European energy markets show different attitudes on liberalization

May 10, 2005 02:00 AM

From July 1, 2004, the majority of non-residential power and gas consumers in the EU became eligible to choose their supplier. However despite this, the liberalization process in Europe continues to take place at varying speeds reflecting both the widely diverse levels of energy market development and also disparate attitudes towards the concept of market opening.
The fact that the gas and power markets in the EU 25 are at widely differing stages of development, and market maturity is a factor that has long been acknowledged as one of the main barriers to bringing about a truly liberalized and competitive single European energy market.

Europe's gas markets range from the high levels of gas penetration and market development prevalent in the UK and Germany to markets such as Finland, Greece, Latvia and Portugal, where the markets were regarded as sufficiently immature and undeveloped by the EU to warrant the awarding of derogations regarding the implementation of the directive.
The situation in the power markets is less incongruent, though significant differences remain with regard to generation fuel mixes, grid access conditions and market concentration to mention just a few factors.

The widely differing nature of these markets and the contrasting attitudes towards liberalization at both a governmental and corporate level inevitably means the degree of success and progress made in incorporating the terms of the EU gas and power directives into national statute books has also varied widely.
This divergence prompted the European Commission to send formal warnings to 18 member states in October 2004, admonishing them for not having either adopted, or sufficiently communicated to the Commission how they had adopted, all of the terms of the directives. This was followed in November with the head of energy and water at the EU Competition directorate describing the current level of competition in the EU as “disappointing” and acknowledging that energy consumers were beginning to lose confidence in the concept of market liberalization.

Full compliance with the required laws to the EU's satisfaction has since been carried out by eight of the original 18 member states censured by the EU, though 10 countries are still subject to potential further action by the Commission.
It is becoming increasingly necessary for the commission to show some strength in admonishing the member states still not in full compliance given that full market opening is now little more than two years away.

How the EU 25 gas markets differ
One of the key differences in the EU energy markets lies in the widely varying roles played by natural gas. Both the role of gas and levels of absolute demand vary widely between markets. With an annual gas demand of around 100 bn cm and a gas penetration of 38 %, the UK is far ahead of the rest of Europe, reflecting its status as the country that has long led the field in terms of gas market opening and liberalization.
However now that it has become a net gasimporter for the first time since the mid1990s, the future market fundamentals are certain to shift radically. The role of gas in the UK and other mature western European markets is in stark contrast to the newly emerging gas markets such as Sweden, Portugal and Greece where, although increasing rapidly, gas utilization is very much in its infancy.

This means that the majority of gas demand growth in recent years has been in the less developed, immature markets where a combination of economic growth, greater supply availability, a movement towards gas fired power and network expansions have boosted consumption. Over the past decade, annual demand growth has averaged 9 % in Spain and 7 % in Greece, far outstripping growth rates in markets such as the UK and Germany. Growth in these markets has been tailing off, reflecting the established nature of gas in the energy mix.
The degree of gas self sufficiency within each market also varies widely. With just two net gas exporters in the EU 25, the dependence on non-EU sources of supply (mainly Norway, Russia and Algeria but increasingly LNG from various sources) will continue to grow in the coming years.

Electricity market diversity
Although the degree of diversity amongst the EU electricity markets is somewhat less exaggerated than that seen in the gas market, significant differences still exist between markets in just about every stage of the value chain. In terms of generation fuel mix there is a significant degree of polarization, particularly in terms of how specific fuel types dominate individual markets. For example more than 70 % of French power is sourced from nuclear capacity, two thirds of Austrian power is hydro based and more than half of Germany power production is coal based. In other markets such as the UK, there is a much more even distribution of fuel types.
One of the most apparent areas of differences between EU markets lies in market structure. Mature markets such as the UK have high levels of customer switching in both the gas and power markets, diluted and largely unconcentrated market power at both a wholesale and retail level, as well as strong degrees of legal and operational unbundling. Conversely markets such as France and Spain still have significant degrees of market control in the hands of a small number of players.

Regulation
Market regulation is another key area of difference between Europe's gas and power markets. Markets such as Ireland, Italy and the UK all have relatively proactive, visible and fully mandated regulatory bodies, the actions of which are far removed from the sometimes less than forceful regulatory polices seen elsewhere.
One of the most serious examples of lacklustre regulation, or more specifically non-existent regulation, is apparent in Germany. Despite continued planning and debate, an energy regulatory body is still not in place and is unlikely to become functional until at least the middle of this year, significantly behind the timetable laid out by the EU.

With such widely divergent market characteristics and sometimes reluctant and conflicting political attitudes towards market liberalization, it is not surprising that progress towards a single European energy market has been somewhat sporadic and disjointed. The theoretical 100 % market opening that will arise from the second phase of the EU directives in July 2007 will in itself not be a guarantee of a fully liberalized market.
Even as political willingness at a national level becomes more attuned to the concept of market opening, and new market entrants continue to emerge, the idea of a truly single, harmonized and fully liberalized European energy market remains very much a distant vision rather than a near term reality.

Source: Datamonitor
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