Communication from the Commission to the European Parliament and the Council - Energy Infrastructure and Security of Supply {COM(2003) 739, 740, 741, 742}
Date: 2003-12-10
Institutions: European Commission
Subjects: competitiveness, electrical energy, energy policy, energy supply, gas, security of supply, sustainable development

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 10.12.2003
COM(2003) 743 final

COMMUNICATION FROM THE COMMISSION
TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

Energy Infrastructure and Security of Supply

{COM(2003) 739, 740, 741, 742}

EN

  EN

TABLE OF CONTENTS

1.

2.

3.

3.1

3.2

3.3

3.4

4

4.1

4.2

4.3

4.4

5

KEY POLICY OBJECTIVES FOR THE ELECTRICITY AND GAS INDUSTRY
IN EUROPE ................................................................................................................ 3

WHAT MEASURES ARE REQUIRED TO DELIVER A SECURE,
SUSTAINABLE AND COMPETITIVE ENERGY SECTOR................................... 3

MEASURES NECESSARY IN THE ELECTRICITY SECTOR .............................. 5

Introduction ................................................................................................................. 5

System security and reliability .................................................................................... 6

Reaping the full benefits of the internal market .......................................................... 9

Concrete Actions Proposed ....................................................................................... 12

MEASURES NECESSARY IN THE GAS SECTOR .............................................. 13

Introduction ............................................................................................................... 13

Measures to support security of gas supply............................................................... 14

Measures to develop the internal gas market ............................................................ 14

Measures to improve the gas transmission network.................................................. 17

CONCLUSIONS ....................................................................................................... 17

ANNEX 1 Review of Progress and Actions since the 2001 Communication on Energy

Infrastructure ............................................................................................................. 18

ANNEX 2 Encouraging New Electricity Infrastructure.............................................................. 21

2

 
1.

KEY  POLICY  OBJECTIVES  FOR  THE  ELECTRICITY  AND  GAS
INDUSTRY IN EUROPE

Europe  needs  an  energy  industry  that  is  dependable,  in  terms  of  security  and  continuity  of
supply; sustainable, in terms of its environmental performance; and competitive, delivering an
efficient service  to  households  and  business  and thus  contributing  to  the  competitiveness  of
the European Economy and the quality of life of its citizens.

In respect to the final objective, the organisation of the energy sector in the European Union is
already undergoing fundamental change. The first electricity and gas Directives1 have already
abolished  the  principle  of  a  monopoly  provider  and  allowed  large  users  to  choose  their
electricity  and  gas  supplier.  Many  Member  States  responded  to  this  initiative  by  moving
quickly to establish a fully competitive market. With the entry into force of the new gas and
electricity Directives2, all Member States will, in 2004, extend competition to non-households
with the final step to full market opening by 2007 at the latest.

The internal market, moreover, needs to contribute to the underlying objective of sustainable
competition.  This,  above  all,  relates  to  the  EU’s  environmental  commitments  to  control  the
emission  of  greenhouse  and  other  gases.  Specifically,  in  the  Kyoto  Protocol,  the  EU
committed  itself  to  reducing  its  emissions  of  the  six  Kyoto  gases  by  8%  below  their  1990
level by 2008-2012. In order to comply with the Kyoto Protocol, more stringent measures and
policies from Member States are of utmost importance. This includes the initiative to reduce
emissions  from  the  power  sector,  to  constrain  growth  in  demand  through  energy  efficiency
and to introduce common rules for the taxation of energy products.

Finally, it must be ensured that the internal energy market develops in a manner that provides
the highest possible standards of security of supply for European  citizens and industry. This
has  two  elements;  system  security,  and  ensuring  adequate  supplies  of  gas  and  electricity  in
both the medium and the long term.

2.

WHAT  MEASURES  ARE  REQUIRED  TO  DELIVER  A  SECURE,
SUSTAINABLE AND COMPETITIVE ENERGY SECTOR

The  question  of  the  measures  required  to  achieve  the  Community’s  energy  objectives  have
already  been  examined  by  the  Commission  in  previous  Communications.  In  particular,  the
Green  Paper  of  the  Commission  on  Security  of  Supply3  drew  attention  to  a  number  of  key
considerations for the  energy industry over the  next  20-30  years.  A  key  feature  is  the  EU’s
increasing dependence on imported energy, the growing importance of natural gas as a supply
source,  and  the  level  of  investment  needed  in  infrastructure.  The  debate  launched  by  the
Green Paper also underlined the need for a strategy based on demand management and of the
desirability of competitive markets and effective competition, reinforcing the competitiveness
of  the  European  economy  and  implying  a  better  use  of  existing  cross-border  capacities.
Responses  to  the  Green  Paper  of  the  Commission  on  Security  of  Supply  have  made  a  key
contribution to the formation of the Commission’s energy strategy and the associated package

1

2

3

96/92/EC and 98/30/EC
2003/54 and 55 and Regulation 1228/2003
COM(2000) 769 final, 29 November 2000

3

 
                                                
of  measures4  following  the  Green  Paper.  For  example,  the  Commission  proposal  on
coordinated measures on the security of energy supplies5 was adopted on 11 September 2002
addressing oil and gas stocks.

Likewise, the Commission’s Infrastructure Communication of December 20016 was the first
examination of the crucial role of such investments to support the development of the internal
market.  The  Barcelona  Summit  in  March  2002  welcomed  this  document  and,  in  particular,
endorsed the target for Member States to have a level of electricity interconnection equivalent
to at least 10% of their installed production capacity by 20057. The 13 proposed actions in the
first communication are in the process  of being  completed,  or have  already  been  achieved8.
As  well  as  the  adoption  of  the  new  Directives  and  Regulation,  which  was  achieved  in  July
2003,  other  completed  actions  include  an  agreement  on  the  removal  of  charges  on  cross
border electricity exchanges, publication of cross border gas capacity and an initial revision of
the  Trans  European  Energy  guidelines  adopted  in  June  2003.  Other  actions,  such  as  the
implementation of the agreed congestion management guidelines are still ongoing and will be
completed  in  the  context  of  the  new  Directives,  and  the  Regulation  on  Cross  Border
Electricity Exchanges.

The  Commission  also  recently  released  a  Communication  examining  the  development  of
energy  policy  for  the  enlarged  European  Union,  its  neighbors  and  partner  countries9.  This
paper  discussed  issues  relating  to  extending  the  internal  market  for  electricity  and  gas  to
neighboring countries and securing gas supplies for the European Union.

This wide ranging consultation has shown the need for futher measures at Community level
are now necessary, in particular, to provide a stable framework to encourage investment. This
relates  to  all  the  objectives  of  the  Community,  whether  to  do  with  security  of  supply,
sustainability or the internal market. These measures can be summarised as follows.

Firstly,  following  the  introduction  of  the  competitive  market,  there  is  a  clear  need  for  a
regulatory  framework  for  the  wholesale  electricity  market  which  ensures  the  continuing
balance  between  supply  and  demand,  including  both  demand  management  and  the  required
levels  of  investment  in  electricity  generation,  by  encouraging  their  response  to  the  price
signals in the market. In this context, measures to manage demand expansion must be at the
heart of the Community’s approach in this field. Managing demand is both cheaper and works
more  quickly  than,  for  example,  efforts  to  continuously  increase  generation  capacity  on  the
basis  of  extrapolations  from  the  current  situation.  However  some  new  investment  will  be
needed simply to renew plant that has reached the end of its life. Much of this investment is
expected to take the form of renewables and distributed small scale CHP generation. Security
of  supply  also  requires  that  investment  in  internal  EU  transmission  networks  and  in  long
distance  gas  transport  must  also  be  maintained.  This  requires,  above  all,  a  stable  and
consistent regulatory framework and streamlined procedures for the approval of new projects.

