European energy markets – views from Brussels Ricardo Cardoso de Andrade DG Competition, European Commission AEM-SVSE Conference, Prague 12 September 2007

2 Overview Introduction Problems in the European energy sector –The Energy Sector Inquiries –Results of the Electricity Study –Competition cases in the energy sector The remedies

3 An integrated market – as far as possible using the cheapest resources Networks developed and operated to serve the interests of European consumers Strong and efficient European energy companies Objective of EU internal market

4 The Energy Sector Inquiry Better targeted case investigations / Better remedies in cases Better proposals for regulation and a better informed debate in Council and Parliament Strong base for competition advocacy One of the most thorough investigations by DG Comp The results The procedure Inquiry under Art. 17 Regulation 1/2003 Launched in June 2005; main focus: wholesale; aimed at: assessing the prevailing market conditions establishing causes of perceived market malfunctioning Final Report adopted by the Commission Jan Broad knowledge of sector, better understanding of competition problems

5 Market concentration/market power 1 7 Little competition on downstream markets 2 Vertical foreclosure: inadequate unbundling of supply and network 3 Lack of market integration: lack of regulatory oversight on cross border issues 4 Lack of transparency 5 Distrust in price formation 6 Inadequate balancing regimes EC Sector Inquiries – the findings

6 Scope of the study –Six Member states: BE, DE, ES, FR, NL and UK (GB) –A period: –Real data collected –and checked!- from more than 110 generators and all TSOs (500 million input data points) –The study on an hourly basis of (1) Concentration, (2) Price outcomes and (3) the link between the two For each hour, the study calculated the dispatch to serve the demand with the minimum total cost Perfect competition EC Sector Inquiries – the electricity study

7 Inputs Demand to be served for every hour in each MS Available generation capacity: taking account of outages, deratings, etc Constraints on generation capacity: must-run, min-up and down, efficiency curve, start-up costs, etc Outputs Cost of the most expensive plant running “economically” in the simulation Dispatch Underlying assumptions Imports/exports Load CO2 and opportunity costs Perfect foresight A number of modeling issues Load = Consumption = generation + imports - exports Simulating perfect competition

8 Results for DE, ES, NL and UK

9 Mark-ups calculated constitute a difference between the « theoretical market » and the realised price The profit of operators depends on many factors –place in the merit curve –plants effectively run on the basis of the realised price –CO2 allocations –If they sold in advance (forward markets) Note that it is the magnitude not the exact value which is important Important remarks on mark-ups

10 First-of-its-kind study: huge data collection and verification exercise; first estimation of price level in competitive wholesale electricity markets In general, level of prices exceed the relevant costs The higher concentration, the higher the mark-ups Operators may have withdrawn capacity to raise prices Need to further promote competition in the sector by: –Reinforcing the regulatory framework –Carrying out competition investigations in specific cases Electricity Study - conclusions

11 Regulatory Instruments Competition lawStructural What can we do: the remedies

12 Case work – Energy release programmes – Addressing unbundling concerns in cases – Challenging foreclosure at downstream level – Cancellations of PPAs – Removal of regulated tariffs –Antitrust Inspections relating to wholesale and balancing markets Complaints on regulated tariffs and interconnectors –Merger –State Aid Possible actions/ remedies (1) Competition law enforcement

13 Company ENIRWE StageOpening of proceedings ReasoningBased on information obtained in inspections in 2006 Market foreclosure of the Italian gas supply market - capacity hoarding and strategic underinvestment in the transmission system Market foreclosure by impeding third-party access to gas transport network in NRW (raising rivals’ costs) Antitrust – two recent cases

14 Regulatory environment – stronger powers and better cooperation between regulators – better cooperation between TSOs Lack of transparency – More transparency on voluntary/compulsory basis Other – Removal of regulated tariffs, limited TPA exemptions, improve allocation of interconnection capacity (2) Pro-competitive regulatory remedies

15 (b) Independent System Operator (ISO+) (a) Ownership unbundling (Preferred option) Network and supply business operated and owned independently Network owned by supply entities BUT operated by independent companies HOWEVER: requires very invasive regulation EU Summit conclusions (EPE) called for: Non discriminatory network access Facilitation of new investment in generation plant by new entrants (similarly new gas import facilities) Independence of investment decisions of TSOs Better co-ordination of TSOs Difficult to fulfil without ownership unbundling (3) Structural remedies

16 StructureTSO is owner and operator of the network Supply and generation companies are not to hold significant stakes in TSOs AdvantagesLack of current conflicts of interests enables non-discriminatory network access Facilitation of exchange of sensitive market information between TSOs Facilitation of cross-border TSO mergers Lower regulatory burden DrawbacksConstitutional misgivings (Guarantee of property) Market power of suppliers outside of EEA ExamplesUK, DK, NL (a) Ownership unbundling

17 StructureNo change in network ownership Operation of the network arm of a vertically integrated undertaking transferred to an ISO in which supply and generation companies do not have significant shareholdings ISO decides on network maintenance and development AdvantagesNon-discriminatory network access better than currently in place DrawbacksSeparation of network operation and ownership Detailed and costly regulation necessary Countless detail issues (investment decisions, personnel) Can it be efficient? ExamplesScotland (b) Independent System Operator (ISO+)

18 Structure No change in network ownership Operation of several neighbouring TSOs will be transferred to an RSO/RIO Many open questions: –Legal identity (for-profit undertaking, association?) –Independence from the cooperating TSOs (TSOs as members of the legal entity?) –Powers to decide on investments and/or raise funds? Advantages Easier cross-border integration of transmission networks Non-discriminatory network access will be provided for Drawbacks Separation of network operation and ownership Detailed and costly regulation necessary (additional complexity resulting from participation of various national regulators) Countless detail issues (investment decisions, legal identity) Competition problems: Art.81 Examples Some US states (c) Regional System Operator (RSO)

19 Delivering investment Network unbundling combined with stable regulation lowers the cost of capital for infrastructure Fair network access will encourage generation and supply investment from a wider range of companies More liquid wholesale markets (in particular futures) send the right price signals to investors and consumers

20 Conclusions Current situation unsatisfactory after nearly a decade of effort to open the market We believe that unbundling is the key to successful market opening Time for EU to act decisively for a competitive market The Commission’s view and the Member States’ view

21 Thank you for your attention. Ricardo Cardoso de Andrade DG Competition, European Commission