Memorandum by the Association of Electricity
Producers
1. The Association of Electricity Producers
(AEP) represents large, medium and small companies accounting
for over 90% of the UK generating capacity, together with a number
of businesses that provide equipment and services to the generating
industry. Between them, the members embrace all of the generating
technologies used commercially in the UK, from coal, gas and nuclear
power, to a wide range of renewable forms of energy.
2. The Association welcomes the Sub-Committee's
inquiry and the opportunity to contribute to it. In relation to
the European single market, the Association's main interest is
in the liberalisation of the EU electricity and gas sectors, and
the comments below therefore focus on this topic. AEP strongly
supports the creation of a more competitive and integrated energy
market in Europe, and believes that this will have considerable
benefits for the European economy as a whole.
Are there significant barriers to firms seeking
to offer their goods or services, or to consumers accessing these
goods or services, in other Member States of the European Union?
If so, what are the most important of these barriers?
3. The 2003 energy liberalisation package
and the subsequent Gas Regulation in principle provide a sound
basis for ensuring competitive electricity and gas markets in
the European Union. The legislation covers most of the major issues:
the creation of competitive markets in generation and retail;
unbundling of networks from competitive activities; non-discriminatory
access to networks based on published tariffs; and the creation
of independent regulators.
4. However, despite these measures, progress
to competitive markets in Europe has so far been disappointing,
particularly in the main continental market and particularly in
gas. New entrants have found it difficult to challenge existing
players in power generation and gas supply and, while competition
has developed in the large customer market, the picture for smaller
customers is rather less satisfactory in most Member States. This
is clearly revealed in the thorough analysis carried out by the
European Commission in its report Prospects for the internal
gas and electricity market and in the energy sector inquiry.[1]
In the Association's view, the Commission has identified the major
shortcomings in the EU's energy markets and highlighted those
areas where further regulatory measures are needed, in particular
unbundling of networks, regulation and transparency.
5. Governments should remove barriers to
genuine competition within national markets and ensure that there
is a level playing field between incumbents and new entrants.
In addition to full liberalisation of national markets, action
is required to ensure compatibility of arrangements so that energy
can be traded freely across borders.
Do you consider further legislative measures by
the Commission to be necessary for the completion of the single
market? If so, what measures do you consider appropriate?
6. The Association believes that further
liberalisation measures will be necessary, but recognises that
this process will inevitably take time. It is therefore important
that further efforts are made now to implement the existing package
fully. In some Member States, regulators have not been given sufficient
powers to ensure full implementation, so that, for instance, regulated
tariffs remain in force, reducing the scope for retail competition.
AEP would welcome further action to ensure that national regulators
have broadly equivalent powers so that they can effectively implement
market liberalisation and are able to function independently of
national governments. However, care must be taken not to impose
excessive regulation in markets which are already heavily regulated,
such as the UK.
7. The Association supports further measures
to ensure non-discrimination and transparency in European markets.
Appropriate levels of transmission network unbundling should be
reached in all Member States. Greater enforcement of existing
provisions should help achieve this, but we also support proposals
to set higher minimum standards for transmission unbundling. The
Association endorses the need for mandatory minimum transparency
standards, with disclosure standards in all gas and electricity
markets raised to levels comparable with the most open markets,
notably Great Britain and Scandinavia. There is merit, however,
in having some flexibility for differences between markets where
these do not adversely affect trade and where uniformity would
impose unnecessary burdens on markets that are already highly
liberalised.
8. The Association considers that further
action is required to resolve cross-border issues which are not
currently dealt with in national frameworks. In particular, greater
cooperation and coordination between national regulators and Transmission
System Operators (TSOs) is necessary. To achieve this, the Association
supports the strengthening of the existing European-level regulatory
and TSO bodies, ERGEG and ETSO respectively, provided that adequate
lines of accountability are established. Both bodies must be properly
resourced, take proper account of stakeholder views and reach
decisions in a timely manner.
9. The Association welcomes the proposed
measures to remove barriers to interconnection, but does not consider
arbitrary targets for interconnection to be appropriate; interconnectors
should be built on the basis of market need.
Are the current remedies available to the Commission
to enforce single market legislation adequate; and are they used
effectively?
10. The Commission is taking an active approach
to enforcing the single market legislation in energy. For instance,
it is currently pursuing infringement proceedings against sixteen
Member States for non-implementation of the 2003 package. Furthermore,
the Commission's Competition Directorate has recently conducted
a full sectoral inquiry into the EU electricity and gas markets
and has announced that it will bring forward several anti-trust
cases as a result.
11. Infringement proceedings can be effective
in encouraging national governments to put right failings in implementation.
However, such actions tend to be lengthy and rarely reach their
conclusion. The problem of enforcement therefore seems to centre
on the amount of time taken to achieve results rather than a lack
of powers.
Do the concepts of the "national champion"
and "economic nationalism" pose a threat to the single
market?
12. The Association supports the view that
markets should be organised on a competitive basis and that companies
throughout the European Union should compete on a level playing
field. "National champions" and "economic nationalism"
are concepts which run counter to the philosophy of a single European
market and do pose a threat in sectors such as energy.
