Communication from the Commission to the Council and the European Parliament - Report on progress in creating the internal gas and electricity market {SEC(2005) 1448}
Date: 2005-11-15
Institutions: European Commission
Subjects: competition law, electrical energy, gas, liberalisation of the market, single market

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 15.11.2005 
COM(2005) 568 final 

. 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND 
THE EUROPEAN PARLIAMENT 

Report on progress in creating the internal gas and electricity market 

{SEC(2005) 1448} 

EN 

   EN 

 
 
 
 
 
 
A. CONTEXT AND MAIN CONCLUSIONS 

Europe is currently seeking means to re-launch its economic performance to achieve a higher 
level of growth and competitiveness. A reliable electricity and gas service at acceptable prices 
is  the  key  to  this  and  businesses  and  households  should  be  able  to  benefit  from  efficient 
energy supply. This is a key element of Europe’s Lisbon strategy. To achieve this objective, 
the EU decided to bring the energy sector into line with the competitive parts of its economy 
by  gradually  introducing  competition.  On  the  basis  of  the  second  Electricity  and  Gas 
Directives1 the EU now has the unique opportunity to create the largest integrated competitive 
electricity  and  gas  market  in  the  world.  The  EU  cannot  afford  to  miss  the  opportunity  of 
making this market a success. This has been recently underlined by the European Council at 
the Hampton Court Summit. 

It is now one year since the new directives should have been implemented by Member States 
and there are one and a half years to go before markets will be fully open to competition. This 
report takes stock of the current situation and identifies areas requiring further improvements.  

The main conclusion of this report is that, whilst the initial opening period of energy markets 
has  largely  been  a  success  to  date,  with,  for  example,  electricity  prices  now  being  lower  in 
real terms than in 1997 notwithstanding recent price rises for oil, gas and coal, more needs to 
be  done  to  ensure  that  industry  and  citizens  receive  the  full  benefits  flowing  from  market 
opening. This assessment is shared by energy regulators and most interested parties consulted 
during preparation of this report.  

The  most  important  persisting  shortcoming  is  the  lack  of  integration  between  national 
markets.  Key  indicators  in  this  respect  are  the  absence  of  price  convergence  across  the  EU 
and the low level  of cross-border trade. This  is generally  due to the existence of  barriers to 
entry,  inadequate  use  of  existing  infrastructure  and  -  in  the  case  of  electricity  -  insufficient 
interconnection  between  many  Member  States,  leading  to  congestion.  Moreover,  many 
national  markets  display  a  high  degree  of  concentration  of  the  industry,  impeding  the 
development  of  effective  competition.  The  gas  market  continues  to  suffer  from  a  lack  of 
liquidity  of  both  gas  and  transport  capacity.  In  this  context,  the  effects  of  long-term  gas 
contracts  will  have  to  be  taken  into  account,  both  in  terms  of  competition  and  the  fact  that 
such contracts may be necessary to underpin the financing of major new gas infrastructure2. 
Another  indicator  of  the  lack  of  real  competition  is  that  switching  by  customers  remains 
limited in most Member States and that choosing a new supplier from another Member State 
remains the exception. 

Thus, this Report shows that in economic terms, with very few exceptions, electricity and gas 
markets in the EU remain national in economic scope. Sufficient cross-border competition has 
not yet developed to provide a fully effective constraining influence on the economic power 
of companies in each national market. This issue needs to be addressed with determination, by 
the Commission, Member States, Regulators and Industry. The main immediate action that is 
necessary  is  the  full  and  complete  and  effective  implementation  of  the  second  Gas  and 
Electricity Directives. The fact that most Member States have transposed the new Directives 

1 

2 

Directives 2003/54/EC and 2003/55/EC concerning common rules on the internal market in electricity 
respectively gas (LS). 
For details see Commission Staff Working Document, Technical Annexes (TA) to this communication, 
section 5. 

EN 

2 

   EN 

 
                                                 
only  with  delay  and  some  not  yet  at  all  is  particularly  damaging.  The  Commission  will 
continue  to  insist  on  compliance,  when  necessary  in  infringement  procedures.  In  particular, 
Member States need to give careful consideration to ensure that in their implementation of the 
Directives in practice, they pursue their spirit and not only their letter. The Directives provide 
a  common  minimum  set  of  principles  and  measures  applicable  to  all  Member  States. 
However, additional measures may well be necessary in certain areas, to take account of the 
specific characteristics existing in certain countries in order to ensure that individual markets 
really  integrate  with  their  neighbours.  The  development  of  the  Nordpool  area  provides 
examples  in  this  respect.  Some  Member  States  have  already  taken  such  active,  additional 
steps; for example reinforcing the minimum unbundling measures provided in the Directives, 
strengthening  the  power  and  independence  of  Regulators,  freeing  up  existing  and  building 
new interconnection capacity, and taking measures to promote liquidity on gas markets. 

