# EUR-Lex - 52012DC0663 - EN

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# 52012DC0663

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Making the internal energy market work /* COM/2012/0663 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

Making the internal energy market work

1.           INTRODUCTION

The European Union needs an internal energy
market that is competitive, integrated and fluid, providing a solid backbone
for electricity and gas flowing where it is needed. To tackle Europe's energy
and climate challenges and to ensure affordable and secure energy supplies to
households and businesses, the EU must ensure that the internal European energy
market is able to operate efficiently and flexibly. Despite major advances in
recent years in the way the energy market works, more must be done to integrate
markets, improve competition and respond to new challenges. As underlined by
the Commission's Energy Roadmap 2050,[1]
achieving the full integration of Europe's energy networks and systems and
opening up energy markets further are essential in making the transition to a
low-carbon economy and maintaining secure supplies at the lowest possible cost.

If we fail to make major changes to the way
the energy market functions, we will be faced with a less reliable and more
costly European energy system, declining EU competitiveness and wealth, and
slow progress towards decarbonisation. To reverse these trends, we urgently
need to invest in generation, transmission and distribution infrastructure, as
well as storage. Existing energy systems need to be modernised, at a cost
estimated at a trillion euro[2].
We also need to encourage more efficiency measures, stimulate fair competition,
and empower consumers to take an active role and fully exercise their rights
and choices.

Accordingly, the European Heads of State or
Government set a clear deadline of 2014 for completion of the internal energy
market. The internal energy market is not an end in itself. It is a key
instrument in delivering what EU citizens aspire to most: economic growth,
jobs, secure coverage of their basic needs at an affordable and competitive price,
and sustainable use of limited resources.

By 2014 the existing legislation needs to
be implemented fully, including putting in place the essential technical rules
at EU level, and providing regulators with necessary tools and resources to
enforce legislation effectively. Cross-border markets for gas and electricity
must be up and running in all parts of the EU and the implementation of plans
to complete, modernise and smarten EU grids must be well under way. Only when
this is achieved can consumers start reaping the full benefits of the internal
energy market.

Today the EU is not on track to meet this
deadline. Not only are Member States slow in adjusting their national
legislation and creating fully competitive markets with consumers' involvement,
they also need to move away from, and resist the calls for, inward-looking or
nationally inspired policies. These tendencies are preventing the internal
market from working effectively. They even threaten to unravel the progress we
have made on the way to the internal energy market. Yet, there is clear added
value in pulling Member States' energy policies together and creating efficient
and secure energy systems transcending national borders.

This Communication reiterates the benefits
of integrated European energy markets and sets out ways to ensure that the
market fulfils its potential as soon as possible and satisfies the needs and
expectations of the EU's citizens and businesses. Because of its importance for
the deepening of the Single Market, this initiative has been identified as one
of the 12 priority actions under the Communication "Single Market Act II –
Together for new growth."[3]

2.           THE BENEFITS OF OPEN, INTEGRATED
AND FLEXIBLE ENERGY MARKETS

National governments, businesses and
individuals alike must be satisfied that the internal market gives them the
best deal. This is not the case at the moment. The generation market is still
highly concentrated. In eight Member States more than 80% of power generation
is still controlled by the historic incumbent. In a well-functioning energy
market, ideally addressing costs of externalities, investments in generation
should be driven by market considerations rather than subsidies. Energy markets
in general are perceived not to be transparent or sufficiently open for
newcomers, including demand-side service providers. Economically rational
investments in energy efficiency are not being made – or at least not enough.
Consumer satisfaction is low even in Member States that today have fairly
competitive energy markets.

Yet, the internal energy market has already
delivered undeniable benefits and the potential gains remain more attractive
than ever.

2.1.        Much has already been achieved

More choice and flexibility for
consumers

At least 14 European electricity and/or gas
companies are now active in more than one Member State and there are more than
three main electricity suppliers in twenty Member States[4]. Even households and small
businesses can now choose from several suppliers in two thirds of Member
States.

Price comparison tools have helped
consumers find better deals. An insight in what can be gained from changing
suppliers has led to high switching rates in a number of Member States, from
Sweden to the UK, to Ireland, Belgium or the Czech Republic[5].

More competitive pricing

Market opening, increased cross-border
trade and market integration[6],
and stronger competition, all fostered by EU legislation and by the forceful
enforcement of competition and State aid rules, are keeping energy prices in
check[7],
helping to keep manufacturing jobs in the EU and benefiting all consumers.

However, the energy bill paid by consumers
consists of more than just its energy component, which makes this price effect
less visible. Transmission and distribution networks charges make up a substantial
part of the total bill, as do taxes and levies.[8]
These charges, taxes and levies are not always spread evenly over all customer
groups, burdening household consumer bills in particular. They are all
determined at Member States level and subject to national policies.[9] In some Member States taxes and
levies constitute around 50% of final energy bill.[10] In the EU-15, taxes in the
final bill for domestic customers increased on average from 22% in 1998 to 28%
in 2010.[11]

More liquid and transparent wholesale
markets

Liquidity and transparency in traded
electricity markets have gradually improved as the result of 'market coupling'
between Member States.[12]
Market coupling has spread steadily from the North-West of the EU to other
regions. Currently, 17 Member States are "coupled". Also the
formation of the All-Island market in Ireland in 2007 was a positive
contribution to the construction of the internal electricity market. These
developments have led to more cross-border trade and greater price convergence.[13] Transparency is increasing,
also as a consequence of the Regulation on wholesale market transparency and
integrity in energy (REMIT) adopted in 2011.[14]

With ever more trading between gas
companies, the tenfold growth of gas trading platforms ("gas hubs") between
2003-2011 has been impressive. EU markets with liquid gas hubs have been able
to benefit much more from their exposure to gas-to-gas competition, including
global LNG markets influenced by events taking place beyond the EU such as, for
instance, the so-called ‘shale gas revolution’ in the US. The stark contrast
between the beneficial effects this has had on wholesale gas prices in liquid
and competitive markets in the EU, compared to less liquid and competitive
markets, is striking.[15]

More
secure supplies

The increased liquidity of wholesale
markets has also enhanced security of supply in the EU. In gas, the number of
major gas supplying countries to Europe has increased between 2000 and 2010
from 14 to 23. The effect on security of supply can be seen from what happened
in early February 2012, where exceptionally high demand for gas and electricity
during extremely cold weather coincided with reduced gas imports. Short-term
price signals at the various gas hubs and power exchanges in the western part of
the EU attracted gas to where it was needed most and ensured that all available
electricity generation capacity was brought on line, keeping energy supplies to
end-consumers intact.

