Waiting for ‘the quantum leap forward’

The European Commission has unveiled the third energy liberalisation package on schedule, urging governments to sign up quickly to the proposed measures to create a truly competitive energy market to ensure fair access to networks and long-term security of supply.

"The time for incremental steps is over. We need a quantum leap forward," said European Commission President José Manuel Barroso. Competition Commissioner Neelie Kroes said: "Europe cannot afford to wait any longer."

The thrust of the Commission’s approach is to push for effective unbundling in the energy sector, ie, forcing energy companies which own generating capacity to sell off their transmission assets. Barroso compared the current situation in which some companies control both production and transmission to "a supermarket which sells its own brand goods but doesn’t want to stock other brands". Kroes said that vertically integrated companies had "no interest in allowing their rivals to have access to pipes and cables". Transmission companies owned by groups with supply interests would restrict investment in new transmission infrastructure because their affiliated countries would be the main beneficiaries of congestion, she said.

Kroes said that evidence showed that countries which had introduced ownership unbundling had higher levels of investment in infrastructure and smaller gaps between wholesale and retail prices, which showed that the margins for transmission were lower. In Germany wholesale prices rose between 2004 and 2006 by 10% while industrial users paid 25-30% more and households 31% more, she said.

But there is strong opposition in the Council of Ministers to ownership unbundling. Ministers from France, Germany and seven other countries have written to Energy Commission Andris Piebalgs saying that ownership unbundling should not be the only option. So the Commission, while insisting that ownership unbundling is the best option, has proposed an alternative to an independent system operator (ISO) to run the transmission network. This could still be owned by companies with generating assets, but would have to be fully independent in operational control. Under the new proposals, the Commission would be able to examine and "certify" whether an ISO was fully independent.

But Barroso warned that there would be an increased regulatory burden to ensure that this model was working properly and he pointed out that some member states supporting the ISO model were those arguing most strongly for cutting red tape in other areas.

The Commission is working on the assumption that the so-called deep ISO model would impose such a high level of bureaucratic intrusion and a loss of control over investment decisions that some governments might opt for ownership unbundling at a later stage.

One official from a country which favours ownership unbundling said: "The ISO option [proposed by the Commission] is as tough as it can be," adding that the degree of bureaucracy required to police the ISO could produce a "gradual progression to full unbundling".

To accompany the ISO approach, the Commission is also proposing an extension of the powers and independence of national regulators as well as a new agency for the co-operation of national energy regulators and a European network for transmission system operators (TSOs). National regulators would continue to be responsible for national markets and would see their powers increased so that they moved closer to the powers of the UK’s regulator, OFGEM.

John Mogg, chairman of OFGEM as well as the European Regulators’ Group for Electricity and Gas (ERGEG), said that while national regulators had to take a national perspective there was need for a "European perspective".

The new agency would be able to address the current "regulatory gap" left by a purely national approach, he said, and address key cross-border issues like infrastructure investment. The European TSO would need to do work in areas like standardising safety and technical codes for cross-border trade. But Mogg predicted that the process could advance quickly, driven by what he called the

"political dynamic" of concern about security of supply and competitiveness, and the need to boost By Simon Taylorthe use of renewable energy sources.

The package also includes conditions on companies from third countries. Such companies would have fully to comply with the EU’s unbundling rules as well as their home countries having to sign an agreement promising reciprocal access for EU companies to their energy sectors. Barroso said that these measures were designed to ensure that companies outside the EU respected "the principle of competition in the internal market". He dismissed suggestions that they were aimed at Russia. "We all need investment in the EU from European and non-European companies," he said. Requiring third countries to sign agreements would also give the EU more leverage in negotiations, he said.

Major European energy companies such as Italy’s ENI and France’s GdF have criticised the Commission’s proposals, but Piebalgs said that it was up to governments, not companies, to ensure security of energy supplies. Barroso added that there had been unanimous agreement on the need for further unbundling measures at March’s European Council although the precise approach had not been agreed.

Piebalgs said that the Portuguese presidency wanted to make rapid progress on the proposals which he hoped could be concluded during the French presidency of the EU in the second half of 2008. That was why the Commission had adopted the package now, he said.

Key elements of the package

• Effective unbundling: clear preference for ownership unbundling (separation of production and supply from transmission networks).

• Alternative option: an independent system operator where companies retain ownership of network but operations are controlled by a fully independent entity.

• Third country companies: to acquire shares or control of an EU network, companies will have to demonstrate that they comply with the same unbundling requirements as EU companies. The Commission will decide if they comply. Third countries will also have to have reciprocity agreements with the EU guaranteeing equal access to their energy markets.

• New agency for co-operation of national energy regulators: decision-making powers over cross-border issues, dispute resolution between national regulators and exemptions from new infrastructure investment requirement to provide access to third parties.

• National regulators: stronger powers and more independence for national regulators.

European network for transmission system operators: new body would develop commercial and technical codes and security standards and plan investment at EU level.

Greater transparency on pricing, demand forecasts, balancing requirements.

New energy solidarity mechanism.

The European Commission has unveiled the third energy liberalisation package on schedule, urging governments to sign up quickly to the proposed measures to create a truly competitive energy market to ensure fair access to networks and long-term security of supply.