Making the Internal Energy Market work Tudor Constantinescu DG Energy The Commission has adopted its Communication on the Internal Energy Market, 'making the energy market work'. The Communication takes stock of the progress made in market opening sofar. It identifies clear benefits that the IEM is already today bringing to many households and businesses in Europe. But it also identifies challenges. Challenges that need to be addressed urgently if we are to reach our goal of completing the IEM by 2014. The package we are launching today also contains country-specific analysis and recommendations. It contains statistical data on market functioning as well as information on investments taking place in energy. Tudor Constantinescu DG Energy Bucharest 22 November 2012 Energy

EU Energy Mix Gross inland consumption increased by 3.3% in 2010, compared to 2009. As far as natural gas is concerned, an increase in consumption was observed, in both relative and absolute terms, between 2009 and 2010. Renewables, the consumption of which increased by 12.6% from 2009 to 2010, to reach 172 Mtoe. This represents a continuation of the rising consumption of renewables that has been experienced in recent years, which is itself a consequence of the policy of greening the energy mix. This growing trend is projected to continue in the future. Almost half of the EU's electricity was produced from CO2-neutral sources (renewables and nuclear). When natural gas is added, this covers more than two thirds of generated electricity. Compared to 1995, these shares were 46% and 57% respectively The importance of natural gas has been rapidly increasing since 1995,. This is due to the significantly greater importance of gas in some Member States to provide the necessary back-up supply for variable generation from renewables.

Energy Mix Romania Gas represented 30 % of the Romanian energy consumption mix in 2010, followed by petroleum products (26 %) and solid fuels (20 %). The significant share of RES (16 %) and nuclear power (8 %) contributes to a balanced energy mix. The power generation mix is mainly shared between solid fuels (34 %), renewables (33.5 %) and nuclear (19 %). The country’s 2020 renewable target indicator increased from 17.2 % in 2006 to 23.4 % in 2010, the aim being 24 % by 2020. The share of cogeneration in electricity production was 10.8 in 2010.

The internal energy market can deliver Economic growth Jobs Secure supply Why do we think an internal market for the energy sector would be good? What can an open, well-connected and well functioning energy market bring? The internal energy market is not an end in itself. It is a key instrument in delivering what EU citizens aspire to most: economic growth, jobs, secure coverage of their basic needs at an affordable price, and sustainable use of limited resources. A fully operational internal energy market would be a huge stimulus for growth and jobs in the EU. Estimations indicate that an operational IEM could increase EU GDP by 0.8%. Consumers throughout the EU could save up to € 13 billion per year if they all switched to the cheapest electricity tariff available. The IEM is needed now more than ever in view of the major investments in our energy systems (costs estimated at 1 trillion euro) needed this decade. The Commission's estimations show that the full integration of Europe's energy networks and systems and further opening of energy markets are essential to make the transition to a low-carbon economy and maintain secure supplies at the lowest possible cost. In February 2011, the EU Heads of State and Governments declared the need to complete the internal energy market by 2014. To achieve this, timely and complete transposition of EU legislation on the single market of gas and electricity into national law is crucial. Sustainable use of limited resources Affordable energy

Where are we today? Benefits and Challenges - Choice Competitive prices Secure supplies Impact in the world Benefits and Challenges Some of these benefits are already materializing today: more choice for consumers, competitive prices, secure supplies, more weight in relations with third countries. However, there are a number of issues which need to be tackled urgently if we are to complete the internal energy market by 2014, implement the Europe 2020 agenda and move towards a transformed, modernised, decarbonised and energy-efficient energy system by 2030 and 2050 at minimum cost. These are the same issues which stand in the way of realising full benefits for consumers and which raise barriers to competition and innovation and undermine the security and sustainability of European energy. - Enforcement - Consumer satisfaction - Investment

More choice and flexibility for consumers In 2/3 of the MS there is now a choice between 3 or more retail suppliers. At least 14 European electricity and/or gas companies are now active in more than one Member State and there are more than three main electricity suppliers in 20 Member States. Price comparison tools have helped consumers find better deals. An insight in what can be gained from changing suppliers has led to high switching rates in a number of Member States, notably in Belgium, the Netherlands, Spain and Germany, both in electricity and gas markets. Sweden and Finland are also experiencing high switching rates in their electricity market. Normally, in countries with regulated prices, there is no (big) incentive to switch and rates are lower. But we will come back to the question of regulated prices later on. Also, the internal market has helped keeping energy prices in check. The red line depicts the prices of electricity and the other lines the prices of the raw materials with which the electricity is generated. The electricity price has risen much less than the prices of the commodities. Better integration of European wholesale power markets which has enabled more convergent wholesale power prices could be a factor explaining why power prices did not follow the sharp increase in fossil fuel prices in the last couple of years. Besides market integration, the increasing deployment of renewable energy sources, mainly solar and wind power generation, also had a beneficial impact on power generation costs; further weakening the link between power prices and fossil fuels

