# EUR-Lex - 52014DC0634 - EN

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# 52014DC0634

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Progress towards completing the Internal Energy Market /* COM/2014/0634 final */**

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COMMUNICATION
FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN
ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Progress
towards completing the Internal Energy Market

1.         INTRODUCTION

Over the last two
decades Europe's energy policy has consistently been geared towards achieving
three main objectives: energy in the European Union should be affordable and
competitively priced, environmentally sustainable and secure for everybody. A
well-integrated internal energy market is a fundamental pre-requisite to
achieve these objectives in a cost-effective way.

In 2011 the Heads of
State or Government recognised the importance of having an internal energy
market in place and set a clear deadline for its completion by 2014, underlining
that no EU Member State should remain isolated from the European gas and
electricity networks after 2015.[1]
These targets have often been repeated ever since and explicitly endorsed by
all the main stakeholders, from industry associations to consumer
organizations.[2]
The enormous importance of the energy sector to Europe's competitiveness,
welfare and independence means that the EU cannot afford failure.[3]

In November 2012 the
Commission reported exhaustively on the state of the internal energy market,
taking stock of what had been achieved and looking forward by identifying three
main challenges to focus future work on.[4] The
challenges and associated actions related firstly to the need to implement,
apply and act in accordance with existing legislation, secondly to the need to
make our energy systems fit for a low-carbon future and thirdly to put the
consumer centre stage as a key enabler of the necessary transition and also as
the ultimate beneficiary of liberalisation efforts. It is now time to take
stock of the progress made towards meeting these challenges and to identify
remaining gaps in this endeavour.

In January 2014, the
Commission published a Report on 'Energy prices and costs in Europe' which
established that wholesale prices for electricity have dropped significantly in
the EU and that wholesale gas prices have remained roughly stable since 2008.[5] However,
retail energy prices in Europe rose significantly between 2008 and 2012 i.a. as
a result of increasing energy taxes and levies which represent a significant part
of the retail energy bills.[6].
They diverge moreover substantially between Member States, showing the
importance of thorough assessment of their interventions and highlighting the
potential and the need for more policy co-ordination.[7]

The need for policy
co-ordination at an early stage has also been a guiding reason for the
Commission to propose in January this year a new climate and energy policy
framework until 2030. A competitive and integrated internal energy market is an
important component of that framework as it will provide the necessary
environment for the achievement of ambitious future energy and climate policy
objectives in a cost-efficient manner and thereby help to ensure that energy
prices for business and households are not distorted and that necessary
investor confidence is retained.

Most recently, the Ukraine crisis with all its risks for security of supply demonstrates once more what the EU
stands to gain from well-integrated and well-connected energy markets with diversified
supplies and solidarity in the face of crises. We must continue to focus on the
diversification of gas supplies, on the construction of missing links to
connect isolated areas, on developing our own low-carbon energy resources and
ensuring the integration of renewables in a secure and reliable manner, on the
creation of liquid trading places and the removal of unnecessary administrative
hurdles, on increasing investment in smartening grids, on empowering consumers
and on the equal application of common energy law across the Union. Regional
cooperation is crucial to achieve these objectives and the recent crises
demonstrate that it is no longer an option for the Member States to act in
isolation.

This Communication
underlines that the EU is moving in the right direction. But whilst we are well
underway, it is also clear that the work is not done yet and that clear gaps
exist that form obstacles for the market to function smoothly.

2.         MARKET
INTEGRATION IS IN PROGRESS AND DELIVERING CONCRETE RESULTS

There is little doubt that a well-functioning
cross-border energy market is the only realistic tool to maintain a healthy and
efficient energy sector in the EU in the future. A recent study commissioned by
the Commission estimates the net economic benefits from completion of the
internal market to be in the range of 16 - 40 billion Euros per year.[8]

2.1       An
integrated market is a basis for the cost-efficient decarbonisation of our
energy systems

Today 23.5% of the
electricity produced in the Union and 14% of final energy consumption over all
sectors is from a renewable energy source. This puts the EU on track to reach
its target of 20% of our energy consumption being from renewables by 2020, even
if further efforts will be necessary to achieve this target. It also provides a
strong basis to continue and reach a more ambitious renewables target for 2030.[9] The
Commission has proposed to set such an EU-wide target of at least 27%.[10]

As renewable
penetration increases, it also raises challenges. The variability and limited predictability
of solar and wind power make it more demanding to stabilise the grid. Well-integrated
markets are without any doubt best suited to address that challenge.[11] They
make it possible to connect areas with complementary energy mixes and hence
make the energy system more resilient to swings in demand or supply. A telling
example are the coupled German and French electricity markets where the
continuous cross border flows enable Germany to keep its system stable in times
when wind and sunshine is abundant, and at the same time allowing France to
ensure its supplies at peak demand.