More coordination and transparency in
relations with third countries

The EU and its Member States have
recognised the need to do more to co-ordinate their external energy relations[16], in particular towards
producer, transit and consumer countries.[17]
This gives the EU more weight in energy-related trade relations.

At the initiative of the EU, the benefits
of applying the rules of the EU internal energy market have been spread to Western
Balkan and neighbouring countries, especially by the agreement establishing the
Energy Community[18].
The Energy Community can and should expand further to establish an ever growing
energy market going beyond the borders of the EU. Trade in energy in
well-functioning markets provides a true benefit to the EU, the Energy
Community and other neighbouring countries. They create value for importing and
exporting countries alike and enable the complementary use of natural resources
in various regions. The EU assists and supports Energy Community countries in
addressing their challenges in applying the internal energy market rules.

Significant improvements have also been
achieved in defining common regulatory best practices and technical standards,
on the basis of internal energy market principles, with Southern Mediterranean countries,
paving the way to the intake in the internal energy market of significant flows
of renewable power and for joint infrastructure projects within the framework
of the European Neighbourhood Policy.

2.2.        Even more to be gained

In addition to these benefits, there is a
number of areas where on-going work is expected to bear fruit soon.

More power for consumers to control
their energy costs

Energy prices are likely to continue to
rise in the future due to, among others, unrelenting global fuel demand as well
as investments needed to maintain and modernise the EU's ageing energy systems[19]. However, the internal energy
market can ensure that investments are made in the most cost-effective way and
that pre-tax costs for households and industry remain in check through
competitive pressures on suppliers. Estimates indicate that already today EU
consumers could save up to €13 billion per year if they switched to the
cheapest electricity tariff available[20].
This potential is currently largely untapped as many people are still not fully
aware or able to make full use of the opportunities created by the market[21].

Better control of consumption through
smart technologies

New energy services open to new actors and
market incentives can help consumers better manage their bills by enabling them
to consume energy in a more cost-efficient way and to more easily produce their
own electricity.

Further technical developments will support
this trend. Smart metering systems both facilitate micro-generation by
consumers and can help reduce household energy consumption. Moreover, smart metering
systems allow adjusting electricity consumption in real
time in response to market price fluctuations. This has been shown to reduce
household energy costs by 13% but can lead to even bigger savings with home
appliance automation[22].

The new Energy Efficiency Directive, which
includes provisions on distributed generation and demand response[23] will help the market to evolve
in this direction. Cooperation between utilities (in
particular energy and telecommunications) can ensure that related investments
are cost-effective.[24]

More
competition through better access to transmission grids

It is not enough to simply have the
transmission networks in place, it is equally important that all market players
are able to use them. This was the conclusion of the Commission in its sector
inquiry into the functioning of energy markets in 2007.[25]

The lack of open and non-discriminatory
access to transmission infrastructure has prevented new entrants from competing
fairly in the market. EU rules already oblige Member States to separate
(unbundle) their transmission and supply businesses.[26] A new industry branch has
emerged with a transmission-only focus and an increasingly cross-border
footprint. The European networks of TSOs (ENTSO-E and ENTSOG) and the Agency
for Cooperation of Energy Regulators (ACER) play an important role in ensuring
that existing infrastructure is used more efficiently, and new infrastructure
is planned and developed optimally with a European, rather than
company-centred, perspective, using best available technologies. Unbundling and
competition rules will have to continue to be enforced rigorously to ensure
effective access to transmission infrastructure across the EU.

More efficient use and development of
grids

Pan-European technical rules (binding
guidelines and codes) can deliver further improvements in network efficiencies.
Suppliers and users should gain easier access to infrastructure and profit from
lower transaction costs for cross-border trade. In gas, new rules on the
management of congestion, and the transparent allocation of pipeline
capacities, can remove barriers to grid access. In electricity, new technical
rules such as on cross-border balancing markets and on liquid intra-day markets[27], should, in combination with
smart grids, help improve system flexibility and the large-scale integration of
electricity from renewable energy sources and participation of demand response
resources alongside generation. This will enable renewable energy producers to
participate fully in a truly competitive market and progressively take on the
same responsibilities as conventional generators, including as regards
balancing.

3.           GETTING THE MOST OUT OF THE INTERNAL
ENERGY MARKET

Although the benefits of a well-functioning
internal energy market are progressively becoming visible, there are challenges
that need to be tackled urgently in order to complete the internal energy
market by 2014. Without action, the transition towards sustainable, innovative,
low-carbon and energy-efficient systems by 2020 and beyond may be compromised
and urgently needed investments may not be secured at the lowest possible cost
or even not at all.

3.1.        The enforcement challenge

3.1.1.     Implementing the Third
energy package

The architecture for the internal energy
market is clear. It is laid out in the Third energy package[28] and in complementary
legislation[29].
The building blocks are there but they must be implemented effectively for the
internal energy market to work.[30]
Delays in implementation have negative effects on all players and therefore are
not acceptable, neither the parts dealing with market opening nor those meant
to ensure effective empowerment and protection of consumers.

The Commission is pursuing, as a matter of priority, infringement procedures against those Member States that have not yet fully transposed the Third energy package Directives or have failed to do so correctly.[31] The Commission intends to provide regular updates on the state of implementation of internal energy market legislation in individual Member States and on the infringement procedures. The Commission, with support from CEER, will facilitate Member States' exchange of best practices on key consumer-related issues, including price comparison tools, transparent pricing and billing, and elaborating the concept of vulnerable consumers. National energy regulators are called upon to disseminate information to consumers. Before the end of 2012, the Commission will launch web-based guidance on energy consumer rights and on sources of consumer information and protection in individual Member States' energy markets.