4

5

6

7

8

9

See the follow up Communication “Final report on the Green Paper "Towards a European strategy for
the security of energy supply" COM(2002) 321,Brussels,  26.6.2002. The Green Paper website can be
found at: http://europa.eu.int/comm/energy_transport/en/lpi_lv_en1.html
COM(2002) 488 final
COM(2001) 775
Presidency  Conclusions,  Barcelona  European  Council  15-16  March  2002,  page  15,  16/3/2002
Nr: 100/1/02
See Annex 1 for details.
COM(2003) 262 final: 26 May 2003

4

 
                                                
Secondly, with respect to the environmental targets of the European Union, there are also new
challenges relating to infrastructure. To reach the targets relating to, for example, renewables,
a range of measures is being used; including fiscal and other economic measures, to improve
efficiency  of  plant,  reduce  emissions,  increase  the  use  of  renewable  energies  and  manage
demand.  However,  adequate  energy  infrastructure  is  also  a  key  requirement  regarding  the
implementation of many of these measures. This is especially true for the connection of wind
farms  now  being  located  in  off-shore  sites  and  for  distributed  generation.  There  therefore
exists  a  direct  need  to  make  the  appropriate  reinforcements  in  transport  and  distribution
capacity  to  support  renewable  and  low  emission  technologies.  Without  new  infrastructure
some renewable energy will not be able to have the required impact on supply of the internal
market. In this context, it should be pointed out that significant support also needs to be given
to  the  very  promising  development  of  hydrogen,  which  as  a  future  energy  carrier  could
contribute  significantly  to  security  of  supply,  the  reduction  of  greenhouse  gases  and  the
improvement of the local environment.

Finally, without more interconnection between Member States and for  gas, better use of the
existing  infrastructure,  the  functioning  of  competition  in  the  internal  market  will  be
constrained. For example, in a number of EU countries, a trend has emerged at national level,
not  to  create  effective  competition,  but  to  reduce  competition  through  mergers,  both
horizontal and vertical. This tendency towards consolidation has not been accompanied by the
necessary  measures  to  ensure  that  the  markets  concerned  have  become  fully  integrated  into
the  wider  European  market  by  constructing  additional  interconnector  capacity.  Unless  this
happens, customers  will  remain  captive  in  practice,  even  if  they  theoretically  have  a  choice
between  suppliers.  Thus,  a  greater  level  of  interconnection  between  Member  States  is
instrumental to the development of a competitive internal market, which is a priority for the
European  Union.  Incidentally,  given  the  importance  of  constructing  new  electricity
interconnectors, it is of particular concern that inadequate progress is being made in achieving
the 10 %  interconnection target.  There  is  also recognition that even this  target might  be  too
low in some Member States or regions of the Community where the very high market shares
held by one or very  few companies signal  the  existence  of barriers to entry  in the  domestic
generation market.

With the accession of ten new Member States and the ongoing development of the EU energy
relationships  with  neighbouring  countries,  the  need  for  a  stable  regulatory  framework  that
supports the necessary investment is now a high priority for the Community.

3.

3.1

MEASURES NECESSARY IN THE ELECTRICITY SECTOR

Introduction

A  successful  electricity  industry  must  deliver  a  continuous  equilibrium  between  supply  and
demand  of  electricity  while  also  allowing  for  competition  between  different  generators  and
suppliers. In addition to the market opening measures already in force appropriate incentives
to invest in both transmission and distribution networks as  well as  for demand management
and\or  electricity  generation  are  central  to  these  objectives.  Without  such  investments  the
reforms of the electricity sector will not succeed and there will be an ever increasing risk of
interruptions if demand for electricity  continues to grow at its  current rate  and  the strain on
the network increases.

5

 
3.2

System security and reliability

Despite  the  various  interruptions  to  supply  that  occurred  during  2003  it  would  appear,  in
general,  that  the  European  electricity  system  does  not  have  the  same  level  of  systematic
failings that exist in the US. In particular there exists a clearer allocation of responsibilities,
there  is  greater  integration  in  terms  of  organisation  and  regulation  and  a  higher  level  of
cooperation between network operators. There is also a greater emphasis on the management
of  demand  for  electricity  which  reduces  the  likelihood  of  such  incidents.  However,  the  key
lessons to be drawn from such incidents that are particularly relevant for the European Union
are that.

(cid:1)  Co-ordination between transmission system operators of different Member States and
neighbouring countries must be enhanced. A lack of co-ordination was a key factor
in both the black out in Italy in September 2003 and the incident in the north Eastern
USA.

(cid:1) 

(cid:1) 

The  question  of  the  supply  demand  balance  cannot  be  neglected.  Although  there
were no blackouts due to supply-demand issues, extreme weather conditions in both
the  winter  and  summer  did  lead  to  some  emergency  measures  being  taken.  In  this
context, it is clear that demand growth must be controlled since this is the underlying
cause of the increased stress of the existing network.

Sufficient transmission capacity is also a necessary component of security of supply.

These  three  factors  for  a  secure  supply  of  electricity  are  discussed  in  the  sections  below  in
more  detail.  However  it  is  worth  noting  that  although  there  is  some  attention  to  these  pre-
occupations at Member State level, this has been sporadic and inconsistent and if no further
action  is  taken  the  risk  exists  that  the  problems  that  have  been  experienced  might  become
more  frequent  within  the  European  Union.  The  dislocation  caused  by  the  various  incidents
during 2003 within the EU is an indication of the impact of such events.

3.2.1

Security and Reliability Rules at EU Level

The introduction of competition, particularly across national borders, brings new demands on
the  transmission  network.  The  increase  in  the  quantity  of  cross  border  transactions  and  the
less predictable flows that tend to result mean that it is crucial that not only the infrastructure
itself, but also the rules and mechanisms for controlling such flows, are adequate.

To this end, the Union of Co-ordination of Transmission of Electricity (UCTE) at the request
of  the  “Florence”  Electricity  Regulation  Forum,  has  initiated  the  work  on  Operational
Handbook  which  aims  at  binding  security  and  reliability  rules  in  the  UCTE  network.  This
work serves mainly to consolidate existing agreements between system operators which have
been in place for a number of years. Although similar systems are in place in the US, they do
not  appear  to  have  been  implemented  in  the  recent  incident.  This  strengthens  the  case  for
binding security standards where the principles of reciprocity are respected and enforced.

The  Commission,  European  regulators,  the  TSOs  outside  the  UCTE  area,  and  other
stakeholders  have  also  participated  in  this  work.  The  Regulation  on  cross-border  trade  of
electricity provides for the possibility to include, in the guidelines on congestion management,
common rules on minimum safety and operational standards for the use and operation of the
network.  It  is  the  intention  of  the  Commission  that  the  future  guidelines  will  include  basic

6

 
rules of this type in support of the development of the Handbook. In addition, however, it is
essential that Member States ensure that the TSOs comply with the detailed guidelines.

3.2.2

Supply Demand Balance

Imbalances between  demand  and  supply  can cause major  disturbances.  In particular, even a
minor  imbalance  may  lead  to  a  general  interruption  caused  by  failure  of  individual
transmission line which spreads to other parts of  the network. Such events are normally the
result of an absence of sufficient reserve generation capacity, which is needed to serve peak
demand  and\or  needs  to  cover  outages  and  maintenance.  In  some  countries  and  regions  the
need  for  either  new  capacity  or  demand  constraints  are  already  evident.  Insufficient
generation  was  a  major  contribution  to  the  California  electricity  crisis  (even  if  not  the  only
one).  Similarly,  Nordic  countries  were  obliged  to  look  for  crisis  measures  in  cold  weather
periods in winter 2002/2003, as dry weather caused historically low reservoir levels. In order
to avoid more serious incidents, Member States need to have a clear policy in place, both on
the demand side and the supply side.

The contribution to be made by demand management

One key lesson from these events, as already established in the Commission’s Green Paper on
Security  of  Supply,  is  that  measures  to  control  demand  are  a  crucial  component  of  any
Member  State’s  security  of  supply  policy.  It  is  clear  that  a  significant  reduction  in  demand
could be made through relatively simple efforts to avoid unnecessary consumption of energy.
What  is  more,  such  measures  are  usually  faster  to  implement  than  the  alternatives.  For
example, It is estimated today that the average cost in many Member States of saving a unit of
(off-peak) electricity in the domestic sector is around 2.6 euro cents /kWh,  compared to  the
average (off-peak) price for delivered electricity of 3.9 euro cents. Overall, total final energy
consumption  in  the  EU  is  approximately  20%10  higher  than  can  be  justified  on  purely
economic  grounds.  Many  case  studies  on  projects  in  different  Member  States  show  that
typical energy performance projects often have a potential savings of 15-35%.