Cross-border trade in
electricity between most EU countries has increased and so has the use of
interconnectors – the share of imports in the total
electricity available for final consumption has grown in 23 Member States
between 2008 and 2012. However, it is nowhere
near its full potential yet. More trade requires strengthening the physical
connection of our markets which is still insufficient in many areas of the EU. It
also requires that remaining obstacles to cross-border trade are removed, such
as remaining restrictions on exports or disproportionate licence requirements.

Well-functioning
markets can furthermore promote and reward flexibility and energy efficiency. If
prices reflect the balance between supply and demand, and consumers benefit
from the possibility to adjust their consumption patterns to price signals
(demand response) the total cost of securing energy supplies can be lowered as
the need for expensive peak generation and network capacity is reduced.

2.2
      A well-connected internal energy market is key to secure energy supplies

Europe
traditionally enjoys a very high degree of secure electricity supplies compared
to other regions of the world, thanks amongst others to the reliability of our
grids. As outlined above, maintaining the same level of grid stability becomes
a bigger challenge as increasing shares of variable renewables enter the energy
mix. Europe’s electricity transmission grids need to be better connected to
each other and operators need to cooperate more closely to keep the system
balanced throughout the day. A bigger connected area will enable variability of
renewable sources to be better counterbalanced. In this regard, Europe needs to
continue to address the effects of unplanned power flows ("loop
flows") on cross-border market integration which still cause problems in
parts of Central and Eastern Europe.

For gas, it is even
more evident that a competitive and integrated internal market is Europe's key insurance for a high level of security of supply. This year's Ukraine crisis has put energy security and dependence high on the agenda of the EU again.
The Commission has
come forward with an in-depth study and a comprehensive plan for the reduction
of the EU's energy dependence[12]
following up on the conclusions from the European Council of 21 March 2014. Ending
the isolation of those Member States that today are entirely dependent on a
single external supplier remains also in this respect a priority.

The overall gas
security of supply situation in Europe has significantly improved over the past
five years. The robustness of Europe’s security of gas supply has been tested a
couple of times in recent years. February 2012 and March 2013 were much colder
than predicted, but markets have continued to function well, sending gas to
where it was most valued and preventing shortages from occurring anywhere in Europe. Even if a major disruption of gas supply occurred, Europe is today in a much better
position than five years ago. As of the adoption of the Security of Supply
Regulation[13],
Member States have increased their efforts and invested in more flexible
pipelines, more storage capacity, enhanced emergency preparedness and response
plans and increased coordination.

The level of Europe’s
security of gas supply will further increase for instance thanks to the opening
of the Southern Corridor, allowing gas from Azerbaijan to be delivered on
European markets, as well as the construction of further missing links and LNG
terminals, such as in the Baltic Region and Poland. These investments
demonstrate that an integrated market of 500 million consumers and a yearly
consumption of 480 bcm, continues to be an attractive place for investors to
invest and for producers to sell their gas. However, such investments by
themselves are not enough to ensure an appropriate level of security of supply
now and in the future. To ensure supplies the EU gas market needs to be a place
where market participants can trust that they will be treated fairly on the
basis of a transparent and stable legal framework. In order to continue
enjoying the high security of supply standards the EU is used to and to keep
the associated costs in check, Member States need to be serious about the
internal market, applying the legal framework[14]
and stimulating the right investments.

2.3       Competitive
markets are ensuring competitive prices and reducing system costs

The increased
competition on the wholesale market has significantly impacted prices. In
electricity, wholesale prices have fallen significantly – between 35% and 45%
in the period between 2008 and 2012[15]
– and they have remained stable for gas. Interconnectors are used more
efficiently and better regulation ensures that the most cost-efficient solution
is implemented in deciding which power plant should produce at each point in
time. Moreover, system costs are substantially lower in an integrated market.[16]

In gas, the
diversification of supplies especially in the Western part of the continent has
allowed Europe to benefit from low LNG import prices in the period between 2007-2010.
Several long term contracts have been partially and to differing extents
renegotiated with Europe’s traditional suppliers, especially in areas where
alternative supply possibilities are available. These renegotiations have in
turn led to the reduction of the importance of the outdated oil price link in
gas supply contracts.

Even if LNG prices have
gone up following the increase in demand in Asia post-Fukushima, prices on Europe’s gas hubs have remained in check. And while the key ingredients for a functioning
hub have so far been available only in North-Western Europe, the last two years
show important positive developments in for instance Italy, Poland and the Czech Republic as well. Well-organised, transparent market places that operate on
the same set of simple, harmonised rules across Europe make it much easier for
sellers of gas to ship and trade gas across borders.