3.1.2.     Ensuring a level playing
field

Energy regulators and competition authorities, at EU and national level, need to act decisively to ensure that all companies in the market are treated equally and that a level playing field is established and maintained[32]. The Commission will actively enforce competition rules.

This is important in particular where
legacy advantages of historical operators act as a barrier to entry for
newcomers. The Commission will continue to enforce antitrust and State aid
rules in the energy sector to ensure that when barriers to competition that are
lifted by regulation are not reinstated by the actions of undertakings or
public authorities that could lead to distortions on the market.

The Commission will press public authorities ensuring that concessions, e.g. for hydro power generation facilities, storage facilities or the operation of distribution grids, are awarded in full compliance with Treaty principles and EU secondary legislation. The most appropriate way should be to put these concessions out to tender on a non-discriminatory basis, using open instruments such as auctions. The Commission intends to assess the adequacy of the existing regulatory measures for achieving this goal.

A level playing field is also important
between EU and foreign companies. The internal market rules and trade by way of
liquid power exchanges open the EU energy market to operators from third
countries. Once established in the EU, these third-country operators enjoy the same
rights and obligations as European operators. The lack of import restrictions
or import duties on gas and electricity imports makes the European market one
of the most open energy markets in the world and a good example for the further
facilitation of worldwide energy trade. EU trade policy aims to ensure that EU
companies can compete on an equal footing outside the EU in their competitors'
home markets. An internal energy market of 500 million consumers gives the EU
and its companies weight in international trade.

3.1.3.     Bridging the gap between
Member States

If the EU is to develop a single
electricity and gas market, no region or individual Member State must be left
behind. The fact is, though, that energy market development is, in economic
terms, highly divergent between countries[33],
for example with respect to gas markets in the north-western parts of the EU as
compared to the Eastern part of the EU.

The Commission and ACER shall promote regional initiatives to play a prominent role in bridging the gap. Regional Initiatives should help set up additional regional gas hubs and power exchanges, and reach the target of full market coupling in electricity across the EU as soon as possible[34].

However, in Member States where there is a
single supplier and no network connections to other suppliers, enforcing
regional market arrangements is of little help. The Commission is committed to
providing assistance to help these Member States catch up. But without
fundamental reforms in the countries concerned, progress will not be possible.

Member States must stimulate competition by developing infrastructure, in particular in support of cross-border activity, and eliminating market entry barriers.

3.2.        The
consumer challenge: helping consumers take advantage of opportunities

While rigorous enforcement of consumer
protection rules is crucial, it will not be sufficient. To make the most of the
benefits the internal market brings, consumers, including individual citizens
and small businesses, must be enabled, and feel incentivised, to play an active
role in the market.

Currently, SMEs and households are more
passive than large industrial customers and are therefore losing out as
available price differentials remain unexploited. This may be due in part to
inefficient consumer protection or lack of transparency or consumer-friendly
information, which all engender low consumer satisfaction[35] and trust. However, without consumers'
appetite for active participation in the market, service diversification and
value-added services are not developing.[36]

3.2.1.     Enabling the delivery of
diverse and innovative services to consumers

Getting the best deal might involve
changing supplier to reduce bills or increase service quality, choosing price formulas
that reward efficient energy use or facilitate micro-generation, etc. In competitive markets, consumers are offered a diversified
choice as suppliers endeavour to cater to consumers' diverse needs and
preferences. Some suppliers target price-conscious customers by competing on
cost while others base their offer on high service quality or added value and
ancillary services, or even bundle energy services with other services (e.g.
telecoms).

Timely deployment of smart meters as set
out in the EU acquis can trigger demand-response and other innovative and smart
services. For example, consumers can be given the possibility to take advantage
of lower prices in periods of weak demand while avoiding energy consumption in
peak periods. This will increase consumer benefit and further broaden consumer
choice. Such service offers will depend not only on the ability of businesses
to address the diversity of consumer motivations and capacities with respect to
their energy consumption , but also on the availability of diversified,
flexible and/or dynamic pricing schemes. [37]

However, at present, price regulation in
many Member States prevents suppliers from offering attractive services[38] and tailor-made and dynamic
pricing schemes. It discourages new entrants that could challenge the
incumbents. In some Member States prices are even regulated by the State for
some or all customer groups at levels below market costs. This can lead to
energy tariff deficits borne by energy companies or by public finance, which
may burden future energy consumers or taxpayers with serious costs. This also
fails to provide the right incentive for efficient energy use. It is clear that
such a situation is not conducive to the development of a competitive market
and is economically unsustainable.

Even if regulated prices allow the cost of
operations to be covered, they do not send the right price signals needed to
secure efficient investment. They are perceived by investors as an indicator of
political interference which stifles investment. While a number of Member
States[39]
have already allowed electricity and gas prices to be free of state
intervention, including for retail consumers, and the Commission has agreed
with several others[40]
a timely phase-out of regulated prices, the majority of Member States still
intervene in some form in retail price formation.

The Commission has earlier opened a number
of infringement procedures against Member States regulating prices for
industrial customers. A recent European Court of Justice ruling states that
price regulation can be compatible with EU law only under strictly defined
circumstances[41].

Member States should seek to cease regulating electricity and gas prices for all consumers, including households and SMEs, taking into account universal service obligation and effective protection of vulnerable customers. Suppliers should clearly spell out the different cost elements in the final cost for their customers, to encourage well-informed decision-making. The Commission will continue to insist on phase-out timetables for regulated prices being part of Member States' structural reforms. The Commission will continue to promote market-based price formation in retail markets, including through infringement cases against those Member States maintaining price regulation that is not meeting the conditions laid down by EU law.

