Greening the Economy

Although initiatives and legislative measures have been introduced since 1993, a genuinely competitive and genuinely interconnected European market for gas and electricity is still not in place. This workshop at the European Business Summit will deal with this situation, which was recognised by the Energy Council and EU Heads of State in early 2007.

Establishment of a large European market for gas and electricity requires first of all a strengthening of physical links between national markets.

This is particularly necessary for electricity where interconnection capacity is insufficient, which is due to a shortage of investments in this area.

In order to establish a well-functioning EU gas and electricity market, it is also important to put in place a regime which ensures effective unbundling of the production/supply activities and transport activities currently carried out by vertically integrated operators.

It is necessary to give third parties (competing operators, new entrants, etc.) fair and non-discriminatory access to existing networks so that industrial consumers can have the opportunity to choose between alternative offers.

An effective unbundling regime must ensure this fair and non-discriminatory access while not creating obstacles or disincentives to investments in networks.

The economic rationale and the wider philosophy of a carefully thought-out approach to sustainable development means that the advantages of greater competition on the energy market must not be eroded by the introduction of an unreasonable financial burden on industry prompted by unilateral European initiatives to protect the climate or by costly programme to promote renewables.

Main issues at European level

Cross-border interconnections

The absence of sufficient interconnections is largely due to governance problems. The fact that national energy regulators’ competences are not harmonised at a high level and that some regulators are insufficiently independent of policy-makers places a brake on the opening of and progress in bilateral/regional discussions on the introduction of new interconnection capacities or on a strengthening of existing capacities.

In this context, BUSINESSEUROPE supports the general thrust of the Commission’s September 2007 proposals to improve the governance of the internal energy trading market.

Unbundling

In 2003 the Commission introduced a “legal unbundling” regime providing that vertically integrated energy groups should at the very least hive off their transport activities. This regime was complemented by “functional unbundling” provisions aiming at ensuring that transport subsidiaries can take their investment and operational decisions independently.

The Commission’s September 2007 proposals seek to move on from the 2003 provisions by requiring Member States to make a choice between the following two options:

  • full ownership unbundling;
  • stopping short of severing formal ownership relations between producers and transporters, but submitting transport subsidiaries to management by an independent system operator (ISO model).

Stakeholder’s positions: BUSINESSEUROPE calls on the Council and the European Parliament to look at the pros and cons of taking a radically new approach such as ownership unbundling or the ISO Model (Independent System Operator), compared with making a greater effort to ensure complete implementation, in letter and spirit, of existing Community legislation on legal and functional unbundling.

In addition, BUSINESSEUROPE would like future EU policy on unbundling not to discriminate between private-owned and public-owned energy groups.

The debate at Council level seems to be widening following presentation of a “third way” by a group of countries including France and Germany. This offers an alternative to full unbundling and the ISO model. (Note: the content of this alternative is not known at the present time.)

Challenges and new initiatives needed in the short to medium term

Several elements of the September 2007 energy liberalisation package represent a positive step forward, in particular the plan to improve governance of the European gas and electricity market. However, the package does not reflect a sufficiently wide strategic vision. In particular, it fails to pay adequate attention to the need to upgrade the framework conditions which play a critical role in guaranteeing the long-term supply of energy to energy-intensive industries at competitive prices. The Commission should give strategic consideration to the positive role that long-term contracts between producers and consumers can play in this respect.

Besides this strategic aspect, the Commission should also facilitate the establishment of long-term contracts given that it will take a long time before the new European liberalisation measures have tangible effects (several years will pass before the EU decision-making process is complete and before decisions are implemented at national level).

Clearly, long-term contracts should be encouraged in such a way as not to hinder the development of the internal market.

Possible questions

  • Reaction to the “third way” proposed by France and other countries for unbundling (if more information is available)
  • Evaluation of the agency proposed for cooperation between energy regulators: does this proposal do enough to improve governance, because the agency will not have power over cross-border issues?

Further reading

European Commission’s September 2007 liberalisation package
BUSINESSEUROPE policy briefing on the internal market

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