Empowering Europe for the global marketplace

Date: 07/03/1996

ONE of the major successes of the EU in recent years has been the rapid progress towards completing the single market. Trade barriers have been removed, innovation has been encouraged and previously protected sectors have been opened up to competition. European business has had to concentrate on becoming more efficient, with benefits for both the European economy and consumers.

In the energy sector, however, progress has been disappointingly slow, and the electricity and gas markets continue to be organised largely along national lines.

Yet energy is a major factor in the economy and European business must have access to competitively-priced, high-quality energy supplies if it is to compete effectively on world markets.

At present, an industrial customer in one member state can be paying up to twice as much for his electricity as a competitor in a neighbouring country. This damages European competitiveness and distorts competition.

Domestic customers, too, must be able to benefit from the increased efficiencies and lower prices which are made possible by the introduction of competitive pressures in the energy industry.

In 1992, the European Commission proposed a gradual introduction of competition and customer choice in the electricity and gas sectors. This would have allowed a limited number of electricity distributors and customers to negotiate access to the network and thus to choose their supplier. However, these proposals met with strong resistance from monopoly electricity and gas suppliers in Europe and from some governments, with the result that the timetable for energy liberalisation has now slipped considerably.

In the autumn of 1994, the French government put forward the 'single buyer' model as an alternative to the Commission's proposals on negotiated access to electricity networks. This model would have provided for some limited competition in electricity generation, in the form of tendering for new power station capacity, but a single buyer could effectively retain a monopoly over the purchase and onward sale of electricity to final customers.

The Commission has since studied the French proposal and concluded that it would not provide an equivalent degree of market opening to a negotiated third-party access system, as originally proposed. However, it was felt that it might be possible for the two systems to coexist, provided that the single buyer model was substantially modified in certain ways.

A revised text of the electricity directive was put forward by Spain in the autumn of 1995, during its EU presidency, in the hope of reaching consensus at the December Energy Council, but member states failed to reach agreement on the proposal.

The Italian presidency has since proposed modifications which would allow for a certain percentage of market opening according to electricity consumption in each country, and permit each member state to decide which customers should be eligible for access to the electricity network. Countries which only opened their markets to a limited extent would be restricted as to the amount of electricity they were permitted to export. But this would not prevent them from circumventing the restrictions by building a plant in a more open member state.

The proposal adopts a largely 'twin-track' approach which would not produce equivalent economic results in both systems. It would enable some member states to maintain de facto monopolies in the electricity sector in the form of the single buyer model, while others open up their markets to full competition. The latest text also places considerable emphasis on various derogations which may be granted to member states in the interests of public service obligations and long-term planning. Although these considerations are legitimate in themselves, they can be satisfied equally well in a competitive market, and the introduction of specific derogations is likely to be used by some member states as a means of reinforcing barriers to trade.

Small customers must not be denied the benefits of competition. Under the current proposals, electricity distributors are not specifically included in the definition of 'eligible customers' and it is therefore left to the discretion of member states to decide whether distributors should have free access to the network and the ability to choose their supplier.

But if distributors are prevented from having this choice, the benefits of competition, in terms of lower costs and improved services, will not feed through to captive domestic customers and will be restricted only to a small number of very large customers.

Independent power producers (IPPs) must be allowed to compete fairly. They are the key to the development of competitive generation within Europe. The current text proposes that member states should be allowed to restrict independent power production if it obstructs the performance of public service obligations. Such a restriction is unnecessary, and will discriminate against IPPs and produce distortions between member states.

The single buyer system would, in any case, restrict competition in generation since tenders would only be put out when new capacity was required. There would be no competition between existing generating plant and efficiency gains would be extremely limited as a result. Independent producers must be granted the right of establishment in other member states without artificial limits on the size or capacity of their generating plant. They must then be free to negotiate to supply customers and distributors over European grid networks.

The single buyer must be independent. Where member states opt for this model, the single buyer must be completely separate from any vertically-integrated company with generation interests. The single buyer's responsibilities, which include all purchasing and selling of electricity within a given system, lead to an extremely dominant market position.

Whatever the level of liberalisation in the management of generation, transmission and distribution, a single buyer in an integrated company is bound to be influenced by the commercial interests of the group as a whole and may seek to protect its own in-house generation business from other generators.

Complete separation of the single buyer from all generation interests is thus necessary to ensure transparency of operation and non-discrimination, and that purchases are made on a competitive basis in the interests of captive customers.

The current text enhances discretion given to member states to impose public service obligations. These must not be used as a pretext to restrict trade as competitive systems can meet these obligations equally well and with greater economic efficiency. Public service obligations can also be fulfilled without the need for central planning, which, in the text, is assumed to be synonymous with long-term planning.

Long-term planning must be carried out in all electricity systems - competing companies will be keen to ensure their own survival by investing in the future. There is no evidence to show that the centralised planning associated with monopoly systems provides better results than those of competitive systems.

Given the central importance of energy for the European economy, it is essential that rapid progress is now made towards opening up Europe's electricity and gas networks. If industry is to meet the competitive challenge from the rest of the world, it can ill afford to maintain a protected and compartmentalised energy sector. Urgent action is needed to establish a single market based on fair and reciprocal trading rights.

The long time-scales for the introduction of competition should be reduced. The benefits of open energy markets are being recognised world-wide and countries are increasingly restructuring their electricity industries to take advantage of the improved efficiencies which competition makes possible.

Support for liberalisation is growing and customer groups are increasingly pressing for a greater degree of choice. Given the example of other sectors such as telecommunications and experience with competitive electricity markets both inside and outside the EU, it will become increasingly difficult in future to argue that electricity supply should remain in the hands of national or regional monopolies.

Philip Daubeney is chief executive of the Electricity Association in the UK.