3.2.2.     Targeted assistance to give
vulnerable consumers better protection

Final energy prices for consumers may
continue rising in the coming years, having a negative impact particularly on
consumers in an economically weak situation. They should therefore be
adequately protected. However, subsidies or regulation aimed at lowering the
overall energy prices tend to reduce the incentives for energy-efficient
behaviour, do not specifically target the most in need, and can distort competition.
While assistance to vulnerable consumers by financial measures may be part of
social policy, assistance with energy efficiency improvements represents a
cost-effective form of assistance[42].

The on-going changes in the energy sector
may pose additional challenges to certain consumers who may not have the tools or
competencies (literacy, access to information on- and offline etc.) to
participate actively in the newly developing market and reap the benefits on
offer. These consumers may need further assistance of non-financial character, helping
them also to understand their rights and responsibilities.

The existence of vulnerability is not an
argument against continued liberalisation, but highlights the fact that
ensuring adequate protection of consumers, especially those in vulnerable
positions, will be one of the key success drivers of the completion of the EU's
internal energy market.

Member States should provide targeted assistance to vulnerable consumers in order to address their economic vulnerability and to help them make informed choices in the increasingly complex retail markets. The Commission will support Member States in defining what is meant by and what causes energy consumers' vulnerability by providing guidance and facilitating the exchange of best practice. Member States should emphasise the importance of energy efficiency improvements in addressing consumer vulnerability and energy poverty.

3.3.        The
transition challenge: making Europe's energy systems fit for the future

Our energy systems are in the early phase
of a major transition. Significant investments are needed to replace the EU's
ageing systems, decarbonize them and make them energy-efficient and increase
security of supply. The EU supports these investments through various instruments
such as the European Energy Programme for Recovery, the future Connecting
Europe Facility, the EU Cohesion Policy[43]
and Horizon 2020[44].
Investments are taking place[45],
but the pace must be stepped up if we are to achieve our objectives.

The internal energy market can help the EU
make the transition: well-functioning markets promote and support system change
much more effectively and more cheaply than any central planning or purely
subsidy-driven overhaul. But the system change cannot take place without a
properly integrated, modern infrastructure.

3.3.1.     Let the market work to
encourage the appropriate investments

Before liberalisation, vertically
integrated national energy companies were in control of the entire system from
production to consumption. With the development of a competitive market with
multiple producers and unbundled network operators, no single entity can on its
own ensure the reliability of the electricity system. The market participants
are interdependent. Integrating more wind and solar energy[46] adds to the variability of
supply and demand, and to the challenge of keeping supply and demand in balance
at all times, at least until demand response and storage possibilities improve.

But these challenges to the electricity
system can be overcome provided the regulatory framework clearly defines the
role of the different players involved in the provision of electricity to final
customers, such as producers, network operators, demand-response providers,
suppliers, and consumers. Supply- and demand-side flexibility can and should be
rewarded on the basis of market-based price signals (short-, medium- and
long-term) to encourage the energy-efficient production and use of electricity.
The enforcement of the antitrust rules will complement regulation in this
regard. Public intervention that discourages private investments and undermines
the internal market must be avoided.

Flexibility

The market, if allowed to function, will
always indicate the economic value of power at each point in time. Prices will
be low when there is a sudden surge in supply (e.g. when there is a lot of wind
and solar power) and higher at times of shortage.

Such dynamic price signals are essential to
encourage consumers and demand-side service providers to reduce consumption
during periods of peak demand. In the electricity sector, changes of price have
traditionally had little effect on the demand volume. But as smart grids and
meters are rolled out, the potential for demand flexibility on the part of
individual consumers or aggregators can really be tapped into.

Price signals are equally pivotal in
encouraging flexibility on the supply side, from storage or from generation
capacity that can be quickly ramped up or down. Together with a stronger EU
Emission Trading System[47],
the market can secure optimum investments and ensure the quality of our
electricity systems in the future.

Policy makers and consumers may be
concerned about the variability of prices. Linking markets across Member States
will limit the risk, as spikes and falls are less likely to occur
simultaneously in all countries. Increased demand responsiveness and flexible
generation and storage will help absorb the peaks. There is no evidence that
more volatile short-term markets lead to higher average prices, especially when
there is continued back-up generation.

Suppliers will be able to hedge the risk
against short-term price volatility in longer-term forward markets. Retailers
will be able to offer innovative price plans to consumers interested in
benefitting from flexible supply contracts, which will allow them to optimise
their energy costs by using smart metering systems and appliances to focus
their consumption on periods of low prices.

In short, properly functioning long-term
and short-term wholesale markets (in particular, day-ahead, intraday, balancing
and ancillary services markets), which reflect the economic value of power at
each point in time in each area can steer investments to where they are most
efficient.

The Commission will as a matter of priority: -           ensure the further development of well-functioning, cross-border, wholesale markets in all timeframes by developing network codes[48]. The Commission counts on ACER, ENTSOs, the European Parliament and Member States for their support in ensuring that network codes are put in place according to plan[49]. These codes will establish common rules to enable network operators, generators, suppliers and consumers to operate more effectively within the market. -           help speed up the integration of storage and flexible generation e.g. by tackling remaining regulatory issues in the context of the European balancing market network code. The Commission will consider setting up a co-ordination initiative to address emerging regulatory and technical issues. Its upcoming communication on energy technologies and innovation will analyse how technology development, including storage technology and micro-generation, could link up with market developments at the European level to achieve the climate and energy targets.

Optimising State intervention: steering
the energy mix to low carbon

To achieve agreed greenhouse gas emission
reduction objectives at least cost the EU Emissions Trading System — a
market-based instrument that has created a single European carbon price — has
been introduced. From 2013 on, also the carbon market design is fully
'europeanised', thus enabling the internal energy market to facilitate the
transition towards sustainable, low carbon and efficient energy systems by
rewarding low-carbon investments[50]
and low-carbon fuels over carbon-intensive ones.

In addition, the above-mentioned transition
challenge will require optimising state support to ensure that the appropriate
investment continues to take place.

Currently, Member States use various forms
of direct or indirect state support and/or surcharges on consumers' bills for a
range of energy sources. Assuming further progress in completing the internal
energy market as described above, falling production costs, and evolution in
the carbon market, all forms of support mechanisms need to be regularly reviewed.