Without  reducing  comfort  or  standards  of  living,  it  is  therefore  possible  to  reduce  energy
consumption  by  at  least  one-fifth  at  no  extra  net  cost  –and  in  many  cases  negative  costs–
because  the  saved  energy  is  sufficiently  valuable  to  repay  the  cost  of  investment  in  a
reasonable length of time – well within the technical lifetime of the investment – and to cover
interest charges. Today this savings, were it to be calculated in terms of primary consumption,
would correspond to over 8, 400 PJ/year, or 200 million tonnes of oil per year.

The  realisation  of  such  savings  would  provide  an  alleviation  of  potential  supply  demand
imbalances  over  the  next  few  years.  Demand  management  would  prevent  the  need  for
expensive investments in new generation capacity and would contribute to the Commission’s
commitment  to  reduce  greenhouse  emissions.  The  introduction  of  appropriate  incentives  to
mange  demand  should  be  the  first  port  of  call  for  any  Member  State  with  concerns  about
security of supply. It is for this reason that the Commission intends to put forward a specific
proposal for a Directive on the provision of energy efficiency and energy services relating to
demand management. In addition to improving the security of supply for the electricity sector,
this  proposal  will  also  contribute  to  improving  the  security  of  supply  in  other  important
energy sectors, including gas and heating and transport fuels.

10

MURE model estimation based on current energy prices. European Commission, 2003.

7

 
                                                
A stable framework for investment

Another  consideration  is  that  much  obsolete  and  environmentally  damaging  existing  plant
will be closed thanks to the implementation of the Large Combustion Plant Directive over the
next few years. This measure will do much to create a fair competitive and sustainable market
in the medium term.  A number of policies are already in place to promote investments in less
carbon intensive technologies. For example the renewables Directive and the proposals for a
Directive on electricity from cogeneration will already provide a significant impetus to these
forms  of  new  generation  and  will  lead  to  significant  investments.  However,  some  new
investment in conventional generation is also inevitable.

In general, provided the appropriate prices signals exist in the form of a transparent wholesale
electricity price, the market should, be able to guarantee the necessary response on a purely
competitive  basis.  Specifically,  as  the  supply-demand  position  deteriorates,  prices  will
increasingly  be  set  by  more  expensive  generation  units.  As  this  occurs,  either  consumption
will  be  reduced,  or  investment  in  new  generation  capacity  will  become  viable  and  the
situation will rectify itself. This is, broadly speaking, the same process as in other sectors of
the economy.

However,  there  are  concerns  about  whether  this  process  will  function  in  a  sufficiently
effective  way  in  the  electricity  market.  Firstly,  electricity  markets  are  characterised  by  both
inelastic supply and demand and wholesale prices tend to be volatile. This is exacerbated by
the  current  design  of  the  electricity  markets:  on  the  demand  side,  most  consumers  do  not
participate  actively  in  the  price-setting  process;  therefore,  they  behave  as  if  they  were
insulated from the effects of higher prices on the spot market for electricity. Demand, at least
over the short term, is relatively inelastic , since most consumers lack both the incentives and
the means to reduce peak demand. However, the provision of demand response mechanisms
can  enhance price responsiveness. For the supply side, although prices in wholesale markets
will occasionally need to rise significantly above the cost recovery level in order to attract the
necessary  new  investments11  ,  there  are  concerns  that  new  investments  may  not  respond
sufficiently  quickly  to  higher  prices  that  these  might  thus  last  for  a  long  time  and  have  a
negative  impact  on  the  economy.  A  second  concern  is  that  the  market  may  never  deliver
sufficient capacity to cope with the very highest episodes of peak demand, as the uncertainty
that  exists  as  to  the  frequency  and  timing  of  such  events,  together  with  the  prospect  that
regulators might cap the market price for this peak supply, make the expected rate of return of
these investments extremely low and uncertain.

Several EU member states are currently studying whether any other specific measures should
be implemented, either to encourage general investments to occur more quickly, to encourage
a faster demand response to emerging imbalances or in order to guarantee a sufficient reserve
capacity in electricity production to cover peaks in demand. The electricity directive already
obliged Member States to monitor the supply demand position and to provide an option to use
tendering in order to acquire new capacity. Greece and Ireland have already made use of this
possibility. Tendering should, however, be seen as an absolute last resort given the numerous
distortive effects that such a measure can have on the market and the bias that this produces in
favour of purely supply side measures. In particular, the existence of the possibility to tender

11

Prices  in  electricity  markets  are  normally  be  set  by  the  marginal  cost  of  the  highest  cost  plant  that
successfully  offers  its  production  into  the  market.  In  periods  of  surplus  generation  capacity  this  is
normally  well  below  the  cost  recovery  level  for  a  new  investment  meaning,  specifically;  the  capital
costs of new plant will not be covered.

8

 
                                                
will  tend  to  constrain  independent  investment  decisions  being  made  spontaneously.  Other
Member  States  have  experimented  with  some  more  general  form  of  incentive  to  generation
such as availability payments or compulsory reserve margins. A correct balance is needed and
the  ideal  solution  is  likely  to  be  different  in  each  Member  State.  For  example,  hydro-based
systems differ considerably in this respect from thermal based systems.

Great care is required with any intervention. If such policies are poorly designed, they can be
counter-productive  and  make  the  original  problem  of  the  functioning  of  the  market  even
worse. What is clear, however, is that Member States must, either individually or collectively,
have a clear and unambiguous approach to the wholesale electricity market. Without this the
regulatory risks to investors will be unacceptable.

3.2.3

Adequate transmission infrastructure

In the context of the single market, interconnector investments are crucial to secure both the
commercial capacity and the security of the network. Of particular importance are measures
to reinforce transmission networks to respond to the changing pattern of flows in the network
that  result  from  the  introduction  of  the  internal  market;  as  well  as  the  growth  in  renewable
energy and other distributed generation. Control of these critical energy infrastructures is, in
turn, highly dependent on the  security  and reliability  of  the  monitoring  and  controlling  ICT
infrastructures. The emerging consensus is that transmission investments need to have a high
degree of central co-ordination in order to deliver a rational network and reduce uncertainty.
There are a number of reasons for this.

Firstly the transmission network of much of the European Union is a single integrated system.
Adding a new element has an influence on the whole of the network. All transmission system
operators affected by the investment therefore need to be aware of the positive and negative
consequences  of  the  network  changes.  Transmission  planning  is  also  necessary  to  reduce
uncertainty  for  potential  investors  in  generation  capacity.  For  example,  generators  need  to
know about future transmission investments which could possibly enable competitive imports
from a lower price area.

There  are  a  number  of  reasons  why  the  necessary  transmission  investments  are  not
progressing  which  are  discussed  in  more  detail  in  Annex  2  below.  This  includes  several
projects  that  the  European  Council  has  already  identified  and  agreed  as  projects  of  priority
European  interest.  This  situation  is  not  sustainable  given  the  investment  needs  of  the
European Union in this sector.

3.2.4

Conclusions

The inter-related questions of system  reliability,  energy  market  design,  generation  adequacy
and  transmission  investment  and  to  the  priority  given  to  managing  energy  demand  are  all
relevant to the objective of overall security of supply.

 Despite the  work  undertaken  to  date  since  the  start  of  market  opening,  it  is  not  always  the
case that Member States have a clearly set out overall policy with defined standards on all of
these questions. It is, therefore, the view of the Commission that this aspect of energy policy
needs to be further clarified.