All Member States therefore need to consider carefully how to implement the Directives in a 
manner that will rapidly lead to wider, more open and more competitive markets. This means 
in  particular,  in  addition  to  ensuring  that  the  requirements  of  the  Directives  regarding 
effective  non-discriminatory  network  access,  unbundling  and  effective  Regulation  work  in 
practice,  taking  an  active  approach  to  ensuring  the  existence  of  adequate  and  available 
interconnection capacity. They also need to take care to ensure that any price regulation does 
not  act  to  exclude  competition.  At  the  same  time,  the  Commission  and  national  Regulators 
will accelerate their efforts under the gas and electricity Regulations to deal with a number of 
technical issues such as cross-border trading mechanisms, balancing, etc. 

It is therefore too early to decide whether additional legislative measures at Community level 
are  necessary,  such  as  those  suggested  by  some  respondents  to  the  Commission’s  enquiries 
when  preparing  this  report;  for  example  additional  unbundling  or  further  powers  to 
Regulators.  It  is  first  necessary  to  see  the  results  of  the  implementation  of  the  Second 
Directives in practice. The Commission will therefore, in addition to following-up closely the 
formal legal compliance with the Directives, carry-out detailed country-by-country reviews of 
the  effectiveness  in  practice  of  legislative  and  regulatory  measures,  including  specific 
additional  national  measures.  This  will  lead  to  a  further  Report  by  the  end  of  2006  and,  if 
necessary, proposals to redress any remaining requirements in 2007. 

In  addition  to  these  measures,  a  number  of  other  supporting  actions  are  necessary.  The 
introduction  of  competition  will  tend  to  exert  downward  pressure  on  prices.  In  themselves, 
falling prices for energy do not encourage either careful consumption or investment in energy 
efficiency,  another  area  where  the  EU  needs  to  make  further  progress,  as  the  Commission 
highlighted recently in its Green Paper on Energy Efficiency3. In response to this dilemma, in 
December  2003  the  Commission  proposed  a  directive  on  energy  end-use  efficiency  and 
services,  aiming  at  providing  a  framework  for  the  development  of  a  real  market  for  energy 
efficiency.  

Furthermore,  the  increasing  share  of  renewable  electricity  needs  to  be  integrated  into  the 
internal  electricity  market,  both  technically,  through  the  provision  of  sufficient  network 
capacity,  and  commercially.  The  European  Union  has  set  a  target  of  21%  renewable 
electricity  in  20104.  Member  States  have  been  supporting  the  development  of  renewable 

3 
4 

“Doing more with less” – Green Paper on Energy Efficiency, COM(2005) 265. 
See target contained in Directive 2001/77/EC on the promotion of electricity produced from renewable 
energy sources in the internal market and the acts of accession of the new Member States. 

EN 

3 

   EN 

 
                                                 
electricity through specific schemes. A separate Commission report will analyse the impact of 
these schemes on operation of the internal market. There is a need to continue to monitor the 
situation  and  encourage  best  practice,  as  the  share  of  renewable  electricity  has  to  increase 
further to achieve the 21% target.  

Finally,  as  regards  climate  change  policy,  a  new  instrument  –  the  EU  emissions  trading 
scheme – became applicable in January 2005. Since then there has been a marked increase in 
the  price  of  the  allowances,  for  various  complex  reasons.  The  Commission  will  continue  to 
follow  developments  on  the  new  and  not  yet  fully  stabilised  market  for  allowances  very 
closely,  will  examine,  in  the  report  due  in  mid-2006  on  the  emissions  trading  scheme,  its 
functioning,  including  the  possible  effect  on  energy  prices  and,  if  necessary,  will  propose 
changes to make sure that the market works properly. 

This  Report  and  its  follow-up  form  part  of  a  coherent  Commission  strategy  to  ensure  the 
effective functioning of the Internal Energy Market. In particular, it is closely connected with 
the sector competition policy enquiry, the final results of which are also expected in 2006. 

