Report from the Commission to the Council and the European Parliament - Progress in creating the internal gas and electricity market [SEC(2008) 460]
Date: 2008-04-15
Institutions: European Commission
Subjects: competition law, electrical energy, gas, liberalisation of the market, report, single market

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 15.4.2008 
COM(2008) 192 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Progress in creating the internal gas and electricity market 

[SEC(2008) 460] 

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REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Progress in creating the internal gas and electricity market 

A. CONTEXT  

The  relevance  of  energy  to  Europe's  growth  and  competitiveness  is  steadily  increasing. 
Reliable energy services at acceptable prices for both industrial and household users continue 
to  be  a  key  factor  in  social  and  economic  development.  A  well-functioning  internal  energy 
market is essential if all three of Europe’s energy challenges of competitiveness, sustainability 
and security of supply are to be met. 

The last step on the road to competitive energy markets was achieved on 1 July 2007 with the 
full opening of national retail markets. From a legal perspective, all European consumers are 
now able to choose their supplier and benefit from competition.  

However,  this  report  shows  that,  in  practice,  market  integration  is  still  far  from  a  success. 
With very few exceptions, electricity and gas markets in the EU remain national in economic 
scope with limited competition. 

This  report  highlights  that  the  problems  identified  in  the  Commission’s  2006/07  Progress 
Report  and  Sectoral  Inquiry  Report  on  the  European  electricity  and  gas  markets  to  a  large 
extent  still  remain.  Not  all  the  shortcomings  can  be  solved  within  existing  legislation: 
improved legislative measures are needed. 

B. DEVELOPMENTS IN KEY AREAS, REMAINING DEFICIENCIES  

1. Implementation of legislation 

All  Member  States1  have  met  the  deadline  of  1  July  2007  for  full  opening  of  their  gas  and 
electricity  markets.2  Restrictions  to  free  and  fair  competition  have,  however,  developed 
through the coexistence of open market segments and end-user supply price regulation. 

More  than  three  years  after  the  deadline  of  July  2004  for  implementation,  some  Member 
States have still not properly implemented the legal requirements of  the  Electricity and Gas 
Directives.3 This concerns in particular core areas of market liberalisation, such as regulatory 
oversight,  unbundling  and  regulated  supply  tariffs  as  well  as  the  communication  of  Public 
Service Obligations.  

Regulators have a key statutory role in monitoring compliance of network operators. ERGEG4 
plays an important role in coordinating national monitoring and thus harmonising compliance 

1 
2 
3 
4 

Insofar as not benefiting from derogation. 
Technical Annex (TA), section 1. 
TA, section1. 
European Regulators Group for Electricity and Gas set up by Commission Decision 2003/796/EC of 11 
November 2003. 

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review.  ERGEG's  monitoring5  in  2007  of  implementation  of  the  Electricity6  and  Gas7 
Regulation  shows  inadequate  compliance  in  areas  of  core  relevance  for  the  development  of 
liquid markets such as transparency and primary capacity allocation. Some 15% of European 
gas TSOs do not comply with the gas transparency requirements. Historical flows, utilisation 
rates  and  the  legally  required  forecast  of  available  capacities  are  not  published  by  about  a 
third of TSOs. At the same time, a third of TSOs making use of the “3 minus shipper rule”8 do 
not publish the aggregated data required and nearly 85% of TSOs apply the exemption rule 
without the requisite regulatory approval. 

Reporting on market indicators — a Member State responsibility — is generally insufficient. 
For example, only 30% of national regulators can indicate the switching rates for the groups 
of industry, small and medium businesses and households.  

2. Market integration  

Market integration has still not developed to a sufficient extent. This is demonstrated by price 
differences,  regional  monopolies  and  persistent  cross-border  congestion  between  Member 
States, for example. 