Hubs and power
exchanges do not just facilitate trade, they also provide important information
on the value of the traded commodity. Whether in gas or in electricity, the
price at the hub or power exchange indicates where demand is high and supply is
low or vice versa. In the short term, these price signals make sure that power
and gas are dispatched in an economically sensible manner. As a consequence
cross-border interconnectors are today used in a much more efficient manner
than before and flows in the economically 'wrong' direction hardly occur
anymore.[17]
In the longer term, these price signals are crucial to indicate where
investments in additional infrastructure or generation capacity make sense.[18]

In other words, price
signals help optimise the use of existing infrastructure and make sure we
invest in the most economically sensible projects for the future, enabling us
to keep wholesale prices in check today and at the same time maintain an
affordable energy system throughout the process of modernizing and
decarbonizing our energy sector further.

However, while the development
of prices on the wholesale markets is encouraging, consumers are not directly experiencing
these benefits. An important and growing[19]
part of retail energy bills in the EU consist in taxes and surcharges. In most
parts of Europe, retail markets are still organised towards a one-way flow of
energy from centralised large generation to many individual consumers. But as
new technologies, such as smart meters, home automation and small-scale
generation become increasingly available to all consumers, an opportunity and a
necessity arises to enable consumers to take control of their energy bill,
while facilitating the integration of renewables in the distribution grid and
increasing its efficiency.[20]

3.         MARKET
INTEGRATION REQUIRES MORE GRIDS AND TRANSPARENT, SIMPLE AND ROBUST RULES

Whilst significant
progress has been made, a lot still remains to be done. In order for gas and
power to be traded and transported smoothly across borders, physical wires or
pipelines (‘the hardware’) are needed, on the one hand, and a clear, commonly
applied regulatory framework (‘the software’) on the other. However,
transmission grids as well as regulatory frameworks have grown nationally, with
the understandable focus to optimise the national system. These now need to be
forged together in regional and EU-wide systems.

3.1       The Hardware:
investing in the networks of the future

Software cannot run
without hardware and energy markets can only function when they are
well-connected. The last years have witnessed progress in getting investments
done, particularly in transmission infrastructure and particularly in countries
where a stable regulatory framework is in place[21]. An
energy system, in which Member States try to be self-sufficient in their
electricity generation and in their gas production or imports, is no longer sensible
or efficient.

3.1.1    Significant
progress

Thanks to the rigorous
application of the provisions in the Third energy package, including the
unbundling rules and those mandating the establishment of ten-year-network
development plans, an investment climate now exists that makes sure those lines
are being built that are needed most. The Third package has reduced both the
incentive and the ability for operators to revert to discriminatory behaviour
or withhold the construction of important infrastructure. Today, 96
of approximately 100 transmission system operators in Europe have been certified as compliant with one of the Third energy package's unbundling
models.[22]
The Commission will continue to monitor the situation and will also remain
vigilant to ensure compliance with the EU competition rules.

More investment in
strategic energy infrastructure is needed and Europe can help to support important
investments both financially and administratively. Therefore, the Commission has
proposed, in May 2014, to extend the current 10% interconnection target to 15%
by 2030.[23]
Currently, the average interconnection level stands at about 8%. Moreover, in
October 2013, the Commission adopted the first Union list of 248 projects of
common interest ('PCIs') which urgently need to be realised so as to further
strengthen the integrated market. Three quarters of these projects should be
completed by 2020.

Being qualified as a
PCI means that a project can benefit from more efficient permit granting
procedures. Moreover, it can obtain financial support from the European Union
under the so-called Connecting Europe Facility. €5.85 billion has been
dedicated for energy infrastructure[24], [25].

Already the European
Energy Plan for Recovery (EEPR) of 2010 and its implementation have shown how
political consensus and targeted Union funding can make a decisive difference
in accelerating the construction of critical infrastructure projects and
thereby stimulate not only the energy markets but also the economy in general.
This programme has delivered several reverse flow projects in Central and Eastern
Europe, for instance between Germany and Poland, which has made the European
gas system more resilient to potential supply shocks.

Moreover, many missing
links have already been completed, such as the electricity cables between Estonia and Finland or between the UK and Ireland. Other vital projects are currently under
construction, such as the LNG terminals in Poland and Lithuania, the electricity interconnector between Sweden and Lithuania or the gas interconnector on
the Hungarian-Slovak border.

3.1.2 
Additional infrastructure needs to be
built urgently

Making our gas and
electricity networks fit for the future requires the reinforcement of the
existing transmission pipelines and cables within and between market areas. In
gas, investments should first and foremost focus on ending the isolation of the
Baltic States and the diversification of supply in many Central-Eastern and South-Eastern Member States.

Critical areas where
electricity transmission capacity is scarce inside a market area are Germany and the intra-Baltic connections. Linking the electricity grids of the Iberian
Peninsula, the Baltic region and Ireland and the United Kingdom better with the
continent also remains a priority. The construction of an integrated offshore
grid in the Northern Seas as well as electricity highways that will allow
cost-optimal integration of the EU's significant offshore and onshore
renewables generation in the power system is another important challenge.
Moreover, ensuring electricity grids that can deal with the challenges of
tomorrow means that they need to be smartened. In particular at distribution
level investments in smart meters and local generation need to be accompanied
by investments that enable DSOs to manage the grid in a smarter and more
efficient way. Smart grids also offer a unique opportunity for industry to
develop engineering solutions and innovative products that automate the grid or
the home: This is something that EU companies have traditionally been good at.

