on the German market
4.4 Reserve and balancing power market

5. Second period of the energy trade liberalisation
5.1 The second Electricity Directive
5.2 The cross-border regulation
5.3 The security of supply

6. The characteristic of the liberalised electricity market
6.1 Interview and survey: some questions to my colleagues and their comments to the liberalisation
6.1.1 What are the price differences between Germany and the other EU states (X-Border trading)
6.1.2 Why not propose to control prices?
6.1.3 Trading: why are the electricity prices so high?
6.2 Single market issue, is it something useful?

7. Electricity trading principles
7.1 Trading
7.1.1 The early trading experiences
7.2 The Models of the liberalised electricity trading
7.2.1 To the TPA and the “single-buyer” model
7.3 The single buyer model in detail
7.3.1 The strong liberal model

8. Modelling of the competition in the electricity market
8.1 The grid access model

9. Approach adopted
9.1 Methods
9.2 Research Strategy
9.3 Sampling
9.4 Data Collection
9.4.1 Interview
9.4.2 Given Literature

10. Findings

11. Conclusion and outlook

Bibliography
Appendix A. Definitions
Appendix B. The Directive from 1996
Appendix C. The Directive from 2003

List of Tables

Table 1: Typical daily consumption of electrical power in Germany and the best possible technology to fulfill the daily base and peak sections.

Table 2. Development of energy consumption in Germany

Table 3: German energy and power mix (2007)

Table 4: Structure of the German electricity market (2005)

Table 5. The largest electricity companies in Germany by sales to end customers (2006)

Table 6: The German ESI

Table 7: Factors exerting a major influence on electricity wholesale prices.

Table 8: Comparison of wholesale prices in European power markets.

Table 9: The 'marginal power plant' principle, key to price formation on the wholesale market in Germany

Table 10: Remaining power generation capacity in Europe

Table 11: Germany: import and export of electricity.

Table 12: German merit order: theoretical power pricing with and without emissions trading

Hypothesis

My hypothesis is that the European Commission Directives to the gas and electricity market liberalisation drives to more market activities and competition in Germany and also in the member states through cross-border-trading.

Research Objectives

At the end of my thesis I will answer some fundamental questions regarding the electricity market opening and integration in Europe and especially in Germany. The question this research will be answering is:

What will be the follow-up to the changes?

How can we encourage new investment in electricity generation?

Is structural unbundling took place?

Is there a lack of market integration and how can we improve the regulatory environment?

What are explicit and implicit auctions of cross-border electricity capacity?

The answers will be given after the definition and history the market of electricity. The thesis literature review part will go in detail of the liberalization and will collect the knowledge and information to answer the upon research objectives.

1. Introduction

The main experience with the liberalisation of the electricity market in the European Union (EU) suggests that the politic as such is more advanced in the integration of the European electricity markets as any electricity market player itself (E, et al., 1983). The legal bases were created by the Commission from the time of the late 90´s on until a new Directive adopted by the European Commission set to power last year (Bier, 2001). The implementation is still a long time ahead. Additionally, the regulatory step to liberalised European power industry has modified the whole regulatory structure of the electricity industries (Union, 2009). There is a wide range of different national experiences of liberalisation in terms of the degree of the concentration of generation, the stringency of unbundling of public ownership and of the regulatory institutions., but the core drive of the different procedures are the same, which is the creation of a Single European Market for electricity (Cameron, 2009).

By combining theory with empirical evidence, this report will reach a number of significant conclusions and also makes several policy recommendations for further steps on the way to integrate different markets (X-Border Trade). The report makes a difference between several types of observations and literature sources, which are relevant to the design of a well functioning electricity market. The fully functioned electricity market needs a competitive market environment. (DOE, 2005) This is an antagonism, competitiveness on the market and securing the community supply with a stable and well functioning service providing is hard to merge to appreciate this complex issue and to stress the meaningfulness of the opening the European and especially the German market. (Brunekreeft, 2002) My thesis follows a two step strategy. First, it provides an overview about the material electricity, to get a feeling what kind of service will be liberalised and analyse the legal framework the EU Directives that forces to liberalisation (Ilie, 2007). Second, it shows how the market works and in addition gives a strong theoretical- mathematical background of the market functionality in a well liberalised environment (Jiménez, 2007).