B.  THE  PRESENT  STATE  OF  THE  INTERNAL  MARKET  -  DEVELOPMENTS  IN 
KEY AREAS AND REMAINING DEFICITS  

1. Implementation of the new directives  

Most  Member  States  missed  the  deadline  of  1  July  2004  for  the  transposition  of  the  new 
Electricity  and  Gas  Directives.  In  most  Member  States  the  legislation  implementing  the 
directives  has  been  in  force  for  less  than  a  year  and  some  Member  States  have  not  yet 
implemented the directives at all5.  

This  delay  runs  counter  to  the  commitment  made  by  the  European  Council  to  complete  the 
internal energy market rapidly. As a result, a number of the structural measures will come into 
effect  later  than  provided  for  in  the  directives.  Particularly  important  in  this  respect  are  the 
rules on regulatory oversight and the unbundling provisions.  

2. Market integration  

It must be recalled that the objective of opening the market is to create a single electricity and 
gas  market,  not  a  juxtaposition  of  25  national  markets.  This  is  a  challenging  task  and 
integration  of  all  national  markets  will  not  happen  overnight.  At  the  moment  the  degree  of 
market integration remains insufficient. Two key indicators point to this conclusion:  

–  the significant price differences prevailing in the internal market 

–  the low level of cross-border trade.  

When trade is easy in an integrated market, the resulting EU-wide competition keeps prices 
close together across the EU, or at least between adjacent Member States or regions. This is 
not  yet  the  case  with  electricity  and  gas6.  Price  differences  for  electricity  for  industrial 
customers  in  the  EU,  for  instance,  are  more  than  100%  in  some  cases.  On  the  other  hand, 
wholesale price levels have started to converge in some neighbouring countries. Whilst these 

5 
6 

TA, section 1. 
TA, section 4. 

EN 

4 

   EN 

 
                                                 
are promising first steps, the development of regional markets, as an intermediate step before 
ultimate integration at EU level, is still in its infancy, with the exception of the relatively well 
developed Nordic electricity wholesale market.  

Cross-border  trade  increases  competitive  pressure  on  prices.  In  the  internal  energy  market 
trade  is  currently  underdeveloped.  Cross-border  flows  of  electricity,  for  instance,  in  2004 
stood  at  around  10.7  %  of  total  consumption7,  which  is  an  increase  of  only  around 
2 percentage points  compared  to  2000 (8-9%). Although commercial trade activities are not 
necessarily  fully  reflected  in  flows,  flows  would  be  expected  to  increase  if  trade  increases 
significantly. 

Likewise, in merger procedures under EU competition law it has generally not been possible 
to define the “relevant market” as any wider than national.  

In  the  case  of  electricity,  the  lack  of  market  integration  is  largely  due  to  the  fact  that  the 
interconnection capacity available to the market between many Member States is still broadly 
insufficient  to  allow  proper  integration  of  national  markets  and  competitive  pressure  from 
imports. Congestion is frequent at many borders in the EU. It must be recalled that back in 
2002 the European Council in Barcelona adopted the objective that all Member States must 
have  interconnection  capacity  equivalent  to  at  least  10%  of  their  national  consumption,  an 
objective  which  has  not  yet  been  achieved.  The  graph  below  illustrates  the  correlation 
between missing electricity links and price differences on the internal market8. 

Average spot price (or equivalent)

Jul 2004 – Jun 2005

no price index

over €60

€50 - €60

€40 - €50

€30 - €40

under €30

Missing Infrastructure Links

under construction/ complete

under consideration

no progress on new connection

The persisting bottlenecks in electricity infrastructure need to be removed. A stable regulatory 
framework  conducive  to  investment  must  be  in  place.  Regulators  play  a  key  role  in  this 
respect.  Effectively  unbundled  transmission  system  operators  must  demonstrate  their 

7 

8 

Flows  between  member  countries  of  the  Union  for  the  Co-ordination  of  Transmission  of  Electricity 
(UCTE). 
TA, section 5. 

EN 

5 

   EN 

 
 
                                                 
independence and fulfil their role of market facilitators by investing in missing links, even if it 
increases competition for the related supply branch.  

Another equally important issue is planning procedures. In this respect, Member States must 
strike a reasonable balance in the general interest of ensuring a competitive and safe energy 
supply for European citizens. There is also a need to be innovative and develop solutions less 
likely to affect the interests of the local population, such as the integration of electricity lines 
in new railway tunnels.  

The  construction  of  priority  electricity  and  gas  infrastructure  has  been  supported  under  the 
TEN-Energy (TEN-E) programme. Given the persisting lack of infrastructure, it is important 
to  reinforce  the  TEN-E  programme  further.  The  Commission  has  proposed  a  significant 
increase in the budget of the programme under the new financial perspective (2007-2013). 

