The Commission presents a Staff Working Document on Article 22 of Directive 2003/55/EC concerning common rules for the internal market in natural gas and Article 7 of Regulation (EC) No 1228/2003 on conditions for access to the network for cross-border exchanges in electricity.

Directive No 2003/55/EC and Regulation (EC) No 1228/2003 are based on the general principle of a regulated access regime to gas and electricity infrastructure. Both legal acts, however, allow for exemptions from provisions enshrining this overall rule, as well as from provisions establishing ex ante and ex post tariff regulation.

This document provides information on the Commission's assessment of exemption decisions taken by national authorities according to Article 22 of the Gas Directive and Article 7 of the Electricity Regulation. It explains the general framework and analyses the assessment criteria, the information to be provided by the relevant authorities and conditions that may be imposed.

The experience with granting exemptions for new major infrastructure has shown that the conditions of Article 22 of the Gas Directive and of Article 7 of the Electricity Regulation are not always sufficiently clear to the national authorities and market participants, in particular the interpretation of the assessment criteria, the information that needs to be submitted and the conditions that may be imposed to meet the criteria. The Commission services have therefore decided to revise the interpretative note issued in 2004, and replace it by the current one.

The present document does not modify the general exemption policy regarding Article 7 of the Electricity Regulation and Article 22 of the Gas Directive but gives better guidance in the light of the practical experience gained since the publication of the previous note. The objective is to provide transparency and guidance to national authorities and market participants and to facilitate the procedures for assessing exemptions.

This document is not intended to restrict or change the criteria for awarding exemptions. Nor is it intended to give an exhaustive interpretation of the various assessment criteria that are applied in the light of the facts and circumstances of each individual case. It applies to all types of infrastructure eligible for an exemption according to Article 22 of the Gas Directive and Article 7 of the Electricity Regulation.

SEC(2009)0642
EUR-Lex

The Commission presented a report on progress in creating the internal gas and electricity market.

The last step on the road to competitive energy markets was achieved on 1 July 2007 with the full opening of national retail markets. From a legal perspective, all European consumers are now able to choose their supplier and benefit from competition. However, this report shows that, in practice, market integration is still far from a success . With very few exceptions, electricity and gas markets in the EU remain national in economic scope with limited competition.

Implementation of legislation : all Member States have met the deadline of 1 July 2007 for full opening of their gas and electricity markets. Restrictions to free and fair competition have, however, developed through the coexistence of open market segments and end-user supply price regulation. Some Member States have still not properly implemented the legal requirements of the Electricity and Gas Directives. This concerns, in particular, core areas of market liberalisation, such as regulatory oversight, unbundling and regulated supply tariffs as well as the communication of Public Service Obligations. ERGEG’s (European Regulators Group for Electricity and Gas) monitoring, in 2007, of the implementation of the Electricity and Gas Regulation shows inadequate compliance in areas of core relevance for the development of liquid markets such as transparency and primary capacity allocation.

Market integration : market integration has still not developed to a sufficient extent. This is demonstrated by price differences, regional monopolies and persistent cross-border congestion between Member States, for example. Energy prices for industrial electricity customers in the EU are starting to converge in the Central and North Western EU areas but still differ by almost 100% in some cases. Cross-border trade is a key source of competitive pressure on prices. The lack of independence of network operators continues to be a barrier to adequate investment. Lastly, legal differences between Member States remain a barrier to market integration.

Concentration and consolidation : market structures on a national scale are still very concentrated. In addition, incumbents control essential infrastructure facilities, further increasing their market power. Between 2005 and mid-2007, the number of independent suppliers on the electricity market increased in 40% of the Member States where data was available. In 7 out of 21 Member States, no independent supplier is active on the national gas market. Retail markets are not yet well developed, mainly because of limited access to gas supplies for new entrants. Alongside highly concentrated national markets, the tendency towards consolidation and concentration continues.

Price trends : c ustomers in the EU-15 Member States benefited from cumulative price savings from electricity liberalisation to the order of €60 billion over the period 1998 to 2004. These savings were partly countered by price increases in later periods. As competition is still limited, competitive pressures on prices are correspondingly weak. Moreover, prices mirror general trends, notably in oil prices, which increased by more than 50% between 2005 and 2007. Since market opening in 1998, Member States with ownership unbundled TSOs have experienced more positive price developments than Member States where the TSOs were and are still related to supply companies .

Independence of network operators : functional unbundling is still not effectively implemented in all Member States. This applies both to electricity and gas and to transmission and distribution system operators. Insufficient independence of network operators is reflected in underinvestment in network capacities and, in particular, in inadequate cross-border capacities. Legal unbundling has not been sufficient to cope with this effect.

