Report from the Commission - Annual Report on the Implementation of the Gas and Electricity Internal Market {SEC(2004) 1720}
Date: 2005-01-05
Institutions: European Commission
Subjects: application of EU law, competition policy, consumer protection, electrical energy, energy industry, intra-EU trade, liberalisation of the market, market, price of energy, security of supply, single market

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 5.1.2005 
COM(2004) 863 final 

REPORT FROM THE COMMISSION 

Annual Report on the Implementation of the Gas and Electricity Internal Market 

{SEC(2004) 1720} 

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TABLE OF CONTENTS 

1. 

2. 

3. 

4 

5 

6 

7 

8 

BACKGROUND TO THIS COMMUNICATION ..................................................... 3 

OVERALL SUMMARY ............................................................................................. 3 

EVALUATION OF PROGRESS IN THE ELECTRICITY SECTOR ....................... 5 

EVALUATION OF PROGRESS IN THE GAS SECTOR ......................................... 7 

SECURITY OF SUPPLY ............................................................................................ 8 

PUBLIC SERVICE AND USER/CONSUMER PROTECTION................................ 9 

ENVIRONMENTAL ASPECTS ................................................................................. 9 

CONCLUSIONS.......................................................................................................... 9 

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1. 

BACKGROUND TO THIS COMMUNICATION  

The new electricity and gas Directives1 were due to be transposed by Member States by July 
2004 and the Regulation on cross border electricity exchanges2 also came into effect. The new 
rules  are  aimed  at  achieving  to  a  competitive  electricity  and  gas  sector  across  the  whole 
European Union as envisaged by the Lisbon Council objectives3.  

The  Directives  require  the  Commission  to  issue  regular  reports  on  the  functioning  of  the 
market on an annual basis and therefore this report has been prepared in consultation with the 
European  Regulators  Group  for  Electricity  and  Gas  (ERGEG)  using  both  their  data  and 
published information from a number of sources.4 More detailed information is contained in a 
supporting document which will be released at the same time as this Communication. 

2. 

OVERALL SUMMARY 

A recent report compiled for DG Enterprise on European productivity growth5 demonstrated 
the excellent performance of the utility sector as summarised in Table 1 below. This serves to 
underline  the  contribution  of  market  opening  to  driving  efficiency  improvements  in  these 
sectors and the potential contribution from the energy sector towards the Lisbon objectives.  

Table 1 

Labour Productivity Growth: Gas, Electricity and Water 

% per annum. 

1979-1990 

1990-95 

1995-2001 

EU-15 

USA 

2.7 

1.1 

3.6 

1.8 

5.7 

0.1 

However, many  aspects of implementation remain disappointing. In October 2004, eighteen 
Member  States  had  to  be  sent  a  letter  warning  that  they  had  still  not  fully  notified  to  the 
Commission the legal measures taken to transpose the latest Directives.  

This delay is unsatisfactory since it is now clear that the provisions of the previous Directives6 
have  not been adequate  to  achieve the objective of competition, even for larger  users. Such 
customers  would  normally  be  expected  to  negotiate  with  suppliers  on  a  regular  basis. 
However after five years of competition for electricity and over three years for gas, fewer than 
50%  have  switched  supplier  in  most  Member  States.  In  addition,  many  are  unsatisfied  with 
the range of services being offered.  

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5 

6 

Directives 2003/54 and 2003/55 
Regulation 1228/2003 
European Council Conclusions 24/3/2000 ( English ) Nr: 100/1/00 23-24 March 2000 
For  example:  “Qualitative  study  -  European  consumers  and  services  of  general  interest  in  the  EU  25 
(December 2003), DG Health and Consumer Affairs” 
EU productivity and competitiveness: An industry perspective: Mary O’Mahony and Bart van Ark (ed.) 
for DG Enterprise, European Commission 2003 
Directives 96/92, 98/30 

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It  is  not  enough  just  to  consider  the  number  of  customers  changing  supplier,  but  also  the 
nationality  of  new  suppliers.  In  many  cases,  customers  have  only  been  able  to  change  to 
another  domestic  supplier  with  the  result  that  penetration  of  national  markets  by  foreign 
companies is also disappointing in many cases, reflecting a lack of integration of markets and 
missing  infrastructure  links.  In  most  cases,  foreign  suppliers  represent  less  than  20%  of 
market  share.  The  only  exceptions  are  those  markets  reasonably  well  integrated  with 
neighbouring Member States or those where the main suppliers have, in fact, been privatised 
and purchased by foreign companies. 

