Development of European energy market - Essay Example

Development of European energy market The European energy market was highly fragmented and was under the monopoly of different member states until about 1990 (Cameron, 2007). European Commission initiated liberalization of energy market for the benefit of consumers and for development of its economy and this procedure is still underway heading towards a single energy market, which is proposed to reduce price and increase the quality of the service. The present essay is intended to analyse the current position of the energy market and the steps taken by the government for implementing liberalization. The future proposals, which are intended to be implemented, would also be analysed. The process of liberalization of energy and electricity market which started in 1990’s has resulted in the development of an open and competitive market for electricity and now electricity could be transported cross border. Power generation, its trade and supply are opened to competition. However network activities such as lower voltage distribution and high voltage transmission are still regulated by national monopoly. The liberalization started as a result of Electricity Market Directive of 1996. By the year 2000 most of the member states implemented the liberalization package. But some members especially France and Germany did not agree with these policies (Prospects for the internal gas and electricity, 2007). The Directive of 1996 was updated later, in the year 2003. The legislation ensured security of supply, efficient operation of power generation plants, efficient network access, access to storage, and transparency in the dealings of all member countries and thus facilitated a fully open energy market to all member countries. The industrial markets were opened up for competition by July, 2004. By 1st July 2007, all the household users also had access to the open market and both industrial and household customers could select a provider of their own choice in the competitive market. This resulted in price reduction, increase of reliability and better quality service to all customers. Based on the legislation in 2003, national regulatory bodies were set up in each country to oversee the monopolies and European Regulators Group for Electricity and Gas (ERGEG) was set up to give advice to the European Commission to implement liberalization package more effectively (Liberalising the EU energy sector, 2009). European commission conducted an enquiry in the market in January, 2007 to study the nature and effect of open market, and found that the structure of the market is still the same as old monopoly structure. It was dominated by companies which had both power generation as well as its transmission under their hold and therefore could control the prices. They prevented the entry of new companies into the market. This became one of the biggest obstacles for the complete impletion of liberalization package (Talus, 2008). Other major issues in the field, which still needed attention, are large-scale investments to set up more power generation plants and to increase the transmission capacity and the integration of overall electricity system. A third package of proposal for energy sector legislation is presently under discussion and this involves updating of the directives on electricity and gas, regulations of cross border trade of electricity and gas and establishment of a Cooperative Agency for Regulators. The key factors in the proposal, which was published on 19th September 2007, are the following (A competitive market, 2009): 1. According to this proposal in order to ensure better competition the energy production sector has to be separated from the supply section. This would facilitate easy access to the market for competition. The proposal has put forward two options for the companies for this procedure. One is ownership unbundling in which the companies that deal with both power generation and its transmission has to sell part of its assets. This is also called share splitting in which, in the place of an existing single share there would be two different shares for the sectors of power generation and its supply separately. The second option is the appointment of an Independent System Operator. This is for companies that want to retain their assets in power generation and supply. Here Independent System Operator would do the management of these assets and the owners would not have any control over that. The Independent System Operator would be appointed by the Commission and would have powers to intervene in any anti-competitive behaviour from the company. They would have the power of decision in respect of investments in the transmission sector by the network operators. The companies that opt to take this system have to comply with the ten-year investment plan proposed by the national energy regulators (Liberalising the EU energy sector, 2009). 2. It was found that the shortcoming in the consistency of the powers of national regulators is another major obstacle in the development of a full-fledged European energy market. Therefore the third proposal intends to strengthen and harmonize the powers of these regulators so that they can effectively manage companies and even punish them for their anti-competitive behaviour. They would be completely independent of government interventions as well as the interference from the industry. These national regulators of each member countries have to cooperate with each other in all respects for implementing liberalization. 