Gas sector prepares for liberalisation

Date: 04/11/1999

By Renée Cordes

LONG before the European Union has to look beyond its borders for the bulk of its natural gas, it is coming under mounting pressure to put its own house in order.

The first step will come next August, when EU legislation requiring member states to open up at least 20% of their domestic markets to competition enters into force.

For the first time ever, electricity producers and large customers will be free to shop around for the cheapest suppliers. This initial phase of liberalisation will be followed by more gradual market-opening measures, with at least 33% of the market due to face the chill winds of competition by 2008.

Although some EU governments are still dragging their feet in coming forward with national legislation to implement the directive, many have already decided to go beyond the required minimum - not because regulators are demanding it, but because industry is.

Intensive energy users such as chemical, aluminium and steel manufacturers are anxious to see the market liberalised quickly to get more favourable rates and easy access to the gas grid. Some have already warned suppliers that they will take their business elsewhere unless they can get shorter-term contracts which give them more flexibility.

Customers have traditionally been locked into 'take or pay' contracts, obliging them to pay a certain amount whether or not they actually use the gas. But as the Union becomes a net importer of gas, and access to reserves from other countries such as Russia and Algeria becomes vital for EU firms, industry will no longer settle for this system.

"The driving force is the customer," said one London-based energy consultant, who believes that, as has happened in other sectors, the market will ensure that liberalisation takes place "at a faster pace than originally envisaged."

With gas consumption in the Union expected to rise significantly over the next few years, industrial customers in Europe will increasingly have the upper hand.

Consumption is growing by an estimated 4% a year in Europe, and the proportion of the electricity market powered by natural gas is expected to double to 20% within 15 years. Gas is widely considered a more environmentally friendly alternative to other forms of power and is being used increasingly to power electricity plants.

Member states which want their firms to remain competitive and win a significant slice of this growing market will have no choice but to lay down fair, transparent rules governing access to their gas distribution networks.

Liberalisation will create a single European market in gas, ensuring the free movement of products across borders as in other sectors, and make European industry more competitive.

This is especially crucial given the Union's growing dependence on imported gas, which is likely to account for three-quarters of gas consumption by 2020, up from 40% today. Once the Union has to depend on outside sources for most of its supplies, it will be crucial to have a well-functioning distribution network in place and for suppliers to be able to offer customers as flexible terms as possible.

If all goes according to plan, the ultimate beneficiary of liberalisation will be the consumer, ranging from the large industrial companies which need gas for production to individuals who use gas at home for cooking and heating. In the long run, gas prices in the EU - which are currently 30 to 35% higher on average than in the US - should come down significantly.

But there is still much work to be done. The UK, which privatised its gas industry in 1986, is the only EU market to date which has been fully privatised, although further follow-up legislation may be needed to iron out wrinkles in the system.

Spain opened 46% of its market in 1998 and plans to complete the process by 2013; the Netherlands is aiming to get 45% of its market open by 2000 and 100% seven years later; and Belgium opened 47% of its market this year and is aiming for full liberalisation by 2010. Ireland, which is planning new legislation by the end of this year, already allows third parties access to 75% of the market.

However, other countries still have a long way to go. By far the biggest foot-dragger is France, which has also stubbornly resisted implementing EU legislation aimed at liberalising electricity. Paris has said that it will only open its gas markets to the minimum level required under the EU legislation, in order to give state monopoly Gaz de France time to adjust to competition.

Energy-intensive industrial users are also impatiently waiting for several member states to come forward with details of the commercial conditions they intend to impose for granting access.

"We need a regulation to make sure that the commercial conditions are transparent, non-discriminatory and fair," says Francesco Balocco, head of the International Federation of Industrial Energy Consumers' oil and gas working party and head of energy issues at Dow Europe in Switzerland.

"We have had some statements of intentions from different member states, but only when we see the drafts of the implementation laws will we be sure of their plans."

EU legislation gives member states two options when deciding how to grant gas companies access to distribution networks in other member states, also known as third-party access.

Under the first of these, known as regulated third-party access, everyone has equal rights to a distribution system, pro-vided they pay a fixed fee. Under the second, negotiated third-party access, firms wishing to use a distribution network have to negotiate terms each time they want to access the system. The gas company which owns the distribution network is required to publish details of the main commercial conditions attached to this, such as technical requirements for access to the network, samples of prices normally charged for using the system and the point of entry of the gas to be contracted.

Most energy-intensive industries are urging member states to follow the UK's example and opt for regulated third-party access, arguing that this is the best way to ensure free competition. They are also pressing member states to give detailed, transparent information about gas quality - which varies significantly across the EU - and pipeline capacity.

New Energy Commissioner Loyola de Palacio plans to address some of these technical barriers to creating a well-functioning single market in a communication to be published later this month, although this is not expected to include proposals for new legislation.

But despite these technical obstacles, and the continuing debate over negotiated versus regulated access, most gas industry experts expect the pace of liberalisation to gather speed quickly.

"The commercial drivers will become so strong that it will force the pace of change," says Keiron Ferguson, head of European business development for Centrica Energy Management Group, a unit of Centrica formed two years ago following the British Gas demerger.

The shape of the future can already be seen in a standardised contract for trading natural gas launched by six companies, including Centrica, at the Belgian port of Zeebrugge this week. The firms involved in building the 200-kilometre 'Interconnector' pipeline, which runs from Zeebrugge to Bacton in eastern England, have negotiated flexible contracts with extractors and suppliers from Russia and Algeria.

"We are obviously looking at the opportunities presented by deregulation," says Ferguson. If EU governments fulfil their promises, the rest of Europe will soon be following suit.

Plans in the pipeline

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