2. Theory of the electricity and the electrical energy industry

2.1 Introduction to the electricity itself

Main characteristics of electricity

Electricity is a homogenous product at a certain time on the demand side. Electricity is a non-storable good or the storage is expensive and cannot reach it without losses of effectiveness. Electricity demand fluctuates (peak and off-peak; day-night; weekday-weekend; summer-winter) (Ji Xuan†, 2006). Electricity demand and supply are both uncertain, and electricity flows are grid-bound (Müsgens, 2004). Different plant technologies have varying short-run generation costs and long run efficiency (Fehr, 1994).

These facts lead to large variations in marginal generation costs. Additionally, due to the fact that capacity has to cover the highest demand levels, unused capacity remains most of the time. For this purpose those two factors: generation and consumption have to be equal at every time. The demand fluctuations may be known to a large extent, but there is uncertainty beyond the known supply fluctuation (Agency, 2006). For instance, demand depends on the weather and daytime. Supply is uncertain due to technical outage of generation units, the disposability of the power plants and transmission lines, wind and weather (Ulrich Steger, 2008) and (Crastan, 2007) (See Table No.1). The commodities within an electric market generally consist of two types: Power and Energy. (Wikipedia, 2009)

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Table1: Typical daily consumption of electrical power in Germany and the best possible technology to fulfill the daily base and peak sections.

(Source: http://upload.wikimedia.org/wikipedia/commons/8/8d/Tagesgang_engl.png)

2.2 Introduction into the electricity market mechanism

EM show unique features which distinguish electricity from nearly all other goods. First to clarify what is traded, the traded good is power. Power is the metered net electrical output of a generator at any given time and it is measured in Megawatts (MW) or in Kilowatts (KW). Energy is electricity that flows through a metered point for a given time and is measured in Megawatt Hours (MWh) or Kilowatt Hours (KWh). (electricity, 2007)

Furthermore, I define the EM as a system for effecting purchases, through bids to buy; sales, through offers to sell; and short-term trades regarding to balancing the network and clear own positions (Scherer, 1977). Moreover, trades^[1] can make is the form of financial or obligation swaps or duty to deliver physical energy at the delivery point agreed on. On a liberalised EM bids and offers use supply and demand principles to set the price. Long-term trades are contracts similar to power purchase agreements and generally considered private bilateral transactions between counterparties. (Brunekreeft, 2002)

Wholesale transactions (bids and offers) in electricity are typically cleared and settled by the market operator or a special-purpose independent entity charged exclusively with that function (clearing house or exchange, See Chapter: EEX).The difference between the market operator and th Transmission System Operator (TSO) and the market/exchange that the TSO do not clear trades as such, but often require knowledge to the TSO of the trade in order to maintain generation and load balance.

2.3 Electricity market function

On the short run, demand is relatively insensitive to price (Energy, 2009). This function caused by consumer preferences, technology and institutional arrangements. End-user prices normally do not reflect the short-run system’s marginal production costs as reflected by wholesale spot prices (Joskow, 2007). End-user prices, even if they include a peak-load element, are normally fixed for an entire year. There are developments called demand side management (DSM) aiming at an increase in consumer sensitivity to price but these developments are still minor (Mario Ragwitz, 2006).

2.4 The European electricity market

Since the late 1980s, economic policy in Europe has aimed to remove barriers to trade and competition. Not only the commodity market but also gas, postal services, telecommunication was historically shelter from competition and operated not on market rules. European consumers had a little or no choice to choose the supplier of a good or service delivered by firms in network industries (Bergmann, 2000). They have the possibility today to choose from an increasing number of independent suppliers in those areas. Competition is rapidly establishing itself in telecommunication and partly in postal services, and begun to emerge in the electricity industry. In some countries like United Kingdom, competition has advanced significantly in most of the whole electricity industry. However, the problem is, there are only six big player and no additional chances to market entry for new player (Buchan, 2007) and (Bergmann, 2000). As this report states: It is no longer regarded as inefficient on many power markets, especially in Germany to have several firms generating electricity. New producers must be also welcome and allowed to operate their plants and makes businesses successfully by free market conditions. Increasing demands, notably in local sight is also facilitating competition. The inefficient supply of the German network industry has also promoted reforms. For example a German electricity consumer pays up to 45% more for energy than their US competitors (CEPR, 2005).

Apart from differences in tax treatment, the lack of competition has been identified as a key factor in explaining the cost differences. The tax factor is not the objective of this thesis. It has been calculated that full liberalisation of the European electricity market will provide substantial gains amounting to € 10-12 billion per annum, or twice as much as the gains anticipated from the opening agreed inefficiency, coupled with changes in market structure, has encouraged political acceptance of pro-competition measures (Commission, 1996). Yet only a few countries have exploited the political momentum in favour of liberalisation, notably not Germany but UK and the Nordic countries (Hall, 1999).