3.3

Reaping the full benefits of the internal market

The new electricity and gas directives set clear dates for the full market opening with all non-
household customers being eligible already in July 2004. Many Member States have already

9

 
anticipated  these  requirements  and  already  have  the  possibility  for  all  customers  to  choose
their  supplier.  However,  for  electricity  in  particular,  the  lack  of  cross  border  capacity  is  a
particular problem for the functioning of the single market. It is therefore regrettable that the
target  set  following  the  first  Communication  on  Energy  Infrastructure,  that  the  level  of
interconnection should be equivalent to 10% of installed generation capacity, has not yet been
met in all Member States.

Furthermore it is clear that even this level of interconnection will not be sufficient to support
the internal market where relevant barriers to entry in the domestic market still persist . In this
event,  the  entry  of  suppliers  from  other  Member  States  is  the  only  realistic  way  for
competition  to  develop  rapidly.  The  Commission’s  benchmarking  exercises12  have  clearly
demonstrated  this  problem.  There  are  several  markets  where  the  conditions  are  far  from
optimal in this respect.

The graph below shows the degree of concentration in each generation market, in terms of the
share of the largest, and the three largest companies. This figure has then been adjusted (i.e.
lowered) by taking into account the amount of import capacity, recognising that this is also a
source of competition.13

Graph 1

Concentration in the electricity generation market

100

80

60

40

20

0

G R IR L

F R

B E

PT

C Z

SK

IT

ES B A LT IC

D E

A T

SE

U K

N L

N O

F I

PO

SN

D K

3

Largest

3 largest

This analysis clearly shows an unsatisfactory position in a number of the 25 Member States
with the following striking examples:

– 

– 

Greece,  where  the  “Public  Power  Company”  (PPC)  controls  the  domestic
generation  market  and  connection  with  Balkan  neighbours  is  not  well
developed,

Ireland,  where  Electricity  Supply  Board’s  (ESB)  position  continues  to  be
isolated  from  potential  competitive  pressures  and  where  there  is  insufficient
interconnection with Northern Ireland and the wider EU market,

12

13

SEC(2003) 448, European Commission, 4 April 2003
Published NTC Summer 2003: source ETSO.

10

 
                                                
– 

France, where Electricité de France’s (EDF) position can only be challenged to
a limited extent through imports,

– 

– 

– 

– 

– 

Belgium,  where  the  dominant  position  of  Electrabel  is  compounded  by
insufficient import capacity,

A  number  of  the  new  Member  States  (e.g  Czech  Republic,  Slovakia),  where
transmission  grids  need  to  be  reinforced  and\or  further  upgraded  to  allow
competition between former incumbents,

Austria,  where  reinforcement  of  the  national  network  is  needed  to  ensure
sufficient cross border competition with the newly merged “Energie Austria”,

Italy  where  reinforcement  of  connections  with  neighbouring  countries,
especially, Austria and Slovenia would increase reliability and provide greater
diversity,

Finally, in Spain and Portugal, the slow progress in developing interconnectors
and  the  completion  of  an  integrated  market  still  means  that  the  largest
companies retain a significant degree of control.

These concerns have been confirmed by a recent survey of large consumers in the electricity
and gas markets which covered, in particular, Belgium, Italy, Germany, Austria and Finland.
On  aggregate,  45%  of  the  total  respondents  were  dissatisfied  with  the  development  of
competition in the electricity market14 and around 80% of these cited the low availability of
import capacity, or the existence of a dominant player, as a significant problem. The market
conditions prevailing in these Member States are reasonably reflective of the EU as a whole
and the companies covered make a key contribution to European competitiveness.

As well as new investment, other actions can also contribute to a suitable market structure for
the  electricity  industry.  Measures  such  as  divestment  and  capacity  release  through  “virtual
power  plant”  auctions  have  already  been  undertaken  sporadically  in  the  EU  with  some
success.  Ideally  a  combination  of  an  extension  and  intensification  of  these  measures
combined with suitable investment in cross border transmission capacity is required. Overall,
it  would  seems  that  the  lower  the  level  of  investment  by  Member  States  in  new
interconnections, the greater the need for measures such as capacity release or divestment are
necessary  to  ensure  that  the  electricity  market  can  function.  Or,  put  another  way,  if  the
problems  due  to  lack  of  interconnector  capacity  are  more  quickly  resolved,  more
interventionist measures may not be necessary. For example, measures such as end-user price
controls,  which  restrict  the  benefits  of  a  competitive  market  and  should  be  seen  as  a
temporary measure during the initial stages of the market opening process, could be removed
more rapidly if a more satisfactory market structure were in place. One thing is clear: a policy
of  no  action  would  deprive  consumers  of  the  benefits  of  competitive  electricity  prices
and needlessly damage the overall performance of the European economy.

The prime responsibility for addressing many of these issues lies at national, not Community
level, pursuant to the subsidiarity principle. It is only Member States, at present, which have
the authority to authorise new interconnectors or to increase the level of competition through
other  measures.  By  contrast,  the  Commission  does  not  have  such  powers.  It  cannot,  for
example,  order  capacity  release  or  divestment  schemes,  except  possibly  as  a  remedy  under

14

2 or less on a scale of 1 to 5

11

 
                                                
competition  law  during  a  decision  on  a  concentration.  Neither  can  it  currently  take  the
measures  which  would  directly  lead  to  the  construction  of  new  interconnectors.  However,
there are a number of supporting actions that could be taken at European level.

3.4

Concrete Actions Proposed

The sections above highlight the main improvements that need to be made to the structure of
electricity market in the European Union to ensure both a functioning competitive market and
a reliable and efficient supply. These relate, in the main, for improved system operation, the
need  to  support  appropriate  investments  in  transmission  and  to  ensure  an  ongoing  balance
between supply and demand. The Commission therefore proposes a Community framework in
this  subject  which  will  ensure  these  objectives  are  met  with  the  minimum  distortion  to  the
internal  market  through  the  following  measures,  for  which  proposals  are  attached  to  this
Communication.

ACTION 1
which will:

a  Directive  concerning  the  energy  end-use  efficiency  and  energy  services

– 

– 

– 

– 

– 

– 

– 

remove  barriers  to  the  provision  of  energy  services  and  energy  efficiency
measures;

adopt national targets of an annual amount of energy to be saved that is equal
to 1% of an average of previous years` final consumption in order to promote
energy end-use efficiency;

ensure  that  retail  suppliers  and/or  distributors  of  electricity,  natural  gas,  fuel
(heating)  oil,  and  district  heating  co-operate  and  participate  actively  in  the
energy services market and that they ensure that energy services are offered to
customers and promoted;

appoint a body or agency that will oversee the savings obligations, the energy
services obligation and the task of  monitoring and verifying  the  fulfilment of
these obligations;

allow  for  publicly  overseen  financing  possibilities  for  energy  end-use
efficiency,  especially  for  investments  with  comparatively  long  payback
requirements or high transaction costs;

ensure  that  the  public  sector  in  each  Member  State  sets  a  good  example
regarding  investments,  maintenance  and  other  expenditures  for  energy-using
equipment,  energy  services  and  other  energy  efficiency  measures.  To
accomplish this, Member States shall adopt a target, expressed in terms of an
annual  improvement  of  total  energy  efficiency  in  the  public  sector  of  a
cumulative  1½  %  per  year,  attributable  to  the  implementation  of  energy
services, energy efficiency programmes and other energy efficiency measures
in the public sector;

require  Member  State  regulators  or  their  equivalent  bodies  for  energy
distribution  and  retail  sales  of  grid-bound  energy  to  take  measures  for  the
introduction of innovative tariffs, cost recovery regulations, revenue caps and
similar  instruments  and  obligations  to  promote  energy  services,  energy
efficiency programmes and other energy efficiency measures;

12

 
– 

– 

establish  energy  efficiency  programmes  that  promote  and  facilitate  the
provision  of  energy  services  and  energy  efficiency  measures  such  as  energy
auditing,  energy  and  tariff  advice  provision,  the  provision  of  financial
instruments for energy savings, etc;

ensure  that  end-users  are  provided  with  competitively  priced  individual
metering  and  informative  billing  that  reflect  their  actual  energy  consumption
and, as nearly as possible and when appropriate, its actual time of use.