As the lion’s share of
the grid investments will not come from public money, the investment climate
needs to be further improved. Consequently access
to finance remains a continuing problem for infrastructure development in the
EU. Investments in energy infrastructure are capital intensive projects that
require stable and predictable regulatory conditions. While investors are still
risk averse, the lack of a stable regulatory framework can shake investors'
confidence. Ongoing work on common EU-wide rules for setting transmission
tariffs in gas as well as the practice developed by NRAs and the Commission in
setting tailor-made regulatory regimes for important new individual projects
(such as TAP or Eleclink) are steps in the right direction which need to be
built upon further.

Member States need to
implement the TEN-E Regulation, in order to identify and complete the most
important Projects of Common Interest. Current delays in the implementation,
such as in the designation of single points of contacts for permit granting,
are unacceptable. In addition to building new infrastructure, it needs to be
ensured that existing infrastructure is used efficiently and to the benefit of secure
supplies. In that context, the Commission is aware that utilization rates for
LNG terminals have dropped in recent years and months, putting pressure on the
industry. Also the commercial use of gas storage facilities seems to be on a
downward trend, even if storage levels in August 2014 are at record highs.
Market uncertainties certainly expose LNG and storage operators to increased
commercial risks. An assessment is necessary as regards the potential impacts
of this development on the security of supply in the long run.

3.2       The Software:
the need for transparent, simple and robust rules

With wholesale gas and
electricity markets becoming larger than national and with energy companies
spreading their footprint beyond their home-market, market integration should
not be held back by regulation and regulatory oversight that remains nationally
focussed. The patchwork of national regulatory regimes, and the frequency of
changes in the regulatory framework in some Member States have created
unnecessary administrative and transaction costs thus failing to provide a
solid basis for needed investments.

The Third energy
package foresees the development of a harmonised legal framework at European
level. Thanks to the cooperative efforts at European level of national
administrations, the energy regulators (under the umbrella of the Agency for
the Cooperation of Energy Regulators (‘ACER’)) and the network operators
(associated in the European networks of transmission system operators for gas
and electricity (‘ENTSOs’)) it has started to take solid shape.

These binding European
rules, referred to as Network Codes, are being developed, adopted and
increasingly applied in the day-to-day practical functioning of the gas and
electricity wholesale markets. Their impacts may not be as immediately tangible
as those of a new interconnector, but they represent true progress that is
fundamental to foster cross-border trade in gas and electricity. However,
progress diverges between the electricity and the gas sector as well as between
regions and new challenges have become apparent.

3.2.1 
Significant progress to date and
remaining challenges

For the market to take
off, a first prerequisite is ensuring that all market participants can make use
of the existing gas and electricity infrastructure in a non-discriminatory way
and at a fair price. Priority has hence been given to capacity allocation and
congestion management of the networks and in particular interconnectors. Pilot
projects and early implementation at regional level have shown the way.

A prime example of such
regional cooperation was the establishment in February 2014, by grid operators
and power exchanges from fourteen Member States[26],
of the so-called 'day-ahead market coupling', a mechanism that manages
cross-border electricity flows in an optimal way, smoothing out price
differences from the Baltic States to the Iberian peninsula.[27]
Since May 2014, also the South-West European Market, i.e. Spain and Portugal, are coupled with North-Western Europe. Hungary, Slovakia and the Czech Republic have also implemented as a first step the coupling of their markets, with
the ambition to couple that market with the larger market in the west. A market
design that better reflects actual physical bottlenecks would further improve
investment signals and operational efficiency. In gas, an example of the
achievement of similar impact is the establishment of the PRISMA-platform in
2013, where interconnection capacity for the networks of 28 TSOs responsible
for transporting 70% of Europe's gas is auctioned in a transparent and uniform
manner.[28]

The rules have now been
formalised in the first legally binding network codes for gas. For electricity,
we are on track for the adoption of the first set of codes later this year. The
next step will be to focus on facilitating short term trading and developing
ancillary services markets to allow participation by new actors, including
renewable energy producers. As our energy systems need to become more flexible
with the integration of variable wind and solar power, it is important to
develop short term markets which allow buyers and sellers to adjust their gas
and power purchases on a continuous, real-time basis during the day, buying at
short notice or selling unforeseen surpluses. This
needs to take into account the
changing interaction between TSOs and DSOs, as grids become smarter. Cross-border balancing markets are also
key, to allow balancing resources to be effectively shared between countries
enhancing security of supply and reducing balancing costs for the system. In
gas, a binding network code has been adopted harmonizing at EU level the
responsibilities and rights of various actors and enabling trades in so-called
balancing markets. In electricity, a first set of minimal rules to align the
patchwork of national balancing regimes is under way.