The European economy as a whole to benefit from the liberalisation, the question is, how fast will be the process of implementation in Germany (Ganova, 2007).

2.5 The Germany market

Germany has the largest population with around 82 million inhabitants in Europe and the largest electricity markets (Stalker, 2000). This is the main point why I take Germany as a reference for my Thesis to analyse the liberalisation process and the market structures/market systems in the electricity industry. There are small independent market players between the four big providers so called “market makers” and also several mid size companies are operating on the market (Bonde, 2001). The total net consumption summed up to 532 TWh in 2005 and the net production of 637 TWh in 2007.

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Table2. Development of energy consumption in Germany

(Source: http://rwecom.online-report.eu/factbook/en/marketdata/electricity/supply/germanydevelopmentofenergyconsumption.html)

The total installed net generating capacity in Germany at the beginning of the year 2003 amounted to 116 GW (in 2008 the gross electric power generation in Germany totalled 639 billion kWh. A major proportion of the electricity supply is based on lignite (23.5 %), nuclear energy (23.3 %) and hard coal (20.1 %). Natural gas has a share of 13 %. Renewables (wind, water and biomass) accounts for 15.1 %. (Müsgens, 2004) and (Society, 2007).

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Table 3 : German energy and power mix (2007)

(Source: Arbeitsgemeinschaft Energiebilanzen (Energy Balance Working Group), VDEW, February 2008)

The nuclear capacity should be replaced by coal or gas-steam turbine until 2020. Gas has a minor share against coal and nuclear generation currently, but falling gas prices, improved technology (efficiency about 50% and above) and tougher environmental constraints, the contribution of gas is expected to grow (Society, 2007). The German ESI is however, as a centre between other European markets of wider importance: the country is regionally located so that it connects northern and southern European markets; and the interconnectors being built from the Nordic (baltic cable, owned by Statkraft capacity about 500 MWh countries to Germany will allow substantial trading with Nord Pool (Chan-Ki Kim, 2009) and (Bergmann, 2000).

What is more, within the options allowed in the EU´s Electricity Directive, the German government’s choices are quite distinct from those of most other member states. For this purpose the well functioning market platform is essential (Pool, 2008).

2.6 The German power exchange

The first German power exchange, the Leipzig Power Exchange (LPX), started operations on 15 June 2000 (Ilie, 2007) and (Müsgens, 2004) and (Lang, 2006) While before electricity was traded over-the-counter (OTC), the LPX was the first market place which quoted hourly prices. On 8 August 2000 a second power exchange started, the European Energy Exchange (EEX) in Frankfurt. EEX used Eurex’s XETRA trading system (Brunekreeft, 2002). Both exchanges merged in July 2002 and formed the new exchange based in Leipzig. The EEX is the leading energy exchange in Continental Europe and operates market platforms for trading in power, natural gas, CO2 emission allowances and coal (EEX, 2009) To this end, EEX relies on an open business model which generates higher flexibility, increased market coverage and bigger volumes through targeted spin-offs and partnerships. Through a systematic expansion of co-operations, EEX contributes decisively to the integration and liberalisation of the European energy markets (EEX, 2009).

2.7 The working principles of the EEX

The exchange uses the SAPRI exchange system for the auction market of single hours (Economics, 2008). Bids and offers have to be sent to the exchange until 12 p.m. of the day before delivery.

“Market results are published by EEX until 12:30 p.m. and become binding one and a half hour later. All trading ceases at 2:30 p.m. when binding schedules have to be reported to the grid operators” (Müsgens, 2004 p. 7) While trades in principle are possible between the EEX’s auction ending and market closure at 2:30, traders report that volumes on the OTC market are low in that period (Carlo Obersteiner, 2008). The only source for intra-day energy trades are reserve and balancing markets. Reserve and balancing energy is not traded at the exchange but should be addressed and known. In cases where exchange of primary/secondary reserves have higher value than tertiary reserves, intra-day trade or day ahead trade, cross-border capacity should be given to the primary/secondary markets (the products giving the highest profitability and highest European social welfare).