For example, support schemes for renewables
- as well as a number of mandatory rules on priority grid access[51] - were introduced on the
grounds of incomplete market opening, incomplete internalisation of the
external costs of conventional generation, and the early stage of development
of most renewable-energy technologies. Markets and technologies have evolved
since then.

The Commission will issue guidance on best practice and experience gained in renewable energy support schemes and on support scheme reform.[52]

The aim here is greater consistency in
national approaches, whilst protecting the principles of cost-efficiency and
regular degressivity, as well as to avoid fragmentation of the internal market.
The more efficient schemes are, the cheaper renewable energy becomes. And the
more consistent they are, the easier it is to integrate renewable energy across
EU borders and beyond.

The
Commission is in the process of reviewing the guidelines on State aid for
environmental protection to reflect changes in the technological landscape and
EU policy objectives in the energy sector, while minimising competition
distortions in the internal market.

In particular, the revision aims at
ensuring that State aid control facilitates the granting of aid provided that
it is well-designed, targeted, least distortive and provided that no better
alternatives (regulatory, market based instruments) are available. The
Commission will encourage in particular solutions that are cost-efficient and
promote cross-border integration.

The Commission intends to actively contribute to the G20 goal to remove all environmentally harmful subsidies, including remaining direct and indirect support for fossil fuels.[53]

Optimising State intervention: security
of supply in electricity

Some Member States have introduced or plan
to introduce separate payments for the market availability of generation
capacity, as they are concerned that the 'energy only' market will not deliver
sufficient investment in generation to ensure security of supply in the longer
term. Such capacity mechanisms are long-term tools that aim to provide a stream
of revenue to (selected) generators and commit consumers to paying for the
capacity provided.[54]

However, the Commission is of the view that
if capacity mechanisms are not well designed and/or are introduced prematurely
or without proper co-ordination at EU level, they risk being counterproductive.
If capacity mechanisms do not treat demand reduction fairly, they can lock in generation-based
solutions rather than energy efficiency or demand response solutions. If they
do not distinguish base load from peak load, they may not attract sufficiently
flexible generation capacity. Capacity mechanisms distort the EU-wide price
signal and are also likely to favour fossil fuel generation sources over more
variable renewable sources (beyond levels necessary for maintaining power
systems in balance) and may therefore run counter to EU decarbonisation and
resource efficiency objectives.

In well-functioning energy markets,
generation investment incentives and security of power generation supply depend
also on the evolution of the carbon market. The Commission is putting forward
options for structural measures to address the current over-supply of ETS
allowances resulting from the economic crisis[55].
This would create more investor certainty and reduce the need for national
measures.

Far from ensuring generation adequacy or
security of supply, poorly designed capacity mechanisms will tend to distort
investment signals. As such, these interventions can interfere with
cross-border trade and competition as they can close off national markets from
generation elsewhere in the EU and also distort the location of generation in
the internal market. Nationally-based capacity mechanisms can increase costs
for all Member States by preventing the best use of generation and flexibility
across borders.

The Commission considers that capacity
mechanisms are likely to be subject to EU internal market rules, including
State aid control and Directive 2009/72/EC.

Member States should demonstrate the need
for such mechanisms over alternative approaches such as peak-shaving measures,
increased imports through appropriate interconnections, and facilitating
demand-side participation in the market for industrial as well as retail
customers. Even in times of generation capacity constraints, cross-border
exchanges need to be maintained. Allocation procedures need to be transparent
and non-discriminatory.

Member States should carry out a full analysis of whether there is a lack of investment in generation, and why. They should seek cross-border solutions to any problems they find before planning to intervene. Any capacity mechanism needs to take into account any impact the intervention will have on neighbouring Member States and on the internal energy market. Fragmentation of the internal energy market must be avoided. The Commission is launching a public consultation on security of supply in electricity, generation adequacy and the internal energy market. Depending on the results of its consultation and further engagement with Member States and stakeholders, the Commission may propose follow-up measures.

Security of supply requires coordination
among Member States that can deliver short-term crisis response and long-term
solutions to security of supply challenges. As our energy systems become more
integrated, we shall need more coordination and cooperation across borders to
identify and address risks, and to ensure proper crisis response.

The Commission is formally setting up an Electricity Coordination Group with the mandate to facilitate cooperation on security of supply in electricity, including generation adequacy and cross-border grid stability.

3.3.2.     More integration, faster
modernisation and better use of grids

More
grids to integrate EU energy markets

Energy must
be able to flow to where it is needed, without physical barriers at national
borders. This implies inter alia addressing the effects
of unplanned power flows ("loop flows") on cross-border market
integration. Serious investment in energy networks is
needed to enable certain areas of the EU to emerge from isolation[56] and to achieve our Europe 2020
targets.

There is a pressing need to enhance the way
investment takes place as stressed in the proposed Regulation establishing the
Connecting Europe Facility[57].
Work has already started on defining the energy networks of the future in
accordance with the environmental acquis. In October 2011, the
Commission tabled a proposal for a Regulation on "Guidelines for
trans-European energy infrastructure"[58].
It identifies twelve priority corridors and areas covering electricity, gas
transmission and storage, and oil and carbon dioxide transport networks and a
dynamic identification of projects of common interest. The Commission has come
out in favour of faster permit-granting procedures, improved cross-border
infrastructure cost allocation, and financing support.

The swift adoption and implementation of the Energy Infrastructure Package is crucial as acknowledged by the European Council on 9 December 2011.

Faster modernisation towards smart grids

With the growing need for flexibility and
energy efficiency and to accommodate distributed generation and demand-side
participation, co-ordinated action is needed with a view to the deployment of
smart grids at European, regional and municipal levels. Smart grids rely on
digital infrastructure. The Commission tabled a
proposal for a Regulation on "Guidelines for trans-European telecommunications
networks"[59]
identifying inter alia digital services infrastructure as priorities. An efficient deployment should exploit the synergies
between telecommunication and energy operators at infrastructure and services
level, which must cooperate in a pro-competitive way, thus opening the field
for new entrants.