ACTION 2

a Directive on Electricity Infrastructure and Security of Supply which will:

– 

– 

– 

– 

– 

require  Member  States  to  have  a  clearly  defined  policy  towards  the  supply-
demand  balance  which  allows  for  targets  for  reserve  capacity  to  be  set  or
measures including demand side measures ;

require  Member  States  to  have  defined  standards  to  be  met  relating  to  the
security of the transmission and distribution networks;

require  that  each  Transmission  System  Operator  submits  an  (multi)annual
investment strategy to its national regulator; ;

require regulators to submit a summary of these investment programmes to the
Commission  for  consultation  with  the  European  Regulators  Group  on
Electricity and Gas and with account having been taken of the Trans European
Energy Networks Axes of Priority European Interest;

include  a  right  for  regulators  to  intervene  to  accelerate  the  completion  of
projects and, where necessary, to issue  a  call for tender  on certain projects in
the  event  that  the  Transmission  System  Operator  is  unable  or  unwilling  to
complete the projects concerned.

ACTION 3 A  further  Revision  of  the  TENs  guidelines  for  electricity  which  will,  in
particular, integrate the new Member States into this framework.

4

4.1

MEASURES NECESSARY IN THE GAS SECTOR

Introduction

As  for  electricity  there  is  a  need  to  ensure  that  the  gas  network  is  adequately  developed  to
provide  both  a  competitive  market  structure  and  ensure  security  of  supply.  This  point  has
been  emphasised  in  successive  Commission  Communications  on  the  energy  market.  The
current  situation  for  gas  is  however  subtly  different.  Firstly,  because  actual  physical
congestion of pipelines is not so frequent and there should already be scope for considerable
cross  border  trade  if  the  regulatory  framework  was  improved;  and  secondly,  because  an
important  difference  between  gas  and  electricity  is  the  possibility  of  storing  gas  and  the
greater degree of interruptible consumption. For this reason, an event analogous to a general
“black-out” is not likely. This means that the concerns relating to the timing of investment do
not  have  the  same  degree  of  importance.  However  it  is  still  necessary  that  required
infrastructure  is  developed.  It  is  also  of  note  that  the  security  of  supply  question  is  equally
related to investments outside the EU.

13

 
4.2

Measures to support security of gas supply

The  Green  Paper  on  Security  of  Supply  showed  that  Europe  will  become  increasingly
dependent  on  imported  energy.  According  to  the  EU  25  baseline  scenario,  62%  of  primary
energy will be imported by in 2030 (compared to 47% in 2000). A large part of this increase
will  be  natural  gas  and,  as  already  stated  in  the  first  Infrastructure  Communication  and  the
recent  document  on  energy  co-operation  with  the  neighbouring  countries15,  important
investments are necessary to transport gas from the producing countries to Europe whether by
pipeline  or  through  LNG  imports.  The  need  to  have  a  close  energy  dialogue  with
neighbouring countries, several of them being gas production or transit countries for Europe,
was  emphasised  in  this  document.  The  EU-Russia  energy  dialogue  is  the  most  important
example of this and it will continue to be a high priority.

New  investment  will  be  needed  both  within  and  outside  the  Community.  The  internal  gas
network of the EU must also be developed to ensure that sufficient capacity in the EU system
is available. The modalities  of reserving  capacity  in the EU network  must  also be such that
long  term  investments  are  supported.  This  implies  long  term  capacity  reservations  will
continue to form a key role in arrangements for third party access. This is not a problem for
the internal market provided that the allocation of capacity rights is organised in a transparent
and non-discrimatory way.

Questions  of  security  of  gas  supply  have  already  been  addressed  in  the  Commission’s
proposal for a Directive on gas security of supply.  On 11  September 2002, the Commission
proposed a Directive concerning measures to safeguard security of natural gas supply in the
context  of  the  internal  market16 .  It  is  the  intention  of  the  Commission  to  continue  to  work
towards this objective.

ACTION 4

the completion of the Directive on Gas Security of Supply will;

– 

– 

– 

establish common minimum base level criteria that would  be  respected  by  all
Member States regarding security standards, and,

require  all  Member  States  to  assign  clear,  transparent  and  non-discriminatory
roles and responsibilities to market actors.,

establish a Community mechanism to co-ordinate action in the event of a major
gas supply disruption. 

It is important that discussions on this proposal in Council and the European Parliament are
rapidly concluded.

4.3

Measures to develop the internal gas market

For gas, the functioning of the competitive market is heavily influenced by the availability of
gas  from  those  countries  with  reserves.  Other  than  the  remaining  UK  and  Dutch  resources,
there  are  essentially  four  main  significant  sources  of  external  natural  gas  for  the  European
Union;  Russia,  Algeria,  Norway  and  Liquefied  Natural  Gas  (LNG).  New  sources  such  as

15

16

Communication from the commission to the council and the European parliament on the development
of  energy  policy  for 
its  neighbours  and  partner  countries,
COM(2003) 262 final, May 2003
COM(2002) 488 final

the  enlarged  European  union, 

14

 
                                                
Egypt, Libya and the central Asian republics are also being developed. For instance, Caspian
gas  has  already  been  traded  in  the  EU  internal  market.  However,  if  customers  in  Member
States  have  access  to  gas  from  only  one  of  these  sources  then  the  internal  market  cannot
function. The objective must therefore be that individual customers in the EU should all have
the potential access to buy from a portfolio of the various primary sources of natural gas that
are available. This clearly requires a well developed network and consistent rules at EU level.

Russia is already the largest single energy partner of the European Union. In 2001, over 40%
of European Union gas imports came from Russia. Further integration of the EU and Russian
gas  markets,  based  on  common  regulatory  principles  and  long  term  contracts,  would  thus
increase security of supply and facilitate the financing of important infrastructures. Therefore,
in  October  2000,  an  energy  dialogue  on  a  regular  basis  between  the  European  Union  and
Russia  was  set  up.  In  the  three  years  of  its  existence,  the  Energy  Dialogue  has  assisted  in
developing trust  and a better understanding of our policy objectives in the energy  field, and
significant  progress  has  been  made  on  a  number  of  the  issues  identified.  Only  recently,  for
instance,  it  was  possible  to  find  mutually  acceptable  solutions  regarding  a  number  of
restrictive  clauses  in  existing  long-term  contracts,  which  have  been  revised  and  made
compatible with EC competition rules.

Within  the  Community,  in  most  cases,  sufficient  physical  capacity  is  already  available  to
permit  customers  to  choose  between  different  portfolios  of  wholesale  gas  in  the  way
described above. However, the current lack of coherence of tarification mechanisms used in
different  countries,  the  non-transparent  procedures  for  reserving  capacity  and  the  overall
operational  practices  used  in  gas  networks  mean  that  the  full  potential  of  the  network  to
support competition is not being used.

The  second  benchmarking  report  shows that,  based  on a national market  definition,  there  is
currently a very concentrated market structure. In most cases one company controls well over
50% of the gas produced or imported. The Commission’s survey of large consumers covering,
in particular, Germany, Italy, Austria and Belgium showed that 75% of those surveyed were
unhappy  with  the  development  of  the  market  and  80%  of  these  cited  import  capacity  or
market dominance. Overall, the following problem areas exist:

– 

– 

– 

– 

– 

– 

– 

The Nordic and Baltic markets, where new investment is needed to increase the
diversity of gas sources available;

Germany,  where  inconsistent  distance  related  tariffs  mean  that  the  scope  for
competition through Third Party Access is constrained;

France, where  weak  internal connections and lack of cross border  capacity  to
neighbouring countries may be restricting scope for competition;

Spain,  where  a  large  proportion  of  entry  capacity  is  still  contractually
congested and where there is little interconnection with other Member States;

the  UK,  where  new  connections  to  mainland  Europe  may  be  required  to
provide some diversification away from North Sea supplies;

Italy, where new connections to the north are necessary to bring in alternative
sources of gas to compete with Algerian supply;

Austria  and  many  of  the  new  Member  States  where  a  greater  range  of  gas
sources are needed.