Although electricity prices are lower than 1995 in real terms, they have increased in the last 
18 months, partly due to increased prices for primary energy sources. At the same time, gas 
prices  are  higher  than  in  1995  due  to  the  ongoing  linkage  with  oil.  Although  such  price 
fluctuations  are  normal,  increases  are  unpalatable  to  customers  where  the  prospects  for 
changing supplier appear to be limited by regulatory barriers and where the negotiating power 
of  customers  is  weak  due  to  an  unfavourable  market  structure.  Particular  concerns  exist 
among  the  largest  users  that  suppliers  are  failing  to  offer  an  adequate  range  of  contract 
structures, especially longer term arrangements.  

A  key  issue  relates  to  the  failure  to  fully  integrate  national  energy  supply  into  a  wider 
European market. In this context it is vital for rules on cross border electricity exchanges to 
continue  to  be  improved  to  ensure  that  existing  infrastructure  is  utilised  to  its  maximum 
possible  extent.  Likewise  for  gas,  the  adoption  and  implementation  of  the  proposed 
Regulation7  is  similarly  important.  New  investment  in  infrastructure  is  also  needed  and 
progress in this regard remains slow, as was also noted in the Commission Communication on 
Energy Infrastructure and Security of Supply8.  

Secondly, Member States are still failing to deal with the issue of market structure. As has 
been  highlighted  in  previous  reports,  the  gas  and  electricity  markets  in  too  many  Member 
States  are  dominated  by  one  or  two  companies,  and  there  is  often  inadequate  capacity  for 
cross border competition. It is imperative that solutions are found to such problems. 

Thirdly, although much process has already been made in terms of unbundling of network 
operators  and  the  introduction  of  regulated  third  party  access,  there  are  still  certain 
aspects  which  remain  unsatisfactory.  A  fully  independent  transmission  system  operator  is 
crucial  for  a  well  functioning  market.  Likewise  distribution  system  operators  need  to  be 
adequately separated from supply companies to ensure cost reflective tariffs and the removal 
of  any  cross  subsidies.  The  independence  of  regulators  is  crucial  in  this  respect  in  order  to 
ensure fair network access in terms of tariff levels and structure. In this respect the gas sector 
is measurably behind that for electricity. 

A  final  group  of  issues  which  may  tend  to  be  an  obstacle  to  the  internal  market  is  the 
continued  existence  of  a  regulated  end  user  prices  for  electricity  and  gas  alongside  the 
competitive market and associated long term power purchase arrangements (PPAs). Although 
such controls are a valuable transitional measure during the initial phase of market opening, 
there are risks that such an approach will stifle competition, constrain investment and confuse 
and contradict unbundling measures.  

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8 

COM (2003) 741 
COM (2003) 743 

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3. 

EVALUATION OF PROGRESS IN THE ELECTRICITY SECTOR 

3.1 

Summary 

Although many of the necessary measures to implement competition have been taken, or are 
in  process,  the  obstacles  referred  to  in  Section  2  above  appear  in  many  of  the  electricity 
markets of Europe as summarised in the table below.  

Table 2 

Summary of main obstacles to competition9 

Customer switching:  
Large Users 

a. No major issues 

SE, FI, DK, NO, UK,  

>50% 

b. Unbundling \ Regulation 

LU, AT, DE 

range 10% (LU) -35% (DE) 

c.  Market  Structure  or  Lack 
of Integration  

FR,  BE,  GR,  IE,  ES,  NL,  LT, 
IT, SI, CZ, SK, LV 

range 0%(GR) - 35%(NL) 

Long 

d. 
Regulated end-user prices 

term 

PPAs\ 

PT, EE, PL, HU,  

range 0% (EE) - 25% (HU) 

In  addition  to  this,  the  island  states  of  Malta  and  Cyprus  have  limited  scope  for  the 
development of competition for electricity. 

3.2 

Effective Regulation and Unbundling 

New suppliers will only be able to enter the  market if  they have  fair access to transmission 
and distribution networks. An independent transmission system operator is a vital ingredient 
of  a  functioning  electricity  market.  Cross  subsidies  must  be  removed  and  access  based  on 
published  regulated  prices  which  are  reflective  of  the  costs  of  the  network  business  in 
question. Network tariffs are now broadly comparable in the majority of Member States and it 
is  expected  that  those  which  deviate  from  the  normal  range  will  be  closely  scrutinised  by 
regulators. 

3.3 

Market Structure and Integration 

Market structure is a severe problem in many parts of the EU electricity market and it appears 
evident that only those regions with an adequate number of players, i.e. the UK and Nordic 
market, have been able to deliver a really competitive market across the board. Furthermore, 
many  of  the  electricity  generation  markets  in  new  Member  States  are  characterised  by  the 
continuation  of  long  term  power  purchase  agreements.  This  means  that  there  may  be  much 
less scope for competition than indicated by market share analysis. 