The full benefits of the existence of sufficient physical infrastructure will not be felt unless the 
capacity  is  made  available  to  market  participants  on  a  non-discriminatory  basis.  This  is, 
however, often not the case and major improvements are necessary in this respect9. 

One important issue has been capacity reservation in favour of historical long-term contracts. 
In  a  recent  ruling10  on  a  case  concerning  capacity  reservation  in  the  electricity  sector,  the 
European  Court  of  Justice,  without  questioning  long-terms  contracts  as  such,  declared  a 
system  under  which  historical  contracts  are  per  se  given  priority  over  other  requests  for 
interconnector capacity incompatible with the principle of non-discrimination. In the light of 
this  judgment  the  legality  of  the  current  practice  of  capacity  reservation  for  both  electricity 
and  gas  needs  to  be  reconsidered  by  regulators  and  transmission  system  operators,  in 
consultation  with  companies  benefiting  from  reservations.  The  Commission  will  insist  on 
compliance of capacity allocation with EU-Law and will publish its view on the consequences 
of the ruling of the Court. 

3. Concentration and consolidation of the industry  

In  the  absence  of  well  developed  cross-border  competition,  the  structure  of  the  industry  in 
national  markets  requires  special  attention.  Market  opening  started  in  many  Member  States 
from a monopolistic or at least oligopolistic market structure. The introduction of competition 
at EU level was intended to put an end to this situation by exposing companies to EU-wide 
competition. This has not yet been achieved in most markets. Concentration in many markets 
remains high and industry has been further consolidating since market opening started.  

In  the  case  of  gas,  there  is  still  a  lack  of  liquidity  on  the  market,  largely  due  to  the  limited 
access to gas supplies for new entrants as well as the limited scope for moving gas around the 
European network. 

The  number  of  genuine  newcomers  to  the  market  has  decreased  recently  and,  for  instance, 
only a very limited share of new electricity generation projects were commissioned by non-
incumbents. 

9 
10 

TA, section 6  
Case C-17/03 

EN 

6 

   EN 

 
                                                 
One indicator for the degree of competition on national markets is the total market share of 
the biggest three producers (electricity) and wholesale suppliers (gas) (see graph below)11. 

LV

EE

IE

SI

Electricity

HU

NORDIC

FR

BE

LT

LU 

SK

CZ

DE

ES

NL

IT

AT

PL

UK

MORE COMPETITIVE MARKETS

FR

DK

LT

IE

DE

ES

IT

NL

AT

SE

UK

Gas

PL
LV

SK

CZ

EE
HU

SI

100

90

80

70

60

50

40

30

Share of capacity of largest 3 wholesale market participants   %

The graph below shows the turnover of the biggest energy companies in the EU. 

11 

TA, sections 4 and 5. 

EN 

7 

   EN 

 
                                                 
Scottish Power

10.07

Centrica

26.90

EDF

Electrabel

12.15

GDF

Vattenfall

12.59

EON

49.13

46.93

18.47

42.14

RWE

Endesa

18.06

Enel

36.49

12.59

Turnover 
€bn

Electricity

Gas

other

In  addition  to  the  high  levels  of  concentration  in  national  markets,  an  increasing  number  of 
cross-border acquisitions can be observed. In certain electricity markets there also seems to be 
a  tendency  towards  growing  vertical  integration  between  generation  and  supply  activities, 
which might lead to a reduction of liquidity on the wholesale markets concerned, aggravating 
the risks associated with concentration. Furthermore there have been attempts by incumbent 
gas and electricity companies to merge. These mergers can reduce incentives for competitors 
to  build  new  gas  fired  plants.  The  Commission  is  monitoring  these  developments  carefully 
and – to the extent applicable – strictly applies its merger rules12. In its competition cases the 
Commission  pays  particular  attention  to  remedies  that  facilitate  market  opening  and 
integration.  The  Commission  is  investigating  the  concentration  and  consolidation  of  the 
industry in more detail as part of the ongoing sector inquiry launched in June 2005. 

Rigorous  application  of  competition  rules,  including  merger  control,  is  necessary,  at  both 
national and EU levels. Furthermore Member States should consider active policies aimed at 
stimulating competition, such as properly designed electricity capacity release and gas release 
programmes.  