15

 
Unlike  electricity,  these  examples  do  not  systematically  result  from  a  lack  of  physical
capacity in the network. Indeed, it is of note that the construction  of  gas infrastructure  does
not  tend  to  suffer  from  the  same  concerns  that  exist  for  electricity.  For  example,  most  gas
infrastructure  is  underground  already,  so  there  are  not  the  same  environmental  objections.
There are also more possible sites available to locate gas infrastructure.

However  it  is  clear  that  the  key  issue  in  gas,  therefore,  is  the  need  for  binding  Community
rules  on  issues  such  as  tarification  and  capacity  allocation  procedures  to  be  developed.
Without this, network users will be faced with a patchwork of different regimes in this regard
which  will  reduce  scope  for  competition.  Once  such  rules  are  developed,  it  will  be  more
accurate to speak of a true EU market for gas. When this happens, the large market shares of
former  incumbent  companies  will  not  be  a  problem  as  they  will  quickly  face  the  threat  of
competition from cross border movements of gas.

The Guidelines for Good Practice agreed at Madrid in September 2003 relating to third party
access  to  gas  networks  will,  once  implemented,  already  significantly  add  to  the  degree  of
competition  that  is  possible  with  out  further  investment.  The  Guidelines  represent  a  major
step  forward  for  the  internal  gas  market,  and  it  is  expected  that  the  majority  of  the  issues
covered in these guidelines will be implemented by TSOs in the context of their relationship
with regulatory authorise as envisaged in the new Directive.

It  is  vital,  in  order  to  ensure  the  development  of  a  real  internal  gas  market,  with  a  level
playing field, that the rules contained in the Guidelines for Good Practice are legally enforced
and  that  an  appropriate  legal  framework  exists  to  ensure  their  evolution  over  time.  It  is
therefore  now  considered  necessary  to  propose  a  Regulation  on  cross  border  trade  for  gas,
based on the above guidelines, similar to the measure adopted for electricity be  the Council
and Parliament in June 2003.

ACTION 5 Regulation on Cross Border Trade in Gas which will

– 

– 

– 

– 

mirror the existing legislation for cross border electricity exchanges;

provide  for  the  adoption  of  detailed  binding  guidelines,  based  on  the  current
Guidelines for Good practice agreed at the Madrid Forum and covering:

(cid:1) 

(cid:1) 

(cid:1) 

(cid:1) 

Third  Party  Access  services  to  be  offered  by  Transmission  System
Operators,

capacity allocation and congestion management, including use it or lose it
and secondary trading mechanisms,

transparency requirements,

tariff structure and derivation, including balancing charges.

provide a method for the evolution of these Guidelines through Comitology;

require  national  Regulators 
implemented.

to  ensure 

that 

the  agreed  guidelines  are

16

 
4.4

Measures to improve the gas transmission network

In  some  parts  of  the  European  network  real  physical  congestion  exists.  In  these  cases  new
investment is required to alleviate the problem. These bottlenecks are mainly  in the western
and south western part of the EU such as between northern and southern France and between
France  and  Spain.  However,  as  demand  is  growing  rapidly  it  is  expected  that  further
congestion points might also develop. There are also a number of regions of the EU where the
use of natural gas is only a  recent development.  Such networks  will need to be  extended in
order to accommodate greater take up and extend to new areas the benefits of gas as a primary
energy source.

At this stage, however, it is not thought a specific infrastructure measure is needed since the
systemic congestion that exists for electricity is not present for gas. The only action proposed
at present in this respect is therefore:

ACTION 6 A  further  revision  of  the  TENs  guidelines  which,  as  for  electricity,  will
integrate the new Member States.

5

CONCLUSIONS

The Actions proposed in this Communication are required as a matter of urgency.

Firstly, the proposed Directive concerning energy end-use efficiency and energy services will
contribute  to  a  sustainable  energy  supply.  This  measure  will  set  achievable  targets  for
Member  States  and  remove  the  existing  barriers  to  the  provision  of  energy  efficiency
measures and energy services. This approach contributes to the Community’s commitments to
reduce greenhouse gas emissions.

In  conjunction  with  the  above  measure,  the  proposal  for  a  Directive  of  the  European
Parliament  and  of  the  Council  concerning  the  measures  to  safeguard  security  of  electricity
supply and infrastructure investment will complement the development of the internal market
by requiring Member States to ensure that investors have a stable framework for constructing
new transmission capacity and ensuring an ongoing balance between supply and demand.

Likewise, the proposal for a Decision of the European Parliament and of the Council revising
the  guidelines  for  trans-European  energy  networks  will,  in  conjunction  with  the  Directive
above,  give  an  impetus  to  the  most  important  energy  projects  that  are  vital  to  provide  a
competitive market with a secure supply.

Without these measures, in particular a focus on a higher level of interconnection, there is a
clear  likelihood  that  the  opening  of  the  electricity  market  will  not  provide  the  expected
benefits, the internal market will not be completed and exchanges between different Member
States and TSO areas will continue to be hindered and the scope for real competition will be
dramatically  reduced.  In  addition,  for  gas,  the  proposed  Regulation  of  the  European
Parliament  and  of  the  Council  on  Gas  Transmission  and  Cross  Border  Trade  will  allow  for
measures  to  be  taken  that  will  significantly  improve  the  use  made  of  the  existing  gas
transmission  network.  This  measure  will  give  an  important  boost  to  competition  and  help
further increase opportunities for customers to exercise their new rights.

17

 
ANNEX 1 Review of Progress and Actions since the 2001 Communication on Energy
Infrastructure

The  Commission’s  Communication  on  Energy  Infrastructure  was  published  in  December
2001.  In  this  document  the  Commission  highlighted  the  importance  of  improving
infrastructure for the  reasons of security of supply, competition and the environment.  In the
document, the Commission proposed 13 actions to improve the use of existing infrastructure
and to enhance the development of new infrastructure. The status of these actions is described
below.

1.  Amendment  of  the  electricity  and  gas  directives  and  adoption  of  the  regulation  on
cross-border trade on electricity

The  package  of  the  electricity  and  gas  directives  and  adoption  of  the  regulation  on  cross-
border trade on electricity was adopted in July 2003. The electricity and gas markets will be
fully open by 2007 with legal unbundling is required for the transmission  system operators.
Regulated third party access is confirmed as the basic rule and the Regulation on cross-border
trade in electricity will considerably harmonise the rules on cross-border trade of electricity in
Europe. This will greatly enhance the use made of existing infrastructure.

2. Revision of guidelines on transparency and congestion management in electricity

The  Council  of  European  Energy  Regulators  has  worked  on  the  guidelines  on  transparency
and congestion management in electricity. A set of principles on congestion management was
presented in the 9th Florence forum in October 2002 and rules based on these principles were
presented  in  the  10th  Florence  forum  in  July  2003.  The  revision  of  the  guidelines  will  be
continued  in  the  forthcoming  Florence  forum  and  will  be  finalised  in  the  regulatory
committee  which  will  be  set  up  following  the  entry  into  force  the  regulation  of  the  cross-
border trade in July 2004.

3. Implementation  of  the  congestion management guidelines  agreed  in  the  6th  Florence
forum in November 2000.

A  status  report  made  by  the  Commission  together  with  the  Council  of  European  Energy
Regulators  for  the  9th  Florence  forum  in  October  2002  indicated  that  the  congestion
management  guidelines  agreed  in  the  6th  Florence  forum  in  November  2000  were  only  half
way implemented. The  level  of  implementation varies  considerably between member states,
for  several  key  items  as  introduction  of  market  based  mechanisms  the  implementation  has
been far from satisfactory. This confirmed that binding rules which are part of the guidelines
foreseen by the regulation of cross-border trade of electricity are necessary.

4.  Harmonisation  of  technical  and  administrative  rules  regarding  the  operation  of
interconnectors.

The  harmonisation  of  technical  and  administrative  rules  regarding  the  operation  of
interconnectors has progressed in the work lead by UCTE. It aims at a revision of the existing
recommendations  of  security  and  reliability  rules  in  interconnected  networks  through  a
transformation of the  existing recommendations in  a UCTE handbook. The  first drafts  were
presented in the 9th Florence forum in October 2002 and a public consultation was opened in
July 2003. The Regulation on cross-border trade of electricity provides  for the possibility to
include in the guidelines on congestion management common rules  on minimum safety and
operational standards for the use and operation of the network.