13. Overt protection of national players
in electricity and gas markets is now less common than before,
partly through the advent of regulators who are independent of
the industry. The situation could be further improved by strengthening
regulators' independence from government in some Member States
and by ensuring that regulators have the powers to implement liberalisation
within national markets.
14. Government intervention in mergers and
acquisitions does remain a problem in the energy sector. Although
a number of Member States have privatised parts of their electricity
and gas sectors over the last twenty years, public ownership remains
prevalent and governments, even if they do not have major shareholdings,
often seek to exert influence over leading national utility companies.
A number of recent examples indicate that, even where the European
Commission has competence for cross-border mergers, national governments
may attempt to protect national players and may have a significant
impact on the final outcome.
15. The Commission must clearly maintain
its efforts to ensure a level playing field not only in the energy
markets, but also in mergers and acquisitions. In the Association's
view, some problems will persist in the short and medium term,
since some Member States will want to maintain public ownership
of electricity and gas companies, while others will want to protect
national companies from takeover on reciprocity grounds. There
are, however, some grounds for optimism that Europe's energy markets
are becoming more integrated and that cross-border ownership is
becoming more acceptable. The UK's own experience of continental
ownership is positive and this may encourage some other Member
States to move away from protectionist positions. In the longer
term, it may therefore prove more difficult to maintain a policy
of protecting national champions.
Is there agreement on the fundamental importance
of a genuine market to support a Common European strategy for
energy?
16. If Europe is to move towards a common
energy strategy, it is clear that barriers to moving electricity
and gas around the continent must be overcome. A more integrated
market will not only provide economic benefits to European consumers
but also enhance security of supply, by ensuring that any localised
energy shortages can be more readily overcome. A larger, EU-wide
market based on transparent and non-discriminatory rules should
also attract more investment, which will be essential, given the
need to upgrade Europe's ageing power generation and network infrastructure.
Is there a need for greater cooperation between
National Regulatory Authorities?
17. The Association agrees with the analysis
of the European Commission in its recent report on the internal
electricity and gas markets when it commented that "Regulatory
decisions need to be strongly co-ordinated with neighbouring jurisdictions.
If not there is a continuing risk that inconsistent regulatory
frameworks will create perverse incentives of energy companies."[2]
Regulators sometimes take an excessively narrow view of customer
interests and do not pay adequate attention to the benefits of
the wider European market.
18. To help tackle these problems, national
regulators should have an obligation to consider the interests
of European customers in addition to their national remits. Arrangements
will also be needed to fill the cross-border "regulatory
gap", whereby, for instance, one Member State may be less
enthusiastic about a new interconnector because its own customers
are perceived to benefit less. To achieve this, both national
regulators and the European Commission will have to collaborate
more closely to ensure that timely and clear decisions can be
made.
Has there been sufficient unbundling of gas and
electricity markets in all Member States?
19. Effective unbundling of networks is
crucial to the development of competition in electricity and gas.
It is evident that there has not been sufficient unbundling of
networks in all Member States. As an initial step to rectify this,
the existing unbundling provisions should be fully implemented
throughout the EU. Regulators should have sufficient powers to
enforce the provisions and should do so rigorously.
20. The Association also supports the Commission's
proposals to set higher minimum standards for transmission unbundling,
either through effective ownership unbundling or an Independent
System Operator (ISO). In our view, the two models could coexist
provided that it can be demonstrated that the network operator
is in practice independent of generation and supply interests.
A regional ISO model could have further benefits in helping to
integrate national markets.
21. In general terms, transmission unbundling
has so far been less satisfactory in gas than in electricity,
as shown by the low level of compliance with transparency and
other requirements. It is therefore important that efforts are
made to ensure greater independence of gas TSOs.
What are the implications for the single market
of the Commission's commitments on climate change?
22. The Association considers that the best
way to meet the Commission's climate change objectives is through
market-based mechanisms (such as the EU Emissions Trading Scheme)
which allow the market to deliver carbon emissions reductions
at least cost. To ensure that these market mechanisms function
effectively, a stable and non-discriminatory regulatory regime
must be put in place. The completion of the single market is therefore
necessary so that a level playing field can be achieved throughout
Member States and carbon price drivers can act uniformly across
Europe.
23. Policy conflicts between the aims of
the climate change and competitive market agendas should be avoided
as far as possible. It is important that the competitive market's
ability to deliver least cost emissions reductions should not
be distorted by regulatory restrictions for different electricity
generation technologies. For example, setting an overly ambitious,
restrictive vision for the use of renewables or Carbon Capture
and Storage (CCS) does not seem consistent with the aims of liberalised
markets, which usually operate on the basis of freedom of fuel
choice. Provided a strong carbon price signal is in place and
barriers to the development of new low-carbon technologies have
been removed, the market should deliver an appropriate fuel mix
to meet climate change targets.
Should there be a single EU energy regulator?
24. The Association does not support the
creation of a European energy regulator at this stage. Such a
regulator could lead to additional layers of regulation, which
would run counter to the objective of an open market. It could
also raise demarcation issues in relation to the European Commission
and national regulators. Similar issues have proved problematical
in the USA, where there have been regular conflicts over competence
between the Federal Energy Regulatory Commission and the state
regulators.
2 July 2007
1 COM(2006) 841 and COM(2006) 851 Back
2
SEC(2006) 1709 Back
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