Opinion of the European Economic and Social Committee on a ‘Proposal for a Directive of the European Parliament and of the Council concerning measures to safeguard security of electricity supply and infrastructure investment’(COM(2003) 740 final — 2003/0301 (COD))
Date: 2004-10-28
Institutions: European Economic and Social Committee
Subjects: ESC opinion, electrical energy, energy production, energy supply, energy transport, investment, monopoly, restriction on competition, security of supply

20.5.2005

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Official Journal of the European Union

C 120/119

Opinion of the European Economic and Social Committee on a ‘Proposal for a Directive of the
European Parliament and of the Council concerning measures to safeguard security of electricity
supply and infrastructure investment’

(COM(2003) 740 final — 2003/0301 (COD))

(2005/C 120/22)

On 23 January 2004 the Council decided to consult the European Economic and Social Committee, under
Article 95 of the Treaty establishing the European Community, on the abovementioned proposal.

The Section for Transport, Energy, Infrastructure and the Information Society, which was responsible for
preparing the Committee's work on the subject, adopted its opinion on 5 October 2004. The rapporteur
was Mrs Sirkeinen.

At its 412th plenary session of 27 and 28 October 2004 (meeting of 28 October 2004), the European
Economic and Social Committee adopted the following opinion by 134 votes to 7 with 14 abstentions.

1. Background

transmission-system operators. The
incident
provides important lessons to be learned. Open markets will
increase transmission and potentially problems linked to it.

unfortunate

EU energy policy has during recent years followed three

1.1
main lines:

— creating effective open markets for electricity and gas;

— ensuring security of energy supply; and

— reaching stringent environmental targets and in particular

combating climate change.

Key legislation adopted in these areas includes the revised elec-
tricity and gas-market Directives, which open markets for non-
household users in mid 2004 and all consumers in 2007. On
security of electricity supply a Green Paper was published in
2001, highlighting demand-side management as one key action
for both security of supply and combating climate change.

1.2
A reliable energy supply at reasonable prices is an
important precondition for economic growth and welfare of
the citizens of Europe. Consequently,
the EESC has in its
opinions supported the Commissions' objectives and approach.

1.3
The EU energy markets do not yet work in delivering
the above-mentioned objectives. This is perhaps not even to be
expected while key legislation is only approaching its imple-
mentation stage. According to the Commission the present
draft legislation is a supplement to existing legislation aiming
at improving present or future deficiencies.

1.4
A strong motivation for presenting the regulatory
package was the electricity black-out in Italy in September
2003, as well as other incidents in Europe and the United
States. The black-out was caused by a series of operational fail-
ures following a collapse in a heavily overloaded line in Swit-
zerland. It also showed problems in the coordination between

1.5
It is surprising that the Commission merely mentions
the most profound, underlying reason for blackouts. Some
areas or countries have an undersupply of electricity generation
and are continually in need of large amounts of electricity
imports from neighbouring and even more distant regions with
oversupply. Cross-border
trade in the common electricity
market is beneficial for effectively dealing with variations in
supply and demand, and adds thereby to security of supply and
enhances competition. But it cannot and should not compen-
sate for insufficient generation capacity in some parts of the
market.

If sufficient

According to the Commission,

1.6
in a healthy market,
when demand increases but supply does not, prices increase. In
theory consumers react to higher prices by cutting use, but in
electricity markets price elasticity is known to be weak for
several reasons. At a certain price level
investment in more
supply becomes profitable, and so a continuing price increase
is stopped.
investments do not occur, prices
continue to grow creating, at least in the short and medium
term, severe problems to consumers and industrial competitive-
ness, and thereby whole economies. A particular problem
concerning investments in electricity generation is that price
signals cannot be quickly responded to, as investment projects
from planning through licensing to construction take a long
time to execute. Although in certain cases, forward and future
markets can alleviate this problem to some extent, these prac-
tices are recent for their viability to be assured.

