Progress of Electricity Market Deregulation in Europe

In February 2006, the European Commission published a report in which it analysed and criticised progress toward energy liberalisation in the EU and in which it named specific aspects of electricity and gas compliance with EU Directives. This also applied to the ten Accession States. The problems are not just the result of incomplete implementation of the existing 2003 Directives, but also the result of built-in structural and regulatory problems not yet addressed. Even in member states where the current legislation is being fully implemented, problems remain to be solved.

In May 2006 three announcements gave the commission report extra credence and threw the European energy sector into confusion. The reliability of Russian gas supplies, which account for a large proportion of European imports, has been called into question for some time and in 2006 Russia cut off Ukrainian supplies in retaliation for Ukraine’s pro-western stance in elections. Fears were reinforced by belligerent threats from Gazprom, warning European governments not to oppose its ambitions to enter the downstream gas sector in Europe. It is increasingly apparent that President Putin is prepared to use Russian energy as a weapon for political purposes.

In 2006 the European energy market was disrupted as the Emissions Trading Scheme was thrown into turmoil by the disclosure that most member states had issued too many carbon credits at the start of the year, resulting in serious imbalances between countries. The third dramatic announcement which came on May 18, 2006 was that EU anti-trust investigators had used powers to search 20 offices of E.ON, RWE, Gaz de France, ENI, Distrigas and Fluxys of Belgium and OMV of Austria. This third event has been influential in announcements by the Commission in September 2007 aimed at curbing the abuses perpetrated by some major operators.

The European energy sector is at a crossroads, with ever increasing demand and some uncertainties about supply. A number of European countries will require large scale replacement of generating capacity in the next decade, as either generating assets reach the end of their life or because policy decisions have been taken to phase out coal or nuclear plants. Germany is phasing out nuclear and the UK had planned to phase out both, although nuclear now looks set to be rebuilt and coal is enjoying a renaissance. In neither country is the future clear. The UK government, in particular, is avoiding the issue and says the market will decide and some observers predict an energy crisis in ten years in the UK because of this lack of preparation. In this climate of opinion, market liberalisation does not get a good press and after a “bedding in” period some governments and institutions are now questioning the success of market liberalisation in the energy sector. It was widely acknowledged when the concept was launched that it was impossible to foresee all the outcomes, and many countries have designed liberalisation schemes including the successful parts of practice in other countries, or of different components of other schemes. With some experience under our collective belt, there is now empirical data to assess the results and there are different points of view on its success.