EU agrees to deadline in 2007 for full competition in electricity and gas

Nov 27, 2002 01:00 AM

The European Union's 10-year quest to open its energy markets neared completion when ministers agreed to a deadline of July 1, 2007 for full competition in electricity and gas, with strong legal safeguards to stop cross subsidization.
With this pivotal energy agreement signed in Brussels, the European Union is now on route to fulfilling its goal of becoming the world's most competitive economy by 2010. Under the proposal, commercial and industrial customers will be able to choose electric and gas suppliers by July 2004 while residential ones will probably be able to select their provider by July 2007.

EU ministers agreed to push back full deregulation of the residential segment from 2005 to 2007-and possibly to 2009-to accommodate concerns by the French and German governments, which have sought more protections for their state-owned enterprises. France, for instance, has kept all but its biggest corporate customers captive of Electrite de France and Gaz de France. Germany, meanwhile, says the EU's plan would be disruptive to its smaller regional electricity suppliers while still keeping its most powerful utility, E.ON, tightly integrated.
The agreement does not force government-owned enterprises to privatise; rather, it makes them “liberalize” -- or, functionally separate -- their transmission, generation and distribution as well as open their grids to other suppliers. The aim is to facilitate the entrance of new players that will force added efficiencies and greater productivity that will accrue to the benefit of customers.

The EU had been negotiating deregulation for about 10 years and passed laws in 1996 and 1998 to ensure that each country followed a course to open their markets. Last March, ministers agreed in Barcelona, Spain that the market for commercial and industrial customers would open first in 2004. It put off a decision to liberalize the residential segment until the meeting in Brussels.
In May 1999, Great Britain became the first European country to allow both its electric and gas consumers a choice of supplier. Between 1996 and 1998, gas markets opened across the country with the unbundling of British Gas' transmission, distribution and generation assets. The electricity sector followed in 1999. According to utility officials there, the benefits of competition have shown themselves through lower prices and an array of new offerings.

Spain is poised to follow Great Britain's lead. Full-scale competition will occur next year and will permit both industrial and residential consumers a chance to choose their providers. Spain's government expects its four main energy providers to comply with the new rules and to increase their performance metrics in response to competitive forces.
“In the last six years, electricity prices have fallen 33 % in real terms in Spain,” says Secretary of State for Energy Jose Folgado, at the Brussels conference. “Competition will bring those prices down further once companies can cover costs.”

The verve for open markets is spreading. The Netherlands says that it expects to begin full retail choice by October 2003 while the Portuguese government says that it will be ready by July 2004. That announcement comes amidst that nation's goal of joining with the Spanish to form a single market.
Furthermore, Poland and Estonia, which are anticipated to join the EU in the coming years, are going about the difficult task of unravelling their state-owned power plants. Once those Eastern European countries get their houses in order, the thinking is that they have plenty of excess power to sell to the nations of Western Europe. That's exciting to those seeking low-cost power sources but a threat to others wanting to protect their domestic enterprises, or from those who fear that those plants lack modern pollution controls.

France and Germany are fighting some of the changes proposed by the EU. France has come around as a new government took office last June and agreed generally with the goals of deregulation. In October, it dropped its outright opposition, however, it still believes in incremental modifications.
France has proposed that the opening of the residential market be delayed to as late as 2009. It has also said that the final phase of liberalization should be contingent on a progress report that gives a clear bill of health to how open electricity markets have fared across Western Europe.
“We accept the principle of full liberalization of this market, but only on the principle that it is progressive,” says French Energy Minister Nicole Fontaine at the meeting in Brussels. “Only a very serious deterioration in the market should have any impact on the deadline.”

At the same time, Germany opposes attempts to break up vertically integrated utilities and to force it to form legally separate generation, transmission and distribution companies. At the EU meeting, German Economics Minister Wolfgang Clement said that the move is illogical given that those integrated systems have worked well.
But most countries don't buy it, pointing out that deregulation cannot operate if incumbent utilities are permitted to deny alternative power suppliers access to their power grids. Great Britain has deregulated. And, while times are tough now, it remains committed to the aims of deregulation. The bottom line is that liberalization there has played a major role in lower prices and advanced service offerings, although the fallout has been brutal for specific companies like TXU and British Energy.

With 13 of the EU's 15 governments supporting liberalization, it is expected to win approval by the European Parliament when it meets in early 2003. The general feeling among members is that a fragmented continent would, in essence, contradict the benefits that deregulation is expected to bring.
EU Commission President Romano Prodi said that a failure to open markets in Europe would cost $ 15 bn a year in lost opportunities and excessive inefficiencies. The pressure from other countries will undoubtedly force France and Germany to adopt a more progressive approach.

Source: EIA
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