Disappointment over internal energy market’s failure to ignite

By Anna McLauchlin

Date: 08/09/05

More than a year after European legislation on creating an internal energy market came into force, the European Commission is struggling to get liberalisation moving.

Liberalisation has been a slow and painful process. In its latest report on the state of the internal market in gas and electricity, the Commission called the situation "disappointing".

Even in cases where markets have been opened, the amount of cross-border competition is still relatively low, with foreign suppliers representing less than 20% of market share.

The UK and Scandinavian countries are still ahead of the field with now almost fully liberalised markets, but they are frustrated by many other member states, particularly Germany but also France and Italy to a certain extent, which have done little to open up.

In March this year the Commission's energy department sent final warnings to ten member states that had failed to implement the second round of legislation on opening up their energy markets, which was approved in 2003 and should have been in force by July last year.

The Commission's competition department is also on the case. In June the EU's Competition Commissioner Neelie Kroes launched an inquiry into the sector to sniff out any suspicious barriers to creating a wholesale market. Preliminary findings could be published before the end of the year.

Some critics think that the lack of competition is caused by weaknesses in current legislation, and the question now on everybody's lips is whether further legislation is needed to speed up the process.

According to one insider, there is talk of new rules that would ensure that the companies operating the gas pipelines or electricity grid - known as transmission system operators (TSOs) - were independent from the powerful energy companies so that the latter could not discourage new entrants onto the market.

The EU executive has launched a full-scale analysis of the European energy market, the results of which will be published in December 2005 and it will base its decision partly on the findings of this survey.

Part of the Commission's problem is that pushing much harder to create a true single market might prove counterproductive. While a free market should lead to cheaper prices for European consumers, there is also a risk that a collection of smaller players would be at a disadvantage when competing for prices from huge suppliers like Russia's Gazprom.

Some large energy players staunchly oppose any new measures, claiming that despite a slow kick-off, the latest laws are an appropriate solution to the liberalisation problem and, properly implemented, will reap the desired rewards.

"Further legislation at a time when European electricity companies are working to digest and implement the contents of the two extant liberalisation packages would imply a further period of legal uncertainty," said a spokesman for European electricity association Eurelectric.

Large-scale industrial consumers are among those calling for a third legislative package. According to Robert Jan Jeekel, who is trade and economic affairs manager from metals industry association Eurometaux, the lack of true liberalisation and the dominant position of certain energy producers means consumers are still paying more than necessary for energy.

"We would not be averse to a third directive if it were necessary," said a spokesman for the UK's largest gas company, the BG group. "But we think that we could get most of the way there if the current legislation were properly implemented."

Analysis feature looking at the difficulties in realising an Internal market in energy in the European Union. Despite two legislative packages to regulate the opening of electricity and natural gas markets liberalisation has been very uneven across the EU's Member States, with implementation slow and competition in the sector remaining low in many Member States.