Literature review

2.8 The German market structure at the beginning of the liberalisation

As the German electricity market was started to be liberalised; there were eight major integrated generation companies. During the years of 2000 and 2001, mergers and acquisitions reduced this number to four (Cameron, 2009). RWE and VEW merged but kept the name RWE. Preussen Elektra and Bayernwerk merged to E.ON. Swedish Vattenfall first bought HEW. Afterwards, HEW, VEAG, and BEWAG merged to Vattenfall Europe. In addition, French EdF bought a major stake of the south-western player EnBW. While all remaining big players are vertically integrated, they are legally unbundled (Pielow, et al., 2009).

Abbildung in dieser Leseprobe nicht enthalten

Table 4: Structure of the German electricity market (2005)

(Source: http://rwecom.online-report.eu/factbook/en/marketdata/electricity/supply/structureelectricitymarketgermany.html)

The generation capacity share of the four largest companies has increased from 42% of total (by year 2000) to 61% by year 2002 (Müsgens, 2004).

The German ESI is made up of approximately 1000 firms, but again the high number of market participants is relatively concentrated. Almost all of the firms are vertical integrated, moreover they may be distinguished vertically by different core activities. Three classes of firms are commonly distinguished (Young, 2009):

- The “Verbundunternehmen” the Transmission System Operator (Midttun, 1997)
- The regional suppliers (Midttun, 1997)
- The communal distributors “Stadtwerke” (Bergmann, 2000)

The eight EVUs own and operate the high voltage transmission networks they are heavily integrated with generation, the geographical division of their power plants largely overlapping with their respective transmission networks (PINTO, 2001). Together, they produce app. 80% of electricity and although it is not their core activity, they are also active in distribution, focusing on larger consumers taking third of the market (Bergmann, 2000) and (Department, 2006) also see Table No.5.

“The other two types of the firms do not own transmission networks. The difference between them comes down to ownership: the regional suppliers are largely controlled by the eight EVUs, while the communal distributors are commonly owned by local communities” (Bergmann, 2000 p. 310).

From an economic perspective, the regional suppliers and communal distributors are largely equivalent, but not changeable. They own and operate distributional networks, concentrate on supplying end-users (though regional suppliers may also supply communal distributors), but do also produce electricity, mainly for their own use (decentralised feeding of electricity in local networks). There are around 80 regional suppliers and 900 communal distributors.

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Table 5. The largest electricity companies in Germany by sales to end customers (2006) (Source: http://rwecom.online-report.eu/factbook/en/marketdata/electricity/supply/largestcompaniesingermany.html)

The ultimate ownership of the ESI is mixed. Measured in number of firms, it turns out that lots of them is public owned, but, measured by annual production, by far the larger share is mixed ownership. Purely private ownership is low on both counts. The difference is in the relatively high numbers of small communal distributors, which are largely publicly owned by the communities. The larger EVUs are mainly held by mixed ownership. Several German Federal Lands have majority and minority shares; whereas the remaining shares are in the hands of banks, insurance companies and other financial intermediaries, foreign state funds and non-negligible portion of the shares is traded in the stock market (See to this the Table No.6).

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Table 6: The German ESI (Source: (Bergmann, 2000))

3. The liberalisation

The main driving factors to the liberalisation: (Info, 2009)

Market structures changes – innovations and demand changes

Inefficiency of monopolistic structures – poor incentives

Strong central support – The Commission and political legitimacy

More global corporate structure

These factors are explained in the following chapter.

3.1 The history of liberalisation

All members of the European Union are in the process to liberalising their electricity markets. Some, like England are more or less fully liberalised, as they started the process several years ago and accumulated significant experience. Other economies like Germany are late movers (OECD, et al., 2005). They are stimulated to actions by the European Commission Directives and they are struggling with as we will show in this section. The first Directive was issued by 1997 and targeted for implementation by 1999 (International Energy Agency, 1999). The liberalisation is a long term

process. The former monopolistic companies are like dinosaurian they adapt very slow and are against every competition.

This part of the thesis explains -as I formulated at the beginning- the process of the Liberalisation during the diverse European Commission Directives and present the market situation and the end of this section the analysis different market models and theories on the German liberalisation.

There is a wide range of experiences and findings in the literature I will go through. There are many future outlooks and prospects against a well functioning liberalised electricity market in Germany and in the European Union. (Department, 2006) The goal was at the beginning of the liberalisation process:

” The goal should be reducing the concentration in generation of electricity to avoid greater market power throw high capacitie s” (Market., 2006). Whenever market size and the minimum efficient scale of existing power plants allow, a redistribution of generation assets is the preferred approach. The distribution of ownership appears to matter more than its public or private character. Separation of the ownership, between natural monopoly elements and other market activities was not essential in the past. Ownership of transmission system in the transmission system in under single ownership, there are advantages in having systems operation in the hands of the transmission system operator. This ensures the solvency of the transmission system operator, which can then be made subject to powerful incentive schemes in the case of several grids under separate ownership; transmission system operation should be independent. This process is under implementation in Germany (Vaitilingam, 2004) and (Research, 2008).