In  a  well-integrated  market,  competition  will  keep  prices  similar  among  adjacent  Member 
States or regions. Energy prices for industrial electricity customers in the EU are starting to 
converge in the Central and North Western EU areas but still differ by almost 100% in some 
cases.9 More efficient use of infrastructure has led to some improvement in electricity price 
the 
correlation, 
Netherlands/Belgium/Austria/France/Germany and the Nordic market.  

particularly 

between 

region 

the 

of 

Cross-border  trade  is  a  key  source  of  competitive  pressure  on  prices.  Sufficient  network 
capacities being a prerequisite for such trade, the persistent bottlenecks in gas and electricity 
infrastructure  need  to  be  removed.  In  five  Member  States,  the  electricity  interconnection 
capacity in relation to installed capacity is below 10%. In a further ten Member States, it is 
between 10 and 30%. Coordinated planning of investment and testing of market demand are 
fundamental to capacity provision from a European perspective. Voluntary steps taken within 
the  Regional  Initiative  promoted  by  the  Commission  with  the  operational  support  of 
ERGEG10 (e.g. coordinated demand surveys for gas flows on the Iberian Peninsula, regional 
transport and storage investment analysis in the South East Gas Region) are certainly positive. 
But  voluntary  arrangements  cannot  sufficiently  guarantee  the  necessary  level  of  security  to 
cover market demand.  

Lack of independence of network operators continues to be a barrier to adequate investment. 
Experience  shows  that  in  cases  where  national  incumbents  are  shareholders  in  transport 
networks  on  their  markets,  their  interest  in  limiting  competition  in  their  national  market  is 
often  a  barrier  to  sufficient  capacity  expansion  upstream.  The  correlation  between  proper 
unbundling  and  investment  is  demonstrated  by  analyses.  The  share  of  congestion  revenue 

5 
6 
7 
8 

9 

10 

Available at www.ergeg.org. 
Regulation (EC) No 1228/2003. 
Regulation (EC) No 1775/2005. 
Rule  allowing  TSOs  a  restricted  level  of  publication  where  fewer  than  3  shippers  are  active  at  the 
relevant network point; see Article 6(3) Regulation (EC) No 1775/2005. 
TA, section 5. 

www.ergeg.org. 

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reinvested in interconnection capacity has been about twice as high for ownership unbundled 
TSOs as for vertically integrated TSOs and investment levels in the three to four years since 
ownership unbundling have at least doubled.  

It  has  to  be  recognised,  however,  that  other  factors  influence  investment  levels,  particularly 
tariff  regulation.  Regulators  should  provide  an  investment  friendly  framework,  involving  a 
stable  regulatory  system  and  fair  incentives  for  investment  and  an  integrated  market, 
including, but not only, aiming for tariff reduction. Incentive regulation has not yet developed 
sufficiently. 

Legal  differences  between  Member  States  remain  a  barrier  to  market  integration.  For 
example, a coordinated gas capacity auction pilot scheme in the North West Gas Region11 was 
blocked by differences in national legislation. More support from Member States is needed to 
overcome these obstacles. 

The  full  benefits  of  sufficient  infrastructure  will  not  be  felt  unless  the  capacity  is  made 
available  to  market  participants  on  a  non-discriminatory  basis  that  favours  trading. 
Differentiated treatment of cross-border services and domestic transmission has to be seen as 
critical  to  non-discrimination  among  users  and  compatibility  with  existing  (and  proposed) 
legislation.  At  the  same  time,  capacity  systems  need  to  move  towards  the  utmost  possible 
flexibility, which is best offered in a decoupled entry-exit system. 

Regional developments 

Bilateral  and  multilateral  projects  for  improving  cross-border  integration  have  been  set  up, 
such  as  the  Regional  Initiatives  driven  by  ERGEG,  government  cooperation  within  the 
Pentalateral  Forums  in  North  West  Europe  and  MIBEL/MIGAS  for  the  Iberian  countries. 
Unlike  other  initiatives,  the  Energy  Community  boosts  regional  cooperation  on  a  legally 
binding basis.  