The Commission will continue to promote pro-competitive co-operation between the energy and the ICT sector, including innovative service providers for advancing the modernisation of grids and accelerating innovation in the energy sector. Member States are asked to encourage this on a national level. The European Standardisation Organisations (CEN/CENELEC/ETSI) have the urgent task of developing a first set of Smart Grid standards by the end of 2012. The Commission will promote the use of these standards.

The Commission already earlier adopted a
Communication on smart grids[60]
calling for the necessary framework conditions for industry to successfully
develop the technologies and production capacities to deliver this investment,
and setting out the vision of integrated infrastructure management[61]. Based on best practices and
projects in Member States[62]
the Commission is presently developing guidelines and new instruments to
further stimulate the rollout of smart metering systems in the present decade[63], monitoring the progress of
current smart metering projects in the EU and supporting promising R&D and
pilot projects[64]in
smart grids..

The Commission will further support R&Dand innovation to facilitate the deployment of smart grids. The Commission will renew the standardisation mandate granted to the European standardisation organisations in order to develop a second set of standards and develop guidance and identify potential Projects of Common Interest by the end of 2012.

Stronger demand response in distribution
networks

With the advent of smart metering systems, microgeneration
technologies, smart appliances and home automation, consumers will be
increasingly enabled to modulate their energy demand according to the actual
situation in energy markets. Such demand response will allow consumers to save money
while increasing the efficiency and stability of energy systems. It will,
however, require that Members States, regulators, Transmission System Operators
(TSOs), Distribution System Operators (DSOs) and retailers cooperate with each
other and with other players (demand-side service providers, ICT companies or
system developers). The objective is to develop transparent and easily
understandable rules and standards for demand response and data management.

It will also require reconsidering the role
of DSOs. In particular it needs to be ensured that their regulated activities
are limited to tasks which are best performed by a natural monopoly, and that
new services made possible by new technologies are developed in competitive
markets. In this context, it seems also appropriate to consider the role of
third parties (such as aggregators, energy services and actors from other
network sectors, e.g. ICT, telecoms, electrical engineering) in the future
development of local distribution grids or energy services.

The Commission has launched the debate under
the auspices of the Citizens' Energy (London) Forum and will continue the
discussion based on the smart metering rollout plans of Member States.

The Commission will address the technology
aspects of further evolution in energy distributions networks in the upcoming
communication on energy technologies.

The Commission calls on Member States to adopt ambitious strategies for the roll-out of smart metering systems and to ensure that they meet the interests of energy suppliers, distributors and consumers alike. The Commission asks Member States to produce action plans which reflect how to modernise their grids, including rules and obligations for DSOs, synergies with the ICT sector and promotion of demand-response and dynamic prices, in accordance with the Energy Efficiency Directive.

4.           CONCLUSION

Market opening gives
consumers a real choice. It limits the need for public intervention and
prevents inappropriate public intervention. There are a
number of issues which need to be tackled urgently in order to complete the
internal energy market by 2014, end isolation of several EU Member States from
EU networks, realise the Europe 2020 agenda and move towards a transformed
energy system by 2050 at least cost to all. These issues also stand in the way
of realising full benefits to consumers, raise barriers to competition and
innovation and undermine the security and sustainability of European energy.

The Commission is committed to deliver,
within its sphere of competence, on the challenges of building and modernising
a European network, and incorporating renewable energy, micro-generation and
smart grids by means of stable regulatory framework that sets out the role of
the different actors (network operators, producers, suppliers, demand response
providers, consumers and regulators).

On the basis of this Communication, the
Commission proposes an Action Plan (Annex 1) to ensure the success of the
internal energy market. The Commission calls upon all Institutions, Member
States and Stakeholders concerned to work together towards achieving the
proposed actions according to the proposed timing. The Commission will review
the progress of implementation of the Action Plan in 2014. The Commission is
determined to ensure that the follow-up to the Action Plan at Member State and
at EU level be firmly anchored in the European semester, in particular via the
Annual Growth Survey, the Single Market Integration Report and the Country
specific recommendations.

Annex
1: Action Plan for Europe

Action/Measure || Actor(s) involved || Timing

Enforcement

1. Timely and comprehensive transposition of the Third energy package Directives and implementation of the Third energy package Regulations || Member States / national regulators for energy / Commission || March 2011

2. Guidance on defining the concept of "vulnerable customers" || Commission || 2013

3. Rigorous application of the internal energy and competition rules || Commission / Member States / national regulators for energy / national competition authorities || continuous

4. Enhance effectiveness of Regional Initiatives and their contribution to the integration of the internal energy market || Commission / Member States / national regulators for energy / ACER || continuous

5. Revision of guidelines on State aid for environmental protection || Commission || End 2013/ Beginning 2014

Improve consumer empowerment and support

6. Further efforts to involve, inform and motivate consumers, including through the implementation of the Energy Efficiency Directive and through web-based content for consumers pointing to relevant consumer-protection resources and energy consumers' main rights. || Commission / Member States / national regulators for energy/ consumer associations || 2013 / 2014

7. Through the Citizens' Energy Forum, support Member States in setting the scope for research, data collection and reporting on energy retail markets. || Commission/ Member States / national regulators for energy/ consumer associations || 2013

8. Improve information provision to consumers, establish guidelines and best practice on price comparison tools, clear and transparent billing, and on support to vulnerable consumers || Commission / Member States / national regulators for energy / consumer associations || 2013

9. Targeted assistance to vulnerable consumers to make informed choices and giving them the necessary support to enable them to cover their energy needs in competitive retail markets || Commission / Member States || 2013

Making EU Energy Systems fit for the future

10. Adopt and implement network codes - in electricity: capacity allocation and congestion management rules rules for longer-term (forward) capacity allocation network connection rules system operation - in gas: capacity allocation balancing rules including network-related rules on nomination procedure, rules for imbalance charges and rules for operational balancing between transmission system operators' systems interoperability and data exchange rules rules regarding harmonised transmission tariff structures || ACER / ENTSOs / Commission / Member States / national regulators for energy || 2013/2014