The operational rules
for gas and electricity networks are being improved, standardising protocols
for TSOs to interact with each other, under regular circumstances as well as in
cases of system stress and emergency. The aim is to simplify processes and make
them more robust. When the system works, it will mean more security for
consumers and more certainty for investors. An important, but often
underestimated challenge in ensuring the long-term safe and secure use of gas
by EU citizens and industries relates to the fact that gas qualities are
changing as a result of new suppliers and varying flow patterns. Member States
should continue to carefully assess and communicate changing gas qualities.

Finally, transparency
has been improved substantially and in many ways. Regulatory oversight to
ensure market integrity and avoid market abuses has been tightened thanks to
the application of the rules laid down in the 2011 REMIT Regulation.[29] A
central information transparency platform for the publication of data in
electricity markets will be established by ENTSO-E by early 2015.[30] Market
operators and investors need these data to base their short term trading and
long term investment decisions on. It is of the utmost importance that
regulators and ACER keep a close eye on the trading activities, because
consumers and policy makers need to trust that prices are not manipulated to
the advantage of some but detriment of consumers. In the UK the investigation announced by energy regulator Ofgem is a good example.[31] It is
important that ACER and NRAs dispose of the necessary resources to carry out
these significant new tasks effectively, in close cooperation with financial
market supervisors and competition authorities.

3.2.2 
Adoption of further network codes and
better implementation are needed

The work on ensuring a
framework of efficient use and development of capacities in gas pipelines and
electricity grids needs to be continued and complemented.

Network tariffs are a
sensitive issue in both gas and electricity. The composition of tariffs should
be transparent and should build on clear common European rules, so that network
users can be sure that they will be paying a fair price no matter in what
country they are active. Tariffs also have an important distributional effect:
between producers/suppliers and customers, across borders. The internal energy
market will not be complete if this remains a purely national matter, where
cross-border impact is not fully taken on board. The relevant network codes are
currently in the early stages of their development, but will need to be
completed and adopted in the next two years.

Once the agreement
among stakeholders and policy makers on the most urgently needed market rules
is reached, the focus needs to be redirected to the implementation and strict
application in practice. This requires first and foremost the full cooperation
of all the actors involved. The ENTSOs should actively play their role of
monitoring implementation of the network codes, a task they have been entrusted
with under the Third energy package, but which so far they have been reluctant
to take up. ACER is encouraged to put emphasis on implementation as well, as it
has started to do with the congestion management report in gas published in
March 2014 and in their annual market monitoring reports.

3.2.3 
Smart grids need to be beneficial for
the energy system as well as for households and SMEs

Getting the most out of
new technologies means breaking down the barriers between wholesale market and
retail markets. If consumers of all sizes, including households and SMEs, are
to benefit from adjusting consumption and production according to wholesale
market price signals, they need to be able to offer their flexibility on the
market, directly or indirectly, but always with the freedom of choice.[32] In
  Sweden this is already a reality, and retail consumers are increasingly
opting for dynamically priced electricity contracts.[33]

The job of operating
distribution systems will begin to incorporate some of the complexities which
only transmission system operators had to face in the past. It means that
DSOs would need to invest intelligently, not just in wires, and to deal with
local network constraints through markets where flexibility is traded in a
transparent way with a level-playing field for all who offer it. It also means
that DSOs need to get adequate incentives through tariff Regulation.[34]

Data traffic will
increase dramatically in smart grids. Consumers are already legally entitled to
decide who has access to their metering data[35],
but the NRA or the Member State needs to define clear data management processes
to ensure privacy, security and non-discriminatory access. Smart meters will
produce detailed and verified consumption data to be used for billing the final
consumer. Real-time consumption data from the house, the smart appliance or the
electric car do not require verification by the DSO: to create a competitive
market for innovative energy services these should be directly accessible to the
consumer or any party upon the consumer's agreement.[36]

Different pilot
projects give a mixed picture on the interest of consumers in innovative
services, and the price reduction of solar panels or batteries is difficult to
predict, but it is clear that the integration of renewables and the focus on
energy efficiency will transform the way in which electricity is produced,
transmitted and consumed. The regulatory framework needs to accommodate the
transformation and ensure that it allows consumers to take control over their
energy bills in a way that enhances the energy efficiency of the whole system.