These projects play a useful role in the development of best practice solutions. For example, 
the  Regional  Initiatives  driven  by  ERGEG  have  worked  on  coordinated  capacity  allocation 
across  borders  in  North  West  European  gas  markets,  coordinated  demand  analysis  and 
investment  planning  in  the  Iberian  and  South  East  European12  gas  markets,  regulatory 
coordination  towards  harmonised  regulatory  decision-making  across  borders  and  improved 
transparency.  In  2006,  the  trilateral  electricity  market  coupling  project  —  a  capacity 
allocation mechanism which guarantees energy flows in the right direction in relation to spot 
prices — became operational between France, Belgium and the Netherlands and dramatically 
increased  the  efficiency  of  dispatch  of  power  production  in  the  region.  The  Pentalateral 
Forum  for  electricity  succeeded  in  agreeing  on  a  common  flow-based  cross-border  capacity 
allocation mechanism for the whole region. Work on gas started recently and is expected to 
focus on legal bottlenecks and security of supply. In November 2007, the Republic of Ireland 
and  Northern  Ireland  started  creating  a  common  wholesale  electricity  market.  Progress  is 
planned on a gas market. 

The regional approach allows different levels of market development to be taken into account, 
with the common goal of realising the single market. 

11 
12 

UK, NL, B, F, IRL, DE, DK, SW, N-IRL, Norway (observer). 
AT, CZ, GR, H, IT, PL, SK, SI. 

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3. Concentration and consolidation  

Market  structures  on  a  national  scale  are  still  very  concentrated.  In  addition,  incumbents 
control essential infrastructure facilities, further increasing their market power.  

Between 2005 and mid-2007, the number of independent suppliers on the electricity market 
increased  in  40%  of  the  Member  States  where  data  was  available.  In  gas,  the  number 
increased only in a quarter of the Member States. However, in France, Italy, Poland and the 
Netherlands, the increase was 50% or more (10 to 15 suppliers in France; 0 to 75 in Poland; 8 
to  20  in  the  Netherlands;  123  to  182  (2006)  in  Italy).  In  7  out  of  21  Member  States,  no 
independent supplier is active on the national gas market. In electricity this is reported only 
for Cyprus, but relevant data for electricity is not available for 15 Member States. 

Retail markets are not yet well developed, mainly because of limited access to gas supplies 
for  new  entrants.  Even  in  the  most  developed  market  —  the  UK  —  competitive  forces  are 
dominated by gas producers. Entry of new producers to the supply portfolio remains crucial 
for both competition and security of supply. LNG plays an important role.  

Alongside  highly  concentrated  national  markets,  the  tendency  towards  consolidation  and 
concentration continues. As long as the players emerging from mergers and acquisitions act 
on  a  real  competitive  basis,  this  does  not  necessarily  have  negative  effects  on  competition. 
Governments,  national  regulators  and  competition  authorities  should  actively  create  a 
framework that forces competitive behaviour where it is not expected to develop from market 
structures,  e.g.  via  capacity  release,  gas  release  programmes  and  strict  transparency 
requirements.  

4. Price trends  

Customers  in  the  EU-15  Member  States  benefited  from  cumulative  price  savings  from 
electricity liberalisation of the order of €60 billion in the period 1998 to 2004. These savings 
were partly countered by price increases in later periods. EU-27 gas prices have risen along 
with  oil  price  developments.  Prices  rose  for  industrial  users  by  an  average  of  35%  between 
2005  and  2006  and  a  further  12%  in  2007.  The  total  increase  from  2005  to  2007  was 
comparable for household customers, although major price increases came into effect mainly 
in 2007.13 

There are several reasons for these developments. As competition is still limited, competitive 
pressures on prices are correspondingly weak. Moreover, prices mirror general trends, notably 
in oil prices, which increased by more than 50% between 2005 and 2007. Given the linkage of 
gas prices to oil prices and the increasing significance of gas in power production, oil price 
developments affect the prices of both gas and electricity. 