18

 
5. Tarification of cross border exchanges of electricity

The  European  Transmission  System  Operators  proposed  a  system  to  compensate  for  cross-
border  flows  of  electricity  which  was  accepted  at  a  temporary  basis  by  the  European
Commission and the Council of European Energy Regulators. It entered in to force in March
2002.  An  improved  system  was  implemented  for  the  year  2003  and  a  further  improved
version  with  the  abolishment  of  the  export  fee  component  was  agreed  in  the  10th  Florence
forum  in  July  2003  to  cover  the  year  2004.  Future  development  will  take  place  in  the
framework of the regulatory committee of the regulation of the cross- border trade.

6. Further measures on transparency of the gas network operation; and

7. Guidelines on congestion management and cross-border transmission  tarification  on
gas

As part of the discussions at Madrid Forum on third party access to the gas network, a set of
Guidelines for Good Practice were agreed at the fifth meeting in November 2002. These have
been implanted relatively well although with some deficiencies in individual Member States..
A key improvement is the publication of cross border capacity information by GTE which has
been implemented from January 2003. A further revision to the guidelines was agreed at the
seventh meeting in September 2003.

8. Guidelines on regulatory control and financial reward for infrastructure

The  Council  of  European  Energy  Regulators  presented  principles  on  regulatory  control  and
financial  reward  for  infrastructure  in  the  10th  Florence  forum  in  July  2003.  This  topic  is
further discussed in this second communication on infrastructure with the proposal that these
principles form a framework for TSOs and Regulators to compile a multi-annual strategy for
the improvement of infrastructure links, including the financial framework.

9. Priority projects of European interest

Individual projects of Priority Projects of European Interest were included in the revision of
the Trans European Network Energy guidelines, adopted in June 2003. A further revision of
the guidelines, to take account of accession and the importance of incorporating neighbouring
countries  into  the  wider  energy  market,  were  the  subject  of  a  consultation  that  finished  in
September 2003.

10. Commission report on Security of supply

Both  electricity  and  gas  directives  require  the  member  states  to  monitor  the  situation
regarding security of supply. The Commission will make a summary report every second year
on  the  situation  in  Europe  with  the  first  Commission  report  scheduled  for  2004/2005.  The
possibility for further obligations on Member States and the Commission are discussed in this
second Communication.

11.  Repealing  of  regulation  EC  No  736/96  requiring  member  states  to  provide
Commission with information on electricity, gas and oil infrastructure

Repealing  of  the  regulation  EC  No  736/96  requiring  member  states  to  provide  the
Commission  with  information  on  electricity,  gas  and  oil  infrastructure  is  under  way  and
should take effect in 2004.

19

 
12. Communication on EU external energy policy

A  Communication  of  the  Commission  “On  the  development  of  energy  policy  for  the
enlarged  European  union,  its  neighbors  and  partner  countries”  was  adopted  in  May  2003
(COM(2003) 262 final).

13. Long term investment in gas supply

In September 2002, the Commission proposed a Directive covering Gas Security of Supply.17
This suggested that Member States should have published standards relating tog as security of
supply and the power to put obligations on individual companies to ensure those standards are
met.

Further  work  is  needed  in  order  to  ensure  the  existence  of  commercial  and  financial
conditions  within  the  EU  for  the  long-term  investment  in  gas  supply  infrastructure.  The
Commission  communication  “On  the  development  of  energy  policy  for  the  enlarged
European union, its neighbors and partner countries” from May 2003 also addressed the long
term gas supply.

Summary

Most  of  the  actions  have  been  completed,  sometimes  with  a  slight  delay  compared  to  the
original  time  schedule.  In  the  meanwhile  the  accession  of  10  new  member  states  has  been
confirmed, creating further challenges to  the development  of  the  energy  infrastructure.  New
member states are already participating in the regulatory Fora and will be fully integrated in
all relevant activities at the accession in May 2004. The accession creates an immediate need
to  revise  the  Trans  European  Energy  Network  guidelines,  which  is  proposed  in  a  package
together with this second infrastructure communication.

17

COM(2002) 488 final

20

 
                                                
ANNEX 2       Encouraging New Electricity Infrastructure

2.1

Introduction

New transmission investment will make a key contribution to the satisfactory performance of
the electricity market. However progress is slow at present due to two main concerns:

(cid:1)  delays in completing the required and necessary assessment processes to  receive

permission to build ;

(cid:1)  the  lack  of  clarity  of  the  regulatory  and  financial  arrangements  for  investment,

even for unbundled transmission system operators.

Although the construction of new transmission infrastructure often involves controversial and
difficult  decisions,  it  is  the  view  of  the  Commission  that,  without  such  investments,  the
functioning  of  the  market  and,  in  some  cases,  security  of  energy  supply  will  deteriorate
rapidly.  The  current  position,  whereby  the  granting  of  planning  permits  involves  a  very
lengthy procedure over a number of years, must not be allowed to continue.

2.2

Environmental and planning permit issues

Environmental Assessment is a key element of the EU sustainable development strategy. The
Community  requirements  for  such  projects  are  set  out  in  the  Environmental  Impact
Assessment  Directive18.  Successful  environmental  appraisal  in  an  important  part  of  the
decision  making  process  which  avoids  unnecessary  damage  to  the  physical  or  aesthetic
environment and saves money by avoiding expensive mistakes.

In various parts of Europe, however, difficulties in getting the required approvals has meant
that  several  projects  in  advanced  stages  have  been  cancelled  and  there  are  even  important
projects  which  are  almost  finished  but  only  some  short  parts  are  missing.  There  are  also
examples  of interconnectors between countries  where  one  party  has  failed  to  finish  the  link
whilst the other party has built the line to the border. Examples of these shortcomings include
the  links  between  Belgium-France,  Italy-Switzerland,  Italy-Greece19  and  key  projects  to
reinforce the Austrian network.

It  would  appear  that  only  limited  efforts  have  been  made  to  explore  ways  in  which  the
appraisal procedure could be speeded-up, for example by a stricter adherence to the planning
approvals  timetable  including  the  avoidance  of  duplication  of  assessment  referred  to  in
Directive 2001/42, or by the use of less obtrusive technologies such as underground lines or
by investing close to other infrastructure projects such as road and rail links.

The following list contains items that can considerably improve the public acceptance of the
project and help in a timely completion of them20.

(cid:1)  Major new projects should have the support from the European, national and local
authorities  with  the  need  for  the  project  clearly  explained  with  unconditional

18

19

20

Directive 2001/42/EC, 27 June 2001
Example: A 7 km part of the Santa Sofia – Matera line in the Southern Italy. This line is at the moment
limiting the use of the Italy – Greece undersea cable.
This  topic  has  been  discussed  in  the  Eurelectric  report  “Public  acceptance  for  new  transmission
overhead lines and substations”, March 2003.

21

 
                                                
support  received  from  the  authorities.  Member  States  should  give  preference  to
those  identified  in  the  list  of  Trans  European  Networks  Projects  of  Priority
Interest.  The  European  Union  should  support  such  projects  and  regularly  review
progress.

(cid:1)  Close  dialogue  in  advance  with  the  people  affected  by  the  line  should  provide  a
real possibility to influence the routing and help to overcome any concerns. Proper
compensation  for  any  negative  impact  is  also  an  important  element  in  getting
acceptance for the project.

(cid:1) 

(cid:1) 

Shorter time periods should be possible for the design and permit phase of major
projects  without  reducing  the  possibilities  for  stakeholders  to  give  input  to  the
process.  Better  co-ordination  of  different  phases  of  the  design,  consultation  and
permitting  activities  would  contribute  to  this.  Projects  which  have  already  been
accepted as priority European Interest by Member States at Council in the context
of the Trans European  Networks programme should be  a  special category in  this
regard  and  every  effort  should  be  made  to  accelerate  these  procedures  with  the
benefit  to  the  EU  as  a  whole  being  an  appropriate  consideration  to  take  into
account.

