EPSU Contribution to the Progress Report on the Internal Market for Electricity and Gas

EPSU Contribution to the Progress Report on the Internal Market for Electricity and Gas State of Play Steps for the Future Contributing to the Lisbon Strategy Putting quality, reliability and security centre-stage, or how to bolster economic growth and competitiveness {Adopted by the EPSU Standing Committee on Public Utilities on 7 October 2005}

EPSU welcomes the opportunity to contribute to the Commission evaluation of the internal market for gas and electricity. This evaluation is foreseen in the 2003 Directives (2003/54/EC and 2003/55/EC). The Director General Mr. Lamoureux has solicited the views of EPSU and many other organisations in April 2005. The Commission is to deliver a report at the end of the year. A similar invitation to present views and discuss options for the future was made by Commissioner Piebalgs at the Electricity Forum, on 1-2 September 2005. {{1. Introduction}} EPSU has long been critical of the internal market for electricity and gas, arguing that what the sectors needed and need are not more competition, but cooperation to:

-* Sustainable development

-* Reliability and Security of Supply based on a stable investment climate and predictable price development.

-* Social equity, including secure employment, protection of vulnerable users, territorial and social cohesion.

-* Democratic control of these universal services which are essential to modern societies. The Directives will hinder efforts to achieve the requirements placed on Member States by the designation of electricity and gas as services of general economic interest. Cooperation, public ownership and monopolies were a tested recipe in many countries that contributed to Europe's growth and competitiveness during many decades. It was based on solid economic theory that recognised the specific characteristics of the electricity and gas utilities, including the importance of the laws of physics, the long-term nature of its investments and most importantly that electricity, in particular, is a social good and not a purely commercial one. This concept has been challenged and replaced by the notion that competition will deliver better results on the above objectives. It was argued that an internal market for gas and electricity would bring benefits including:

-* lower prices for domestic and large users,

-* improved social equity, social and territorial cohesion, users protection,

-* incentives for long-term planning, investment on research and development, contributing to system reliability and security of supply;

-* employment growth in new services and in the economy at large, -* enhanced environmental protection. The improved efficiencies would contribute to improve Europe's competitiveness. Completing the internal market for electricity and gas became part of the Lisbon Agenda. Competition was introduced with the 1996 (electricity) and 1998 (gas) Directives, which only partly delivered what was expected. Governments agreed that more needed to be done as part of the Lisbon agenda. The Directives were amended by the 2003 Directives. These Directives do recognise the social nature of these services by strengthening public service obligations, user protection and oversight of the industry through regulators. A further recognition of the essential nature of electricity, was the Security of Supply directive. When introducing this directive, the Commission admitted that the market will not deliver security of supply. The SoS Directive was also a reaction to large black-outs in Europe (Italy), and the North East of the U.S. 

2. A brief summary of the report To gain a better and independent insight in developments of Europe's electricity markets, EPSU commissioned a study on the state of play of Europe's electricity and gas markets. Public Services International Research Unit of the University of Greenwich, one of Europe's most renowned institutes researching services of general (economic) interest, was asked to do this for EPSU.

In its assessment of the Directives, it states:

-* Implementation is not yet complete in all Member States;

-* The Directives do not address market dominance;

-* The conditions for a wholesale market have not been established in many Member States;

-* The right to chose for individual consumers was the justification for market opening without guaranteeing an economic benefit to consumers;

-* Consumer protection does not extend to pricing policy (eg. that tariffs should reflect cost, or that companies should not discriminate between classes of users);

-* The security of supply provisions in the Directives are misguided. These are supplemented by the Security of Supply Directive. A big issue which remains, is that the Directive does not solve under-investment and does not address actual system reliability,

-* Legal unbundling will probably lead to ownership unbundling, breaking the connection between the network company and users,

-* The Directives do not ensure maintaining generation adequacy. The report also analyses the different (regional) markets. In its assessment of the operation of the markets, the report argues that there is limited experience with market opening and competition in some countries, and already leading often to problems. There is a lack of investment in all markets. Liquidity of wholesale markets remains a concern. Switching happens less then needed for a proper functioning market. All markets experience market concentration, and vertical integration between generation and retail. The two supposedly most successful markets, the Nordic region and UK (England, Wales, Scotland), experience problems.

Nordic Region - electricity market The wholesale market is liquid. It arises though from particular history and is subject to specific conditions which make it vulnerable to the weather if left alone. There has been little long term investment in new capacity. Dry years can lead to rationing or other measures to be carried out in the market. Supply shortages can lead to very high prices for business and households, possibly driving business out of some countries. Wet weather and low prices could easily bankrupt fossil fuel power plants. While switching has happened to a larger extend then in the rest of Europe, there are differences between the Nordic countries. In general, consumers do not feel they are well informed, consumers are not eager to switch as price differentials are small, and vendors with the lowest prices do not want new customers. Prices for domestic, and to some extent, large users, are volatile and with high peaks, will trigger political debate over the reforms. The report also notes that public ownership is predominant and possibly has played a moderating role on profit maximisation. 

United Kingdom The report notes that the UK has long experience with liberalised markets. The Power Pool did not work, and liquidity on NETA (and BETTA) is very limited, not allowing it to play a price setting role. The prospect for new entry of generators is low. Investment goes in bursts and leaps and currently very little new capacity is under construction, possibly causing capacity problems. The report analyses the retail market in some detail and notes major problems leading to higher prices for consumers. “Retail competition has so far failed to bring benefits to small consumers in Britain”. Both markets are considered as models and each has their problems. The report also analyses the other markets. Most of this analysis is not new. It is shared by many other organisations and many in the Commission. What makes the report different is the thoroughness of its argument and reasoning, and addressing the crucial question can competition work?

2.1 Can competition in electricity work ? In a separate chapter, the report explores if competition can work in the electricity sector. It notes a number of precise characteristics (economic, physical, social, environmental) which it says are wrongly ignored, or deemed no longer valid. The report concludes that a free market for electricity and gas, wholesale or retail, is not feasible. It also notes that competition comes at a cost which is the risk premium on investment. It states that “while shareholders pay if an investment fails, consumers always pay through the higher costs of capital”. And then there are the costs of designing and operating the market. “It seems highly implausible that the operation of competition through improving efficiency, and discipline on investment decisions, could be so effective as to pay for these extra financial and transaction costs”. (...) -

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