Report from the Commission to the Council and the European Parliament on State of liberalisation of the energy markets
Date: 1998-04-07
Institutions: European Commission
Subjects: competition, competitiveness, energy policy, liberalisation of the market, single market

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 07.04.1998 
COM(1998) 212 final 

REPORT FROM THE COMMISSION TO THE COUNCIL 
AND THE EUROPEAN PARLIAMENT 

on State of liberalisation of the energy markets 

Contents 

Introduction 

Objectives of the Commission 

Obstacles to the internal energy market-The reasons for liberalization 

The Commission's approach 

The first phase: Price Transparency and Transit Directives 

The second phase: Hydrocarbons licensing Directive 

The  third  phase:  The  Commission  proposals  for  Directives  concerning 
common rules for the internal market for electricity and natural gas 

Directive 96/92/EC 

State of play in the Member States: 

•  Summary 
•  Country by country overview 

Common position on natural gas 

Conclusion - The progress made is it satisfactory? 

Accompanying and follow-up measures 

Objectives of the Commission 

The main objective  of the  Commission in  developing the internal  energy market has 
been  to  recognize  greater  integration  of  the  national  energy  markets  as  a  way  to 
improve security of supply, reduce costs and improve competitiveness. A Community 
wide market without internal frontiers will provide for  a more flexible and  diversified 
energy supply and will thus contribute to a higher degree of security of supply for the 
Community  as  a  whole.  More  competition  in  the  energy  sector  will  also  improve 
efficiency  of  the  EU  energy  industry,  thus  increasing  competitiveness.  It  will  also 
reduce  prices  for  energy  consumers,  helping  them  to  gain  a  competitive  edge  in 
production.  The  single  market  has  contributed  to  growth,  competitiveness  and 
employment.  For  the  European  Community  thus  the  question  is  not  whether  the 
completion of the internal energy market is necessary but how to realize it in the most 
efficient way. 

Obstacles to the internal energy market - The reasons for liberalization 

There are still substantial obstacles to trade in electricity and gas across borders and 
even within national borders in some cases. These barriers are the result  of exclusive 
rights  that have been granted to the national utilities in those two sectors. It is worth 
noting that the prices for electricity and gas in Europe are on average 40% higher than 
in the United  States. For certain industries, the energy price is vital and represents a 
very high percentage of the production costs. Thus the compartmentalization of energy 
markets  is  liable  to  be  detrimental  to  the  European  industry  competing  in  world 
markets. Removing the  obstacles to intra-Community trade will allow electricity and 
gas users to  enjoy  the benefits  of  a more  competitive  market  including freedom of 
choice  and  reduced  price  disparities  between  Member  States.  The  Commission  has 
therefore focused on the electricity and gas sectors whose transmission and distribution 
rely on a particular network infrastructure.  The main objectives for an internal market 
in electricity and gas have been: 

to improve the security of supply by a progressive opening up of the electricity 
and gas markets; 
to ensure the free movement of gas and electricity within and between Member 
States in response to demand; 
to improve competitiveness by enabling gas andselectricity users to  enjoy the 
benefits  of  a  more  competitive  energy  market  which  is  vital  for  energy 
industries competing in world markets as energy is an important component of 
economic activity. 

The Commission's approach 

The Commission based its legislative proposals for the internal energy market  on the 
following principles: 
•  First,  the  need  to  have  a  progressive  approach  in  order  to  give  to  the  energy 

industry sufficient  time to adjust to the new environment in a flexible manner. 

•  Second,  the  Community must not  impose  a rigid system  on Member  States, but 
rather a framework which Member States can fill in with arrangements best suited 
to their national circumstances. 

•  Third, to avoid excessive regulation. 

•  Fourth,  the  Commission  has  chosen  an  approach  based  on  article  100A  of  the 
Treaty,  which  requires  agreement  between  Member  States,  following  a  political 
dialogue with the Council, the European Parliament  and the Economic and Social 
Committee. 

The first phase: Price transparency and transit Directives 

The Directive on price transparency (Council Directive 90/377/EEC) was adopted on 
29 June  1990. It  sets up  a Cornmunity procedure  ensuring price transparency to the 
final  industrial consumers of gas and  electricity.  The Directive provides that  electric 
and gas utilities shall supply to the Community statistical office the rates they charge to 
all  categories  of  consumers  twice  a  year.  The figures published  so  far  show  large 
differences in the conditions and terms on which industrial consumers of electricity and 
gas  are  supplied  in the  different  Member  States  and  even  within  the  same  country 
which is the result of the closed markets. 
The Directives on transit  of electricity (Council Directive on the transit  of electricity 
through  transmission  grids  90/547/EEC  of  29  October  1990)  and  gas  (Council 
Directive on the transit of natural gas through grids 91/296/EEC of 31 May 1991), are 
designed  to  maximize  and  facilitate  electricity  and  gas  exchanges  across  non 
neighboring countries. However, despite that progress, it has to be recognized that this 
trade has only been possible between monopolistic network and public utilities and not 
between consumers in one Member State and producers in another. 