Several technical alternatives can be used to alleviate the impact of infrastructure
to  the  environment  and  the  people  living  close  by.  Selective  undergrounding  of
transmission lines has become technically and economically possible. Use of other
less  visible  layouts  such  as  new  designs  for  pylons  has  also  been  successful  in
some projects.

2.3

Use of new technology such as undergrounding

Underground cables have been used for many decades for the transport of electricity in low
and  medium  voltage  networks  in  urban  areas.  For  high  voltage  and  extra-high  voltage
networks underground cables were used (in the form of oil-filled cables) only in exceptional
cases owing to their high cost in comparison with the equivalent overhead lines carrying the
same electricity  flow. More  recently,  however,  a new  generation of  underground  cables  has
emerged, which are lower cost and easier and quicker to install. The Commission has already
improved
supported  studies  under 
underground cable technology.21

the  framework  research  programme  relating 

to 

Despite  the  advances  that  have  been  made,  the  construction  cost  of  underground  cables  is
considerably  higher  than  the  equivalent  overhead  lines  for  high  voltage  and  extra-high
voltages  (between  5-20  times  higher).  This  would  seem  to  rule  out  a  general  application  of
such technology in view of the impact this would have on the price of electricity.

However, underground cables also experience fewer losses and lower maintenance costs and a
lifetime  comparison  of  costs  of  cables  versus  overhead  lines  may  render  the  use  of
underground cables a feasible solution in special cases such as urban areas, environmentally
sensitive areas and regions prone to adverse weather conditions where security of supply may
be jeopardised.

21

E.g. Fifth Framework Programme CORDIS RTD Project no. 67584, 1/1/2003-30.6.2006

22

 
                                                
A fuller analysis of the issue of undergrounding of electricity lines in Europe and especially in
the  framework  of  Trans  European  Energy  Networks  is  discussed  in  a  separate  technical
document  which  has  been  placed  on  the  website  of  the  Directorate-General  for  Energy  and
Transport.22.  This  shows  that  low  and  medium  voltage  networks  are  already  often  placed
underground (more than 40%), while for high voltage networks (around 10%) and the extra-
high  voltage  networks  (1-2%),  the  percentage  of  undergrounding  is  much  lower.  The
document also contains a review of the potential economic benefits that could be provided by
undergrounding  cables  despite  the  additional  capital  costs,  which  is  summarised  in  Table  1
below. This shows that certain connections such as France-Italy would be expected to yield a
positive benefit despite the extra cost of underground connections, whereas for France-Spain
the calculations are less favourable.

Table 1: Cost –Benefit analysis of underground electricity interconnectors23

Interconnection

Option

France-Italy

France-Italy

France-Spain

Existing rail
Tunnel

New electricity
Tunnel

Mediterranean
Cable

Cost
€ million

760

900

MW

2000

Cost
€/MW

NPV revenues
€/MW

Net benefits
€/MW

380,000

567,238

187,238

2000

450,000

567,238

117,238

1,500

1200

1,250,000

586,398

-663,602

Overall, there is some room for a concerted effort in Europe to extend the use of underground
cables in exceptional cases, where the extra cost of underground cables can be justified such
as:

–  in  areas  which  are  badly  affected  by  adverse  weather  conditions  (winds,  snow,  ice),  the
security  of  supply  can  be  enhanced  by  the  undergrounding  of  electricity  lines.  Such  a
policy had been adopted by France after the 1999 storms that paralysed significant parts of
the French electricity system.

–  in  specific  segments  of  the  missing  cross-border  electricity  links  that  are  considered  as

priority projects in the Trans European Energy Networks Guidelines of July 2003.

2.4

Overcoming financial and regulatory barriers

Financial barriers to investment may also exist due to an inappropriate or unclear regulatory
regime  for  new  investments.  In  order  to  prevent  this,  it  is  clear  that  Transmission  System
Operators must be rewarded for investments at an appropriate level so that the returns on such
investment  at  least  cover  the  justified  cost  of  capital  of  the  business  concerned.  Generally
speaking,  the  Commission  believes  that  Transmission  System  Operators,  with  their  detailed
technical  knowledge  of  the  network  are  the  best  placed  to  put  forward  and  implement  new
investment  projects.  However  the  Commission  also  proposes  a  strengthened  role  for  the

22

23

http://europa.eu.int/comm/energy/electricity/infrastructure/index_en.htm
This assessment was carried by ICF Consultants in their Report to the European Commission. The cost
of constructing additional underground capacity across a number of borders has been compared to the
projected benefits. The benefits have been estimated from forward electricity price curves produced by
the ICF Consulting power market model (the Integrated Power Model). The analysis has been carried
out on a marginal MW basis, i.e. what benefits would one additional MW of capacity produce.

23

 
                                                
appropriate regulatory authorities in order to clarify the financial framework and  ensure that
the  required  investments  are  carried  out.  Indeed,  the  Commission  itself  has  initiated  some
interconnection  projects  as  a  consequence  of  merger  decisions,  for  example  the  EDF-
Hidrocantabrico case, on of the conditions for the approval of the merger was an increase in
interconnection between France and Spain up to 4000MW from the 1100MW available at the
time.

As one of the Actions identified in the Commission’s 2001 Infrastructure Communication, the
Council  of  European  Energy  Regulators  has  produced  a  document  assessing  the  different
possibilities for the regulatory and financial framework for new investments24. This document
was  presented  to  the  European  Electricity  Regulators  (Florence)  Forum  in  July  2003  and
identified three main options for the financial regulation of new infrastructure projects:

(a) 

regulated reinforcement with regulated tariffs;

(b) 

non-regulated reinforcement with regulated tariffs;

(c) 

non-regulated  reinforcement  with  non-regulated  tariffs,  so  called  “merchant”
lines.

The  Commission  believes  that  these  options,  or  a  combination  of  them,  form  an  acceptable
framework  for  developing  new  infrastructure,  depending  on  the  circumstances  of  each
individual investment project. However, in order to give regulatory certainty, the framework
to be applied should be known in advance by potential developers. The attached proposal for
a  Directive  envisages  that  the  regulatory  authorities  should  have  rights  to  influence  the
investment programme of the Transmission System Operators concerned and, if progress on
certain investment projects is unsatisfactory, regulators should also have the right to arrange
for such work to be conducted by a third party, including the right to launch a tender process.

In order to do this, there needs to be a careful appraisal of each potential project that could be
undertaken  in  the  next  few  years.  This  is  necessary  since,  where  regulators  commit  to
underwriting an investment project through transmission tariffs, i.e. approach (a) above; they
are committing the money of electricity and gas consumers. It is expected that one of the first
tasks  of  the  new  European  Regulators’  Group  for  Electricity  and  Gas  will  be  to  develop  a
common framework for new investments for the internal market.

2.5

Conclusions

The strict environmental and permitting procedures relating to the construction to new
infrastructure are necessary and should not be taken lightly. However every effort should
be  made  to  accelerate  progress  and  this  requires  Member  States  and  their  regulatory
authorities to assume a greater degree of control and responsibility. The Energy Council has
already identified, within the Trans European Networks framework the priority projects which
are  in  the  European  public  interest  and  these  projects  should  be  implemented  without
unnecessary  delay.  For  these,  solutions  need  to  be  found  to  accelerate  the  planning  process
and where necessary new technology such as undergrounding of lines needs to be considered.

24

CEER: Principles on regulatory control and financial reward for infrastructure, paper presented in the
10th Florence forum in July 2003.

24

 
                                                
In order to remove barriers to the construction of infrastructure projects in a reasonable time,
two  new  concepts  are  introduced  in  the  revised  guidelines  of  the  Trans  European  Energy
Networks.  Firstly  a  Declaration  of  European  Interest  for  particularly  important  cross-border
projects gives a highest priority to especially important projects. These projects should get a
priority  regarding  Community  financial  instruments,  within  specific  rules  of  each  of  the
instruments. Secondly these projects should enjoy a well co-ordinated planning procedure in
order to avoid unnecessary delays.

25