Oversight  of  the  complex  electricity  markets  which  pose  high  risks  of  manipulation  due  to 
market  concentration  needs  to  be  strengthened  by  Member  States.  Appropriate  rules  on 
transparency  together  with  obligations  to  disclose  important  information,  such  as  available 

12 

Cf.  merger  cases  3440  EDP/ENI/GDP.  The  prohibition  decision  was  confirmed  by  the  Court  of  First 
Instance in case T-87/05 of 21 September 2005 

EN 

8 

   EN 

 
 
                                                 
generation  capacity,  must  be  in  place.  A  situation  where  only  the  incumbents  have  the 
information necessary to trade effectively in the market is unacceptable.  

There is a need to bring gas from new sources to the EU, in order to stimulate competition and 
strengthen security of supply. The recent decisions taken by investors, supported by national 
regulators  and  the  European  Commission,  to  launch  a  number  of  new  liquefied  natural  gas 
(LNG) terminal projects in the EU are major progress in this respect. 

4. Customer response  

The  number  of  customers  switching  supplier  is  a  natural  indicator  of  the  effectiveness  of 
competition.  If  few  customers  are  switching,  there  is  likely  to  be  a  problem  with  the 
functioning of the market, even if the benefits from the possibility of renegotiating with the 
historical supplier should not be ignored. 

Whilst the rates of larger electricity customers switching continue to rise, gas consumers and 
small  business  customers  and  households,  in  Member  States  where  they  have  the  right  to 
choose,  remain  reluctant  to  exercise  their  right  to  choose13.  Many  factors  contribute  to  this. 
Often competing offers are unavailable or are too similar to constitute a real choice. Dominant 
positions and insufficient unbundling, especially at the distribution level, seem to discourage 
switching, and changing suppliers is still often perceived as risky14. 

The  graphs  below  demonstrate  the  diverging  performance  between  Member  States  for  this 
indicator.

13 
14 

TA, section 3. 
TA, sections 3 and 7. 

EN 

9 

   EN 

 
                                                 
Electricity  

g
n

i

h
c
t
i

w
s
%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Gas  

g
n

i

h
c
t
i

w
s
%

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

I

F

E
S

K
U

T

I

E

I

K
D

E
D

L
N

U
H

T
A

S
E

U
L

E
B

O
P

T
P

R
F

T
L

I

V S
L

Z
C

R
G

E
E

Y
C

A
M

K
S

E

I

K
U

S
E

K
D

E
B

T

I

L
N

R
F

U
H

T
A

U
L

E
S

I

K S
S

O
P

V
L

T
L

E
E

E
D

Z
C

large and very large industrial including power plants

small-medium industrial and business

very small business and household

large and very large industrial

small-medium industrial and business

very small business and household

EN 

10 

   EN 

 
 
 
 
 
Customers must have a real choice of supplier. Member States and national regulators must 
ensure  that  appropriate  rules  on  information  and  transparency  and  that  simple  switching 
procedures exist, to provide the necessary confidence to customers. 

5. Price trends  

Particular  attention  must  be  paid  to  electricity  and  gas  price  trends  on  the  internal  energy 
market15.  Certain  energy-intensive  industries  have  recently  expressed  concerns  about  rising 
prices,  which  have  been  particularly  acute  in  some  Member  States.  This  was  one  of  the 
reasons why the Commission decided, in June 2005, to launch an inquiry into the electricity 
and gas sector, to examine whether competition is restricted or distorted within the common 
market. Should the inquiry confirm the absence of real competition, the Commission will not 
hesitate to take the appropriate remedies.  

It  should,  however,  be  noted  that  despite  recent  price  increases  electricity  prices  have 
decreased over the last 10 years in real terms. Also, prices of other fuels equally important for 
certain industries, such as gas and oil, have increased more significantly than electricity prices 
over  the  last  three  years.  However,  further  action  is  clearly  necessary  to  ensure  that  all  the 
possible benefits of market opening flow to citizens. 

6. Independence of network operators  

Effective  unbundling  of  network  operation  from  the  competitive  parts  of  the  business  is 
essential to ensure independent network operation and non-discriminatory access to networks 
for all market participants.  