Effective regulation by regulators : despite the Electricity and Gas Directives requiring regulators to hold a minimum set of powers, the unequal levels of regulatory powers across borders have not improved. Non-compliance with European legislation is often met by insufficient or ineffective penalties in national legislation. However, the “regulatory gap” remains a barrier to coordinated decision making across borders, which cannot be solved by the existing model of voluntary cooperation by ERGEG.

Customer dimension : while the rates of switching for larger customers continue to rise, most small business customers and households still have limited scope to exercise their right to choose. Electricity switching is at a high level in Iberian countries, the Czech Republic and Nordic countries and above average especially for large industrial customers in Germany, Austria and Luxembourg. In most other countries, the annual switching rate for households is about 1% or below. The picture is similar for gas, with the exception of Italy, where the rate is above 1%. Moreover, retail competition is distorted by regulated supply tariffs. In terms of service quality , market surveys have concluded that the level of satisfaction with the quality of electricity and gas services provided is generally good. Concerns that the introduction of competition would lead to a decline in service standards or problems in the provision of universal service have proved unfounded. The report notes that the coexistence of open energy markets and regulated energy prices is quite common among EU Member States: it exists in one third of the gas markets for at least one market segment and more than half of the electricity markets. The negative effects of regulated energy prices remain a major concern.

Security of supply : European electricity outlook reports drawn up in 2007 by the Group of European Electricity Transmission System Operators (ETSO) and European Gas Transmission System Operators suggest that no particular risk of power shortage is expected in the medium term. However, in terms of gas supply in particular, the European Union relies increasingly on imports. Therefore, the diversification of routes or sources plays a key role in reducing dependence on today’s three major pipeline sources, Russia, Norway and Algeria. Electricity and gas networks are at the heart of a well-functioning European market. Obstacles still remain to the completion of the priority projects that have already been identified. For electricity, dependence on imports is lower. However, the dependence of power generation on gas, much of which is imported, is increasing.

To conclude, the report notes that despite some encouraging improvements, notably in cross-border coordination at regional level, major barriers to the efficient functioning of the market still exist:

The insufficient implementation of European legislation remains a crucial factor. Improvement has to be driven by the Commission, Member States, regulators and industry together; At the same time, national regulators must be empowered with a view to ensuring proper implementation of legislation by stakeholders; Regulators themselves have to act on their own responsibility to encourage implementation of legal requirements. Harmonisation of regulatory best practice models across borders is certainly needed if practical barriers to cross-border trade are to be reduced; The industry must observe the legal requirements without compromise. Implementation of European legislation does not allow for negotiations; Lastly, regulated energy prices remain a major concern.

The Commission has therefore addressed these shortcomings in a legislative package, which it presented on 19 September 2007 (see also COD/2007/0253 and COD/2007/0197 ).

COM(2008)0192
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In presenting this report the Commission is fulfilling Article 14 of Regulation (EC) No1228/2003 to publish a report on the application of the Regulation. To recall, the Regulation’s aim is to set fair rules for cross-border exchanges in electricity in a bid to enhance competition within the internal electricity market. In order to achieve this objective the Regulation establishes a compensation mechanism for cross-border flows of electricity, it sets harmonised principles on transmission charges and it establishes rules on the allocation of available capacities of interconnections between national transmission systems.

The development of cross-border trade volumes: Cross-border electricity flows in Europe have increased modestly year on year since market opening. On average, only 10% of electricity consumed in the EU crosses Member States’ borders. Analysis indicates that there is scope for further integration of the regions towards a European market. Such a move will lead to a higher price convergence between regions with similar generation mixes and to a better use of arbitrage possibilities between regions with different generation mixes. Overall cross-border trade opportunities are far from being fully utilised.

Development of cross-border trading methods : New guidelines have split the EU into seven regions plus South East Europe. The guidelines oblige transmission system operators (TSOs) to operate a common co-ordinated capacity calculation and allocation system. A lot of effort is still needed in order to implement new arrangements, including those set out in the amended congestion management guidelines. Some progress has been made in developing access to intra-day cross-border trade. Both national regulators and the Commission will monitor closely implementation of the amended congestion management guidelines. The report also points out that the Commission is prepared to start infringement procedures in cases of non-compliance of the new guidelines.

Inter-TSO compensation mechanism : Progress on the inter-TSO compensation mechanism has been made on a voluntary basis through the Florence fo rm process with the first voluntary agreement being concluded in March 2002. The voluntary agreement between TSOs is based on a simplified method based on the reality of cross-border flows. The European Regulators’ Group for Electricity and Gas (ERGEG) has worked on guidelines on ITC to be adopted by the Commission. However, by the end of 2006 no agreed method has been approved. The Commission is still considering whether the work of the ERGEG provides a sufficient basis to adopt guidelines with the assistance of the electricity cross-border committee.