The second phase: the hydrocarbons licensing Directive 

The  Directive  on  the  conditions  for  granting  and  using  authorizations  for  the 
prospection, exploration and production  of hydrocarbons (94/22/EC of the European 
Parliament  and  the  Council),  was  adopted  on  30  May  1994.  Unlike  the  electricity 
Directive which liberalizes both production and supply, the gas proposal (see below) is 
limited to the activities of storing, transporting,  and distributing natural gas. It  is the 
hydrocarbons Directive that  covers the complementary  activity of producing  gas and 
oil  The  Directive  provides  that  Member  States  must  grant  equal  and  non-
Q^scrirninatory access for  all EU companies to the activities of prospecting, exploring 
and producing of oil and natural gas within the territory of the EU and the EEA. 

The third phase: The Commission proposals for Directives concerning common 
rules for the internal market for electricity and natural gas 

The  Commission  original proposals  on the  liberalization  of both  gas  and  electricity 
were presented  on 21 February  1992 (COM (91) 548 final). After  a long and intense 
debate, the Directive  96/92/EC concerning  common  rules for  the  internal market in 
electricity  was  adopted  on  19 December  1996.  One year  after  the  adoption  of the 
electricity Directive, on December the 8th, the Council has reached an agreement on a 
common position for the natural gas proposal. These events reflect the real wish of the 
Member States to build together an internal market for energy. 

The Directive 96/92/EC 

A major step has been made by the adoption of the Directive concerning common rules 
for the internal market in electricity by the Council of Ministers on 19 December 1996. 
The Directive entered into force  on  19 February  1997. The electricity Directive will 
affect  the market  in the  following  subsections:  generation,  distribution-transmission, 
consumption and access to the networks. 

Generation 
For the provision of new generating capacity, Member States may chose between two 
alternative procedures. They may chose to follow either the authorization procedure or 
the  tendering  procedure.  Whichever  of  these  are  chosen  they  must  be  based  on 
objective, transparent, and non-discriminatory criteria and must result in an equivalent 
level of market opening. The tendering procedure allows for central planning: a central 
body draws up an estimate for the need of new capacity and the requisite capacity is 
allocated through a tender procedure. Tenders will be organized and decided by a fully 
independent  authority.  In the authorization procedure,  anyone at  any time may build 
and operate and electricity plant provided that the criteria that have been specified by 
the Member  State for the grant  of an authorization  are met. In this case there is no 
central planning as the capacity necessary to meet demand is left to the market. These 
two options will allow companies to construct  and operate new generating capacities 
in a new market  anywhere the European Union.  Certain types of generators  shall be 
able  to  obtain  authorizations  under  both  procedures  (self-generators,  independent 
power producers). 

Transmission - Distribution 
Member  States  shall  designate  or  require undertakings  which  own transmission  and 
distribution  systems  to  designate  a  transmission  and  distribution  system  operator 
responsible for  operating,  ensuring the maintenance  and  developing the transmission 
and distribution system in a given area. 
The transmission  system operator is responsible for the dispatching  of the generating 
installations in its area. The criteria for the dispatching must be objective, transparent 
and non-discriminatory.  The Directive provides  as an  exception  to  this basic  rule a 
mechanism for the favorable treatment of electricity  from: 
•  Renewable energy sources: A Member State may require the system operator, when 
dispatching generating installations, to give priority to generating installations using 
renewable energy sources or waste or combined heat and power. 

•  Indigenous  energy  sources:  Priority  in  the  dispatching  can  be  given  also  to 

electricity produced from indigenous fuels but only up to 15%. 

Consumption 
On the consumer's  side the electricity market will be opened to  competition through 
the gradual opening of the market over a six year period. The first stage is on February 
1999,  the  second  stage  will  be  on  February  2000,  and  the  third  stage  will  be  on 
February  2003.  The  minimum  market  opening  corresponding  to  the  first  step 
represents  25.37  % average  Community  share  of  electricity  market  opening  and  is 
calculated  as the  share  of total  consumption  consumed  by final consumers  with an 
annual consumption  exceeding 40 Gwh. In the second stage this will be reduced to a 
level  of 20  Gwh  representing  28  % average  Community  share  of  electricity market 

opening and in the third stage the threshold is reduced to a level of 9 Gwh representing 
33  % average Community share of electricity market opening.  This degree  of market 
opening  is  a minimum  level  that  all Member  States  must  respect,  but  which  allows 
them to  open up the market  even further.  The customers eligible to participate in the 
market  opening  will be  determined by the  Member  States,  under  supervision  of the 
Commission,  though  two  categories  will  automatically  be  included:  very  large final 
consumers of over  100 Gwh and distributors for the volume of electricity consumed in 
their distribution network by other eligible final customers. 

Access to the network 
All producers  and all  eligible  customers will  be  able to  enter  into  direct  contractual 
relationships  with  each  other  for  the  supply  of  electricity  and to  gain  access  to  the 
network under  objective  and non-discriminatory  conditions.  Member  States have the 
choice of three alternative procedures to meet this: 
•  Negotiated  third  party  access:  producers  and  consumers  of  electricity  contract 
directly with each other for the supply of electricity, but they negotiate access to the 
network with its operator in terms of transport tariffs  or other conditions.  System 
operators  must  publish  indicative  prices  for  the  use  of  the  transmission  and 
distribution system. 