At the moment the tightened unbundling rules in the new directives are not yet fully effective 
in practice. In many instances the process of unbundling has not yet been finalised by network 
operators16,  partly  as  a  result  of  the  late  implementation  of  the  directives  by  most  Member 
States. This applies, in particular, to gas transmission and also generally to distribution system 
operators. On the other hand, with respect to TSOs more and more Member States have gone 
further  than  the  directives  and  moved  to  ownership  unbundling.  At  the  moment,  in  around 
half  of  the  Member  States  ownership  of  the  electricity  and/or  gas  transmission  network  is 
unbundled, as illustrated in the table below.17  

15 
16 
17 

TA, sections 4 and 5. 
TA, section 7. 
The requirements of the Directive are that TSOs should be legally and functionally unbundled. Those 
Member  States  where  transmission  system  operators  are  ownership  unbundled  have  decided  to  go 
beyond the requirement of the Directive in order to ensure non-discriminatory third party access. Those 
Member States with blocked out sections for gas have derogation from the unbundling provisions. 

EN 

11 

   EN 

 
                                                 
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Ireland
Italy
Luxembourg
Netherlands
Portugal
Spain
Sweden
UK
Norway
Estonia
Latvia
Lithuania
Poland
Czech Rep.
Slovakia
Hungary
Slovenia
Cyprus
Malta

Electricity transmissison                      Gas transmission                                    

legal
legal
ownership
ownership
legal
legal
legal
legal
ownership
legal
ownership
legal
ownership
ownership
ownership
ownership
legal
legal
ownership
legal
ownership
legal
ownership
ownership

legal
legal
ownership

legal
partly legal

unbundling not implemented
legal
unbundling not implemented
ownership

legal
ownership
ownership

unbundling not implemented
unbundling not implemented
unbundling not implemented
unbundling not implemented
unbundling not implemented
unbundling not implemented
legal
unbundling not implemented

Regarding distribution, when implementing the unbundling provisions of the directives most 
Member  States  made  full  use  of  all  the  possible  derogations,  by  exempting  smaller 
distributors  from  both  legal  and  functional  unbundling  and  postponing  legal  unbundling  for 
larger  distributors  until  July  2007.  Furthermore,  generally  Member  States’  national 
implementing  legislation  does  not  go  beyond  the  minimum  requirements  of  the  directives. 
This  rather  unambitious  national  implementation  of  the  unbundling  provisions  contained  in 
the directives has not yet had the desired effect “on the ground”18.  

As  regards  network  access,  market  participants  continue  to  complain  about  the  high  costs 
involved19.  In  the  case  of  gas,  there  has  been  no  clear  framework  for  network  access 
conditions,  especially  for  transactions  between  TSO  areas.  The  application  of  the  new 
regulation  on  access  to  gas  networks  from  July  2006  onwards  will  bring  improvements  by 
providing such a framework. 

7. Effective regulation by regulatory authorities 

After the designation of a regulatory authority in Germany in July 2005, all  Member States 
now have regulators in place. Experience with the work of regulatory authorities is generally 
good; over time regulators have gained experience and strength.  

18 
19 

TA, section 7. 
TA, section 7. 

EN 

12 

   EN 

 
 
                                                 
Under the new Electricity and Gas Directives regulators now hold a minimum set of powers 
in every Member State. However, the possibilities for sector-specific regulatory authorities to 
take decisions and enforce them differ between Member States20. Furthermore, some Member 
States have set up several regulators, at national and regional levels, and in some cases powers 
are split between the sector-specific regulator, the competition authority and the ministry. The 
Commission  will  continue  to  pay  particularly  close  attention  to  the  levels  of  powers  and 
independence of all regulators in the context of developing competitive markets.  

Decisions by national regulators have an impact on the functioning of the European market as 
a whole. Therefore, regulators need to be European-minded and cooperation and coordination 
between regulators must be encouraged. The Council of European Energy Regulators (CEER) 
has  already  made  significant  progress  in  this  area  and  continues  to  do  so.  Furthermore,  in 
December  2003  the  Commission  set  up  the  European  Regulators  Group  for  Electricity  and 
Gas  (ERGEG).  In  the  course  of  the  first  two  years  of  its  existence  the  Group  has  made 
significant contributions, for instance on electricity cross-border issues and gas storage.  

In  addition,  the  European  regulatory  fora  for  electricity  and  gas  (known  as  the  “Florence 
Forum”  and  the  “Madrid  Forum”),  which  provide  a  discussion  platform  for  all  interested 
parties,  have  done  excellent  work  on  developing  innovative  solutions  on  key  issues,  for 
instance recently a voluntary agreement on conditions for access to gas storage. 

In this way the CEER, the European Regulators Group and the Florence and Madrid Forums 
have  made  significant  contributions  to  the  development  of  the  internal  market,  in  line  with 
Commission policy to promote co-regulation and better regulation.  

