ACER (Agency for the Cooperation of Energy Regulators) and CEER (Council of European Energy Regulators) have recently published their Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2012. This second report looks at the retail and wholesale electricity and gas markets, as well as consumer protection, in the European Union.

The end result of energy market liberalisation, market integration and improved cross-border access should be a net benefit to the end user. Nevertheless, this target is yet to be reached. Despite a substantial drop in demand, the price of electricity for household consumers still increased by 4.6% and for gas by 10% in 2012.

According to Lord Mogg, Chair of ACER’s Board of Regulators and CEER President: The advantages brought about by the single market, such as lower wholesale electricity prices or a more efficient use of interconnectors identified in the study, still have fully to benefit final consumers in the retail market.

The most relevant findings of the report are briefly listed below:

Retail Market

  • despite low economic growth, gas and electricity prices have significantly increased, both for households and industrial consumers, in most Member States.
  • after tax, electricity prices increased on average by 4.6% for households and by 5.2% for industrial consumers between 2011 and 2012. For gas, after tax prices increased by 10% for households and 11% for industrial consumers.
  • There are substantial differences between pre-tax prices for electricity and gas across the Member States, and this is true even for countries with relatively similar regulatory frameworks for their retail markets.
  • In some Member States, the larger share of the electricity and gas prices is made up of taxes and network charges rather than the energy-only prices. Some of the extra charges are in fact a result of the support schemes for renewable energy.
  • Regulated prices are still a feature of the majority of the retail markets (18 Member States for electricity and 15 Member States for gas).
  • In a number of Member States, the main driver for setting the regulated prices is political rather than the underlying costs of supply. Keeping regulated prices restricts market entry, increases investor uncertainty, and does not incentivize consumers to switch suppliers.
  • For the gas market, the Czech Republic, Great Britain, the Netherlands, Slovakia and Spain are the Members States that host the largest number of suppliers headquartered in another Member State. For electricity, the most open market is Great Britain followed by the Netherlands and Portugal.
  • Latvia, Lithuania, Estonia, Finland, Greece, Bulgaria, Poland, Portugal and Slovenia are the least integrated gas markets.
  • High transmission / distribution charges and high taxation influences the entry choice between national markets. As a result, there is the need to work on harmonisation of the cost assessment methodologies for transmission and distribution charges to be able to progress towards more market integration.
  • The main barriers to market entry are perceived to be: consumers’ reluctance to switch suppliers, retail price regulation, the regulatory framework for the network charges, lack of liquidity, and insufficiently unbundled electricity suppliers.

 Wholesale Market

  • The report confirms that market coupling is an important driver of price convergence.
  • Following the implementation of market coupling, the overall efficient use of interconnectors (i.e. power flowing from lower to higher price zones) increased from 60% in 2010 to 76% in 2012.
     
  • There is little use of cross-border capacity after the day-ahead market closes; the unused capacity is roughly 60%.
  • The report recognises that the increased penetration of intermittent renewable energy raises challenges for the Transmission System Operators (TSOs) to keep the system balanced. The TSOs will have to use additional flexible resources to be able to balance the system. The report concludes that the most efficient way to use the existing flexible resources is to have a well-functioning market in which resources are allocated based on price signals. The right price signals will also stimulate the right amount of investments both in new generation and in infrastructure. ACER believes that this result can be achieved by finalising the full implementation of the Electricity Target Model for cross-border trade, in particular the intraday and balancing timeframes, which would enable the market to arrive at the prices reflecting the correct value of flexibility.
  • Flexibility in the electricity markets requires an integrated and functional gas market with an efficient balancing regime, storage capacity (including line-pack), nomination time, bundled products (i.e. energy and capacity) at interconnectors, and well-functioning secondary capacity markets.
  • The report recognises that given the current shape and substance of the global gas market, European policies in and of themselves cannot impact the price of gas in Europe.
  • Although the gas consumption for EU 27 posted a year-on-year decrease of 4.1% in 2012, gas prices continued to grow due mainly to three factors: the lack of competition in terms of geographical sources, the high demand for LNG in Asia (coupled with the high prices Asia is ready to pay for LNG), and the indexation to the price of oil for long-term supply contracts.
  • Gas-on-gas competition improved in 2012, and the price of gas at European hubs was lower than the forecasted prices under long-term contracts. Full price convergence now exists in the North-West Europe region. Prices in the Central and Southern Europe region (especially in Austria and Italy) have also converged with those in the North-West Europe region.
  • In the gas market, liquidity increased in 2012 as a result of hedging efforts towards spot trading due to greater economic uncertainty and the renegotiation of some long-term contracts.
  • The National Balancing Point (UK) and Title Transfer Facility (the Netherlands) remained the most liquid and lowest-priced hubs. Nevertheless, the majority of the traded volumes in Europe are still negotiated over-the-counter. Other than these two hubs there has been limited progress at the other European gas hubs, as most Member States are still opting for national solutions.
  • The report concludes that as a result of a weak market integration across the EU, social welfare losses have risen to some several billion Euros, with the highest losses in Bulgaria, the Baltic countries, Slovenia, and Sweden.
  • Cross-border interconnection tariffs are largely divergent from one Member State to the next and are only partially transparent. In the CEE region and for those Member States who joined in 2004 and 2007, costing and pricing methodologies have not been fully published by the TSOs and National Regulatory Authorities (NRAs) The report recommends that Member States improve the information available on tariffs and auction designs.

You can access the full report here.