Ultimately a key objective is for a liquid wholesale market to be developed. This will allow 
market  participants,  including  potential  new  entrants,  to  buy  and  sell  electricity  freely  to 
reconcile their generation and supply portfolios. However, power exchanges in most Member 

9 

In  this  table  the  most  important  obstacle  for  each  Member  State  is  identified.  However  this  does  not 
mean that other obstacles do not exist. 

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States  are  still  insufficiently  liquid  in  this  respect.  There  is  also  an  insufficient  degree  of 
transparency concerning the formation of pries in many wholesale markets. 

Interconnection  between  Member  States,  of  course,  provides  significant  potential  for 
increasing the level of competition. However developments in this respect have been mixed. 
Some groups of Member States, such as the Nordic countries, those on the Iberian peninsular 
and on the island of Ireland, have shown that it is not impossible to realise projects if there is 
sufficient  political  commitment.  More  general  improvements  should  also  result  from  the 
implementation  of  Regulation  1228/03  relating  to  cross  border  electricity  transmission.  The 
co-ordination of cross border capacity allocation through, for example, the ideas of “market 
coupling”  put  forward  by  the  participants  of  the  Florence  Forum  will  increase  liquidity  and 
facilitate new entrants in national markets.  

3.4 

Price developments 

With the exception of Italy, 2004 saw a convergence of wholesale prices at around the level of 
€30/MWh  in  both  bilateral  markets  and  standardised  power  exchanges.  However,  forward 
markets show that price increases are likely with prices for base-load10 for 2005 significantly 
exceeding  €30/MWh.  In  some  respects,  this  represents  a  response  to  increased  prices  for 
primary energy sources on world markets. 

Prices  for  end  users,  which  also  include  network  costs  and  a  retail  supply  margin,  have  not 
converged.  A  wide  range  of  price  levels  prevails  in  different  Member  States  for  final 
customers. Electricity  prices  for  large  users range from under €40/MWh in Latvia to nearly 
€80/MWh  in  Italy.  Likewise  prices  for  small  customers  and  households  range  from  under 
€60/MWh to over €120/MWh. 

3.5 

Conclusions 

Much has been achieved since the introduction of competition including the establishment of 
the  principles  of  regulated  third  party  access,  the  separation  of  networks  and  a  degree  of 
integration of national markets into larger groupings. However, as has been identified in many 
previous  reports  of  the  Commission,  the  issue  of  concentration  is  now  the  most  important 
obstacle  to  the  development  of  more  vigorous  competition.  While  this  persists,  consumers 
may  lose  confidence  in  the  market  and  call  for  tighter  regulation.  In  this  respect,  the 
Commission’s  recent  prohibition  decision  on  the  acquisition  of  GDP  by  EDP  and  ENI11 
reflects  an  important  precedent  on  how  the  Commission  intends  to  deal  with  possible 
restructuring of the industry. 

Independence  of  transmission  system  operators  and  an  increase  in  the  level  of  available 
interconnection  is  vital  for  the  further  development  of  electricity  markets.  Without  such 
investments  the  contestability  of  the  market  will  remain  constrained  and  incumbent 
companies will retain a large part of their existing advantages. 

Increased  use  of  competition  policy  at  national  level,  with  greater  transparency  of  the 
behaviour  of  participants  in  wholesale  markets  may  also  bring  results  and  co-operation 
between national regulators, competition authorities and the European Commission also has 
the potential to deliver significant improvements. 

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11 

Baseload implies delivery of a constant amount throughout 24 hours 
Press release IP/04/1455, 9 December 2004 

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4 

EVALUATION OF PROGRESS IN THE GAS SECTOR  

4.1 

Summary 

The  creation  of  the  internal  gas  market  requires  more  integration  and  for  the  efforts  to 
diversify supply to be further intensified. It is clear that those Member States which are poorly 
integrated  with  their  neighbours  and  have  limited  availability  of  external  sources  have  had 
more difficultly in developing competition.  

By  contrast,  those  which  have  a  number  of  different  sources  available  and  which  have  also 
implemented capacity release seem to perform significantly better. As well as the UK, which 
has  a  mature  competitive  structure;  and  in  Ireland  where  large  users  have  had  freedom  of 
choice for many years, the best performance appears to be in markets close to a diverse range 
of resources such as Belgium, Denmark and the Netherlands. Italy and Spain have also made 
significant progress in the last year. In all the above mentioned Member States, it is estimated 
that  at  least  30%  of  large  users  have  changed  supplier.  Of  the  remainder,  only  France  is 
approaching  such  a  degree  of  development,  particularly  in  its  northern  regions.  Progress  in 
Germany and Austria is still very disappointing while the new Member States have a number 
of outstanding issues which are likely to hinder the functioning of competition. 