Regulators need to be given sufficient and clear responsibilities in national legislation, as well 
as  a  proper  level  of  independence,  in  order  to  allow  them  to  fulfil  their  tasks.  Coordination 
and cooperation between national regulators need to be further enhanced.  

8. Service provided to users/consumers and public service considerations 

The objective of the Electricity and Gas Directives - to maintain and improve the position of 
customers - is being met. Surveys of consumer’s perception have concluded that the level of 
satisfaction with the quality of the electricity and gas services provided  is generally good21. 
Fears  that  the  introduction  of  competition  would  lead  to  a  decline  in  service  standards  or 
problems in the provision of universal service have proved unfounded.  

The  Commission  will  also  address  the  subject  of  vulnerable  customers.  In  particular, 
vulnerable  customer  should  benefit  from  special  schemes,  if  necessary  to  ensure  customer 
protection.  

Furthermore,  the  Commission  will  remain  vigilant,  in  particular  regarding  the  social  and 
employment consequences of the restructuring of energy companies, the effect of competitive 
energy prices on employment in energy intensive industries and the protection of consumers 
from unfair selling practices.Customer satisfaction should be monitored on a regular basis to 
detect market deficiencies and Member States and regulators need to continue address issues 
of relevance for consumers.  

20 
21 

TA, section 8. 
EUROBAROMETER, Prices and quality of services of general interest, September 2005. 

EN 

13 

   EN 

 
                                                 
The  Commission  intends  to  propose  a  “Charter  of  Electricity  and  Gas  Customers’  Rights”, 
which  should  be  in  place  before  the  market  becomes  fully  open  throughout  the  EU  on 
1 July 2007.  

C. SECURITY OF SUPPLY 

Even  if  electricity  companies  have  reduced  available  spare  capacity  in  response  to  the 
introduction of competition in the sector, electricity adequacy in the European Union has been 
developing satisfactorily since the market was opened up. Lessons have been learnt from the 
difficulties caused by the heat wave in summer 2003. And even though summer 2005 again 
saw record demand in some southern European countries, this caused no significant electricity 
supply problems22. Parliament and the Council will adopt shortly a Directive on Security of 
Supply  and  Infrastructure  Development  in  Electricity.  Under  this  directive,  which  has  to  be 
implemented  by  the  end  of  2007,  Member  States  will  provide  for  a  reliable  regulatory 
framework conducive to new investment in both electricity generation and infrastructure.  

As regards primary energy sources, the European Union relies heavily on imports. The 2000 
Commission Green Paper on Security of Supply23 highlighted the structural weakness of EU 
energy  supply  and  warned  against  a  further  increase  in  import  dependence.  This  is  of 
particular  concern  with  respect  to  gas.  In  the  case  of  electricity,  the  EU  will  be  able  to 
continue to draw partly on indigenous, including renewable, sources and on fuels for which a 
diversified world market exists (coal and uranium). For gas, globalisation of the market and, 
consequently,  diversification  of  imports  will  be  more  difficult  to  achieve.  At  the  moment 
nearly  all  gas  imports  into  the  EU  come  from  only  three  countries  -  Russia,  Norway  and 
Algeria. With indigenous gas reserves declining and gas consumption worldwide expected to 
increase significantly, the current heavy dependence on a small number of supplying countries 
needs  to  be  overcome,  in  particular  by  maximising  the  use  of  all  of  Europe’s  indigenous 
energy  resources,  for  example,  through  enhanced  oil  recovery  in  the  North  Sea,  notably 
through carbon sequestration.  

Whilst Europe is in many respects in a favourable position, with around 80% of global natural 
gas  reserves  within  economic  transportation  reach  of  the  EU,  access  to  new  gas  sources 
usually requires the construction of new transport infrastructure, pipelines or liquefied natural 
gas (LNG) facilities. In this respect the EU will need to give increasing focus on the strategic 
dimension  of  its  energy  relations  with  third  countries,  particularly  suppliers,  and  how  their 
deepeing can contribute to the functioning of the EU’s energy markets. The recent decisions 
taken  by  investors  to  launch  a  number  of  new  LNG  terminal  projects  in  the  EU  constitute 
progress in this respect. Other pipeline and LNG projects need to follow and the dialogue with 
gas-producing  countries  must  be  intensified.  LNG  imports  from  new  producing  regions  are 
already becoming a competitive alternative in some cases. 

