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Energy and environment

Electricity

Electricity is essential for modern life, and it represents around a fifth of all final energy consumed in the EU. The EU is essentially self-sufficient in electricity generation, although of course the primary fuels used for electricity generation are themselves often imported. Trading between Member States is of more importance than imports into the Union, with some Member States importing over half of their total power requirements. Cross-border transport of electricity has increased recently, with greater co-ordination between neighbouring networks and easier access to cross-border capacity, for example with implicit or explicit auctioning of capacity.

In 1996 the EU agreed to liberalise the electricity sector. A short summary can be found in the overview or a more complete explanation on the website of DG Transport and Energy.

Because electricity cannot be stored cost-effectively on a large scale, the national and international grids must balance electricity generated with electricity used at every moment. Suppliers who use the networks are obliged to input the same amount of electricity as their customers take out and are charged by the network operator for any imbalances. The network operator also maintains some generating reserves with which to ensure that the network can remain in balance. This creates inherent complexity and inter-dependencies across all users of the networks.

In recent years electricity wholesale markets have developed in most Member States which allow the electricity producers, the large suppliers and some customers to trade standard contracts in electricity (e.g. a base load contract for the following calendar year whereby a constant amount of electricity is supplied every hour for the whole year to come; or base load contracts for the days, weeks or months ahead; or peak load contracts, etc). The wholesale markets play a key role in the electricity sector as they set the prices that are then passed on in some manner to the retail customers.

The introduction of emissions trading certificates has also had an important impact on the electricity markets. Electricity producers need emissions trading certificates to cover their production of greenhouse gases, for example from coal, oil or gas generation. So far, electricity generators have received most if not all their emissions certificates for free, but the certificate nevertheless has a value and this "opportunity cost" has been included in wholesale electricity prices to a greater or lesser extent.

Sector inquiry

Given the perceived problems with competition in the electricity markets, DG Competition launched a sector inquiry covering the electricity industry in June 2005. The objective was to identify the barriers that impede the development of a fully functioning open and competitive EU-wide energy market that would provide fairer prices for the final consumer, more efficient allocation and use of the resources and supply, more openness for renewable energies and an economically sustainable basis for security of supply. The final report of the sector inquiry, published in 2007, revealed serious distortions of competition in the sector, in particular:

  • Most wholesale markets remain national in scope, with high levels of concentration in generation, which gives scope for exercising market power.
  • Vertical integration of generation, supply and network activities, which reduces the incentives to trade and for new companies to enter the market, has remained a dominant feature in many electricity markets.
  • The low level of cross-border trade is insufficient to exert pressure on (dominant) generators in national markets.
  • There is a serious lack of reliable and timely information (transparency) in the electricity wholesale markets that is widely recognised by the sector.
  • Price formation is complex, and many users have limited trust in the price formation mechanisms.

In February 2007 the Commission published a detailed analysis of electricity wholesale prices in six Member States on the basis of replies received in the sector inquiry

Regulation

Given the concerns identified in the Sector inquiry, the Commission proposed further liberalisation of the electricity sector on 19 September 2007. On 23 January 2008 it further proposed tougher environmental rules, including a revised emissions trading scheme, greater energy efficiency and ambitious targets for renewable energy, which will have an important effect on electricity generation. These measures were coupled with new guidelines on State support to environment-friendly activities, such as renewable energy production.

Competition cases

On the antitrust side, in 2007 the Commission opened proceedings against EDF and Electrabel due to concerns that they could be foreclosing access to customers in France and Belgium, respectively, through the use of long-term electricity supply contracts.

More recently, in 2008, the Commission has received a proposal for commitments by E.On in order to settle ongoing antitrust cases.

The Commission has used its powers to control mergers to ensure that electricity markets remain competitive (e.g. it prohibited EDP/GDP/ENI and it imposed significant remedies in EDF/EnBW and GDF/Suez).

Some recent State aid cases are highlighted below. A complete list of cases in the energy sector is available in the State aid Register.


Stranded costs compensations in Poland

In November 2005, the Commission opened an in-depth investigation on long-term Power Purchase Agreements (PPAs) in Poland. Under these agreements, the network operator had a purchase obligation for a guaranteed quantity of electricity at guaranteed prices. The last PPA would end in 2027. Around 40% of the Polish electricity generation market was covered by the PPAs. The Commission considered that these agreements confer a State aid to the concerned generators.

During 2006 and 2007, the Polish authorities worked out a new draft law that foresees the end of the PPAs and a compensation system to the generators in line with the Commission's methodology for analysing State aid linked to stranded costs. That methodology allows stranded cost compensations alleviating the effect of liberalisation without threatening the continuation of electricity supply. Such compensations should be proportionate, and not discourage the entrance of new companies into the generation market.

In September 2007, the Commission closed the in-depth investigation with a positive decision with certain conditions.


Stranded costs compensations in Hungary

The Hungarian authorities informed the Commission in 2004 about the existence of long-term power purchase agreements (PPAs) between the State-owned and monopolistic network operator and certain power generators. The PPAs guarantee a return on investment to the generators and a fix profit margin. The agreements end between 2010 and 2024 and cover around 80% of the Hungarian electricity generation market. In September 2005, the Commission opened an in-depth investigation on the PPAs in Hungary, since it consider that they confer a State aid to the generators benefiting from them. The Commission concluded in May 2008 that these agreements constitute unlawful and incompatible state aid to the power generators and requested Hungary to terminate them before the end of 2008 and to recover the aid granted to the generators concerned since the country's accession in 2004.


Electricity tariffs in France

In France, the electricity price for each category of users is regulated by law. Over the last few years, the market price of electricity has increased considerably, whereas the tariffs for large industrial users have remained relatively stable. As a result, certain these users are enjoying tariffs considerably below the market price.

Until the beginning of 2007, clients who had left the regulated market could not return to it: the choice of the liberalised market was irreversible. In 2006, the French authorities made such return possible, under certain conditions, by creating the "TaRTAM" system. Under this system, clients who had left the regulated market for the liberalised market can ask to benefit again from regulated tariffs on their electricity for a period of two years. However, they have to pay a penalty. To finance the TaRTAM system, France has introduced two levies, one payable by all French electricity consumers, and the other payable by the large producers of electricity from nuclear and hydro power.

The Commission opened in June 2007 the in-depth investigation procedure on the regulated electricity tariffs in France.


Electricity tariffs in Spain

In January 2007, the Commission opened the in-depth investigation procedure to examine the potential aid to large and medium-sized companies and to electricity distributors in Spain in the form of artificially low regulated industrial tariffs for electricity. These regulated tariffs led in 2005 to a deficit of €3.8 billion in the Spanish electricity system, which will be financed by a new charge paid by all Spanish consumers in their electricity bill for the next 14 years. The Commission is assessing whether the 2005 tariffs provided State aid to energy intensive, large and medium-sized industries and to the electricity distributors and if so, whether such aid could give rise to disproportionate distortions of trade and competition within the EU's Single Market. The Commission's State aid investigation does not concern the regulated tariffs for small companies and households.

  
  
Related links
Study: Structure and performance of six wholesale electricity markets in 2003, 2004 and 2005
Proposed legislation (third energy liberalisation package and environmental package)
Energy website - European Commission
Energy and environment website - European Commission