At the same time, there are indications that the independence of network operators is having a 
favourable  influence  on  prices,  through  its  promotion  of  network  efficiency,  facilitation  of 
network access for third parties and contribution to market confidence. Since market opening 
in  1998,  Member  States  with  ownership  unbundled  TSOs  have  experienced  more  positive 
price developments than Member States where the TSOs were and are still related to supply 
companies. 

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Eurostat, data as of 1 January each year. 

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5. Independence of network operators  

Functional  unbundling  is  still  not  effectively  implemented  in  all  Member  States.14  This 
applies both to electricity and gas and to transmission and distribution system operators. Some 
Member States have gone beyond present unbundling requirements. In electricity, about half 
of  the  Member  States  have  ownership  unbundled  network  operators;  in  gas,  seven  Member 
States do.15 

At  distribution  level,  Member  States  are  making  extensive  use  of  derogations:  half  of  the 
Member  States  allow  DSOs  with  less  than  100  000  customers  to  be  exempted  from  legal 
unbundling requirements, both for electricity and for gas.16 

Insufficient  independence  of  network  operators  is  reflected  in  underinvestment  in  network 
capacities  and  in  particular  in  inadequate  cross-border  capacities.  Legal  unbundling  has  not 
been sufficient to cope with this effect. 

6. Effective regulation by regulators 

Despite  the  Electricity  and  Gas  Directives  requiring  regulators  to  hold  a  minimum  set  of 
powers, the unequal levels of regulatory powers across borders have not improved. In some 
Member  States,  powers  are  split  between  several  regulators  at  national  and  regional  levels, 
including the competition authority and/or ministry. This is all likely to add to incoherence. 
Regulatory oversight of wholesale and retail markets hardly exists in any Member State. 

Non-compliance with European legislation is often met by insufficient or ineffective penalties 
in national legislation. At the same time, ERGEG monitoring reports on the implementation 
of existing legislation make it clear that regulators are not sufficiently committed to making 
use  of  existing  powers  to  actively  encourage  implementation  of  legal  requirements.  An 
ERGEG  report  to  the  14th  Madrid  Forum,  for  example,  demonstrated  only  one  case  of  a 
regulatory  authority  making  use  of  its  power  to  impose  sanctions  on  a  TSO  not  complying 
with legal requirements.  

The  scope  of  market  integration  requires  harmonisation  of  regulatory  decisions  across 
borders.  ERGEG  and  the  European  Regulatory  Forums  for  electricity  and  gas  (“Florence 
Forum”/“Madrid  Forum”)  certainly  contribute  to  this  process  by  providing  discussion 
platforms  to  tackle  problems  on  a  practical  level  and  developing  commonly  agreed  best 
practice  solutions.  However,  the  “regulatory  gap”  remains  a  barrier  to  coordinated  decision 
making  across  borders,  which  cannot  be  solved  by  the  existing  model  of  voluntary 
cooperation by ERGEG.  

14 

15 
16 

Within ERGEG public consultation on functional unbundling guidelines, TSOs, for example, raised the 
need  for  network  managers  to  be  involved  in  the  management  of  integrated  companies,  and  even  for 
those managers to be given incentives linked to the success of the integrated company as a whole. See 
comments published at www.ergeg.org – Public Consultations – Energy – GGP Functional Unbundling. 
TA, section 7. 
TA, section 7. 

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7. Customer dimension 

Consumer response — switching  

Electricity  switching  is  at  a  high  level  in  Iberian  countries,  the  Czech  Republic  and  Nordic 
countries and above average for especially large industrial customers in Germany, Austria and 
Luxembourg. In most other countries, the annual switching rate for households is about 1% or 
below. The picture is similar for gas, except that Italy is one of the +1% performers. While the 
rates  of  switching  for  larger  customers  continue  to  rise,  most  small  business  customers  and 
households still have limited scope to exercise their right to choose.  

Switching rates are not the only indicator of functioning competition in retail markets. Often 
competing offers are unavailable or are too similar to amount to a real choice. Member States 
and national regulators must ensure that transparent and simple switching procedures exist, to 
give  customers  the  confidence  they  need.  Moreover,  retail  competition  is  distorted  by 
regulated supply tariffs. 