Given  the  forecast  heavy  demand  for  gas  and  the  resulting  increased  competition  for  gas 
resources worldwide, in particular on the evolving world market for LNG, the EU gas market 
must  remain  attractive.  It  must  function  properly,  have  a  reliable  and  stable  regulatory 
framework and allow gas to flow freely throughout the EU, enabling suppliers and investors 
to benefit from business opportunities offered by an open market. 

22 
23 

TA, section 10. 
Green Paper “Towards a Strategy of Security of Supply”, COM (2000) 769 

EN 

14 

   EN 

 
                                                 
The Directive on Security of Gas Supply24establishes a gas coordination group representing 
all  Member  States  and  provides  for  binding  security  of  supply  standards,  with  a  view  to 
safeguarding security of supply on a competitive market. 

Nuclear power accounts for more than one third of electricity production in the EU. The total 
amount of nuclear power generated has never been higher than in 2004. A number of Member 
States  (e.g.  France  and  Finland)  have  decided  to  invest  further  in  nuclear  energy  which,  in 
addition, does not emit CO2 and plays an important role in security of supply in the EU. The 
Commission  has  proposed  a  framework  for  EU-25  on  the  issue  of  nuclear  safety  and 
management  of  nuclear  waste.  It  is  important  that  Member  States  adopt  this  framework, 
whether or not they intend to use nuclear energy.  

D. CONCLUSIONS 

With the adoption of  the second  Electricity  and Gas Directives  the basic framework for the 
development of a real internal market is in place. It is now for Member States to implement 
the directives effectively and make the market work in practice. This needs to be done in the 
spirit of the objective of the directives, i.e. to create a functioning internal energy market in 
the interest of EU citizens.  

This report sets out the reasons why this objective is still far from being reached.  

Some  Member  States  have  taken  additional  measures  in  the  light  of  national  or  regional 
circumstances  to  improve  the  functioning  of  the  market,  such  as  ownership  unbundling  of 
transport  networks25,  gas  release  programmes26,  divestment  of  dominant  companies27  or 
establishment  of  a  regional  wholesale  market28.  However,  generally  Member  States  are 
tending  to  adopt  a  minimalist  approach  to  implementing  the  directives29.  Such  reticence  is 
damaging.  Member  States  need  to  take  the  initiative  themselves  to  identify  and  resolve 
problems on electricity and gas markets within the context of the directives. 

Taking into account that in many Member States the legislation transposing the directives was 
only  recently  adopted  and  that  results  from  the  sector  inquiry  are  not  yet  available,  the 
Commission does not yet in this report draw definitive conclusions on the need for additional 
measures at European level. Member States and national regulators now have a crucial role to 
play in making the market work in practice.  

Against this background, the Commission will: 

•  closely  follow  implementation  of  the  new  rules  in  Member  States,  insist  on  compliance 
and, in the months ahead, open the relevant infringement procedures in any cases of non-
compliance; 

•  carry out detailed country-by-country reviews of the effectiveness in practice of legislative 
and regulatory measures, including additional national measures, in the months ahead. The 

24 
25 
26 
27 
28 
29 

Directive 2004/67/EC concerning measures to safeguard security of natural gas supply 
See table on page 11 
E.g. in Germany, Italy, France, Austria and Spain. 
E.g. in Italy. 
E.g. Nordpool. 
TA, Executive Summary. 

EN 

15 

   EN 

 
                                                 
Commission  will  ensure  the  means  necessary  to  perform  this  task  comprehensively  and 
efficiently.  This  review  will  permit  the  Commission  to  draw  conclusions  about  which,  if 
any, additional measures are needed both at Member State and Community levels. A final 
report on the outcome of this exercise will be presented by the end of 2006 and, possibly, if 
necessary, proposals will be submitted in 2007; 

•  use the instruments foreseen in the Electricity and Gas Regulations to adopt implementing 
measures  in  key  areas,  with  a  view  to  encouraging  further  market  integration.  The 
Commission will, for instance, shortly adopt new guidelines on congestion management in 
electricity  which  will  facilitate  cross-border  trade  through  more  efficient  congestion 
management methods. In areas where the existing instruments do not allow the adoption of 
binding harmonised rules at the EU level, the Commission will request national regulators 
to  develop,  in  the  European  Regulators  Group  for  Electricity  and  Gas,  harmonised 
approaches on key regulatory issues, such as balancing; 

•  continue to exert pressure on Member States and regulators so that investments in transport 
infrastructure  are  enhanced  in  order  to  solve  cross-border  congestion  in  electricity 
networks; 

•  complete its sector competition inquiry and draw operational conclusions from it.  

EN 

16 

   EN