•  Regulated  third  party  access:  producers  and  consumers  of  electricity  contract 
directly with each other for the supply of electricity, but the eligible customers have 
a right of access to the network on the basis of published tariffs. 

•  Single buyer: producers and consumers of electricity will  contract with  each other 
for  the  supply  of  electricity.  The  electricity  price  of  this  contract  is  strictly 
confidential.  Under the single buyer system with repurchasing obligation, the single 
buyer is obliged to purchase the electricity contracted by an eligible customer  from 
a producer at a price which is a function of the sale price offered by the single buyer 
to the eligible customer minus a non-d^crirninatory transmission tariff for the use of 
the  network.  The  economic  advantage  of  the  eligible  customer  is  the  difference 
between  the  price  at  which  it  would  usually  purchase  electricity from the  single 
buyer  and  the  price  of  electricity  it  has  contracted  to  purchase  from  another 
producer,  minus  the  transmission  cost.  Under  the  single  buyer  system  with  no 
purchasing  obligation  of  the  single  buyer,  the  system  works  no  differently  from 
regulated or negotiated TPA as mentioned above. 

Direct Lines 
In addition to  the  possibility  of  access to  the  network  in  order to  deliver  electricity 
contracted  between  eligible  customers  and  suppliers,  electricity  producers  and 
suppliers have a right to supply their own premises, subsidiaries and eligible customers 
through  direct  lines.  Member  States  lay  down  the  criteria  for  the  grant  of 
authorizations  for  the  construction  of  direct  lines which  must  be  objective  and non 
discriminatory. 

Public service obligations 
It is for  each Member  State to  decide  which public  service  obligations  they wish  to 
achieve,  and the  Directive  provides  a mechanism  enabling  them to  take  appropriate 
measures  in  this  context.  These  obligations  will  be  defined  by  the  Member  States 
individually within a Community framework as provided in the Directive.  The Member 
States must define the public service obligations which must be objective, transparent, 
non-discriminatory,  verifiable  and  published.  They  must  fall  within  one  of  the  five 
Community categories which are: security of  supply, regularity,  quality  and prices  of 
supply as well as environmental protection. These obligations need to be notified to the 
Commission in order to  check their compatibility with Community law.  Furthermore, 
public service obligations are not a "carte blanche". Article 90 of the Treaty states that 
undertakings entrusted with the operation of services of general  economic  interest or 
having the character of a revenue-producing  monopoly shall be subject to the rules of 
the Treaty, in particular the competition rules, in so far as the application of these rules 
does not obstruct the performance  of the tasks assigned to them.  In this line Member 
States should ensure that the obligations which they impose on electricity undertakings 
are proportionate to the objectives pursued.  The mechanism provided in the Directive 
allows Member States to ensure smooth interplay between competition and the need to 
promote  certain public  services, where this is deemed to  be necessary to  the  general 
interest,  all  within  a  Community framework in  the  spirit  of  the  Treaty  and  the 
Communication  of  the  Commission  on  services  of  general  interest  in  Europe 
(COM(96) 443  final). 

Transitional regimes 

According to Article 24 of the electricity directive, Member  States had the possibility 
to  apply  for*a  transitional  regime  until  20  February  1998.  Transitional  regimes  are 
limited in time and allow various measures to  support  commitments which have been 
given before the entering into force  of the  directive  and which  could not be honored 
because of the market opening. As an example,  one could think of a take  or pay like 
power  procurement  contract  between  a  generator  and  a  distributor.  The  generator 
invested  into  a power  plant  relying  on  the  sales  contract  with  the  distributor.  The 
distributor,  on  the  other  hand,  relied  on  sales  to  captive  consumers.  As  consumers 
become eligible to choose their supplier, either the distributor may get squeezed or the 
generator's investment  may become  stranded.  Therefore,  under  certain  circumstances 
and  after  careful  examination  of  each  single  case,  the  Commission  may  approve 
support  schemes proposed by the Member  States.  This offers  a flexible possibility to 
tackle specific problems of a Member State's electricity industry without inhibiting the 
schedule  of  implementation  of  the  electricity  directive  and  the  optimal  structural 
choices that each Member  State will try to take in order to  prepare for the  common 
electricity market.  Twelve Member States have applied for such a transitional regime, 
namely  Germany,  France,  the  UK,  Ireland,  the  Netherlands,  Belgium,  Luxembourg, 
Spain, Portugal, Greece, Denmark and Austria. The Commission will need to collect a 
lot of additional data in order to prepare a decision in each case. This process will take 
several months but should be finished before the implementation  date of the directive, 
which is in most Member States the 20 February 1999. 