Infringement procedures for non-transposition of the 3rd package directives The first big challenge that needs urgent addressing, especially by national governments, is the enforcement of existing rules. The IEM architecture is laid out in the Third Energy package and complementary legislation (REMIT, gas security of supply regulation, Commission's proposal for the infrastructure regulation). It needs to be implemented and enforced as a matter of priority! MS have been very slow in adjusting national legislation to the Third Energy Package. These directives had to be transposed by the Member States by 3 March 2011. However, by the transposition deadline not a single Member State had fully transposed the Directive. Since September 2011 the Commission has opened 19 cases for non-transposition of the Electricity Directive and 19 cases for Gas Directive. As of 15 November 2012, 26 of the cases are still pending. The Commission is carrying out prima facie checks of all the notified measures and other information provided in the cases in order to verify whether complete transposition is in place. End of October, the European Commission decided to refer two countries to the Court of Justice of the European Union: Poland for failing to fully transpose the Electricity Directive, and Slovenia – for failing to fully transpose the Electricity and Gas Directives. Similar action might be taken in relation to other of the pending cases. Finally, implementation is more than just transposing completely and correctly the Directives. It is about practical implementation and effective monitoring in practice. No pending infringements   Pending infringement(s) Energy

Independent national energy regulators are central to ensure truly competitive markets A truly independent regulator is a key prerequisite for a well-functioning energy market. Political interference is unacceptable. This is legally enshrined in the Third Energy Package. Today, too many MS still interfere with their regulator's exclusive competences, with their budget or with the limitation of their powers. Information on individual MSs for defensives only: BELGIUM: . CREG has challenged the new Belgian energy law transposing the Third Package Directives at the Belgian Constitutional Court, arguing that it does not grant CREG sufficient powers or autonomy. There are also three regional regulators (VREG for Flanders, CWAPE for the Walloon region and BRUGEL for the Brussels region). Cooperation between the four regulators is essential to ensure there is a consistent, effective regulatory framework across the country. The regional regulators need to be reinforced to exercise proper regulatory oversight over distribution network charges due to the further regionalisation of distribution tariffs competences. BULGARIA: SEWRC budget is insufficient to cover oversight of all the sectors it is responsible for and there are concerns about the stability of its management. The government has intervened in regulatory and management matters. GREECE: The Third Energy Package transposition law provides for stronger independence of the RAE, which seems to be in full compliance with the Third Package. Unfortunately, in practice, RAE’s autonomy in implementing the allocated budget, as planned under the transposition law, has been severely compromised. Moreover, the situation in Greece, due to its financial difficulties, is beginning to impact on the RAE’s ability to fulfil its tasks. It has not been allowed to fill vacant posts, despite the fact that in the last two years, more than a third of RAE’s scientific personnel has sought employment elsewhere and half of this group has already left, after their salaries were cut by over 50 % in many cases. HUNGARY: HEO is relatively sizeable compared to counterparts elsewhere in the EU, with a fairly wide portfolio of tasks. However, the Hungarian government has recently limited HEO’s powers to set network tariffs autonomously. Since 1 January 2012, HEO is obliged to calculate tariffs using the methodology imposed by the Ministry. Furthermore, the government has imposed an internal operational and functional structure on the regulator, thereby reducing its independence and scope for autonomous decision-making still further. ITALY: The regulator is independent but its budgetary autonomy has been reduced by the parliament in the last couple of years. LITHUANIA: The Lithuanian regulator, the National Control Commission for Prices and Energy (NCC), in operation since 1997, employed 46 staff (of which only 15 working on the regulation of electricity and gas) with an annual budget of almost EUR 0.92 million in 2011. These are low figures compared to those of other Member States, even in relative terms. MALTA: an annual budget of EUR 2.23 million. The limited budget is a serious constraint on the effectiveness of the regulator. The Malta Resources Authority’s remit has been extended to cover climate change, as well as petroleum, oil and gas exploration in addition to its regulatory functions. Older tasks cover energy, minerals and water regulation, energy efficiency and promotion of renewable energy. PORTUGAL: ERSE’s independence from the Ministry of Energy should be ensured including equipment with sufficient financial means allowing fulfilling its functions foreseen in the Third Package. Its powers with regard to arbitration and enforcing penalties should also be guaranteed. ROMANIA: ANRE’s independence and its financial autonomy were seriously curtailed in 2009 and 2010 due to two national laws that changed the regulator’s status. SLOVAKIA: Following recent complaints, the Commission is investigating the independence of URSO. SPAIN: In March 2012 the Spanish Government presented a proposal to merge the Spanish competition authority and various national sector regulatory bodies, including the energy regulator, into a single organisation. In the area of energy, Spain must ensure that the designated authority has at least the powers and duties required by the Directives of the Third Energy Package and that it the criteria for independence. ENERGY REGULATORS ARE INDEPENDENT CONCERNS ABOUT INDEPENDENCE Energy