4.         IMPLEMENTATION
AND DEEPER INTEGRATION BASED ON REGIONAL INTEGRATION

Following the agreement
by European Heads of State or Government on the importance of completing the
internal energy market in 2014, the Commission published an Action Plan for the
completion of the internal energy market containing 22 concrete actions to be
undertaken, related to the enforcement of existing legislation, the functioning
of the retail market and the transition of the energy systems.[37]

4.1       Progress in
ensuring enforcement and well-designed public intervention

As to enforcement, the
infringement cases for partial transposition of the Third energy package
Directives which the Commission pursued since 2011 have borne fruit in urging
Member States to put in place the national legislation transposing fully the
Directives.[38]
The Commission now turns its attention to non-conformity checks in order to
verify whether the notified measures by the Member States correctly transpose
the Third Package.

Progress has also been
made in addressing the threat of uncoordinated and counter-effective national
measures damaging the internal market. In the
aforementioned Communication on public intervention and
in the State aid guidelines for energy and environment the Commission provided
guidance to Member States to ensure that their interventions are necessary and
proportionate pointing at their pivotal role
in making the internal market a success rather than intentionally or
unintentionally damaging it. Where justifications for interventions exist, such
as for the promotion of renewables, they should be designed to facilitate
market integration.

Those Member States who
already have capacity mechanism in place (e.g. Greece and Ireland) are now beginning to change them to bring them into line with the Guidance
provided by the Commission. Cooperation between the Commission, Member States
governments, regulators and transmission system operators will continue to be
important on this complex matter particularly in assessing
how the gains from an integrated approach can be best
achieved. Currently several Member States, including France and Italy, are planning
to implement capacity mechanisms, while others, such as Germany, are actively
considering developing fall-back mechanisms. Whereas well designed measures can
offer a proportionate and effective solution to real generation adequacy
shortcomings, badly designed schemes will unnecessarily burden consumer bills
and may undermine investments in energy efficiency and new interconnectors and
impact our decarbonisation policy.

In its guidance
documents, the Commission has underlined the importance of a thorough and
objective analysis looking into all possible causes of and all potential
remedies for security of supply concerns. Regional cooperation is crucial in
this respect in order not to forget possible cross border solutions which may
be more effective and less costly. The Commission notes that neighbouring
Member States such as France and Spain, the United Kingdom and Ireland, Belgium and the Netherlands, or the Baltic States often have complementary energy mixes
with excess capacity in one country and potential deficits in the other.
Integrating such markets better and finding common solutions could be cheaper
and benefit all. Political commitment in the countries concerned is however a
prerequisite to make such common solutions work.

As a minimum
requirement, the Commission asks for capacity mechanisms to be open to capacity
abroad which can effectively contribute to meeting the required security of
supply standards in the Member State concerned. A second requirement is that
the capacity mechanisms must promote and reward demand side solutions to the
same extent as generation solutions. Flexibility of production and demand must
be encouraged so that capacity mechanisms complement in this respect the
incentive stemming from variable electricity prices in the day-ahead, intraday
and balancing market.

The Commission is
undertaking detailed studies on the development of a European generation and
system adequacy assessment. These will help identify the adequacy standards
which are appropriate in an effectively functioning internal energy market. This
work will involve ENTSO-E, ACER and the Member States' authorities, including
through the Electricity Coordination Group. The outcome of these studies will
provide an objective evidence base for future work by the Commission.

Similarly there are
already indications that better cooperation and data exchange alone may not be
sufficient to resolve regional congestions or to respond to wider system
disturbances in real time. The
voluntary regional TSO initiatives that have emerged in response will be a
valuable source of information about the effectiveness of regional control
centers with well-defined decision making powers of specific operational
matters.

4.2       The need for
a regional approach

ACER and the ENTSOs
have played a key role in the progress towards a functioning internal energy
market. The Commission has recently made an
evaluation on the first years of functioning of ACER and has concluded that the
agency has become a credible and
respected institution playing a prominent role in the EU regulatory arena and
focusing on the right priorities.[39] But cooperation of and
between ACER and the ENTSOs will have to deepen as the integration of markets
goes further and regulatory questions are more often of a cross-border nature. The
institutional framework needs to be fit to effectively deal with practical
regulatory questions that come up.

For ACER
and the ENTSOs to function effectively, the active participation of its members
is essential. A large majority of the national regulators take part and lead ACER's
working groups. The Commission is concerned about the cutting of staff and
budgets of the regulators of several Member States, especially as they have
seen their tasks being widened over the past years. Whilst the implementation of budgetary policy recommendations under
the Stability and Growth Pact must not be compromised, in some countries the
regulators appear to be structurally under-resourced[40]. It is equally worrisome that in a limited number of countries the
independence of regulators and the required allocation of powers are still not
fully in place.