“Regulated third party access to the electricity network” (Bier, 2001). This is more transparent and hence preferable to both negotiated third party access and the single buyer model (See: Chapter 7.3 and 7.4). These two alternatives give vertically integrated transmission owners the power to delay the transactions of their rivals. They are also likely to result in stranded contracts, which would hold back further liberalisation of the market:

“Universal service requirements and environmental policy objectives to be met through a combination of licensing requirements, taxes and emission permits” (Bergmann, 2000 p. xxii). In a liberalised market, such goals are achievable by using these instruments (Research, 2000).

3.2 The process of the Liberalisation in the EU and the German implementation

In order to implement the Directive, a new Energy Act (EnWG) came into force on 29 April 1998 (Laresgoiti, 2001) the name “Energy Act” indicates that is intended to apply to both the electricity and gas sector (Bergmann, 2000). In Germany the gas and electricity sector is tighting connected, because of the high amount of the developed gas fired (CCGT) generation capacity. The EnGW applies only for the electricity sector: it has reformed the legal framework of the German ESI with an eye to greater liberalisation and deregulation; but it has not restructured the sector nor changed ownership, though indirect effects on structure and ownership will be inevitable. So the first step to implement the Directives was a step backwards and forwards. It is still somewhat premature to be conclusive about the success or failure of the EnWG (Bergmann, 2000). I will discuss the developments and experiences in the following chapter. Since the single European Act of 1987, the European Commission has been committed to implementing liberalisation in Europe’s network industries. Indeed without the Commission’s effort it is extremely doubtful whether Europe’s economy would have benefited as much from changes affecting the network industries (Coen, et al., 2001). A large German literature addresses the regulatory challenge with a central focus on the State and the State as a wrong market participant. It thereby relates industrial regulation particularly to public institutions. These regulations drives to a further discussion by Schuppert and Hartwick (Hartwick, 1989) discussed the State´s role “The so-called “State discussion” in the late 1970s came to focus on the phenomenon of governmental importance” (Midttun, 1997 p. 321).

The term “state failure” was coined by the political scientist Jänicke (Martin Jänicke, 1999) the economist Recktenwald (Recktenwald, 1974) and the constitutional lawyer von Bogdandy (Armin von Bogdandy, 2006).This discussion was mainly a response to the inability of the state to deal with environmental problems in industrialised countries, but may in principle also apply to ESI in general and the solution of this issues by the liberalisation on a regulated way takes a broader perspective and distinguishes forms of state failure (Martin Jänicke, 1999 p. 330): ”The renunciation of political shaping and preventive intervention towards societal challenges and problems, which he calls “political failure of the state”; the diseconomy of the excessive price of public goods, which he terms “economic failure of the state” and the lack of effectiveness of state activity, which he calls “functional failure of the state”. also cited in: (Midttun, 1997 p. 321) .

The theory of state failure has a clear analogy to the theory of market failure, which was emphasised by Recktewald and Adam Smith (Smith, et al., 1983) who firstly diagnosed a “state failure” concentrated on the “diseconomies in the state sector”, pointing at the wastefulness of the state services because of the non-effectiveness and the lack or the “no need” of new technologies. The Commission has been at the middle of the reform introducing competition in the electricity industries. It has been able to straighten its position as the initiator of reforms because it operates in an increasingly sympathetic political climate in Germany as well as in whole Europe. The Germans has decided to throw a long political discussion to build back the nuclear industry and go forward to an environmental friendly generation (Kirberger, 2006).

The Single European Act mandated the Commission to device policies to bring about a single market in energy and other network industries. (Paul McAleavy, 1997). This required a legislative focused on liberalisation and harmonisation. The reforms were following the “Treaty of European Union” in 1992. By the end of 1998, many of the liberalisation measures had been adopted and attention shifted towards the details of implementation and enforcement. At this time the electricity industry wasn’t sleeping (Jones, 2001) (See the following Chapter about the market pirces). Traditionally, managers in most European networks operated locally and exclusively within their national territories. During the liberalisation the companies, especially the German E-On and RWE but also the French EdF and Swedish Vattenfall were increasingly expanding operations outside their traditional service areas. Manager in newly privatised companies in particular are keen to move into new markets and merger with other companies. State owned companies like Statkraft and EdF explore new fields of operation. EdF get the biggest generator of nuclear in France and England. Statkraft from Norway is the largest environmental friendly Energy Corporation in Europe and one of the leading energy traders in Germany, forced to build up a continental business.