Bridging the gap between Member States GAS FLOWS No Flows Flows only in one direction Flows in two directions If the EU is to develop a single electricity and gas market, no region or individual Member State must be left behind. The fact is, though, that energy market development is, in economic terms, highly divergent between countries, for example with respect to gas markets in the north-western parts of the EU as compared to the Eastern part of the EU. The Commission and the EU Agency for energy regulators ACER shall promote regional initiatives to play a prominent role in bridging the gap. Regional Initiatives should help set up additional regional gas hubs and power exchanges, and reach the target of full market coupling in electricity across the EU as soon as possible . However, in Member States where there is a single supplier and no network connections to other suppliers, enforcing regional market arrangements is of little help. The Commission is committed to providing assistance to help these Member States catch up. But without fundamental reforms in the countries concerned, progress will not be possible. Energy

High concentration in retail electricity markets VERY HIGH (ABOVE 5000 HHI) HIGH (1800 – 5500 HHI) MODERATE (750 – 1800 HHI) As we move to the consumer challenge, the retail market in many countries is still very much dominated by the historical incumbent companies. This prevents the full benefits that fair competition from materializing. As a result of that, consumers feel dissatisfied and disengaged with the energy market. Energy

ENERGY MARKETS IN ROMANIA NA: not available or not applicable. (1) Companies are considered ‘main’ if they produce at least 5 % of national net electricity generation. (2) Retailers are considered ‘main’ if they meet at least 5 % of total national electricity consumption. (3) The HHI (Herfindahl-Hirschman Index) is a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers (the higher the index, the more concentrated the market). Moderate concentration: 750–1800; high concentration: 1800–5000; very high concentration: above 5000. (4) Entities are considered ‘main’ if they handle at least 5 % of natural gas (indigenous production or imported). (5) Retailers are considered ‘main’ if they sell at least 5 % of the total natural gas consumed by final customers.

Consumer challenge: Low level of trust Consumer satisfaction with the IEM is generally low. This is the outcome of a research done by the European Commission (DG SANCO). Energy markets score low compared to 27 other services markets. In 2012, the electricity market ranks 26th out of 30 services markets, with particularly low scores in Southern European countries (the highest for Luxembourg and the lowest for Bulgaria). The gas market ranks 21st out of 30 services markets (the top ranked country is Slovenia and the bottom ranked country – Belgium). Romania 5th from bottom Both electricity and gas markets have poor scores on choice, comparability and switching suppliers and tariffs, suggesting that consumers are not making full use of the saving opportunities created by market liberalisation. Currently, SMEs and households are more passive than large industrial customers and are therefore losing out as available price differentials remain unexploited. This may be due in part to inefficient consumer protection or lack of transparency or consumer-friendly information, which all engender low consumer satisfaction and trust. However, without consumers' appetite for active participation in the market, service diversification and value-added services are not developing. Energy

Price regulation fails to activate consumers and suppliers REGULATED PRICES FOR HOUSEHOLD CONSUMERS AND INDUSTRIAL CONSUMERS, IN GAS AND/OR OF ELECTRICITY REGULATED PRICES FOR HOUSEHOLD CONSUMERS NO REGULATED PRICES The IEM is there for Europe's energy consumers, households and industrial users. The competitiveness of Europe's businesses is to a large extent dependent on affordable energy. True market functioning is the best way to keep energy prices in check, a realistic outcome of supply and demand. Regulating consumer prices is not a sustainable way of protecting the consumer interest. Only 9 MS have no price regulation (AT; CZ; DE, FI, LUX, NL, SL, SW, UK). Price regulation in some MSs is particularly distortive (e.g. FR, ES, PL). Member States currently phasing out price regulations: By 2013: Greece, Portugal & Lithuania By 2017: Romania Energy

Distribution of cost factors in retail prices In eight EU Member States, industrial customers were faced with electricity prices where the tax share exceeded 10%. Industrial electricity retail prices in Italy and Germany had a tax component above 25%. High shares of taxes and levies in industrial retail prices often reflect national energy policies that are designed to shift the power generation mixes in the direction of an energy source composition that is more climate-friendly and more sustainable, by promoting an increase in shares of renewable energy use. In the case of household consumers in the large majority of EU Member States, non-recoverable taxes and levies (including VAT) accounted for around 20% or more of consumer prices. Note that industrial consumer prices are quoted without VAT due to the fact that industrial consumers recover VAT payments. Consumption bands Dc and Ic according to Eurostat classification. Ic denotes an industrial consumer with an annual consumption in a range of 500 MWh - 2000 MWh and Dc denotes a household consumer with an annual consumption of 2.500 KWh - 5.000 KWh. Data for industrial prices in Austria, France and Hungary broken down into cost factors are missing. Data for household prices in Hungary and France broken down into cost factors are missing.