A regional approach has
been and will also in the future be decisive for the integration of the
European energy market. It allows for immediate results and can stimulate
cross-border exchanges, increase security of supply and facilitate the
integration of renewables. Often cooperation in a smaller group than the entire
EU can go faster and can be better suited to address the particular challenges
of the region concerned.[41]

Regional initiatives
provide a solid basis for delivering the internal energy market through
concrete results that are directly visible. This can take the form of expansion
of cross-border network infrastructure, such as the North Seas Countries'
Offshore Grid Initiative, which seeks to develop an interconnected high voltage
transmission network in the North Seas that will link markets better and
facilitate the integration of off-shore wind parks in a secure manner. Another
example is the Baltic Energy Market Interconnection Plan (BEMIP) which seeks to
end the isolation of the Baltic Region and to integrate it fully into the EU
energy markets thus increasing security of gas supplies. Co-operation in
Central and South-East Europe is likewise important to create wider options for
sourcing gas in the region and reducing dependence on a single source of
supply. Co-operation between Greece, Italy and Albania, supported by the
Commission, has for example been effective in putting in place an appropriate
regulatory framework for the TAP which will bring additional sources of gas
from the Caspian region to the EU market.

Regional initiatives
are also proving their concrete value in the (early) implementation of network
codes. This is demonstrated by the examples mentioned in paragraph 3.2.1 on the
market coupling initiative in electricity and the PRISMA auctioning platform
for pipeline capacity in gas. Market integration is thus developing from the
North to the South and from the West to the East, based on concrete projects
initiated at regional level.

Going forward, regional
market integration should continue as a decisive step towards the ultimate
consolidation of a single energy market across the EU.[42] Significant
attention should therefore be paid to enhance coordination of the different
regional processes to ensure its ultimate convergence and integration.

4.3       Stepping up
our efforts

As Chapter 3 of this
Communication has demonstrated, the progress on the completion of the
regulatory framework underpinning the market is significant, but efforts need
to be stepped up especially in finalizing the electricity network codes and in
overseeing their timely and correct implementation throughout the EU.

Most of the 2012 Action
Plan has been implemented or is well on track, taking the EU a long way towards
the completion of the internal energy market as envisaged at the time of the
adoption of the Third energy package. By no means, however, can we rest on our
laurels. Even when all rules will be in place, monitoring and ensuring their
enforcement and the respect of the level playing field for all actors will be
an ongoing effort for authorities at national and EU-level. A consistent and
correct application of the rules applicable to the distribution grid, in
particular the Third energy package and the Energy Efficiency Directive, taking
into account technological developments, is required to ensure that increased
smartness brings benefits to consumers and the energy system as a whole.

Going beyond the 2012
Action Plan, it is the Commission's view that additional benefits could be
gained by deepening the integration of the internal energy market. The
Commission's proposal for a new climate and energy policy framework until 2030 as
well as the European Energy Security Strategy makes it clear that further
integration of energy markets will be a prerequisite for meeting our medium- to
long-term objectives.

[1] Conclusions of the European Council of 4 February 2011, https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/trans/119253.pdf

[2] See e.g position papers of IFIEC (http://www.ifieceurope.org/docs/20140225%20IE_Manifesto.pdf),
Eurogas (http://www.eurogas.org/uploads/media/Internal_market_13PP011_-_Eurogas_Position_Paper_on_the_Internal_Energy_Market_-_24.01.13.pdf),
Eurelectric (http://www.eurelectric.org/news/2012/achieving-the-internal-energy-market-by-2014-must-remain-key-priority,-eurelectric-urges/)
and BEUC (http://www.beuc.eu/publications/x2013_091_mgo_memorandum-greek_presidency.pdf)

[3] Conclusions of the European Council of 21
March 2014, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/141749.pdf

[4] Commission's Communication "Making the internal energy market
work" of 15 November 2012, http://ec.europa.eu/energy/gas_electricity/doc/20121115_iem_0663_en.pdf

[5] Competition is an important but not the only factor contributing to
this decrease. Increasing renewable sources able to produce at zero marginal
costs as well as the economic downturn are also important factors.

[6] Commission's Communication "Energy prices and costs in Europe" of 22 January 2014, http://ec.europa.eu/energy/doc/2030/20140122_communication_energy_prices.pdf.

[7] The Commission has addressed this issue most notably with its
November 2013 Package on Public Intervention in the energy sector, C(2013) 7243
final.

[8] Study "Benefits of an
Integrated European Energy Market" by Booz & Company Amsterdam, page
21, http://ec.europa.eu/energy/infrastructure/studies/doc/20130902_energy_integration_benefits.pdf.

[9] Commission's Communication "A policy framework for climate and
energy in the period from 2020 to 2030" of 22 January 2014,

http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52014DC0015&from=EN.

[10] COM(2014)15 final.

[11] Together with a well-functioning market, the introduction of the EU
ETS System and the full Europeanization of the carbon market design in 2013
facilitate the transition towards sustainable, low carbon and efficient energy
systems.

[12] Commission's Communication, 'European Energy Security Strategy', of
28 May 2014 http://ec.europa.eu/energy/doc/20140528_energy_security_communication.pdf.

[13] Regulation (EU)
No 994/2010 concerning measures to safeguard security of gas supply and
repealing Council Directive 2004/67/EC, OJ L 295/1.