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investment will

1.7
The EU has decided to open its electricity and gas
markets for competition. There is, however, concern about
whether sufficient
take place in the open
market, in particular in peak capacity. The electricity market
Directive requires Member States to establish a system for
monitoring the supply and demand balance and to put into
place a tendering procedure for more power capacity when
deemed necessary. Member States are responsible for
the
general structure of their energy supply and their choice of
energy sources, and the draft Constitutional Treaty does not
change this.

1.11.1
The Committee strongly disagrees with this descrip-
tion of future trends and needs in the electricity sector. In a
Communication on investments in infrastructure, much clearer
and realistic information on future trends and potentials is to
be expected. In particular when much better quantified infor-
mation and scenarios are available, including material produced
by the Commission itself. Nobody is served by avoiding clear
and realistic — be it for many unpopular — baseline informa-
tion.

for

Reasons

insufficient

investments may be both
1.8
market failures (taking insufficiently into account long-term
needs, environmental factors and regional and local circum-
stances etc.) and are not solely inefficient competition, lack of a
stable regulatory framework, prohibitive permit procedures
to make the
and/or public opposition. The requirement
network an independent economic entity (unbundling) means it
will be managed without ambition, since innovation and added
value are found in customer services. Thus, the network is
caught between toll charges fixed by the regulators, and
charges and investment imposed by the client operators, so it
has no opportunity, or clear view of the need, for development.

1.9
Efficiency of energy end use, or energy saving, has for
long been recognized as a powerful element of the energy
market. Less use of energy saves money and contributes
directly to both security of supply and often to reducing green-
house gases by decreasing the need for generation and for
investments in new production and transmission. New technol-
ogies can have much to offer here, and measures need to be
taken to enhance their development and market introduction.

that

The Commission points out

1.10
the question of
supply-demand balance cannot be neglected. An underlying
cause of the increased stress on networks is demand growth,
which can partly be counteracted by demand-side management.
But appropriate incentives to invest in networks and electricity
generation are also necessary.

1.11.2
A very rough calculation can provide an idea of the
magnitude of the problem and options to solve it: Electricity
demand grows presently at a rate of 1-2 % per annum in the
EU. The EU target for increasing electricity generation from
renewable energy sources means a yearly increase of less than
1 %. The target proposed for energy efficiency would cut yearly
growth by 1 %. Renewables and efficiency could thus compen-
sate the growth in demand, and in addition possibly substitute
existing capacity by much less than 1 % per annum. Power
plants run for 30-50 years, which means theoretically that
substitution needs to take place at a yearly average rate of 3 %.
The International Energy Agency (IEA) notes a need for new
power plants in the EU of over 200 000 MW over the next 20
years.

2. The Commission proposal

2.1
The objective of the proposed directive is to promote
investment in the European energy sector to both strengthen
competition and help prevent the recurrence of blackouts. It
emphasises the need of a clear EU legislative framework for the
proper functioning of a competitive internal market for electri-
city, by safeguarding security of electricity supply and ensuring
an adequate level of interconnection between Member States,
through general, transparent and non-discriminatory policies.

2.2

The draft directive requires Member States to:

— have a clearly defined policy towards the supply-demand
balance which allows for targets for reserve capacity to be
set or alternatives such as demand-side measures; and to

1.11
According to the Commission, future growth in electri-
city demand will be taken care of by demand-side management.
Some new investment is, however, seen to be needed simply to
renew plants that have reached the end of their life. Much of
this the Commission expects to take the form of renewables
and distributed small scale combined heat and power genera-
tion.

— have defined standards to be met relating to the security of

the transmission and distribution networks.

2.3
Transmission system operators are required to submit a
(multi)annual investment strategy to its national regulator. The
regulator can add important cross-border projects to the list.

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2.4
National regulators are required to submit a summary of
these investment programmes to the Commission for consulta-
tion 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.

behind this could be insufficient unbundling of energy and
network activities.

2.5
National regulators obtain a right to intervene to accel-
erate the completion of projects and, where necessary, to issue
a call for tender on certain projects in the event that the Trans-
mission System Operator is unable or unwilling to complete
the projects concerned.

3.6
The most serious obstacle to investments in transmis-
sion networks is political and public resistance to such trans-
mission projects. In some Member States almost any form of
generation is not wanted. The right of people to be heard on
projects that have influence on them is an important basic
right. But planning and decision-making processes tend to get
very cumbersome and prolonged, thus putting even the most
urgent and necessary projects at risk.