4.2 

Effective Regulation and Unbundling 

For gas, fair network access requires not only cost-reflective access charges, but also flexible 
conditions  relating  to  the  nomination  of  flows  supportive  of  new  entrants.  In  general,  an 
entry-exit system for both tariffs and booking of capacity on the transmission network is more 
conducive  to  developing  a  competitive  market  and  most  Member  States  are  moving  in  this 
direction.  However,  in  some  cases,  inflexible  procedures  without  adequate  use  it  or  lose  it 
mechanisms  still  represent  a  barrier  to  new  participants  in  the  market.  High  tariffs, 
particularly  for  the  use  of  low  pressure  distribution  networks,  also  continue  to  cause 
problems. 

Balancing  and  storage  regimes  are  also  sensitive  issues  when  it  comes  to  effective  market 
opening.  Many  regimes  remain  rather  uncertain,  particularly  in  new  Member  States.  The 
failure,  to  date,  to  agree  minimum  standard  procedures  for  access  to  storage  at  the  recent 
Madrid Forum is therefore highly regrettable. 

4.3 

Market Structure and Integration 

A key problem at national level is that there is often only a single company bringing almost 
all  the  gas  to  the  market.  This  has  an  important  impact  on  the  potential  for  competition  at 
supply  level.  Even  if  there  are  several  suppliers,  competition  between  them  may  be  rather 
ineffectual if they are all purchasing from the same wholesaler.  

Of course, to the extent that a wider European natural gas market can be created, this concern 
will be alleviated. Further development of the internal market has, however, been constrained 
by  the  continued  existence  of  long  term  reservations  of  transmission  capacity.  The  lack  of 
coherence  between  the  charging  structures  of  individual  transmission  system  operators  has 
also prevented competition in some areas. To transport gas from Zeebrugge to, for example, 
Budapest  would  require  the  use  of  at  least  five  different  networks  and  the  complexity  of 
calculating the charge would be a significant disincentive to any network user. 

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4.4 

Prices 

Gas  prices  remain  under  the  strong  influence  of  international  oil  prices,  often  built  into 
contracts between importers of gas and producing countries. The increase in oil prices during 
2004 has therefore fed through to the gas market and wholesale natural gas has increased from 
around €10/MWh to some €12/MWh by late 2004.  

Although  wholesale  gas  prices  are  similar  in  most  Member  States,  the  latest  information  at 
retail  level,  published  by  Eurostat,  still  shows  considerable  divergence  ranging  from 
€10/MWh to €25/MWh for large users and from €15/MWh to €40/MWh for households.  

4.5 

Conclusion 

Gas markets remain subject to significant rigidities in many cases, usually as a result of the 
continuing  lack  of  integration  between  national  markets.  Without  cross-border  competition, 
the existing incumbents can easily protect their position. Furthermore, inappropriate balancing 
and storage regimes and high distribution tariffs also make it difficult to change supplier in 
several countries. 

5 

SECURITY OF SUPPLY 

Electricity 

Overall, the  situation  regarding  electricity generation adequacy in the Member States  of  the 
European Union is satisfactory. Although 2003 experienced some difficulties, the position in 
Italy  and  Spain  has  now  improved  considerably  as  new  capacity  has  been  brought  on  line. 
However the Nordic countries still have a relatively tight situation12. 

Special measures exist in a number of cases to encourage investment in generation capacity. 
Many  Member  States  have  some  form  of  explicit  capacity  payments  while  Norway  and 
Sweden  also  have  a  form  of  capacity  option  scheme.  Others  have  some  form  of  capacity 
support in the configuration of balancing markets or in the procurement of reserve capacity by 
the TSO. Finally, some Member States have used the possibility of a tender process.  

Development of interconnection is also required in a number of cases to ensure effective use 
of available generation capacity and to reduce the strain on the system caused by congestion 
at certain key bottlenecks. The European Union is still some way from the objective fixed by 
the European Council at Barcelona that cross border interconnections should represent at least 
10%  of  production  capacity  in  each  Member  State  by  2005.  It  is  for  this  reason  that  the 
Commission  has  proposed  in  the  draft  Directive  on  Electricity  Security  of  Supply  and 
Infrastructure,  that  the  degree  of  co-ordination  should  be  increased  and  the  role  of  national 
regulators be enhanced in relation to the question of interconnections.  

