The EU Internal Energy Market: A work in progress

In order to harmonise and liberalise the EU’s internal energy market, three consecutive legislative packages were adopted between 1996 and 2009 addressing market access, transparency and regulation, consumer protection, supporting interconnection and adquate levels of supply. As a result of these measures, new gas and electricity suppliers were able to enter Member State’s markets, enabling both industrial and domestic consumers to choose their own suppliers. Other EU policies related to the internal energy market address the security of supply of electricity, gas and oil, as well as the development of Trans-European Networks for transporting electricity and gas.

However more work needs to be done. Completion of EU’s internal energy market requires the removal of numerous obstacles to trade; the approximation of tax and pricing policies and measures in respect of norms and standards and environmental regulations. The objectives is to ensure a functioning market with fair market access and a high level of consumer protection as well as adequate levels of interconnection and generation capacity. In February 2011, the European Council set the objective of completing the internal energy market by 2014 and developing interconnections so as to put an end to any isolation of Member States from European Gas and electricity grids by 2015.

The need for coordination at an early stage in the development of Energy policy was the core reason for the Commission to propose, in January 2014, a new climate and energy policy framework up to 2030. A competitive and integrated internal energy market is an important component of that framework as …”it will provide the necessary environment for the achievement of ambitious future energy and climate policy objectives in a cost-efficient manner and thereby help to ensure that energy prices for business and households are not distorted and that necessary investors confidence is retained”[1]

Gas and electricity markets: The liberalisation process

The first common rules for a common market in electricity and gas was the legislative package[2] based on Directives  96/62 and 98/30. This package was replaced in 2003 that enabled new gas and electricity suppliers to enter Member States’ markets and enabled consumers to choose their own gas and electricity suppliers.

The third legislative package was adopted in April 2009, seeking to further liberalise the internal electricity and gas markets, amending the second package . The provisions of this third package are the following:

• regulate transmission network ownership by ensuring a clear separation of supply and production activities from the operation of the network or the grid through three models of organization : full “ownership unbundling”; independent system operator (ISO-responsible for maintenance of the networks, while the assets remain the property of the integrated company ); independent transmission operators (ITO-a system of detailed rules ensuring the autonomy, independence and investments necessary in the transmission activities);
• ensure more effective regulatory oversight from the truly independent national energy regulators, strengthening and harmonising the competences and independence of national regulators as to allow effective and non-discriminatory access to the transmission networks;
• reinforce consumer protection and ensure the protection of vulnerable consumers ;
• regulate third party access to gas storage and liquefied natural gas (LNG) facilities and lay down rules concerning transparency and regular reporting about gas reserves;
• promote regional solidarity by requiring member States to cooperate on the event of severe disruptions of gas supply, by coordinating national emergency measures and developing gas interconnections.

Market Integration in progress

There is a little doubt that a well-functioning cross-border energy market is the only realistic tool to maintain a healthy and efficient energy sector in EU. A recent study commissioned by the Commission[3]  estimates the net economic benefits from completion of the internal market to be in the range of 16-40 billion Euros per year.

So can it be said that an integrated market is a basis for the cost-efficient decarbonisation of our energy system?

Some data produced by the Commission[4]  demonstrates how today 23.5% of the electricity produced in the Union and 14% of final energy consumption over all sectors is from renewable energy sources. This puts the EU on track to reach its target of 20% of our energy consumption from renewables by 2020, even if further efforts will be necessary to achieve this target. It also provides a strong basis to continue and reach a more ambitious renewable target for 2030[5]. The Commission has proposed to set an EU-wide target of at least 27%.

For gas, it is even more evident that a competitive and integrated internal market is Europe’s key insurance for a high level of security supply.

The overall gas security supply situation in Europe has significantly improved over the past five years. The robustness of Europe’s security of gas supply has been tasted a couple of times in recent years. Because of the adoption of the Security of Supply Regulation[6], Member States have increased their efforts and invested in more flexible pipelines, more storage capacity, enhanced emergency preparedness and response plans and increased coordination. Member States are therefore in a much better position than five years ago.

Whilst significant progress has been made, a lot still remains to be done. In order for gas and power to be traded and transported smoothly across borders, physical wires or pipelines (the Hardware) on the one hand, and a clear, commonly applied regulatory framework (the Software) on the other are still needed. However, transmission grids as well as regulatory frameworks have grown nationally, with the understandable focus to optimise the national system. These now need to be forged together in regional and EU-wide systems.

Thanks to the rigorous application of the provisions in Third Energy Package, including the unbundling rules and those mandating the establishment of ten-year-network development plans, an investment climate now exist that makes sure the lines that are most needed are being built . The Third Package has reduced both the incentive and the ability for operators to revert to discriminatory behaviour or hold back on the construction of important infrastructure. Today, 96 of approximately 100 transmission system operators in Europe have been certified as compliant with one of the third energy package’s unbundling models[7]. The Commission will continue to monitor the situation and will also remain vigilant to ensure compliance with EU competition rules.

It is particularly interesting for the EU and Member States to have a clear set of rules “…transparent, simple and robust”[8] for buiding  a definitive Internal Energy  Market.

With wholesale gas and electricity markets becoming larger than single member states and with energy companies spreading their footprint beyond their home-market, market integration should not be held back by regulation and regulatory oversight that remains nationally focused. The patchwork of national regulatory regimes, and the frequency of changes in the regulatory framework in some Member States have created unnecessary administrative and transaction costs thus failing to provide a solid basis for needed investment.