State of play in the Member States 
Summary 

The  electricity  market  will be  opened  to  competition  through  the  gradual  opening  of 
the market  over  a six year period which will initially cover  approximately  one  quarter 
of the market  and finally result  in one third  of the total  45  billion  ECU  market  being 
liberalized.  It  is worth  noting  that  a  clear  majority  of  Member  States  will  in  fact  go 
beyond  the  minimum  market  opening  provided  in the  Directive.  In  the  Netherlands, 
32% will be  eligible during  1998 and  all consumers 2008. In  Sweden,  since  1/1/96 all 
consumers are considered  as eligible. In the UK, the current thresholds represent  42% 
of market  opening while by the  end of  1998 it is planned to  fully  open the  market.  In 
Finland,  the  intention  is  during  1998 to  fully  open  the  market.  In  Germany,  all final 
customers and  distributors will all be  eligible. In Denmark,  almost  90% of the  market 
will  be  open  to  competition.  Spain  will  go  further,  and  more  quickly  than  the 
requirements  of  the  Directive.  Most  remaining  Member  States  will  announce  their 
intentions  in the  near  future.  Thus,  even  on the  most  conservative  assumptions,  it  is 
evident that  at least  60% of the EU electricity  demand will be liberalized by end  1999. 
This  highlights  the  fact  that  despite  the  long  debate  that  has  taken  place  since  the 
Commission first presented  its proposal  for  a Directive, the necessity  for  a liberalized 
internal electricity market is widely recognized. 

Country  by country  overview 

Austria 
Structure  of  the  electricity  system:  Each  of  the  nine  Lander  has  its  own  electricity 
company. These regional companies own the low and medium voltage distribution grid 
and  have  a  monopoly  of  electricity  supply  in  their  Lander.  Most  of  the  electricity 
generation is carried  out by eight  generation  companies which are at least  50% owned 
by the  Verbundgesellschaft  (the national  grid  company).  This company  also  owns the 
380 KV and most  of the 220 KV high voltage transmission  grid with the  exception  of 
TIWAG  and  VKW  grids  (the  regional  companies  recognized  as  TSO  in  the  transit 
Directive). 
Present  stage  of liberalization:  The  first  draft  law has been  presented  by the  Ministry 
and  its  expected  to  be  submitted  to  the  Parliament  in  March  1998.  Generation: 
authorization  procedure.  Access  to  the  network:  Single  buyer  with  repurchasing 
obligation  with  limited  exceptions.  Eligible  consumers:  the  threshold  currently 
discussed:  40  GWh,  representing  27%.  In  addition,  it  is  planned  to  include  also 
distributors, which will raise substantially the market opening. 

Belgium 
Structure  of  the  electricity  system:  94%  of  domestic  electricity  is  produced  by 
Electrabel, a private undertaking, and SPE, a public undertaking. These two  companies 
operate  transmission  through  a  joint  network  (CPTE-GECOLI).  Distribution  is 
generally carried out by municipalities and Electrabel. 
Present  stage  of liberalization:  The legislative procedure  has not  yet  started.  Belgium 
benefits from an extra transposition period  of one year.  On the request  of the Minister 
of economic  affairs  the  control  committee  of electricity  and  gas has  given  its  opinion 
on the transposition of the Directive. 

Denmark 
Structure  of the  electricity  sector:  The  Danish  electricity  supply  industry  consists  of 
two vertically integrated  systems  divided by the  Great  Belt.  The two  systems  are not 
interconnected.  The  Western  part  is  connected  to  Norway,  Sweden  and  Germany 
while  the  eastern  part  is  connected  to  Sweden  and  Germany.  There  are  about  100 
distribution  companies  which  own  the  8  generation  companies.  There  are  two 
operators of the transmission  grid, Eltra in the Western part  and Elkraft  in the Eastern 
part. 
Present  stage  of  liberalization:  an  amendment  to  the  Electricity  Supply  Act  was 
adopted in May  1996 and it has entered into force  1/1/98. A proposal is expected to be 
presented  in  autumn  1998  for  the  missing  legislation  necessary  to  comply  with  the 
Directive.  Generation:  authorization procedure. Nuclear  or  coal based plants will not 
be  authorized  for  environmental  reasons.  Access  to  the  network:  negotiated  TPA. 
Eligible  customers:  Industrial  consumers  with  a  yearly  consumption  exceeding  100 
Gwh  and  distribution  companies  with  a  yearly  sale  exceeding  100  Gwh.  This 
represents 90% market opening. 

Finland 
Structure  of  the  electricity  system:  The  Finnish  system  is  dominated  by  the  state-
owned  company  IVO  and  the  private  PVO  which  account  in  total  for  80%  of 
production.  The national transmission grid is owned by FinGrid.  There are around  115 
distributors (local and regional). 
Present  stage of liberalization:  Since  1 June  1995, the  electricity  sector in Finland  has 
been  liberalized.  Generation:  authorization  system. No  central  dispatching  exists and 
the balancing of supply and demand is ensured by the contracts between producers and 
distributors.  Access  to  the  network:  regulated  TPA,  the  tariffs  follow  the  postage 
stamp  system  and  they  are  published.  Eligible  customers:  all  customers  are  eligible. 
Unbundling:  The main grid is owned by Fin Grid which is fully  separated from other 
activities  and  it  has  also  unbundled  accounts.  Renewables:  subsidy  schemes  for 
investment in wind turbines  and  small bio mass fired CHP plants, and also tax rebates. 
The  main  part  of  the  provisions  of  the  electricity  Directive  have  already  been 
implemented in Finland. 

France 
Structure  of the  electricity  system:  The  electricity  sector  is  dominated  by EDF which 
carries out 95% of generation and distribution activities and all transmission. 
Present  stage  of  liberalization:  not  yet  decided.  A  large  debate  has  been  initiated 
through  a  "white  paper"  on  the  organization  of  the  electricity  system  where  all 
interested  parties  may  express  their  opinion  on  the  main  options  provided  in  the 
Directive. 

