19 Competition in the European gas and
electricity sectors
| (a)
(28277)
5236/07
COM(06) 851
|
Commission Communication: Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into European gas and electricity sectors (Final Report)
|
| (b)
(28278)
5232/07
COM(06) 841
|
Commission Communication: Prospects for the internal gas and electricity market
|
| Legal base | — |
| Documents originated | 10 January 2007
|
| Deposited in Parliament | 22 January 2007
|
| Department | Trade and Industry
|
| Basis of consideration | (a) EM of 2 February 2007
(b) EM of 13 February 2007
|
| Previous Committee Report | None
|
| To be discussed in Council | March 2007
|
| Committee's assessment | Politically important
|
| Committee's decision | Cleared, but relevant to debate recommended on Strategic Energy Review
|
Background
19.1 According to the Commission, well functioning energy markets
which ensure secure energy supplies at competitive prices are
key to achieving growth and consumer welfare in the Community,
and it says that the decision to open up Europe's gas and electricity
markets and to create a single European energy market has led
to the introduction of new products and services. However, it
also points out that, whilst progress has been made, barriers
to free competition still remain, leading it in June 2005 to open
an inquiry into the functioning of the European gas and electricity
markets.
The current documents
19.2 The results of that inquiry are set out in the first of the
communications (document(a)), which the Commission stresses was
aimed not at setting out the arguments for and against liberalisation,[73]
but at assessing the conditions of competition and the causes
of any perceived market malfunctioning. In order to do this, the
Inquiry looked at the following eight areas:
— Market concentration
It observes that wholesale gas and electricity markets
remain essentially national, and generally maintain the high level
of concentration of the pre-liberalisation period. It adds that
the wholesale gas market has been slower to develop, with incumbents
largely controlling up-stream imports and/or domestic production,
and that, although electricity trading is more developed, there
is still a significant level of concentration in generation, with
the level of interconnection capacity being insufficient to reduce
this to any marked extent.
— Vertical barriers
The Inquiry comments that the current level of unbundling
of network and supply interests has adversely affected market
functioning and incentives to invest, and that, as well as constituting
a major obstacle to new entry, this also threatens security of
supply. In addition, it notes that the integration of generation/import
and supply interests within the same group reduces incentives
for incumbents to trade on wholesale markets, and thus leads to
sub-optimal levels of liquidity in these markets.
— Market integration
The Inquiry notes that cross-border sales do not
currently have any significant impact on competition, with incumbents
rarely entering other national markets. In addition, there is
limited capacity on gas import pipelines and insufficient electricity
inter-connector capacity, which is dominated by holders of pre-liberalisation
contracts, who lack adequate incentives to invest in additional
capacity, thereby increasing barriers to new entrants.
— Transparency
The Inquiry points out that there is a lack of reliable
and timely information on the energy markets, and that greater
transparency is needed, especially on network availability, generation
capacity and gas storage. In particular, it notes a disparity
between the information available to vertically integrated incumbents
and their competitors, and the need to minimise risks for market
newcomers.
— Price formation
The Inquiry suggests that more effective and transparent
price information is needed in order to deliver the full advantages
of market opening to consumers. In particular, it points out that
gas prices have closely followed developments in oil markets,
and have failed to react to changes in supply and demand, whilst,
in the case of electricity, neither the link between wholesale
prices and those of primary fuels, nor the impact of the Emissions
Trading Scheme, is entirely clear.
— Downstream markets
The Inquiry says that competition at retail level
is often limited, with the duration of contracts liable to have
a substantial impact on the opportunities for alternative suppliers
to enter the market. There are also significant differences between
Member States in the extent to which industrial customers are
tied to incumbent suppliers on a long-term basis, and an insufficient
number of competitive offers from other suppliers.
— Balancing markets
The Commission notes that balancing markets often
favour incumbents at present, and create obstacles for newcomers.
Also, the size of balancing zones is too small, leading to increased
costs, which again protects the market power of incumbents, and
charges are not transparent and often contain unjustified penalties.
It therefore says that effective unbundling is necessary to create
a level playing field in these markets, and that size of control
areas should be enlarged.
— Liquefied natural gas (LNG) markets
The Commission comments that LNG supplies widen Europe's
upstream supplier base, and are therefore important for both security
of supply and competition, but that their potential to favour
less concentrated downstream markets still needs to be realised,
as traditionally they have been imported by national incumbents
who also own LNG terminals. However, the Commission says that
recent trends suggest that more capacity is going to new entrants
and to producers themselves, and that strong investment has taken
place in LNG terminals.
19.3 The Commission says that, in order to address
these criticisms, it is essential to apply both competition and
regulatory-based remedies. In the former case, it proposes full
use of its powers under antitrust rules,[74]
merger control,[75] and
state aids.[76] It points
out that it is "forcefully" pursuing infringements of
Community antitrust law in the sector, and that the full force
of its powers also need to be applied to any future abuses arising
from vertical barriers, including in particular the tying of markets
by long-term downstream contracts, and from problems over access
to infrastructure, particularly as regards cross-border access.
