Towards an EU energy policy 2006 was dominated by the energy sector Inquiry (the “Inquiry”) and the publication of the European Commission’s Green Paper for a common European Energy Policy (the “Green Paper”). The Inquiry is a competition investigation based on Article 17 of Regulation 1/2003, which assesses the competition conditions in European gas and electricity markets and examines whether current indications of market malfunctioning results from breaches of competition law. According to the European Commission, the overall objective of the Inquiry is to address the barriers hindering the development of a fully functioning, open and competitive EU energy market by 1 July 2007, the deadline set by the Second Gas and Electricity Directives.

The results of the Inquiry and the Green Book jointly address a cluster of core objectives (sustainable development, competitiveness, and security of supply). Linked to these objectives are six priority areas: 

  • completion of the internal energy market 
  • ensuring solidarity among Member States 
  • a more sustainable, efficient and diverse energy mix, whilst respecting the right of Member States to make their own energy choices 
  • a strategic energy technology plan 
  • the need for a common external energy policy 
  • identifying infrastructure priorities for the EU’s security of supply

On 10 January 2007, the European Commission published the results of the Inquiry in its final report (the “Report”) and its Communication to the European Council and the European Parliament on Energy Policy for Europe (the “Communication”). Together, the Report and the Communication set out the priorities for the Commission’s proposal for a European energy policy. Whilst the Report and the Communication contain important political suggestions for a legislative package, the Communication is also noteworthy in that it is the first attempt to create a comprehensive and cohesive European energy policy.

The Report has been characterised as “uncomfortable reading” for energy companies by Competition Commissioner Neelie Kroes1 as it identifies five main barriers to a functioning internal energy market: 

  • market concentration 
  • vertical foreclosure 
  • lack of market integration 
  • lack of transparency 
  • distrust in price formation mechanisms

Market concentration

For the gas sector, the Report confirmed that at the wholesale level, markets generally maintain the high level of concentration of the pre-liberalisation period. It stated that wholesale trade had been slow to develop and that incumbent companies remain dominant with only few new companies entering the market. Similarly, in the electricity sector, most wholesale markets continue to show a high degree of concentration in generation.

Vertical foreclosure

In the electricity markets, the vertical integration of generation, supply and network activities has remained a dominant feature in many national markets. For the gas markets, the Report observed that the lack of liquidity and limited access to infrastructure prevent new suppliers from entering the market. The Report criticised the ineffective access to infrastructure such as networks and storage despite EU rules on third party access (“TPA”) and legal/functional unbundling. In addition, the long term supply contracts between gas producers and existing importers render access to the upstream market difficult.

Lack of market integration

In its Report the Commission stated that, in the electricity market, cross border trade was generally insufficient to exert pressure on dominant generators in national markets. The Report highlighted the lack of available interconnection capacity and difficulties caused by diverging national market models. For the gas sector, the Inquiry found a similar lack of pressure from crossborder sales. According to the findings of the Inquiry, this is largely due to the lack of available transportation capacity, which in turn stems from legacy contracts, so called “grandfathered rights” that derogate from the TPA regime of the Second Gas Directive.

Lack of transparency

The Inquiry has concluded that in both the electricity and the gas sectors, there is a serious lack of transparency, with little or no reliable and timely information on the markets. The Report emphasised that more information is needed to create a level playing field. The Inquiry also highlighted that confidentiality rules, if interpreted too narrowly, hinder effective market transparency eg, in respect of available capacity in networks.

Distrust in price formation mechanisms

In both sectors, the Inquiry found that price formation mechanisms were generally opaque and ineffective. The link of the gas prices to the oil price index, leading to wholesale prices that fail to reflect the changes in the supply and demand for gas, was criticised; as was the fact that, in spite of liberalisation, gas prices had actually risen.