Germany 
Structure  of the  electricity  system:  the  German  electricity  industry  consists  of nearly 
1000 companies. On the high voltage network there  are 9 supra-regional  transmission 
companies  which  control  also  most  of  the  generation  in  their  areas.  After  the 
reunification  of Germany, VEAG,  an integrated  generation  and transmission  company 
for  east  Germany,  was  created.  Every  regional  and  municipal  distribution  system 
operator is responsible for the pooling and load management in its area. 
Present  stage  of  liberalization:  The  energy  law  has  already  passed  through  the 
Bundestag  (Parliament) and it is currently under  discussion  in the Bundesrat  (Senate). 

Generation:  authorization procedure.  Access  to the  network: negotiated  TPA at the 
transmission level. At the distribution (municipal) level, the distribution companies may 
opt  either  for  TPA,  or  for  single  buyer  with  purchase  obligation  for  a  transitional 
period (until 2005). Eligible  customers: no  engibility threshold,  every final consumer 
and  distributor  will  be  eligible.  Renewables:  dispatching  guarantee  at  a  guaranteed 
minimum  price.  Indigenous  fuels:  protection  of  East  German  lignite  for  the  East 
German  Lander  up  to  2003.  Unbundling:  it  is  foreseen  unbundling  of  accounts, 
management  unbundling  for  the  transmission  system  operators  and  information 
unbundling for the potential single buyer. 

Greece 
Structure of the electricity system: The Public Power  Corporation  (PPC) operates as a 
state  monopoly  and  controls  virtually  all  power  generation,  transmission  and 
distribution  activities  in  Greece.  The  only  exemption  is  power  produced  from  small 
power  plants by  IPP's  and  autoproducers  using  renewable  energy  sources  (and  only 
exceptionally  conventional  fuels).  However,  all  power  produced  by  IPPs  and  any 
surplus power produced by autoproducers must be supplied exclusively to PPC. 
Present  stage  of  liberalization:  Greece  has  already  notified  a  two  year  extra 
transposition  period  and the plan for  liberalization  of the  electricity  sector has not  yet 
been decided. 

Italy 
Structure  of  the  electricity  system:  ENEL  holds  a  monopoly  over  production, 
transmission  and  distribution  of electricity  as well as imports  and  exports  only with a 
few  exceptions:  local utilities are  engaged  in distribution  of  electricity,  autoproducers 
(Edison etc.) produce  electricity for their  own consumption  or to  sell it to firms of the 
same  group.  Production  from  renewables  and  CHP  is  liberalized  but  electricity 
produced must be sold to ENEL. 
Present  stage  of liberalization: Italy has not  decided yet  its plans for  the  transposition 
of the Directive. 

Ireland 
Structure of the electricity system: The electricity sector is dominated by the Electricity 
Supply  Board  (ESB)  which  is  a  vertically  integrated  undertaking  engaged  in 
generation, transmission and distribution of electricity.  Since  1994 the Government has 
launched  a  number  of  competitions  for  alternative  energy  sources  for  263  MW 
capacity,  and peat for  120 MW, representing  approximately  10% of installed  capacity. 
However, the majority  of plants has yet to be built. 
Present  stage  of  liberalization:  Ireland  has  already  notified  a  one  year  extra 
transposition period. The formal legislative procedure is expected to  start  end of  1998 
and it is not yet decided. 

Luxembourg 
Structure  of  the  electricity  system:  In  Luxembourg  the  electricity  system  depends 
almost  entirely on imported  electricity.  It has two  separate grids operated by Cegelec, 
a  public  enterprise,  and  Sotel,  a  private  enterprise  supplying  only  large  industrial 
consumers. 

10 

Present  stage  of liberalization:  The  draft framework law  has  not  reached  a political 
decision yet. The relevant law and the regulations will enter into force begirrning 1999. 
It  is  expected,  however,  that  the  following  basic  approach  will  be  pursued: 
Generation:  tendering  procedure  in  parallel  with  the  authorization  procedure  for 
smaller  generators.  Access  to  the  network:  not  yet  decided.  Market  opening:  the 
consumers of 100 Gwh, which represent the 40% of the total electricity consumption. 

Netherlands 
Structure  of  the  electricity  system:  There  are  at  present  33  distribution  companies 
which own the four  companies engaged in electricity generation in Netherlands, which 
^emserves own SEP, owner and operator of the transmission grid. 
Present  stage  of liberalization:  The law  will be voted  in  the  Parliament  on  18 March 
and it will enter into force  on  1  January  1999. The general lines are the following: 
Generation: no  specific  authorizations.  Everyone  may build  an  electricity plant  when 
environmental  and  safety  requirements  are  satisfied.  Transmission:  companies 
involved  in the  transmission  and  distribution  of  electricity  are  legally unbundled  from 
production and supply activities. Access  to the network: Regulated TPA. Opening of 
the market: 32% in  1998, all consumers in 2008. Renewables: consumers are obliged 
to buy  at least  5% electricity from renewables.  The  authorities issue green  certificates 
to renewable producers (including foreign producers). These green certificates  are sold 
to  consumers in order to prove that they  comply with the purchase  obligation.  Public 
service  obligations:  captive  consumers  are  supplied  at  a maximum  price  decided  by 
the regulator. The law includes also an "equihbrium" (reciprocity) clause. 