4. First period the energy trade liberalisation the EU Directives

This chapter outlines the first EU Electricity Directive (Commission, 2001) and (Hakvoort, 2003) and its implications for what needs to be done to implement a single European market for electricity. I will begin to implement the first Directive, and give an introduction in the Legal background what need to be implementing in Germany. After the entirely picture I will go in detail what the market participants like: generators, transmitters, system operators, retailers should do:

- A required separation of ownership between generation and transmission/distribution.
- Strict competition policy oversight of integration between generation and retailing (supply on households).
- Harmonising non-tariff condition for access to transmission and distribution networks.

The promotion of international transmission pricing rules based on the principles of transmission costs. The creation of a body in charge of identifying the needs for new interconnection facilities, allocating the cost of these facilities between participants and drawing up compensation schemes that ensure a fair and efficient recovery of these costs (Bergmann, 2000).

4.1 The first Directive

The first Electricity Directive had established a legal framework which laid down the basic structural reforms for liberalisation (See Table No. 11). The first Electricity Directive set up rules based on competition in generation and the possibility of consumers to choose their electricity provider (Marquis, 2001). The goal is not 25 liberalised markets, but one common market for all European countries. It left, however, many requirements for achieving a truly competitive market unaddressed. Jamasb and Politt experience has shown that liberalisation requires the implementation of one or more of the following inter-related steps: sector restructuring, introduction of competition in wholesale generation and retail supply, incentive regulation of transmission and distribution networks, establishing an independent regulator, and privatisation (Jamasb, et al., 2005). The Directives mentions that the generators in the member states must adopt two procedures for build up capacities and authorization (Art 5. Directive 96/92/EC) or tendering (Art 6. Directive 96/92/EC) under the authorization procedure the company may offer to build new plants under an open and impartial procedure that decides whether they should be allowed to go ahead. Under the tendering procedure, a designated authority may decide what new capacity is required and solicit tenders, which are then accessed by an impartial procedure. The idea here is to make the “market competitive for new generators and implement (push) old participants to build up capacity” (Bergmann, 2000). In transmission, the Directive rules that each member state must specify a transmission system operator (Art 7. Directive 96/92/EC) whose job is to ensure dispatch of plant according to transparent and fair rules that do not favour plants owned by the same company as the system operator (Art 8. Directive, 96/92/EC). The ‘natural monopoly status’ of the transmission and distribution segments was, however, maintained. Unlike the telecommunication sector, the Directive did not open the markets at once, but set a time frame, which granted a gradual and minimal opening of the market by up to 33% over a period of six years (Sépibus, 2008). This limitation was the result of a compromise between the Nordic countries and Germany, which argued for a larger opening, and the countries of the South, which wanted their traditional operators to be protected from a massive opening of the market. The Directive also specifies that all electricity producers and suppliers have the right to erect their own direct lines for supply of their own premises, subsidiaries and customers (Art 7.5 Directive 96/92/EC) The system operator may favour renewable energy plants, waste or CHP and subject to a maximum of 15% of demand, plants using indigenous fuel (Art 8.3, 8.4 Directive 96/92/EC). The Directive also provides for management separation of businesses (Art 7.6 Directive 96/92/EC) and functional unbundling of accounts (Art 14.3 Directive 96/92/EC) these clauses require integrated electricity companies to separate the management of their generation, transmission, distribution and non-electricity activities and to produce separate accounts for each. By limiting the obligation to unbundling of accounting, the Directive failed to effectively separate the generation and transmission activities of vertically integrated companies, which is considered crucial for achieving competition in wholesale electricity markets. Evidence accumulated that the access regime did not work properly (Commission, 2001).