3.7
The very relevant question that the directive addresses
and needs a solution at EU level is to ensure, in one way or
another,
in interconnectors takes
investment
that sufficient
place in a market-based manner.

3.8
The draft Directive provides for the regulator the right
to interfere by altering the TSO's investment plan and require a
certain investment
to be made and finally introduces a
tendering procedure. The present proposal goes further than
the electricity market Directive, which provides for monitoring
the supply and demand balance and, when needed, a tendering
In order to avoid too
procedure for more power capacity.
frequent
legislation
regulatory changes and overregulation,
should not be altered on this point before sufficient experience
of the functioning of the present provisions have been gained.

Part of

the contents of

3.9
like the
general provisions in Article 3, are relevant features of any
implemented.
good national
Presenting them as provisions in a directive may lead to confu-
sion of responsibilities.

the draft directive,

energy policy

and widely

3.10
One issue that may have deserved the attention of the
Commission is demand management. Enhancing the possibili-
ties of energy users, in particular medium-sized energy users, to
react to the price fluctuation of the wholesale price of electri-
city could contribute to cutting peak demand.

3. General comments

3.1
The Electricity Market Directive and the Regulation on
Cross-border Trade form the framework for a liberalised
internal market for electricity. Their implementation starts on
1 July 2004. In order to provide investors and other actors in
the market with regulatory stability, which is crucial for the
right climate for investments, any changes to this framework
should be approached with serious caution.

The Commission itself refers, more or less clearly, to the
3.2
underlying reasons for concerns regarding security of supply,
and for presenting the draft directive. The proposed directive
does not, however, directly address these reasons.

3.3
The first reason is lack of sufficient generation capacity
in some parts/Member States of the Union, due to the orienta-
tion of energy policy. The Commission describes this problem
vis-à-vis reserve capacity, but the problem exists for base-load
generation, too.

3.4
The second reason is lack of competition, due to poli-
tical unwillingness by some Member States to act on incumbent
monopolies, oligopolies or dominant market positions. The
Commission notes this and refers to the limitations of its capa-
cities to do much about it. The option chosen is to enhance
competition from operators in other Member States by trying
to ensure sufficient interconnection capacity.

4. Detailed comments

3.5
A third reason is unwillingness or a lack of capability by
some transmission system operators to implement existing
guidelines to cross-border exchanges, even if these guidelines
have been voluntarily agreed by transmission-system operators
in their own organisations. A question is, whether one reason

4.1
Article 4: The EESC agrees on these provisions, given
that the first subparagraph means that all TSOs have to sign up
to the guidelines of ETSO.

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4.2
Article 5: The EESC finds the approach of the article
somewhat confusing as regards responsibilities of the EU and
Member States. In principle, taken out of context, the EESC
agrees with most of the measures mentioned in the article as
being part of a sound national energy policy.

4.3
It remains unclear what is meant by ‘reserve capacity’ in
the second paragraph of Article 5.1. The article should deal
only with short-term technical reserves, needed for system
reliability.

4.4
Article 6: It is difficult to find the sense in connecting
network investments with demand-side management, even less
in the way these are connected in Article 6(1). For 6(2), these
if
requirements would primarily be taken into account,
possible, when setting the methodology for network-access
tariffs. Concerning Article 6(2), actions are needed for intercon-
nectors, as mentioned in point 3.7.

Article 7: The EESC is not in favour of the measures

4.5
proposed in this article for reasons mentioned in point 3.8.

Brussels, 28 October 2004.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

APPENDIX

to the opinion of the European Economic and Social Committee

The following Section opinion text was rejected in favour of amendments adopted by the assembly but obtained at least
one-quarter of the votes cast:

Point 1.8, last phrase:

‘Frequently added new legislation and in particular legislation allowing public interference in the markets do not create
the necessary stable regulatory framework but, on the contrary, increases the investor's risk, delays investment and
thereby increases prices.’

Outcome:

78 votes for deleting the phrase, 67 against and 9 abstentions.