Portugal 
Structure  of  the  electricity  system:  The  national  electricity  system  is  divided  in  two 
subsystems: the public  system (SEP)  and the  independent  system (SEI):  Transmission 
is carried out by an independent  company. 
Present  stage  of  liberalization:  In  the  public  system  generation,  transmission  and 
distribution  are linked by long term contracts.  Customers benefit from a uniform  tariff. 
In  the  independent  system  there  is  small  production  (hydro,  renewables)  and 
independent  producers  which  supply  eligible  customers.  Generation:  in  the  SEP  the 
tendering  system,  in  the  SEI  the  authorization  system  is  chosen.  Access  to  the 
network:  regulated  third  party  access.  Eligible  customers:  consumers  with  annual 
consumption  of  100 GWh and distributors for  an 8% of their  consumption  are already 
eligible by the  Portuguese  law.  The  implementing  regulation  will  allow to  implement 
TPA and then actually open the market by mid  1998. The threshold for final  customers 
will be reduced to 40 Gwh in order to reach the level required by the Directive. 

Spain 
Structure  of the  electricity  system:  The  generation  market  is  dominated  by Endesa, a 
state  owned  company  which  is  planned  to  be  privatize,d  by  1999,  and  two  private 
companies  Iberdrola  and  Union  Fenosa.  In  the  transmission  sector  the  dominant 
company is Redesa.  In the  distribution  sector  Endesa  group  accounts  for  43% of the 
distribution, Iberdrola  35%, Union Fenosa  14%, etc. 
Present  stage  of  liberalization:  On  1st  January  1998, the  legislation  has  entered  into 
force  introducing  a liberalisation  which  goes  even  beyond  the  minimum  requirements 
of the electricity Directive. The new structure is based on a spotmarket  in combination 
with regulated  TPA.  The transmission  system  operator,  Red  Electrica,  is  independent 

11 

also  in  terms  of  ownership,  i.e.  no  single  shareholder  may  hold  more  than  10%. 
Generation:  authorization  procedure.  In the generation market there will be a pool 
system for  all producers. Autoproducers may give their  supplementary production to 
the  pool  once  they  have  supplied  their  own  subsidiaries.  Access  to  the  network: 
regulated  TPA.  Eligible  customers:  since  January  1998  consumers  with  a 
consumption of 15 GWh per year are eligible. These represent  approximately 30% of 
total electricity consumption. On 1/1/2000, the eligibility threshold will be reduced to 9 
GWh, on 2002 to 5 Gwh, on 2004 to  1 Gwh, while from 2007 all consumers will be 
eligible.  Renewables:  there  will be  a  support  mechanism providing  for  a  purchase 
obligation for renewables and CHP. 

Sweden 
Structure  of  the  electricity  system:  There  are  around  300  production  companies, 
although  eight  of them account  for  95% of the production.  The largest  is the state-
owned Vattenfall AB which has a market share of 50%. The second larger is Sydkraft 
with 20% market  share. Distribution is carried  out by municipally owned  companies 
(around 270). The main grid is owned by the State and operated by Svenska Krafmat, 
which is a state agency. 
Present stage of liberalization: 
Since 1 January 1996 Sweden has a liberalized market. All customers are considered as 
eligible. Today 75-80% of the electricity is supplied to the customers following  direct 
contracts with the producers. The remaining 20-25% is supplied via the spot market. 
Generation:  authorization  procedure.  Access  to  the  networks:  regulated  TPA.  A 
postage stamp method is applied for the calculation of the transmission tariffs. There is 
no central dispatching in Sweden and the balancing of supply and demand is ensured 
by the  spot  market  at  the  Nord  Pool  Unbundling:  Svenska  Krafmat,  the  system 
operator, is organized in a separate legal entity and it is not involved in generation or 
distribution  of  electricity.  Renewables:  renewables  are  supported  by  investment 
subsidies  and  the  tax  regime.  Distributors  also  have  an  obligation  to  purchase 
electricity from small generators.  The main part  of the  provisions  of the  electricity 
Directive have already been implemented. 

UK 
Structure  of  the  electricity  system:  In  the  generation  market  there  are  three  large 
producers  (National  Power,  Power  Gen,  British  Energy)  with  a  steadily  increasing 
number  of  IPPs.  Twelve  REC  own  the  distribution  grid.  With  regard  to  the 
transmission system, an independent TSO and NGC operate the transmission grid and 
the spot market. 
Present stage of liberalization: The electricity system in England and Wales has already 
been  restructured  in  1990/91.  Generation:  Authorization  procedure  for  generation 
capacities. Access to the network: operation of an electricity pool, type of regulated 
TPA. The pool is a spotmarket that  coordinates  offers  for  generation  and estimated 
demand on a half-hourly basis one day in advance. All generators sell exclusively via 
the pool. Final consumers may only chose between  suppliers on the distribution level 
through  a regulated  TPA system  Thus the  12 REC which own the  distribution  grid 
compete  with  each  other  as  well  as  with  the  other  supply  companies.  Eligible 
customers:  the  current  threshold  is  at  100  KW,  representing  approximately  42% 
market opening. Since the beginning of 1998 this threshold is gradually abandoned and 
will result in a fully  open market  by the  end  of the year.  Unbundling:  The British 

12 

system has been fully legally unbundled in  1990. Renewables: distributors are obliged 
to buy from renewables producers. A non-fossil-fuel  levy on electricity consumption is 
designed to fund the cost burden. 