Therefore, the Third Energy Package foresees the development of a harmonised legal framework at European level. Thanks to the cooperative efforts at European level of national administrations, the energy regulators (under the umbrella of the Agency for the Cooperation of Energy regulators, ACER ) and the network operators ( associated in the European Networks of Transmission System Operators for gas and electricity – ENTSOs’ ) it has started to take solid shape.

European rules, referred to as Network Codes, are being developed, adopted and increasingly applied in the day-to-day practical functioning of the gas and electricity wholesale markets. Their impact may not be as immediately tangible as a new interconnector, but they represent true progress that is fundamental to fostering cross-border trade in gas and electricity. However, progress diverges between the electricity and the gas sector as well as between regions and new challenges have become apparent.

New rules on Oil&Gas: the Commission’s 2015 proposal on new safety standards for offshore oil and gas operations

Oil and gas have been extracted from beneath the seabed in Europe since the 1970s. Today, over 90% of oil and over 60% of gas produced in the EU and Norway comes from offshore operations. There are more than 1000 offshore oil or gas installations in operation in European waters. While most production is from the North Sea region, and most of the oil comes from the UK and Norway, interest is developing throughout the EU offshore provinces and 13 Member States (UK, the Netherlands, Denmark, Germany, Ireland, Italy, Spain, Greece, Romania, Bulgaria, Poland, Malta and Cyprus) have awarded offshore oil and gas licences to companies exploring for natural resources.

The offshore industry in different Member States operates to different environmental, health and safety standards. To date EU legislation does not cover all the aspects of the offshore oil and gas industry and national legislation is very different between Member States. Despite action by some Member States to reform their systems after disasters in the North Sea in the 1980s there is still a significant risk of severe accidents. Past events show that at least 14 major offshore disasters – such as blow-outs at pumping wells and total loss of production platforms - have occurred around the world in the last 30 years, 5 of them in the last 10 years. Possible consequences of a major accident are extreme. They include loss of life, major environmental damage, and collateral damage to coastal and marine livelihoods. In financial terms, as we have seen, an event on the scale of the Gulf of Mexico disaster can cause damage of as much as Euro 30 billion.

The new draft regulation sets clear rules that cover the whole lifecycle of all exploration and production activities from design to the final removal of an oil or gas installation. Under the control of the National regulatory authorities, European industry will have to assess and further improve safety standards for offshore operations on a regular basis. This new approach will lead to a European risk assessment that allows for continuous upgrades by taking into account new technology, new know-how and new risks. It introduces requirements for effective prevention and response of a major accident:

• Licensing: the licensing authorities in the Member States will have to make sure that only operators with sufficient technical and financial capacity necessary to control the safety of offshore activities and environmental protection are allowed to explore for, and produce oil and gas in EU waters.
• Independent verifiers: the technical solutions presented by the operator that are critical for safety on the installation need to be verified by an independent third party prior to and periodically after the installation starts operating.
• Obligatory ex ante emergency planning: companies will have to prepare a Major Hazard Report for their installation, containing a risk assessment and an emergency response plan before exploration or production begins. These reports will need to be submitted to national authorities competent to give a go-ahead if satisfied.
• Inspections: independent national Competent Authorities responsible for the safety of installations, competent to verify the provisions for safety, environmental protection and emergency preparedness of rigs and platforms and the operations conducted on them. If an operator does not respect the minimum standards, the competent authority will take enforcement action and/or impose penalties; ultimately, the operator will have to stop his drilling or production operations if he fails to comply.
• Transparency: comparable information will be made available to citizens about the standards of performance of the industry and the activities of the national competent authorities. This will be published on their websites.
• Emergency Response: companies will prepare emergency response plans based on their rig or platform risk assessments and keep resources at hand to be able to put them into operation when necessary. Member States will likewise take full account of these plans when they compile national emergency plans. The plans will be periodically tested by the industry and national authorities.
• Liability: oil and gas companies will be fully liable for environmental damages caused to the protected marine species and natural habitat. For damage to waters, the geographical zone will be extended to cover all EU marine waters including the exclusive economic zone (up to about 370 km from the coast) and the continental shelf where the coastal Member State exercises jurisdiction. For water damage, the present EU legal framework for environmental liability is restricted to territorial waters (about 22 km offshore).
• International aspects: the Commission will work with its international partners to promote the implementation of highest safety standards across the world. EU Offshore Authorities Group: offshore inspectors of Member States will work together to ensure effective sharing of best practices and contribute to developing and improving safety standards.

Alongside and in conjunction with this legislative proposal, the Commission is putting forward a proposal for the EU to accede to a Protocol of the Barcelona Convention that protects the Mediterranean against pollution from offshore exploration and exploitation activities.

The EU has struggled to gain competence in the energy sector and to coordinate the policies of the different Member States. This brief review of the past 40 or so years shows that steadily the need for an EU wide approach has been recognised and steps taken to create it. There is still a long way to go. But Europe is a lot further ahead today than many predicted in 1970.

[1] Conclusion of the the European Council of 4 February 2011.

[2] Directives on electricity 2009/72/EC repealing Directive (EC) 2003/54  and gas 2009/73/EC repeailing Directive (EC) 2003/55.

[3] Study “Benefits of an Integrated European Energy Market” by Booz & Company, Amsterdam, pag. 21.

[4] Commission’s Communication “Progress towards completing the Internal Energy Market , COM(2014)634 final.

[5] Commission’s Communication “A policy framework fopr climate and energy in the period form 20120 to 20130”, COM(2014)15 final.

[6] Regulation (EU) No. 994/2010 concerning measures to safeguard security of gas supply and repealing Council Directive  (EC) 2004/67, OJ L 295/1.

[7] Commission’s Communication “European Energy Security Strategy”, 28 May 2014.

[8] Commission’s Communication COM (2014) 634 final, cit.