Overview

The Governments of the 27 EU Member States had until 3 March 2011 (3 March 2012 for unbundling) to implement national legislation giving full effect to the requirements of the EU's new Third Energy Package. We review the key requirements of the Third Energy Package, and the status of its implementation in the 27 EU Member States.

Brief Overview of Third Energy Package

The Third Energy Package provides a revised regulatory framework for promoting the integration of, and increased competition in, EU gas and electricity markets. The package is comprised of separate Directives for gas and electricity (Third Directives), which are required to be implemented by the Member States, and more detailed rules contained in three related regulations. Overall, the Third Energy Package aims to regulate third party access to infrastructure (TPA); ensure the unbundling of transmission and storage undertakings from energy supply, electricity generation, or gas production undertakings; and ensure that the national regulatory authority (NRA) in each Member State has the requisite powers of enforcement. The regime also provides for a new European energy regulator called ACER.

The requirements of the Third Energy Package apply to any entity doing business in an EU Member State, regardless of where that entity is established. So for example, for the proposed South Stream Gas Pipeline Project which will bring Russian (i.e., non-EU) gas into the EU, Russia's Gazprom must comply with the requirements of the Third Energy Package in the EU Member State transit countries of Austria, Bulgaria, Greece, Hungary, Italy, and Slovenia, but not in Serbia which is yet to become a member of the EU (although Serbia has adopted national legislation which is broadly in line with the requirements of the Third Energy Package).

Unbundling

Historically, many of Europe's largest energy markets, including Germany, France, and (prior to the demerger of British Gas in 1997) the UK, have been dominated by incumbent energy companies who have controlled the functions of production, supply, and transportation. The European Commission (Commission) in its energy sector inquiry (2005 - 2007) identified "serious shortcomings" in the effective functioning of EU energy markets. In particular, it found that inadequate separation of network and supply companies has prevented EU energy markets operating on a truly competitive and open basis.

The unbundling provisions of the Third Directives prevent owners of transmission networks (usually high voltage electricity lines in the electricity sector and large scale pipelines in the gas sector) from exercising control or any other relevant rights over, or cross-subsidising, energy, supply, electricity generation or gas production activities and vice versa. Unbundling, may be achieved in one of the following three ways:

  • Full ownership unbundling (OU): transmission networks cannot be owned or controlled by energy production or supply companies;
  • Independent System Operator (ISO): ownership of the transmission network remains with the vertically integrated supply companies, but operation of the network is transferred to a separate company - the ISO; or
  • Independent Transmission Operator (ITO): ownership and operation of the transmission networks remains with the supply companies, subject to ring-fencing rules to ensure non-discrimination and independence of operations. This structure is only available for gas interconnectors.

Third Party Access

The Third Energy Package requires owners and operators of transmission and distribution systems and LNG facilities located in the EU to provide access to capacity in infrastructure to third parties based on published tariffs that are available on a non-discriminatory basis. Cyprus has secured a derogation from the TPA requirements on the basis that Cyprus is an isolated gas market with no existing gas. This derogation will expire when Cyprus ceases to be described as an emerging market by the EU.

Exemptions

The Commission has recognised that the requirements of the Third Energy Package could potentially deter investment in new energy infrastructure in the EU due to the possible adverse financial consequences of compliance, and that continued investment in the EU's energy markets is essential to ensure future security of supply. To address this issue, exemptions from the unbundling and TPA requirements may be granted by the NRAs (subject to approval by the Commission) where certain conditions are met, in particular that the new infrastructure enhances competition and supply. Exemptions may be partial (less than 100% for TPA) or full and are likely to be granted subject to conditions.

Has the Third Energy Package been implemented?

At the time of writing, there is information that only the following seven EU Member States have transposed or are close to completion of the transposition of the Third Energy Package into national legislation: Austria, the Czech Republic, Denmark, France, Greece, Italy, and Portugal. Germany, Estonia, Latvia, Luxembourg, the Netherlands, Slovakia, Slovenia, Sweden, and the UK are expected to do so during the summer of 2011. Belgium, Bulgaria, Finland, Ireland, Lithuania, Poland, Romania, and Spain are expected to follow by the end of 2011. As yet, there is no indication of when Hungary, Cyprus, and Malta will do so.

This position may be explained, in part, by the different political situations in the Member States not least, with general elections taking place in several EU countries. Belgium has been without a formal Government since last June. Nevertheless EU Member States have a relatively poor record on implementing energy market reforms. As at 1 February 2011, the Commission had more than 60 infringement proceedings open against EU Governments for failing to comply fully with the EU's earlier Second Energy Package.

The Commission is able to start legal proceedings against Member States who fail to implement EU law. However, despite the delay, it is thought that it is unlikely to rush to do so in this case. The European Commissioner for Energy, Gunther Oettinger on 28 February 2011 made clear that 3 March 2011 was “not an absolute deadline”.

Although it appears that most EU Member States will be some months late in implementing the reforms, the Third Energy Package is the starting point for an overhaul of EU energy markets which is expected to take effect within the next two years. The Commission will continue to urge compliance in its public statements, with the sanction of formal infringement procedures should political pressure not be enough.