13 

Common position on the natural gas 

The Council on  12 February reached  a common position  on the internal market  for 
natural gas. Hie next  step is for the European Parliament to  give its opinion  on the 
common position and it is hoped that the Directive will be adopted during the first half 
of  this  year.  The  draft  Directive  provides  for  common  rules  concerning  the 
transmission, distribution,  supply and  storage of natural gas. It  aims at  ensuring the 
introduction  of  competition  to  the  natural  gas  sector,  creating  more  efficiency, 
ensuring  more  transparency,  strengthening  security  of  supply  and  providing  equal 
access for  all eligible  customers to this  sector.  The main provisions  of the common 
position are the following: 

Opening of the market: 
The natural gas market will be opened to competition gradually over a ten year period 
through a system which includes a combination of qualitative and quantitative criteria. 
The application  of qualitative  criteria means the establishment  of a threshold  for  the 
eligibility of industrial consumers which will be initially set at 25 million cubic meters, 
then reduced to  15 million after five years, and 5 million after ten years. Moreover, all 
electricity  producers  will  be  considered  eligible,  irrespectively  of  their  annual 
consumption. However, in order to safeguard the balance of their electricity markets, 
Member  States  may  introduce  a threshold  for  the  eligibihty  of  combined  heat  and 
power producers, not exceeding the threshold envisaged for other customers. 

Quantitative criteria will also apply, introducing a minimum obligatory percentage of 
market opening for Member  States, initially set at 20%, and then raised at  28% and 
33% after five and ten years respectively.  To take account  of possible imbalances on 
the level of market opening due to the different  gas market structures, Member States 
may reduce  the  level  of  market  opening  if,  after  the  application  of  the  qualitative 
criteria,  this  exceeds  30%,  38% and  43% during  the  first,  second  and  third  stage 
respectively.  In  addition  to  this  distributors,  where they  are not  already  considered 
eligible, will be eligible for the supply of gas consumed by their customers which are 
designated as eligible. 

Construction or operation of natural gas facilities: for the construction and operation 
of natural  gas facilities  Member  States  grant  authorizations  according  to  objective, 
transparent and non-discriminatory criteria which should be made public. The reasons 
for  any  refusal  to  grant  authorizations  shall  be  notified  to  the  applicant  and  the 
Commission,  and  dispute  settlement  procedures  should  be  made  available  to  the 
applicants. 

Access to the system:  natural gas undertakings and eligible customers will be able to 
have access to the  system so as to  conclude  supply contracts with each other under 
objective  and non-discriminatory  conditions. To this end Member  States may choose 
either or both procedures, negotiated or regulated third party access: 
•  Under  negotiated  TPA,  natural  gas  undertakings  and  eligible  customers  will 
negotiate  access to the system with the relevant natural gas undertakings so as to 
conclude  supply  contracts.  Natural  gas  undertakings  should  publish  the  main 
commercial conditions for the use of the network annually. 

14 

•  Member States opting for regulated TPA shall take the necessary measures to give 
natural gas undertakings and eligible  customers a right of access to the  system on 
tne basis of published tariffs. 

Member  States  shall  ensure  that  each  transmission,  storage  distribution  and  LNG 
undertaking  will  not  discriminate  between  system  users  and  should  not  abuse 
information  obtained from third parties in the context  of providing negotiating  access 
to the system 

Unbundling and transparency of accounts: 
Integrated undertakings have an obligation to separate internal accounts with regard to 
the activities of transmission, distribution, and storage. 

Public service obligations: Member States may impose on natural gas undertakings, in 
the  general  economic  interest,  public  service  obligations  which  must  be  objective, 
transparent and non-discriminatory, verifiable  and published and should fall within one 
of the five categories concerning  security, regularity, quality and price of supplies and 
environmental protection.  These obligations should be notified to the Commission and 
always  comply  with  article  90  of  the  Treaty,  which  lays  down  that  undertakings 
entrusted  with  the  operation  of  services  of  general  economic  interest  or  having  the 
character of a revenue-producing monopoly shall be subject to the rules of the Treaty, 
in particular the competition rules, in so far as the application  of these rules does not 
obstruct the performance of the tasks assigned to them. 

Derogations: 
Chapter  VII  includes  some  specific  provisions  concerning  derogations  from  the 
application  of the Directive.  The  aim of these  derogations  is to  guarantee  a  specific 
protection  in  certain  cases,  for  example,  for  natural  gas  undertakings  with  specific 
economic  and financial difficulties  deriving  from  take-or-pay  commitments,  or  in 
Member States where gas has been introduced recently and huge investments need to 
be recovered  (emergent  markets).  In the first case,  derogations will be  granted  on a 
case by case basis, and the Commission will play a decisive role, whereas in the second 
case,  derogation  will  automatically  expire  after  ten  years from the  first  delivery  of 
natural gas. 