This form of discrimination is called priority production. This section of the Directive applies that the system operator must apply the same criteria’s for the dispatch of plant to incumbent generators as to new entrants. Thus, it was mainly large consumers, the so- called ‘eligible’ customers, who were to become the beneficiaries of the new possibilities, while the majority of consumers remained captive (Art. 7. and 8. Directive 96/92/EC). The centre-piece of the Directive is the (Art 17. and 18, Directive 96/92/EC) “third party access” to the transmission and distribution network. Without this article there is no free market and no access for new entrants. There are three types of arrangements: negotiated third party access, regulated third party access and the single buyer model. To ensure network access for producers and consumers, Member States had to adopt either a TPA system or opt for the ‘Single Buyer System’. (Art 16 & 17. Directive 96/92/EC) If a Member State opted for a TPA system, it could choose between two variants, namely a ‘negotiated’ and a ‘regulated’ TPA. ‘Negotiated’ access meant that the network operator was obliged to negotiate a right of use of its network but could refuse access based on ‘duly substantiated reasons’. Furthermore, Member States had to designate an independent body to resolve conflicts in connection with contract negotiation (Art.17 (5), Directive 96/92/EC). Under ‘regulated’ access, third parties who met the relevant technical standards were eligible for access to the network upon payment of a regulated tariff, provided capacity was available. The terms of access were left to national regulators (Art. 17. Directive 96/92/EC). Regarding generation, the “Directive contemplated two alternative vehicles for the construction of new capacity: an ‘authorisation’ and a ‘tendering’ procedure” (Marquis, 2001 p. 78) and also cited in: (Sépibus, 2008 p. 11). Under the authorisation procedure the generation sector was fully opened to competition, subject only to standard licensing requirements (Art.5, Directive 96/92/EC): “The tendering procedure could be chosen as an alternative or in addition to the authorisation procedure”. It meant that Member States had to conduct the call for tenders according to an inventory based on estimates of future demand. This system made it possible for Member States to control investment decisions rather than to leave them exclusively to the market (Art.5, Directive 96/92/EC).

This control can be annul by the vertically integrated companies used their network assets to make entry more difficult for competitors. The limited rules on unbundling did not resolve the fundamental conflict of interest within these companies relating to the interest of their generation branch in maximising sales and market shares and the obligation of network operators to offer non-discriminatory access to competitors. In order to limit the risk that vertically-integrated electricity suppliers would discriminate against competitors by granting preferential network access to their own supply business and less favourable access to their competitors, the Directive required a split of their accounts. Finally, there should be an absence of measured improvement of high market concentration. This could happen through so-called “horizontal splitting” (Jamasb, et al., 2005) of incumbent generation firms discouraged competition and new entry. Worse still, the barely concealed intent of many Member States to favour so-called ‘national champions’ favoured a wave of mergers that led to even higher market concentrations of incumbents. In the majority of Member States competition remained limited to former monopolists. This meant that these undertakings had to maintain separated accounts for generation, transmission and distribution by recording their costs and revenues on a differentiated basis. (Art.13 & 15, Directive 96/92/EC) and (Marquis, 2001) It also allowed generators to build direct lines to supply their own premises, subsidiaries or customers. (Art.21 (3), Directive, 96/92/EC). made clear that the fact that a company constructs a direct line in no way prevents it from also having access to the main grid. Member States could, however, limit this right and make it subject to the fact that the company wishes to build the direct line had requested access to the main grid and that access had been refused on the grounds of a lack of capacity (Jones, 2001). Member States had, moreover, to appoint a TSO who was responsible for operating, maintaining and, if necessary, developing the network and the ‘interconnections’ in a given geographical area. The TSO was, in particular, accountable for the dispatch of electricity in its area, and for determining the use of capacity available through the ‘interconnectors’. Interconnector means the equipment used to link electricity systems (Art. 2 (10), Directive 96/92/EC). Similar rules applied to Distribution Transmission Operators with respect to the distribution network (Art. 10-12, Directive 96/92/EC). Finally, the Directive made allowance for the strong public service tradition in some MS by allowing the imposition of certain public service obligations on electricity undertakings (Art. 3 (2), Directive 96/92/EC). Public service obligations may relate to security, including security of supply, regularity, quality and price of supplies and environmental protection. See for more details on this subject from (Marquis, 2001 p. 101). By the same token, it recognised that the realisation of legitimate objectives by the MS made it necessary to allow MS to derogate from the full application of certain provisions (Art.24, Directive 96/92/EC). Based on this provision the Commission granted the German VEAG a derogation to allow this operator to fulfil its commitment to maintain electricity generation from lignite or brown coal and to make large investments in the modernisation of generation Although the Directive entered into force four years after the signature of the Rio Framework Convention, the potential negative impacts of the liberalisation process on the climate were largely ignored. One of the reasons for the relative lack of concern of the legislator for environmental aspects was the lack of cooperation between the Energy Council and the Environment Council. See for more information on the integration of environmental concerns in other policies of the EU (Pallemaerts, 2006). The Directive did contain, however, certain references to environmental protection and renewable energy sources. (Art. 5 (1b), Art. 8 (3), Art. 3. (2) and Art. 11, Directive, 96/92/EC) Beside these clauses, which did not set any limit on the industry with respect to greenhouse gas emissions, the Directive contained no provisions to mitigate potential detrimental consequences for the climate. The difficult emergence of a truly competitive internal electricity market ‘The market power of incumbents has increased and the entry of new players into the electricity markets has taken on a “Waiting for Godot” aspect (Cameron, 2009). Significant problems also resulted from the patchy implementation of the Directive. It means that some participants had elected to go beyond the minimum requirements of market opening, whereas others had not (Cameron, 2009) and (Lau, 2008).