Service quality 

Market liberalisation typically aims to improve the position of consumers. The possibility of 
supplier  choice  and  consequent  competitive  pressure  results  in  a  better  match  of  service 
supply and user demand. The Gas and Electricity Directives put clear emphasis on consumer 
rights.  Market  surveys  have  concluded  that  the  level  of  satisfaction  with  the  quality  of 
electricity  and  gas  services  provided  is  generally  good.17  Concerns  that  the  introduction  of 
competition  would  lead  to  a  decline  in  service  standards  or  problems  in  the  provision  of 
universal service have proved unfounded. 

Benefiting from liberalisation requires access to energy supply. Analyses18 show that a very 
large  majority  of  European  end-users  have  easy  access  to  electricity  and  gas  —  the  EU-27 
average  rising  to  93%  for  the  non-substitutable  electricity  sector  and  72%  for  gas,  where 
substitutes are often available. On average, two thirds (66%) of EU citizens deem the cost of 
electricity  services  to  be  affordable;  for  gas  the  figure  is  similar.  Neither  sector  has  shown 
significant variations by socio-demographic category or between results for EU-15 and EU-
27.19 

Regulated prices 

Coexistence of open energy markets and regulated energy prices is quite common among EU 
Member States: it exists in one third of the gas markets for at least one market segment and 
more  than  half  of  the  electricity  markets.  For  most  Members  States  with  price  regulation, 
regulation  is  not  limited  to  small  customers  —  all  customer  segments  can  be  supplied  at 
regulated prices.20 

The  negative  effects  of  regulated  energy  prices  remain  a  major  concern.  They  lead 
immediately to a distortion of competition and reduce liquidity in wholesale markets. In the 

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EUROBAROMETER, Prices and quality of services of general interest, September 2005; and 2007 
Consumer Satisfaction Survey: 
http://ec.europa.eu/consumers/cons_int/serv_gen/cons_satisf/consumer_service_finrep_en.pdf. 
EUROBAROMETER, Services of General Interest – chapter 1.4-1.5, July 2007. 
EUROBAROMETER, Services of General Interest – chapter 3.1, July 2007. 
ERGEG, Status review on end-user price regulation, 14.6.2007 (Ref: E07-CPR-08-04), ww.ergeg.org. 

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long  run,  regulated  prices  give  wrong  price  signals  to  investors  and  thus  have  a  negative 
impact on the development of new infrastructure. By setting a price level that does not allow 
new entrants to supply at cost-covering prices, price regulation creates a market entry barrier 
for alternative suppliers and thus directly threatens security of supply. For the French market, 
for  example,  the  power  exchange  has  indicated  its  inability  to  set  a  market  reference  price 
given  regulated  energy  prices.  Measures  for  consumer  protection  should  not  be  mixed  with 
competitive instruments, they should be addressed by separate means. 

C. SECURITY OF SUPPLY 

European  summer  and  winter  electricity  outlook  reports  drawn  up  in  2007  by  the  Group  of 
European  Electricity  Transmission  System  Operators 
(ETSO)  and  European  Gas 
Transmission  System  Operators  (Gas  Infrastructure  Europe,  GIE)  suggest  that  no  particular 
risk of power shortage is expected in the medium term. These reports summarise national and 
regional power balance forecasts, balancing generation and peak demand. The reports assess 
the global adequacy of interconnected systems. However, under severe conditions such as low 
or  very  high  temperatures  or  gas-supply  crises,  the  power  systems  become  more  stressed, 
especially if that same period is also critical for neighbouring countries. 

Provision  of  sufficient  transport  capacities  continues  to  be  a  pivotal  point  not  only  for  the 
development  of  competition  but  also  for  security  of  supply.  In  terms  of  gas  supply  in 
particular, the European Union relies increasingly on imports.21 With indigenous gas reserves 
declining  and  gas  consumption  worldwide  expected  to  increase  significantly,  diversification 
of routes or sources plays a key role in reducing dependence on today’s three major pipeline 
sources,  Russia,  Norway  and  Algeria.  With  growing  gas  prices,  the  role  of  LNG  in 
diversification is steadily increasing.  

