The EU is still some way short of creating an integrated, competitive internal market for energy. The European Commission’s forthcoming communication on a “strategy for competitive, sustainable and secure energy”, to be published on 9 November, admits that the market remains “fragmented into national markets” and “incumbent companies sometimes have a de facto monopoly position”. As a result, consumers are not benefiting sufficiently from market openings in recent years. 

Various legislative measures and antitrust actions have been aimed at intensifying competition. From 2003, vertically integrated energy companies (those that own generating and transmission businesses) had to ensure the legal separation of the two operations. This was supposed to prevent companies from exploiting their control over transmission networks to favour their supplier businesses by shutting out potential rivals. Investigations by the Commission revealed that legal unbundling had not been sufficient to prevent abuses of market power, and the Commission forced some large companies to sell off their transmission businesses.

Since the 2003 initiative was clearly inadequate, the EU agreed a further liberalisation package in 2009. Stronger measures should ensure greater separation of generating and transmission businesses, including restrictions on staff from one business going to work for another. There are also faster-acting sanctions for non-compliant companies. The new rules will come into force in March 2011.

New regulator

At the same time, a new body, the Agency for Co-ordination of Energy Regulators (ACER), will become fully operational. ACER’s role will be to ensure effective application of the new rules, and particularly to bring an EU-wide perspective to energy-market regulation. Most bottlenecks in the energy market occur at national borders where companies are reluctant to see the free trading of energy affect the national market that they dominate.

ACER’s job will bring it into conflict with national regulators that favour their national champions. It will be able to review companies’ ten-year investment plans to ensure that sufficient resources are allocated to providing the interconnectors needed for cross-border trade.

ACER has already started working on technical codes for national transmission system operators to ensure that technical standards are harmonised across the EU, so as not to present a barrier to trading.

The Commission has drawn mixed conclusions on the degree of integration in the EU energy market. The latest report on progress in creating the internal gas and electricity market, published in March, highlighted the importance of regional initiatives. These have been developing single rules for energy auctioning, and represent an important first step in agreeing common EU-wide rules. There will soon be common auctioning rules for an area taking in 15 countries stretching from France across to Poland and down to Greece.

But the wholesale and retail energy markets are heavily concentrated on a limited number of suppliers. On the wholesale gas market, the three largest suppliers have a market share of 90% or more in ten member states. The picture in the retail electricity market is not much different, with three of the largest companies having more than 80% of market share in 14 member states.

Time for action

Energy market observers believe that even the strengthened powers for regulators in the new energy market package will not be enough to ensure an integrated, competitive market. There is already talk of the need for yet another round of legislative proposals. But time is running out.

If the energy sector is to attract the vast amount of investment needed for a new energy infrastructure, then the EU needs to create the right legal framework. Without that infrastructure, the EU will not be able to handle the enormous increase of energy from renewables that is supposed to come online from 2020.