Political wind on unbundling could change

Opposition from France, Germany, Austria and six other member states to full ownership unbundling has forced the Commission to propose two options to improve integration of the EU’s energy market.

There are strong suspicions that the Commission’s second choice, to give the control of network activities to an independent system operator, might not go far enough to break the dominance of the sector’s behemoths.

In any case, the Commission’s strategy will take several years to deliver significant improvements to the state of the market. The proposals could take up to 18 months to agree and could include a generous transition period before any new conditions bite as part of possible compromise deals.

Consumers and large energy users could face up to five more years without substantial changes in the market to increase supplier choice, raise competition and lower prices. For this reason, organisations including BusinessEurope are calling on the Commission to consider other ways of dealing with the competitiveness problems caused in the near-term by an imperfectly functioning energy market. A memo by the organisation calls on the Commission to come up with initiatives to enable energy-intensive industries to meet their medium- and long-term energy needs at reliable competitive prices. The memo says that the Commission should contribute to creating a conducive environment for striking long-term contracts. Rather than being based on fluctuating short-term market prices, they should be based on the actual costs of imports or generation facilities. For example, the price of electricity derived from nuclear energy is more stable than that for energy from hydrocarbons. So far, the Commission has been slightly distrustful of long-term supply contracts because of the potential for suppliers to shut competitors out of the market by claiming to have fully committed their capacity for years and even decades ahead.

According to Alan Riley, a reader in law at City University in London, the political climate in those member states currently against ownership unbundling could change. "This is only the start of a long process," he says. Riley believes that the change could be driven by three factors.

First, vertically integrated companies currently have little or no incentive to build new infrastructure because reduced capacity means higher prices. Riley points out that Germany has been discussing building its first liquefied natural gas terminal since the 1980s while the UK, which has a liberalised market, has four and is planning a fifth. Limited capacity could increasingly lead to transmission problems such as the one which blacked out much of western Europe last November. This would increase political pressure on companies to tackle infrastructure problems through greater investment and make politicians more open to unbundling.

Second, the Commission could use evidence gathered through its sectoral inquiry into the energy sector and dawn raids into the main energy companies to highlight the anti-competitive actions of well-known public companies to keep prices high.

Finally, if predictions of a supply deficit of Russian gas are correct, it would increase the case for market liberalisation in preference to relying on long-term contracts with Russia, making it easier to distribute supplies from other gas exporters such as Norway and Algeria across the EU.

Opposition from France, Germany, Austria and six other member states to full ownership unbundling has forced the Commission to propose two options to improve integration of the EU’s energy market.