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Europe's Energy Markets: Special Report |
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Written by Staff Writer
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Feb 25, 2007 at 04:11 PM |
"Soaring spot market prices for gas and electricity in the UK
have, once again, focused attention on energy markets and the
operation of competition. Unexplained price differences
between the UK and continental Europe have highlighted
concerns about the extent of competition in the EU market..."
Europe's energy market in reverse?
There has been a fivefold rise in the spot market price of gas
in the UK over a few weeks, well above the levels in the rest of
Europe. With around a third of electricity generation coming
from gas-fired power stations, this has had a knock-on effect to
electricity prices. Yet there has been very little market response
from continental gas suppliers. The UK-Belgium gas
interconnector has been operating at less than full capacity
despite the profitable trading opportunities offered by the high
prices in the UK. Ofgem, the UK regulator, has called on the
Commission to investigate.
These concerns are not new and the Commission is already
well advanced with its own inquiry. Initial findings have been
published and these will be the subject of public consultation
early in 2006. The challenge then will be to move from analysis
to action that can remedy the defects identified by the
Commission.
Sector Review
The new procedures for implementing the provisions of articles
81 and 82 agreed at the end of 2002 contained provision for the
Commission to carry out its own inquiries into particular
economic sectors where it appeared that competition within the
common market was restricted or distorted (see Council
Regulation (EC) No 1/2003, article 17). The energy sector
was identified as an early candidate for such a review. This
followed critical comments from market participants and from
the Commission itself in its 2004 report on market liberalisation.
An investigation was formally launched in June 2005.
The investigation is being carried out by the Competition
Directorate General in collaboration with DG Transport and
Energy. It is centred on the operation of the European gas and
electricity markets, with the objective of establishing whether
current indications of market malfunctioning result from
breaches of competition law. There will be four main phases of
work: (1) identification of issues – November 2005; (2)
consultation on preliminary findings – February / March 2006;
(3) proposed remedies – summer 2006; and (4) final report –
end 2006.
The first issues paper was published on 15 November 2005
and identified significant impediments to competition in both
the gas and electricity markets. These were discussed by
ministers at the Energy Council in early December and will go
out to public consultation in 2006. At this stage, the
Commission has not given any indications of possible remedies
to improve the competitive position.
Initial Findings
The first phase of work has grouped restrictions on competition
into five broad categories: market concentration; vertical
foreclosure; lack of market integration; lack of transparency; and
the price formation mechanism. Problems are identified in both
the gas and electricity markets but the issues appear to be more
significant and, potentially, harder to address in the gas market.
Gas market issues
Most EU national gas markets are highly concentrated. In
addition, the incumbents often control indigenous gas
production and hold long-term contracts for imported gas, the
bulk of which comes from Russia and Norway. As a result, the
scope for new players to enter the market is very limited.
Vertical integration and long term off-take contracts lead to low
liquidity in the wholesale markets, which is a further inhibition
on new entry. Preferential treatment of pre-liberalisation
contracts restricts access to cross-border pipelines and
contributes to continued market segmentation. This is made
worse by lack of information about pipeline availability.
A particular feature of the gas market is the extent to which
the pricing of gas in long-term contracts is linked to oil prices.
As a result, all gas contract prices tend to move in a similar way
in line with oil prices and do not react directly to changes in the
balance of supply and demand for gas.
The structure and functioning of the gas market has
significant implications for the electricity sector where gas-fired
generation is increasingly responsible for setting wholesale
electricity prices. Lack of competition in gas will reflect
through into the price of electricity.
Electricity market issues
The level of concentration in electricity generation varies from
state to state but is high in many cases, creating potential market
power. There is also a high degree of vertical integration
between generation and retail supply and this contributes to
illiquid wholesale markets and represents an obstacle for new
entrants. Long-term power contracts between independent
generators and incumbents add to this problem. In addition,
and despite the provisions of the electricity liberalisation
directive – see Directive 2003/54/EC concerning common
rules for the internal market in electricity – inadequate
unbundling between network activity (a regulated monopoly)
and supply to final consumers (progressively open to
competition) also deters new entrants.
Interconnectors between national markets are the key to
further market integration. Long-term contracts and inadequate
capacity allocation rules are seen as barriers to further
development. As a result, it is difficult for importers of
electricity to provide competition against national incumbents.
Lack of transparency of information both about the operation
of wholesale markets and interconnectors was identified by
many market participants as a serious constraint and a factor
which undermined confidence in the market and market prices.
A New Way Forward?
The liberalisation of energy markets has developed over the past
decade through a directive-driven process, which has
concentrated on setting market rules. While that process has
taken liberalisation forward, it has been a slow march and has
not addressed a number of fundamental market issues. This
energy sector inquiry by the Commission provides the
opportunity for a new approach to be adopted alongside the
continuing implementation of the directives.
The issues paper represents a forthright start to the
Commission’s investigation. There are no great surprises in the
list of issues identified as being of concern but the tone of the
paper is strong in positioning the concerns firmly in the context
of competition law. However, the big challenge now lies in
developing remedies for the obstacles to development of
competition. Making the transition from analysis to action will
not be easy and, as yet, the Commission has given few clues as
to its thinking.
The emphasis in the issues paper on the existence of
dominant players, particularly in the gas market, suggests that
use of article 82 powers will offer the main way forward.
However that leads to further questions. If dominance is
principally within national markets, will national regulators be
prepared to take action? If not, will the Commission be able
and willing to take action over their heads? Either way, what
abuse of dominance will be targeted? There appears to be
considerable choice – pricing, refusal to supply, exclusion
through long-term contracts?
The story may be given an interesting additional twist when
the Commission finalises its new approach to the operation of
article 82. This is expected to put greater emphasis on the
effects rather than the form of actions by dominant firms. That
may allow the Commission to develop new and, possibly,
quicker approaches to enforcement.
Even if action is successfully taken under article 82, that in
itself does not ensure that competitive markets will prevail.
Structural or behavioural remedies would need to be identified
and there is again the potential for conflict between national and
community-wide objectives.
An example of different approaches can be seen in the
operation of merger control in the energy sector: In 2002, the
takeover of Ruhrgas by E.ON, which fell under national
jurisdiction, was approved by the German government, despite
concerns about the strengthening of E.ON’s market position
expressed by the German federal cartel office. In 2004, the
Commission blocked the takeover of Gas de Portugal by
Energias de Portugal, which would have created a combined gas
and electricity business similar to E.ON. In 2005, the
Commission declined to intervene in the bid for Endesa by Gas
Natural, which would, again, create a large gas and electricity
business. The decision has been left to the Spanish competition
authority. At the time of writing, the outcome of this contested
bid remains in the balance.
It is difficult to see any consistent pattern leading to more
competitive markets in this sequence of decisions. Can EU
merger control play a positive role in maintaining and
developing competition in the energy market?
In all, there are many questions still to be answered about the
future development of competitive energy markets. 2006 will
be a year in which the resolve of all those involved, not least the
Commission, will be put to the test.
Written by Jonathan Green |
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Last Updated ( Mar 26, 2007 at 01:31 PM )
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