11. Swift adoption and implementation of the Energy Infrastructure Package || Council / European Parliament / Member States / national regulators for energy || December 2012

12. Adoption of the first Union list of Projects of Common Interest || Commission / Member States || 2013

13. Create framework and market for broad introduction of smart appliances (e.g. via R&D support, standardisation, ecodesign and energy labelling) || Commission / stakeholders (in particular European standardisation organisations) || 2014

14. Prepare national action plans for swift deployment of smart grids || Member States / Commission || 2013

15. Reflection on future roles and responsibilities of DSOs, demand response, smart appliances and home automation, distributed generation and energy saving obligation schemes || Commission / Member States || 2013

16. Analyse how the internal energy market can contribute to improving energy efficiency || Commission || 2013

17. Analyse how technology development, including storage technology and micro-generation, can link up with energy market developments || Commission || 2013

Ensuring appropriate State interventions

18. Phase-out of regulated gas and electricity prices taking into account universal service obligation and effective protection of vulnerable customers. || Commission / Member States || 2009 and beyond

19. - Analyse investment incentives and generation adequacy in electricity under the existing European framework - And develop criteria for assessing and ensuring consistency of national capacity-related initiatives with the internal market || Member States Commission || 2013 and beyond

20. Adopt guidance on support schemes for renewables || Commission || 2nd/3rd quarter 2013

21. Formalise the Electricity Coordination Group || Commission || October 2012

22. Phase-out of environmentally harmful subsidies, including direct and indirect fossil-fuel subsidies. || Commission / Member States || By 2020 at the latest

[1]               COM (2011) 885.

[2]               COM (2011) 658 final.

[3]               COM (2012) 573 final.

[4]               See also table 12 in Staff Working Document entitled
Energy Markets in the European Union in 2011, referred to as "SWD 1".

[5]               Consumer
Markets Scoreboards, European Commission, DG SANCO, http://ec.europa.eu/consumers/consumer_research/editions/cms7_en.htm,
The functioning of retail electricity markets for consumers in the European
Union, Study on behalf of the European Commission, DG SANCO, 2010 ("Study
on retail electricity markets"). http://ec.europa.eu/consumers/consumer_research/market_studies/docs/retail_electricity_full_study_en.pdf.

[6]               See SWD 1, page 47.

[7]               While prices of primary energy commodities have
increased annually by 14% for crude oil, almost 10% for gas and 8% for coal in
recent years, wholesale electricity prices in the EU have risen much less,
namely by 3.4%. See SWD 1, figure 29.

[8]               Those are used inter alia to reflect the
environmental externalities of the energy use as recommended by the Commission
in Annual Growth Surveys 2011 and 2012 (COM (2011) 11 final, COM (2011) 815
final) as well as European Council conclusions (EUCO 10/1/11 REV1), aiming to
shift taxation away from labour towards i.a. consumption and environmental
pollution, with due regard to competitiveness of EU industry and consumer prices.
They can however also be used for revenue raising.

[9]               For details about these elements in individual Member
States see SWD 1, part 3.

[10]             See SWD 1, part 2, figure 33.

[11]             See study titled 'Price developments on the EU retail
markets for electricity and gas 1998 – 2011', page 2 http://ec.europa.eu/energy/observatory/electricity/doc/analysis_retail.pdf.
However, the average share of environmental taxation in total tax revenues in
the EU is decreasing. Taxation trends in the European Union, European Union
2011: http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-DU-11-001/EN/KS-DU-11-001-EN.PDF

[12]             Market coupling optimises interconnection capacity and
ensures that electricity flows from low price to high price areas by the
automatic linking of buyers and sellers on either side of a border.

[13]             The Commission remains vigilant to ensure that power
exchanges do not engage in anticompetitive practices alongside their necessary
cooperation for market coupling projects.

[14]             OJ L 326, 8.12.2011, p. 1

[15]             See map 1, page 31 of SWD 1.

[16]             Decision No 994/2012/EU of the European Parliament and
of the Council of 25 October 2012 establishing an information exchange
mechanism with regard to intergovernmental agreements between Member States and
third countries in the field of energy, OJ L 299, 27.10.2012, p. 13. See also COM(2012) 218 final

[17]             Europe's national regulators coordinate their work on
international issues through the Council of European Energy Regulators (CEER).

[18]             Signed in 2005, members are the Western Balkan
countries, Ukraine and Moldova, with Norway, Turkey, Armenia and Georgia as
observers.

[19]             See Commission's Communication "Energy Roadmap
2050", pages 2, 5, 6 and 7. Decarbonisation of the energy system would not
be more expensive than a continuation of current policies.

[20]             Study on the functioning on retail electricity markets.

[21]             Throughout EU, awareness among consumers is low, with
only one in three consumers comparing offers, see the Study on retail
electricity markets.

[22]             Vaasaett study, "Empower Demand", http://www.esmig.eu/press/filestor/empower-demand-report.pdf

[23]             COM
(2011) 370.

[24]             DG
CNECT public consultation: http://ec.europa.eu/information_society/policy/doc/library/public_consult/cost_reduction_hsi?cost_reduction.pdf.

[25]             COM (2006) 851 final.

[26]             To date, the Commission has received draft
certification decisions for over forty Transmission System Operators (TSOs) in
thirteen Member States, out of 99 TSOs requiring certification. Eighteen of
those TSOs are to be certified as ownership unbundled.

[27]             Intraday and balancing markets will allow market
participants (including consumers) to adjust their production and consumption
in response to changing circumstances, in particular in response to prices.
Liquid intraday markets are needed to enable adjustments in supply and demand
schedules on an hourly basis, which is not yet a reality Europe-wide. Cross-border
balancing markets will help avoid unnecessary costs linked to purely national
procurement of balancing services. Thanks to these arrangements, demand and
supply will be matched on a cross-border scale at all time-frames.

[28]             Directives 2009/72/EC and 2009/73/EC, Regulations (EC)
No 713/2009, 714/2009 and 715/2009.