19.4 In addition, the Commission identifies a number
of other regulatory measures which could be taken. These include
unbundling, a substantial strengthening of the powers of regulators
and enhanced European coordination, programmes to address lack
of liquidity, and access to market information.
19.5 These regulatory measures are set out more fully
in the second communication (document (b)), which — like
the results of the Inquiry dealt with in document (a) forms part
of the Strategic Energy Review[77]
— analyses the prospects for the internal gas and electricity
market. The Commission notes that unbundling of network
from other energy businesses is already required by Community
legislation, but has not proved to be effective in preventing
vertically integrated companies from discriminating in favour
of their affiliates. It suggests that the best way to prevent
this is to require separate ownership of networks from other activities,
but points out that an alternative approach would involve making
an independent system operator solely responsible for the operation
of the network. It says that, if the system operator were to perform
those functions which allow the network owner to favour its own
affiliates, this would potentially provide the same protection
as full ownership unbundling, but that it would require detailed
oversight to ensure that the necessary separation was maintained.
19.6 The Commission considers that there is a need
for improved network access at both national and Community
levels, and that, in the former case, the powers of national regulators
to promote competitive markets are insufficient, and should be
strengthened under Community law. It also proposes greater coordination
at Community level to remove regulatory inconsistencies hindering
cross-border trade. It recognises that regulators are already
seeking to resolve such issues through the European Regulators
Group for Electricity and Gas (ERGEG), but says that this process
has a major weakness, in that it requires the agreement of all
participants, and that a greater impetus is needed, with enforceable
arrangements. It suggests that this could be achieved by evolving
the current approach (with national regulators continuing to collaborate,
but with a new duty to promote the internal market and with some
Commission oversight); by a reinforced Regulators Group (which
would be given the role of structuring agreements on cross-border
issues which would bind regulators and market players, with the
Commission seeing that account was taken of the Community interest);
or by establishing a new, single body at Community level to be
responsible for determining issues relevant to cross-border trade.
The Commission regards the first of these as insufficient, as
it would still rely on voluntary cooperation, and sees a reinforced
Regulators Group as the minimum approach likely to be effective.
19.7 The Commission says that the concentration of
many national electricity and gas markets gives dominant companies
the power to manipulate markets, and has explored ways of reducing
the scope for unfair competition. It suggests this could be
done by introducing binding guidelines to improve transparency;
by strict monitoring of long-term gas transmission and supply
contracts to ensure compliance with existing and future rules;
and by ensuring that arrangements for effective access to gas
storage facilities are in place. It also says that it will use
its existing competition powers to tackle anti-competitive behaviour
where it can.
19.8 On the remaining issues:
- the Commission says that coordination
between transmission system operators over the technical development
of networks is essential for the development of the internal market,
and suggests that this needs to be enhanced, with Community legislation
giving regional groupings of transmission system operators formal
obligations and objectives: it also suggests that an eventual
goal should be to replace the currently nationally orientated
operators by regional system operators;
- the Commission emphasizes the need for a clear
framework for investment in generation and transmission infrastructure,
and says that the establishment of an Energy Observatory would
provide the information on likely developments in the market needed
to bring forward investment: it will also monitor investment in
electricity generation; and
- as regards issues relating to households and
smaller commercial customers, the Commission emphasizes the
importance of non-discriminatory access for market entrants to
distribution networks and the need for regulators to enforce existing
legislation, and it will consider whether the threshold below
which the relevant Directives exempt integrated distribution and
supply businesses from legal unbundling remains appropriate: in
addition, it will monitor markets to ensure that public service
obligations are met, and examine the way in which existing services
are provided to ensure this does not limit competition.
The Government's view
19.9 In his Explanatory Memoranda of 2 and 13 February
2007, the Parliamentary Under Secretary of State for Energy at
the Department of Trade and Industry (Lord Truscott) simply says
that the issues raised by these two documents are important for
the UK as they highlight the obstacles to the development of a
competitive Community energy market, particularly for gas. He
also notes that a functioning gas market would put downward pressure
on UK prices and enhance security of supply.
Conclusion
19.10 The first of these two documents provides
an interesting analysis of the obstacles which currently still
prevent the full realisation of the internal market for gas and
electricity, whilst the second proposes ways in which these shortcomings
can be addressed. However, neither document breaks any very new
ground, and, although we think it right to draw them to the attention
of the House, we see no need to withhold clearance, bearing in
mind that any points arising on them can be raised in the debate
which we have recommended in European Standing Committee on the
Strategic Energy Review (of which they each form part).
73 Described by the Commission as a competitive and
efficient energy sector, security of supply, and sustainability. Back
74
Articles 81, 82 and 86 of the Treaty. Back
75
Council Regulation (EC) No. 139/2004. Back
76
Articles 87 and 88 of the Treaty. Back
77
(28276) 5282/07: see paragraph 2. Back
|