3. It has been found that the present cross border capacity of transmission could not be accessed fully because of the complexity in the rules and administrative procedures at these borders. The works of the Transmission System Operators would be integrated through the establishment of European Network of Transmission system operators and is believed to increase the efficiency of network planning and investments in the sector. They would be provided with separate incentives to avoid nationalistic view in these aspects (Godfried, 2008). 4. Another proposal in the third package is the setting up of a new European Agency (Agency for Coordination Energy Regulators) for involving in cross border transmission cases between the member countries and to settle it amicably with the intention of increase in competition. This energy regulatory framework is highly necessary for the coordination of rules of the different member states so as to facilitate smooth transmission of energy through borders. 5. There is also a clause in the third package, which is intended to protect the competition, and according to this all the companies other than EU companies who would like enter the market also has to undergo the unbundling procedure. Majority of member countries headed by France and Germany were against this unbundling package, however countries like UK, Denmark and Netherlands supported this package. Creation of a single EU electricity market has many challenges to overcome. ERGEG is now heading towards development of regional market in the member countries, the further development of which would result in the integration of these markets to single market. The initiative is to harmonize rules and legislations as well as procedures in different geographical region in such a way that it would lead to single market at least in a large area of EU( A competitive market, 2009). The Union of electricity industry EURELECTRIC is of the opinion that in order to deliver high quality service which produce maximum customer satisfaction, the European Commission has to give thrust to four major factors, They are a strong confidence on the market, development of energy as well as environmental policy that would assist in the process, development of appropriate market regulatory framework and ensuring cooperation from all the related parties (A competitive market, 2009). There should also be integrative dealings and negotiations at the political level (Claes, 2002). Decentralized power generation would result in considerable savings in CO2-emmissions and energy consumption (Joerss et. al., 2003). Five countries such as Germany Luxembourg, Belgium, Netherlands and France at Energy council in Luxembourg signed a Memorandum of Understanding, in June 2007 and this became the milestone for the largest integrated regional energy market in Europe (Single European Electricity Market Agreement Moves Forward, 2007). European Commission believes that development of regional market would act as an intermediate step for further development to a single energy market. For the best performance of this market more concentration has to be given to investments, regulation, market design and security of supply (Jamasb and Pollit, 2005). On 12th January 2009 all the European Union Council ministers agreed to accept and adopt third liberalization package. Thus it could be seen that the liberalization of energy market of Europe, which started in 1990, is still a long way to go to reap its exact benefits. Although the market is opened for competition and the industries and households could have a choice of their provider of power, the structure of the market is almost the same as before mainly because of some companies as well as member states, which do not cooperate with the system. But as a result of continuous negotiation with these companies and other stakeholders the third package proposed to solve the current issues has been agreed upon by all and Europe is heading towards a single energy market with considerable reduction in price and increase in the quality of service. References ‘A competitive market’ (2009) [online] Available at: http://www2.eurelectric.org/Content/Default.asp?PageID=818 (accessed on 3/3/2009) ‘Liberalising the EU energy sector’ (2009). [online] Available at: http://www.euractiv.com/en/energy/liberalising-eu-energy-sector/article-145320 ‘Prospects for the internal gas and electricity’ (2007) Communication from the commission to the council and the european parliament, Commission of the European communities p.1 ‘Single European Electricity Market Agreement Moves Forward’ (2009) [online] Available at: http://petrochemical.ihs.com/news-07Q2/eu-electricity-market-harmonisation.jsp (accessed on 3/3/2009) Cameron, P. (2007) Competition in Energy Markets: Law and Regulation in the European Union Oxford University Press p.475 Claes, D. H. (2002) ‘The Process of Europeanization: Norway and the Internal Energy Market’. Journal of Public Policy 22 (3): 299-323. Godfried, M. (2008) ‘Energy liberalisation deserves adequate oversight’ [online] Available at: http://www.energypolicyblog.com/?p=395 (accessed on 3/3/2009) Jamasb, T. and Pollitt, M. (2005) ‘Electricity Market Reform in the European Union: Review of Progress toward Liberalization & Integration’. Center for energy environmenyt and Plolicy Reseaerch p.1-15 Joerss, W., Uyterlinde, M., Loeffler, P. and P. E. Morthorst (2003) Decentralised Power Generation in the Liberalised EU Energy Markets, Springer publishers, p.259 Talus, K. (2008) Competition in Energy Markets. Law and Regulation in the European Union. European Journal of International Law 2008 19(4): 878-879. Read More