[29]             In particular, Regulation No
994/2010 concerning measures to safeguard security of gas supply and repealing
Council Directive 2004/67/EC, REMIT, and the proposed
Regulation on guidelines for trans-European energy infrastructure.

[30]             Details of the Commission's implementation policy of
the Third energy package have been set out in the Communication on a ‘Better
governance for the single market’, COM(2012) 259 final. Referring to this
Communication, the October 2012 European Council has called upon Member States to
take urgent action. The follow-up to this policy will be carried out, inter
alia, in the context of the European semester.

[31]             See SWD 1, part 4. Since September 2011 the Commission
launched 19 infringement cases for non-transposition of the Directive
2009/72/EC and 19 cases for non-transposition Directive 2009/73/EC. By 24
October 2012, only 12 cases have been closed and the rest of the proceedings
are on-going. This is without prejudice to the right of the Commission to
pursue at a later stage a failure to transpose certain provisions, should
shortcomings be identified, e.g. in the context of a non-conformity check (all
received notifications of national transposition measures are subject to examination
as to conformity with EU law).

[32]             Competition law enforcement has proven to be supportive
in levelling the playing field in the power generation sector, e.g. antitrust
case against E.On (2008), GDF Suez/International Power merger case (2011), and
in the gas supply sector, e.g. RWE (2009) and ENI (2010) cases.

[33]             See SWD 1, part 2 and 3.

[34]             Commission communication "The future role of
Regional Initiatives", COM(2010) 721 final.

[35]             Consumers rank the electricity and gas markets poorly.
In 2012, the electricity market ranks 26th out of 30 services
markets, with particularly low scores in Southern European countries (the
highest for Luxembourg and the lowest for Bulgaria). The gas market ranks 21st
out of 30 services markets (the top ranked country is Slovenia and the bottom
ranked country – Belgium). Both electricity and gas markets have poor scores on
choice, comparability and switching suppliers and tariffs, suggesting that
consumers are not making full use of the saving opportunities created by market
liberalisation. Details on performance country-by-country are provided in SWD
1, part 3. See http://ec.europa.eu/consumers/consumer_research/cms_en.htm.

[36]             This has been recognised by the European Economic and
Social Committee (EESC). Based on its work with civil society organisations,
EESC promotes an informed and structured debate on energy issues among civil
society and between organised civil society and decision-makers.

[37]             BEUC, 'Empowering
Consumers through Smart Meters', pp 23-26, http://bit.ly/JKn9R7

[38]             This may in part explain the low switching rates in
several Member States. For further details on switching rates see SWD 1, part
3.

[39]             Including Austria, Czech Republic, Germany, Finland,
Luxembourg, the Netherlands, Sweden, Slovenia, the United Kingdom.

[40]             Romania, Greece, Portugal.

[41]             Case C-265/08, Federutility and others v Autorità per
l’energia elettrica e il gas.

[42]             On 22 June 2011, the Commission
proposed a new Directive to step up Member States' efforts to use energy
more efficiently at all stages of the energy chain – from the transformation of
energy and its distribution to its final consumption. On 4 October 2012, the
Council endorsed the political agreement on the Energy Efficiency Directive.
The European Parliament had casted its favourable vote on such agreement on 11
September 2012.

[43]             With planned allocations of at least EUR 11 billion
foreseen for 2007-2013. For 2014-2020 the Commission has proposed a significant
concentration of EU Cohesion Policy efforts on renewable energy and energy
efficiency, including smart grids, as well as a strong focus on RTDI. Member
States and regions need to ensure that this funding complements private
investment, leveraging it, and not crowding it out.

[44]             Aimed at well targeted support to R&D.

[45]             See Staff Working Document entitled "Investment
projects in Energy Infrastructure", also referred to as SWD 2.

[46]             The Energy Roadmap shows that renewable energy will be
the core of the EU energy system in a 2050 perspective, and represent very high
shares of electricity generation already by 2030.

[47]             Directive 2003/87/EC as amended by Directives
2008/101/EC and 2009/29/EC

[48]             See paragraph 2.2, more efficient use and development
of grids.

[49]             Commission decision of 19 July 2012 on the
establishment of the annual priority lists for the development of network codes
and guidelines for 2013, 2012/413/EU.

[50]             Including in carbon capture and storage
("CCS").

[51]             Directive 2009/28/EC.

[52]             COM(2012) 271 final.

[53]             Roadmap for a resource efficient Europe, COM (2011) 571
final, includes a milestone that ‘by 2020, environmentally harmful subsidies
will be phased out'. Annual Growth Surveys 2011 and 2012 (COM (2011) 11 final,
COM (2011) 815 final) also call for elimination of environmentally harmful
subsides. Commitments to reform fossil fuel subsidies have also been adopted at
the global level, for example in the context of the G20 and at the Rio+20 conference.

[54]             In some Member States, the public intervention
envisaged takes the form of long-term security of supply contracts, with the
State or an entity assigned by it as counter party. Capacity mechanisms are to
be distinguished from short-term mechanisms aimed at ensuring that the
real-time balance between supply and demand is maintained even in the face of
sudden variation on either side.

[55]             See Communication "The state of the European
carbon market in 2012", COM(2012)652

[56]             See the conclusions of the European Council of February
2011. In particular, Baltic states operating in Russian and Belarussian
electricity system should be synchronized with the EU.

[57]             COM(2011) 665

[58]             COM(2011)658 final.

[59]             COM(2011)657 final.

[60]             COM(2011)202.

[61]             The Electricity Directive and the Energy Efficiency
Directive provide a complementary mix of obligations and incentives to Member
States to establish such a framework.

[62]             In line with the Commission's Industrial Policy
Communication COM(2012)582.

[63]             The number of smart meters in the EU will need to rise
from some 45 million at present to at least 240 million by 2020, with the
necessary annual investment spending increasing from just over €1 billion at
present to €4-5 billion by 2015, subject to costs-benefit analysis.

[64]             For example through the European Industrial Initiatives
for Electricity Grids, and the European Innovation Partnership for Smart Cities
and Communities.