4.2 The summary of the legislative regulations

The main characteristic of the new Energy Act was: completely free entry at all stages of the ESI, eligibility for all consumers; and an access provision based on nTPS. In addition to the access provision in the EnWG, the recently modified competition law includes an essential facilities doctrine, which aims at enforcing access to the networks. The access charges was largely unregulated and left to the industry to negotiate and gives an instrument in the hand of the big six to avoid new entrants.

Representatives of the industry have reached a common agreement, which sets out the basic structure of the access charges. The level of charges is, however, left to negotiations. The association agreement has been criticised, especially with respect to the distance-related component, which would give incumbent generators that are simultaneously the network owners an unjustified competitive advantage. The access charges are high by international standards and show substantial variation in several respects. In this chapter recommended that a national sector-specific regulator be installed to concentrate on access charge in Germany. While the remaining antitrust problems in generations and retail are left to the political bodies. Currently in this section of the liberalisation there is no chance to operate as new entrants businesses with success. This may be at the expense of excessive profits for the biggest companies in Germany. Since all costumers are eligible, the government should be aware that retail competition is cannot and should not be neglected as it this time was. So that is to summarise that at the first time was something paradox on the Germany ESI liberalisation. Distributors and large users are renegotiated their terms of trade and switching their supplier. Prices for large end-users have dropped on average by 8% already (Bergmann, 2000) and (Bonde, 2001) and (Brunekreeft, 2002). As mentioned with the sideward movements, one the one hand, there are cases that strongly suggest anti-competitive behaviour; while on the other hand, something seems to have been set into motion that cannot be stopped (James M. Griffin, 2005).

4.3 The electricity prices and the dilemma between liberalisation and price spoiling on the German market

In the last three to five years, wholesale electricity prices have increased dramatically in Europe and especially in Germany. From 2001 to 2006, the average yearly increase was approximately 13.4% (Möst, et al., 2009).

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Table 7: Factors exerting a major influence on electricity wholesale prices (Source: http://rwecom.onlinereport.eu/factbook/en/marketdata/electricity/generation/electricityprices/factorsinfluencingelectricitywholesaleprices.html)

In Germany, doubts have been voiced as to whether electricity markets function competitively. In this context, it is supposed that electricity producers use market power to increase prices and thus boost their profits (Bjerkholt, et al., 1990) and (Möst, et al., 2009). It has been argued by some authors that suppliers exercise market power by withholding available power plant capacity. It is supposed that this practice would create an additional burden for end consumers and would result in welfare losses for society. The current debate is primarily based on empirical studies of price formation on the German wholesale electricity market (Möst, et al., 2009).

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Table 8: Comparison of wholesale prices in European power markets (Source:http://rwecom.onlinereport.eu/factbook/en/marketdata/electricity/generation/electricityprices/wholesalepricesineuropean powermarkets.html)

Most of the studies used fundamental market models to calculate the marginal costs of power production. On the basis of the difference between wholesale electricity prices and the calculated marginal costs of power production, the authors concluded that electricity markets are not competitive (Chauve, et al., 2007). The first study dealing with market power in Germany was published by (Bower, et al., 2001). After the dramatic reduction in electricity prices in 1999 and 2000 due to the liberalization of the markets, (Bower, et al., 2001) concluded that the price decrease created the circumstances for a benign endorsement of industry consolidation as well as a prolonged period of high prices. As prices had previously been quite low, the authors demonstrate using an agent-based simulation model that the process of strategic consolidation could have resulted in average annual peak prices rising by 87% and average annual off-peak prices increasing by 50%. (Möst, et al., 2009)

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^[1] Market as such can defined also as a sum of whole trades in given time on given place