Electricity and gas networks are at the heart of a well-functioning European market. Obstacles 
still  remain  to  the  completion  of  the  priority  projects  that  have  already  been  identified. 
Coordinators  have  been  designated  for  the  projects  declared  to  be  of  European  interest  and 
encountering  delays  or  implementation  difficulties.  These  projects  are:  (1)  Power  link 
between Germany, Poland and Lithuania; (2) Connections to offshore wind power in Northern 
Europe; (3) Interconnection between France and Spain; and (4) Nabucco gas pipeline. 

For  electricity,  dependence  on  imports  is  lower.  Generation  can  be  based  on  indigenous 
sources, including renewables, and on fuels for which a diversified world market exists (e.g. 
coal). However, the  dependence of power generation on gas, much of which is imported, is 
increasing.  Alongside  this,  investors  in  infrastructure  are  facing  new  challenges.  The 
electricity  system  is  becoming  reliant  on  gas  infrastructure.  Investment  in  renewable 
electricity  production  (such  as  wind)  requires  high  capacity  transport  infrastructure  to  adapt 
the system to unbalanced capacity use. 

After the cold winter of 2005/2006, some countries undertook to build up gas storage and to 
maximise  the  use  of  import  capacity.  Italy,  for  instance,  introduced  ship  or  pay  contracts 
under which shippers could opt out of transportation capacities in order to increase physical 
use  of  capacities.  At  the  end  of  2006  through  to  2007,  a  small  gas  surplus  emerged  which 
allowed  an  increase  in  gas  trade,  bringing  some  liquidity  to  hubs.  It  remains  to  be  seen 
whether this will become the basis for a positive and dynamic future market developments.  

21 

TA, section 8. 

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The  EU  will  not  only  need  to  continue  to  focus  on  the  strategic  dimension  of  its  energy 
relations  with  third  countries,  particularly  suppliers,  it  will  also  have  to  keep  in  mind  the 
importance  of  providing  a  market  structure  that  enables  suppliers  and  investors  to  benefit 
from  an  open  market  and  a  barrier-free  flow  of  energy.  This  calls  for  action  by  the 
Commission, governments and regulators as much as by network operators. A critical factor is 
delays  in  authorisation  procedures  for  investments.  These  now  constitute  a  major  risk  to 
security of supply and the development of the internal market. 

D. CONCLUSIONS 

Despite  some  encouraging  improvements,  notably  on  cross-border  coordination  at  regional 
level,  the  overall  analysis  of  progress  on  the  internal  market  in  electricity  and  natural  gas 
shows that major barriers to the efficient functioning of the market still exist. 

Insufficient  implementation  of  European  legislation  remains  a  crucial  factor.  Improvement 
has to be driven by the Commission, Member States, regulators and industry together: 

•  In  parallel,  national  regulators  must  be  empowered  with  a  view  to  ensuring  proper 

implementation of legislation by stakeholders.  

•  Regulators themselves have to act on their own responsibility to encourage implementation 
of legal requirements. Harmonisation of regulatory best practice models across borders is 
certainly needed if practical barriers to cross-border trade are to be reduced. The Regional 
Initiatives  driven  by  ERGEG  and  other  similar  projects  at  government  level  are  positive 
contributions to this process.  

•  The industry must observe the legal requirements without compromise. Implementation of 

European legislation does not allow for negotiations. 

•  Regulated energy prices remain a major concern.  

The  major  concerns  in  the  various  areas  all  share  two  characteristics:  significant  impact 
hampering the development of a well-functioning internal market in electricity and gas, which 
cannot  be  solved  within  the  existing  legal  framework.  The  Commission  has  therefore 
addressed  these  shortcomings  in  a  legislative  package,  which  it  presented  on  19  September 
2007. 

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