[14] This includes rules on state aid, environment and the EU commitment
to phase out fossil fuel subsidies.

[15] Commission's Communication "Energy prices and costs in Europe" of 29 January 2014, http://ec.europa.eu/energy/doc/2030/20140122_communication_energy_prices.pdf

[16] Study "Benefits
of an Integrated European Energy Market" by Booz & Company Amsterdam,
page 21, http://ec.europa.eu/energy/infrastructure/studies/doc/20130902_energy_integration_benefits.pdf

[17] See Figure [26] of the SWD "Trends and developments in
European energy markets", as annexed to this Communication, SWD (2014) 310

[18]
Where there are concerns about a lack of investment signals in a particular
region within a wider price zone (generally corresponding to a Member State) this is either a result of insufficient network strength, or a sign of a
fundamental economic divergence between the two parts of the price zone. Once
network strength and stability is ensured, the geographical location of
generation does not in itself affect security of supply. Indeed this is one of
the benefits of the internal electricity market. TSOs should be able to procure
system support services for a limited period of time and in a regulatory
approved manner while the network is being strengthened; however, a regional
capacity mechanism within a single price zone would distort market functioning.

[19] Data
between 2008 and 2012 show an increase in taxes and levies.

[20] According to Member States' intelligent metering system roll-out
plans, based on the obligation of Annex I.2 of Directive 2009/72/EC, by 2020
72% of all electricity consumers will have a smart meter. Solar panels on roofs
currently account for around
11,5% in Germany, 5% in Italy of total installed generation capacity; Sources:
KEMA (2014) “Integration of Renewable Energy in Europe”, EPIA, pvgrid.eu,
Commission.

[21] Staff Working Document on the Implementation of TEN-E, EEPR and PCI
Projects, as annexed to this Communication, SWD (2014) 314 and Staff Working
Document on Investment Projects in Energy Infrastructure as annexed to this
Communication, SWD (2014) 313..

[22] The most popular unbundling model is the model of full ownership
unbundling. The ITO-model is applied by approximately one third of the gas
TSOs. In electricity, the ITO model is applied by only six TSOs. The
effectiveness of the ITO-model is assessed in a Staff Working Document annexed
to this Communication, SWD (2014) 312.

[23] See footnote 12.

[24] Staff Working Document on the Implementation of TEN-E, EEPR and PCI
Projects, as annexed to this Communication, SWD (2014) 314.

[25] The European Regional Development Fund can also support
investments, mainly in less developed regions.

[26] Belgium, Denmark, Estonia, Finland, France, Germany, Austria, UK, Latvia, Lithuania, Luxembourg, the Netherlands, Poland and Sweden. Norway also joined as non-EU Member State.

[27] Commission's Press Release entitled "Progress towards the
Internal Energy Market 2014: Pilot project for EU wide electricity trade starts
today" of 4 February 2014, http://europa.eu/rapid/press-release_MEX-14-0204_en.htm

[28] Other examples of early implementation of the gas network code on
capacity allocation are the Polish GSA-platform and the Hungarian-Romanian RBP.

[29] Regulation (EU) No 1227/2011 on wholesale energy market integrity and transparency, OJ L 326/1.

[30] As defined in Commission Regulation (EU) No 543/2013.

[31] Ofgem's Press Release of 27 March 2014.

[32] Article 15.8 of the Energy Efficiency Directive requires that
demand response service providers have access to organised markets at equal
terms to suppliers.

[33] According to the Swedish NRA the number of variable price contracts
has increased from 4% to 38% between 2004 and 2014. Source: EI, 17 April 2014.

[34] As defined in Article 37.8 of Directive 2009/72/EC.

[35] As defined in Annex I.1(h) of Directive 2009/72/EC.

[36] Article 4.12 of Directive 2014/94/EU on the Deployment of
Alternative Fuels Infrastructure requires that consumers are able to contract
electricity for an electric car separately. This enables new business models to
sell cars with an electricity 'subscription'. When it is possible for a car it
is also possible for any appliance in the house.

[37] This was part of the November 2012 IEM Communication. Nine of these
actions were specifically targeted at making the retail market work in the
various Member States.

[38] As of 22 September 2014 such infringement cases for partial
transposition remain pending only against 2 Member States, one of which has
recently adopted further legislation, under assessment by the Commission.

[39] http://ec.europa.eu/energy/gas_electricity/acer/doc/20140122_acer_com_evaluation.pdf

[40] See country reports attached to this Communication.

[41] Regional integration has been successful so far. The Nordic
countries have shown the way in the electricity sector with an early
integration of their markets into NordPool. Likewise, the Pentalateral Forum in
the West has initiated ground breaking integration projects in both the
electricity and the gas sector.

[42] The EU promotes regional integration in energy also in the context
of its Macro-Regional Strategies as well as in the framework of the European
Territorial Cooperation ('ETC').