Implementation of proposed legislation would provide new opportunities for investors in the European energy market.
Yesterday the European Commission announced its proposed third package of legislation affecting the European energy market. It proposed significant changes to existing legislation to further boost competition. The most significant of these changes relate to the unbundling of the ownership and operation of transmission networks, improved third-party access to key infrastructure and further cross-border cooperation between Member States. If implemented, the proposals would create new investment opportunities for existing players and new entrants throughout the European Union (EU).
Background: Lack of Meaningful Competition
The Commission adopted its first package of legislation to liberalise the European energy market in the late 1990s and its second package in 2003. The Commission’s view, informed (in part) by the energy sector inquiry completed in January 2007, is that while these packages embedded basic concepts of a European energy market, "meaningful competition" still does not exist in many Member States.
The impetus for the third package of legislation has been the Commission’s frustration with the "shortcomings" of the second package of legislation and the "structural failing" of the electricity and gas market in a number of areas. In particular, the Commission has been concerned about access to local network infrastructure and the failure of Member States to prevent a large number of transmission network operators from discriminating against new users of their networks in favour of related companies. It is against this backdrop that the Commission has proposed the unbundling of transmission network ownership and operation and improved access to other forms of infrastructure, such as gas storage facilities and liquefied natural gas (LNG) terminals.
Unbundling: Permitting All Travellers to Pass
The Commission has stated that gas and electricity transmission networks should "work like highways, permitting all travellers to pass". To achieve this vision, it has formulated a bipartite proposal in respect of the unbundling of transmission networks (which applies to both privately and publicly owned networks). The first part is a prohibition on the same person or persons from exercising control over a company performing generation or supply functions and, at the same time, holding an interest in or exercising any right over a transmission system operator or a transmission system. Accordingly, transmission network operators must not be affiliated with or be part of the same group of companies as companies performing generation or supply functions. However, this would still allow a person to have a non-controlling (minority) interest in the transmission network operator and any other company.
The second part of the proposal is that a Member State may seek a derogation from the prohibition. The derogation would enable a vertically integrated company to retain ownership of its network assets if the transmission network is managed by an independent system operator (ISO). The ISO would be entirely separate from the vertically integrated company. The ISO would be required to act "truly independently", would be subject to regulation and its activities would be monitored. This approach mirrors the wholesale electricity market structure in several regions of the United States.
The aim of the Commission’s requirements is to improve competition, allow greater and easier access to transmission networks, promote "non-discriminatory access to network information and [provide] unbiased incentives for investments". In particular, the Commission expects unbundling to facilitate easier access to transmission networks by renewable energy companies which will provide incentives to invest in the generation of renewable energy and to diversify generation methods. The Commission also anticipates that its proposals are likely, in some cases, to force energy companies to dispose of transmission network assets or allow third parties to take over the management and operation of the networks.
If a non-EU party wishes to acquire a significant interest or control over a transmission network within the EU, it will be required to "demonstrably and unequivocally" comply with the Commission’s proposed unbundling requirements. Moreover, the Commission has indicated that it may look to reciprocal standards of market opening to obtain better access to non-EU markets.
Third Party Access: Gas Storage Facilities and LNG Terminals
The existing directive on the internal gas market contains high-level principles requiring storage operators to provide third party access in certain circumstances. Member States had significant flexibility regarding the way in which the principles were transposed into domestic law. The Commission has proposed measures to define more clearly the requirements on storage operators, including the following:
Make existing (voluntary) guidelines about good third party access practice legally binding Establish legal and functional unbundling of storage system operators that are part of supply undertakings. The Commission also proposed to implement more clearly defined guidelines relating to third party access to LNG terminals by extending legislation to require third party access services, and to define how capacity will be allocated and congestion managed.
It is anticipated that easier access to both gas storage facilities and LNG terminals will provide significant opportunities for new entrants to gain a foothold in increasingly important parts of the energy market.
Integration: Towards a Single European Energy Market
European energy policy to date has enhanced competition mainly within Member States. The third package of legislation proposes a natural extension to that policy by encouraging greater cooperation and integration between Member States to make a single European energy market a reality. The Commission makes an important proposal in this respect: that transmission network operators be tasked with strengthening their cooperation in relation to, inter alia, developing market and technical codes to integrate electricity and gas markets, to coordinate transmission network operation and to coordinate long term planning of system development with the intention that forward-looking (that is, at least 10-year) network development plans will be published to identify investment gaps.
The Commission also has proposed the formation of an Agency for the Cooperation of European Regulators (ACER) to address the gap in cross-border regulation. ACER will be required to act in cases where pipelines and electricity lines extend into the territory of more than one Member State. ACER also will encourage more cooperation between national regulators and monitor cooperation between transmission network operators.
Further market integration, particularly as a consequence of the cross-border transmission of energy and the role of ACER, will allow investors to more easily access different parts of the European energy market and will enhance trading opportunities. The forward-looking development plans also are likely to allow investors to invest with greater certainty.
The third package of legislation must now be approved by the Member States meeting in the European Council, and by the European Parliament. Given the high profile of the third package of legislation, this process may take a year or more to complete. The third package of legislation would "come into force" a short time after it has gone through the approval process (generally within a month). It is currently proposed that each Member State will then have 18 months to implement the legislation into its own domestic law.
Spurred on by its frustration with "structural failing[s]", the Commission has proposed changes that will shake up the European energy market. If enacted, its proposals will be a significant boost to competition by legislating for greater access to infrastructure, such as gas and electricity transmission networks, gas storage facilities and LNG terminals. The proposals also encourage greater cooperation and integration between, in particular, transmission network operators in Member States with a view to making a single European energy market a reality. These proposals could present investors with a spectrum of opportunities to take advantage of a new competitive environment in Europe, such as gaining access to infrastructure, investing in assets that may be disposed of as a consequence of the new unbundling rules and investing with greater certainty based on long term development plans.