Network access tariff harmonisation: Network tariffs for accessing the transmission network vary enormously. The average network tariff for a load connected to the transmission network (the L-charge) ranges from ca. €2/MWh (in Sweden) to ca. € 27/ MWh (Denmark East). Several factors explain these differences. In addition to differing infrastructure costs, these tariffs may or may not include losses, location signals, system services or charges not directly related to TSO activities. These other charges are mostly related to public service obligations such as support to renewable energy sources and combined head and power as well as stranded costs. Further tariff harmonisation is needed in order to have a better level playing field for the electricity market and it is one of the main issues addressed by Regulation 1228/2003. The draft guideline on transmission tariffs seeks to gradually diminish the spread of the G-charge. This is because the G-charge is more important regarding the level playing field that the L-charge.

Congestion: Congestion patterns have become more volatile, even if there is no uniform method to collect and publish data on the appearance of congestion. In the past the flows, often dominated by long-term contracts, remained relatively stable. Increased volatility can be seen as a sign of a better functioning market leading to increased trade in both direction over the interconnections. According to the Regulation, congestion revenues can only be used for guaranteeing capacity, building infrastructure or lowering the network tariff. Unfortunately, lowering the tariff has been the most common use of congestion revenues. Only in some cases have network investments been preferred – as in the Nordic countries and the Netherlands.

Access to cross-border electricity to end users: Borders between countries and control areas continue to act as important obstacles to true market integration. To address this problem a medium term target has been set the aim of which is to foster regional harmonisation of the market and to ensure that any new infrastructures is built in such a way as to ensure that market participants will be less hindered by borders than they are today. One example of an integrated, wholesale market is Germany and Austria.

Security of supply : The first year in which the Regulation entered into force, namely 2003, proved to be a difficult year for the security of the electricity supply. Italy suffered a major black-out in September 2003 due to problems in the inter-connection lines with Switzerland cause by a failure to limit the spread of the fault. A major black-out also occurred in Sweden and eastern Denmark. Less far-reaching blackouts occurred in 2003 in London and in Helsinki. The most recent black-out (November 2006) affected the whole Union for the Co-ordination for the Transmission of Electricity (UCTE) synchronous area. The incident originated in northern Germany but lead to the splitting of the UCTE area into three parts and to approximately 10% of load shedding in the western area in order to preserve the integrity of the transmission networks. A recent ETSO report on generation adequacy indicates that there is no major concern for most of the European network until 2012. After 2012, the situation might become critical if investments are too slow.

Conclusions: The report concludes by noting that there has been a steady but modest increase in cross-border flows. The main driver for this increase is the possibility to trade between price areas with price differentials. The capacity calculation and allocation methods have developed, with possible further improvement to come as a result of the amended guidelines for congestion management as adopted in November 2006. However, there are signs that the transmission network sometimes operates close to its physical limits. The blackout in Italy in 2003 and in UCTE in 2006 showed how costly any incident in the European-wide transmission network can be.

The European market is increasingly based on a regional concept. This first developed naturally, following the physical realities of the network. With the establishment of the regions in the amended congestion management guidelines and with the development of the Electricity Regional Initiatives by ERGEG, the regional approach has received an official status. The regional approach should be viewed as a pragmatic tool to achieve an overall European market. There is no major reason why the implementation of the electricity market should vary a lot between the regions.

On a final point the Commission lists seven of issues that need to be addressed in future:

1) Security and reliability rules: rules between the TSOs to ensure the safe operation of the grid.

2) Connection rules: governing the relationship between the TSOs and the customers (generators, distribution system operators and big end-customers).

3) Rules for trading electricity: harmonisation of trading arrangements, timetables and products, including intra-day trade.

4) Transparency rules: detailed rules on data exchange and publication between market participants. Transparency rules are already addressed in the amended congestion management guidelines.

5) Balancing and reserve power rules: the aim of which is to seek further integration of the balancing and reserve power markets.

6) Data exchange and settlement rules: the aim of which is to seek further integration of the retail market through sufficiently harmonised data exchange and settlement rules.

7) Investment incentive rules including location signals: providing a European framework for efficient investment signals for both generation and network investments.

The need for and the level of detail of these rules is still to be discussed and further studies are needed in order to provide the necessary input. However, it has become evident that further integration of the internal market needs a coherent set of rules. Many of these rules already exist – but on a national basis or a company basis, with a differing oversight by national regulators. The incompatibility of these rules may be one of the biggest obstacles to market integration.

COM(2007)0250
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The European Commission has published its Annual Report on the Implementation of the Gas and Electricity Internal Market.