Conclusion 
The progress made, is it  satisfactory? 

The  Uberalization  of  the  markets  for  electricity  and  gas  has  started  a  process  of 
structural change. With regard to the electricity Directive,  some Member  States have 
already liberalized their markets even before the adoption of the Directive  such as the 
UK,  Sweden and Finland. Others have started the discussion on the necessary changes 
only after the adoption of the Directive. Among them there are Member  States which 
intend  to  open  their  markets  rather  quickly  and  they  have  already  put  in  place 
legislation  such  as  the  Netherlands,  Spain  and  Germany,  and  others  who  have  not 
proceeded that much in the legislative process. However, despite the different progress 
that  Member  State  have  achieved  so  far  in  the  legislative  procedure  for  the 
implementation  of  the  electricity  Directive,  it  is  clear  that  the  restructuring  of  the 
electricity  sector  in line with the  rules provided  in the  Directive  is  at present  on the 
agenda  of  all  Member  States.  As  the  Directive  offers  various  options  for  the 
organization of the markets it needs to be reviewed in order to ensure that the outcome 

15 

is  satisfactory.  The  Commission  has  therefore  closely  followed  the  process  of 
implementation  of  the  Directive  into  national  legislation  both  through  bilateral 
meetings  with  the  Member  States  and  in  the framework of  the  "follow-up"  Group 
which  meets  twice  a  year  with  the  objective  to  prevent  any  inconsistencies  and  to 
ensure  a coherent  implementation  of the  Directive.  In this  context  it  should thus be 
underlined  that,  despite  the  difficulties  faced  by  Member  States  during  the 
that  the  coherent 
transposition  period,  there 
implementation  of  the  Directive  will  not  be  ensured  with  the  relevant  timetable  as 
provided for in the Directive.  The same approach will be followed for the gas once the 
Directive will be adopted. 

indication  whatsoever 

is  no 

Accompanying and follow-up  measures 

The adoption of the electricity Directive and the common position on the gas proposal 
is  not  the  ultimate  goal.  Therefore  the  electricity  Directive  provides  for  a  review 
clause, which requires the  Commission to  reconsider the Directive  in the light  of the 
experience gained in due time to permit further measures to take effect  in 2006.  It is 
expected that the  same will apply for gas in ten years following  the final  adoption  of 
the Directive. The Commission will thus reflect on new proposals for market opening. 

In the meantime, monitoring  of the implementation  of the electricity Directive is vital 
with the  aim to  ensure  the  proper  functioning  of the  internal  market,  to  verify  that 
different  network  access  systems result in comparable market  opening, the  envisaged 
procedures  for  new  production  capacities  ensure  the  freedom  of  establishment,  to 
ensure  fair  competition,  and  to  verify  that  effective  regulatory  and  arbitration 
procedures  are  effective  to  ensure  a level  playing field. In this  respect  considerable 
commitments  need  to  be  made  by both  the  Member  States  and the  Commission  to 
ensure that competition is fair.  The Commission will ensure that competition rules are 
enforced  in  order  to  avoid  the  foreclosure  of  markets  and  any  abuse  of  dominant 
positions. Merger policy will also have to be attentive to the dynamics of liberalisation 
which is now being put in place.  Action  should  also be taken  against  any unjustified 
aids. 

In parallel, the  opening  of the national  energy  markets will have to  be  accompanied 
with  additional  measures  as  well  to  ensure  that  competition  is  fair:  these  include 
harmonization  in the  field  of technical  and  safety  standardization  and harmonization 
with  regard  to  the  protection  of  the  environment.  However,  as  the  opening  of  the 
markets will be progressive, the harmonization can also be progressive  and pursued in 
parallel.  The electricity Directive  in any case provides  for  a report  on harmonization 
requirements  which  has to  be  prepared  yearly.  The  first  report  concentrates  on  the 
treatment  of renewables in the internal electricity market.  An  examination  of existing 
and planned support  schemes for renewables in each Member State  should be carried 
out  before  it  is  determined  what  provisions  might  be  included  in  any  Directive 
providing for harmonization in this  field. 

In addition, the development  of trans-european energy networks is absolutely vital for 
the balanced operation of the single market. The existence of adequate infrastructure is 

16 

sine qua non for the transfer of energy in the context  of an integrated internal market 
and will increase security of supply. 

Finally, the close examination of the social consequences of the new market rules and 
increased competition is vital  The Commission is concerned with regard to the  effects 
of  liberalization  of  the  electricity  and  gas  sectors  on  employment  in  the  European 
Union. Therefore the Commission plans to launch a study on the effects  of electricity 
and gas  liberalization  on  employment  and to  examine  carefully  which  accompanying 
measures and programs to assist re-employment might be taken. 

17 

ISSN 0254-1475 

COM(98) 212 final 

DOCUMENTS 

EN 

12  10  15 

Catalogue  number  :  CB-CO-98-227-EN-C 

ISBN  92-78-33052-3 

Office  for  Official  Publications of the European  Communities 

L-2985  Luxembourg 

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