Switch on or switch off?

The problems with Europe’s gas and electricity markets will persist for years to come, writes Simon Taylor.

The first day of July will be a significant milestone on the long journey to liberalising the EU’s gas and electricity markets. It is the deadline for households to be given the freedom to choose their suppliers. But the target date for opening the market for business users was 1 July 2004 and when the European Commission’s competition department conducted a sectoral inquiry into the energy markets, its analysis of each member states’ progress showed that profound problems remained.

Last December the Commission issued 26 complaints or reasoned opinions against 16 countries for failing properly to implement the 2003 directives on the EU’s gas and electricity markets. There had already been 27 formal warnings to 17 countries in April 2006. The offences included deterring competition by shutting out new entrants through regulated prices, a lack of independence of transmission and distribution system operators, discrimination in granting access to the network, and weak powers and insufficient independence for national regulators.

The Commission has also carried out dawn raids on the offices of French and German energy companies and launched formal investigations of Germany’s RWE and Italy’s ENI for anti-competitive behaviour over gas pricing.

Energy policy has become one of the key priorities for the EU, driven by a desire to combat climate change, obtain security of supply and maintain the competitiveness of the European economy.

In September the Commission will present its third EU energy market package. While there is consensus about the importance of the sector among EU leaders, opinions vary widely about what exactly the next steps should be. The Commission’s aim is to create a truly integrated competitive EU energy market which provides free and fair access to the networks as well as guaranteeing sufficient levels of investment in generating capacity and transmission infrastructure. A key challenge will be to ensure that renewable energy sources such as wind and photovoltaic power can feed into the energy grids, enabling member states to meet the target of 20% of energy consumption to come from renewables by 2020.

While the Commission has a clear line that the best way to achieve a competitive market is by full separation of generating capacity from transmission and distribution networks, so-called ownership unbundling, this is strongly resisted by Germany, France and several other member states. There are questions-marks over the extent to which other measures like independent system operators and stronger pan-EU regulation can tackle the problems.

This special report aims to explore some of the key issues at stake for EU governments when they start the lengthy negotiations on the third package from September.

The problems with Europe’s gas and electricity markets will persist for years to come, writes Simon Taylor.