The new electricity and gas Directives were due to be transposed by Member States by July 2004 and the Regulation on cross border electricity exchanges also came into effect. The new rules are aimed at achieving to a competitive electricity and gas sector across the whole European Union as envisaged by the Lisbon Council objectives.

However, many aspects of implementation remain disappointing. In October 2004, eighteen Member States had to be sent a letter warning that they had still not fully notified to the Commission the legal measures taken to transpose the latest Directives. This delay is unsatisfactory since it is now clear that the provisions of the previous Directives have not been adequate to achieve the objective of competition, even for larger users. Such customers would normally be expected to negotiate with suppliers on a regular basis. However after five years of competition for electricity and over three years for gas, fewer than 50% have switched supplier in most Member States. In addition, many are unsatisfied with the range of services being offered. In many cases, customers have only been able to change to another domestic supplier with the result that penetration of national markets by foreign

companies is also disappointing in many cases, reflecting a lack of integration of markets and missing infrastructure links. In most cases, foreign suppliers represent less than 20% of market share.

Although electricity prices are lower than 1995 in real terms, they have increased in the last 18 months, partly due to increased prices for primary energy sources. At the same time, gas prices are higher than in 1995 due to the ongoing linkage with oil. Although such price fluctuations are normal, increases are unpalatable to customers where the prospects for changing supplier appear to be limited by regulatory barriers and where the negotiating power of customers is weak due to an unfavourable market structure. Particular concerns exist among the largest users that suppliers are failing to offer an adequate range of contract structures, especially longer term arrangements.

A key issue relates to the failure to fully integrate national energy supply into a wider European market. In this context it is vital for rules on cross border electricity exchanges to continue to be improved to ensure that existing infrastructure is utilised to its maximum possible extent. Likewise for gas, the adoption and implementation of the proposed Regulation is similarly important. New investment in infrastructure is also needed and progress in this regard remains slow, as was also noted in the Commission Communication on Energy Infrastructure and Security of Supply.

Secondly, Member States are still failing to deal with the issue of market structure. As has been highlighted in previous reports, the gas and electricity markets in too many Member States are dominated by one or two companies, and there is often inadequate capacity for cross border competition. It is imperative that solutions are found to such problems.

Thirdly, although much process has already been made in terms of unbundling of network operators and the introduction of regulated third party access, there are still certain aspects which remain unsatisfactory. A fully independent transmission system operator is crucial for a well functioning market. Likewise distribution system operators need to be adequately separated from supply companies to ensure cost reflective tariffs and the removal of any cross subsidies. The independence of regulators is crucial in this respect in order to ensure fair network access in terms of tariff levels and structure. In this respect the gas sector is measurably behind that for electricity.

A final group of issues which may tend to be an obstacle to the internal market is the continued existence of a regulated end user prices for electricity and gas alongside the competitive market and associated long term power purchase arrangements (PPAs). Although such controls are a valuable transitional measure during the initial phase of market opening, there are risks that such an approach will stifle competition, constrain investment and confuse and contradict unbundling measures.

The report states that Member States need to maintain their commitment to this objective in the decisions they make regarding the implementation of the Directives and restructuring of the industry. It is only be doing this that the objective of a competitive and secure market will be achieved. With this in mind, the issue of investment in infrastructure and the sound operation of networks, in support of the competitive market, remains a critical issue. Although some of these issues have been addressed the concerns which were expressed in previous Communications and the proposed Directive on Infrastructure and Security of Supply remain pertinent and progress, in some form or another, is required on this issue. The role of independent regulators remains a crucial component of the introduction of competition and their decisions relating to network tariffs and other important market rules will continue to shape the development of the market. In this context it remains important to ensure that authorities have sufficient resources and competences. Whether the improvements made under the Directives are adequate to achieve the objectives of the internal market remains to be seen, especially if Member States take a minimalist approach to the transposition of the current legislation. One thing that is certain is that in the new global environment of higher primary energy prices it is more important than ever for the Community to live up to its commitment to a competitive market.

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COM(2003)0420
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Regulation 2003/1228
OJ L 176 15.07.2003, p. 0001-0010

T5-0244/2003
OJ C 068 18.03.2004, p. 0148-0262 E

T5-0244/2003

Debate in Parliament

A5-0134/2003

A5-0134/2003

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15527/2/2002
OJ C 050 04.03.2003, p. 0001-0014 E

15527/2/2002

05595/2003

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T5-0107/2002
OJ C 047 27.02.2003, p. 0089-0379 E

T5-0107/2002

Debate in Parliament

A5-0074/2002

A5-0074/2002

CES1311/2001
OJ C 036 08.02.2002, p. 0010

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