Gas 

For the time being, import capacity into the European Union would appear to be more than 
adequate to serve demand. As long as capacity is available there are already strong incentives 

12 

Based on data released by transmission system operators. For example System Adequacy Forecast 2004 
– 2010, UCTE, December, 2003: UCTE System Adequacy Retrospect 2003, UCTE June 2004. 

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for  producing  countries  and  EU  suppliers  to  conclude  contracts  to  serve  increasing  gas 
demand.  At  present,  therefore,  there  are  few  very  specific  measures  currently  being 
implemented  in  this  area  at  a  general  level.  In  the  medium  term,  a  number  of  projects, 
particularly for LNG terminals are either in progress or being considered. It is expected that 
such investments will be forthcoming without specific support measures.  

6 

PUBLIC SERVICE AND USER/CONSUMER PROTECTION  

By July 2007 all customers will become eligible customers having the possibility to choose 
the most attractive electricity and gas suppliers. In this context it is important that the opening 
of the market provides customers with the same degree of reliability regarding the provision 
of  electricity  and  gas  and  at  least  the  same  degree  of  transparency  and  comprehensibility 
relating  to  the  way  they  are  charged  for  this  service,  whether  they  chose  to  change  their 
supplier or not. Similarly with regard to the provisions of the Directives on labelling of energy 
sources, Member States will need to ensure the smooth implementation of this requirement so 
that customers are able to make an informed choice.  

Some  households  and  small  business  have  expressed  the  perception  that  informed  customer 
choice  is  often  not  possible  as  price  comparisons  are  either  not  available  or  difficult  to 
understand.  Improvements  on  this  issue  are  required  and  industry  and  regulators  need  to 
ensure  that  meaningful  information  on  prices  and  services  is  available  in  an  objective  and 
transparent manner.  

As  well  as  ensuring  the  fulfilment  of  the  above  conditions  of  the  Directives,  the 
Commission’s  other  main  concern  is  that  public  service  obligations  should  not  distort  the 
market and should allow equal access to customers for suppliers. In this regard, the possible 
distortive effect of regulated end-user prices has already been noted. 

7 

ENVIRONMENTAL ASPECTS  

The internal energy market will need to develop in a manner consistent with the Community’s 
sustainability objectives. This means that the necessary incentives to support the penetration 
of  renewables,  the  reduction  of  emissions  and  demand  management  need  to  be  maintained. 
Liberalisation also offers the opportunity for new innovative players to enter the market and 
enable  market  differentiation  strategies,  for  instance  on  the  basis  of  environmental 
characteristics. 

Information  provided  by  the  authorities  in  Member  States  show  that  such  policies  are 
continuing to have an effect. In excess of 7000MW additional renewables and efficient CHP 
generation  capacity  was  added  to  companies’  portfolios  during  2003,  the  majority  of  which 
was in Germany and Spain. This represented well over 50% of new generation capacity added 
in  2003.  The  prospect  of  further  development  is  significant  with  new  technologies  such  as 
micro-cogeneration beginning to appear on the market. Many Member States also continue to 
follow an active approach to demand management through fiscal incentives.  

8 

CONCLUSIONS 

Europe is in the process of creating a wide energy community, going well beyond the borders 
of  the  Union  based  on  common  rules  and  practices.  Member  States  need  to  maintain  their 
commitment to this objective in the decisions they make regarding the implementation of the 

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Directives  and  restructuring  of  the  industry.  It  is  only  be  doing  this  that  the  objective  of  a 
competitive and secure market will be achieved. 

With  this  in  mind,  the  issue  of  investment  in  infrastructure  and  the  sound  operation  of 
networks,  in  support  of  the  competitive  market,  remains  a  critical  issue.  Although  some  of 
these  issues  have  been  addressed  the  concerns  which  were  expressed  in  previous 
Communications and the proposed Directive on Infrastructure and Security of Supply remain 
pertinent and progress, in some form or another, is required on this issue. 

The  role  of  independent  regulators  remains  a  crucial  component  of  the  introduction  of 
competition  and  their  decisions  relating  to  network  tariffs  and  other  important  market  rules 
will continue to shape the development of the market. In this context it remains important to 
ensure that authorities have sufficient resources and competences.  

Whether the improvements made under the Directives are adequate to achieve the objectives 
of  the  internal  market  remains  to  be  seen,  especially  if  Member  States  take  a  minimalist 
approach to the transposition of the current legislation. One thing that is certain is that in the 
new global environment of higher primary energy prices it is more important than ever for the 
Community to live up to its commitment to a competitive market. 

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