Support for renewables differs significantly across EU-countries Note that support levels for Spain, Portugal, Bulgaria and Latvia are from before support was put on hold. Although we are in one market, the level of support per MWh of generation differs significantly between countries. There can be varying reasons for these differences. First, the differences can reflect real differences in the costs of RES-E generation in the member states that result for example from different availabilities of primary resources. Second, the different support levels can be due to different support schemes applied in the Member States that lead to different efficiency levels in supporting RES-E. Third, the differences can result from different methodologies in setting the support levels that also entail different efficiency levels. This may distort trade and investment signals and Remuneration ranges (average to maximum remuneration) for onshore wind in the EU-27 MS in 2011 (average tariffs are indicative) compared to the long-term marginal generation costs (minimum to average costs).

Removing retail price regulation Allows other companies to enter; Competition brings choice and better services Retail price regulation deters competitors from entering the markets. Neither do prices set by state intervention do not always provide consumers with the best deal. However, they often give a false impression of protection that de-incentivizes them from actively exploring better options, including energy efficiency services. Furthermore, regulated end-user prices impede investments. They keep companies from entering the market and from investing in new generation. Prices regulated below costs lead to debts which ultimately falls back to taxpayers. Gives incentive to invest in infrastructure, enhances security of supply

Deficit at taxpayer's expense Retail prices regulated below costs Deficit at taxpayer's expense Example: 24 billion € accumulated energy debts in Spain Retail price regulation Causes deficits, when producers cannot cover their costs. Deficits have to be covered by the taxpayer, or will have to be paid by consumers at a later stage. Example 1: Spain has accumulated almost 24 billion Euro deficit due to retail energy price regulation alone, this debt alone accounts to more than 2% of the GDP. [Source: European Commission, SWD national reform programme 2012, p.23] Example : Greek electricity incumbent will have in 2012 alone (!) 250 Mio € deficit related to price regulation for electricity.

Lower prices in competitive and open markets Market opening brings more liquidity, better pricing signals … Markets with access to multiple sources of gas and competitive trading arrangements (e.g. North-West Europe, UK) have benefitted from lower prices in recent years. By contrast, Eastern European countries that depend predominantly on long-term, oil-linked contracts have paid relatively higher prices.

Complaint handling and Dispute resolution Empowerment for all consumers Access to information Complaint handling and Dispute resolution Liberalisation has brought choice to households. In many Member States consumers can choose between diverse suppliers and tariffs, in others they are going to enjoy this choice thanks to EU law hopefully soon [to be modified according to the country where the presentation is held] EU law makes sure that Member States empower consumers by providing: Easy access to informartion through the establishment of a single point of contact Easy and prompt handling of complaints between suppliers and consumers – and – when necessary – resolution of disputes (alternative dispute resolution mechanisms) Easy and transparent billing and contractual information by suppliers. Facilitate the comparison of prices through access to price comparison websites Easy and cost-free switching of suppliers Comparing prices and offers Switching supplier

Protecting vulnerable consumers in particular EU law asks Member States to focus additional protective measures to truly vulnerable consumers by defining the categories of people (such as people with disabilities, low revenues or advanced in age), These categories may access specific energy measures: Delaying / prohibiting disconnection under particular circumstances Ensuring heating in winter times Providing energy efficiency measures … or specific social measures Addressing energy poverty through financial measures (energy bonus) Prohibition of disconnecting Heating in winter times Energy efficiency measures

Investment challenge Letting the market work to encourage appropriate investments: - Market Coupling has already integrated national markets - State intervention needs to be optimised Our energy systems are in the early phase of a major transition. Significant investments are needed to replace the EU's ageing systems, decarbonize them and make them energy-efficient and increase security of supply. The internal energy market can help the EU make the transition: well-functioning markets promote and support system change much more effectively and more cheaply than any central planning or purely subsidy-driven overhaul. But the system change cannot take place without a properly integrated, modern infrastructure. Price signals are pivotal to encourage investment in flexibility on the supply side, from storage or from generation capacity that is able to ramp up and down quickly. At present there are tendencies of inward-looking and nationally inspired policies. But State intervention needs to be optimised: to renewables (see Renewables Communication) and to ensure security of supply in electricity (Commission has launched a public consultation on this subject and might present follow-up measures in 2013) Energy

National measures are insufficient in a European market The advance of market coupling 2012  2014 National measures are insufficient in a European market But we cannot look only at our own national market anymore. Markets are already integrated. Market coupling is now in place in 18 Member States. This means that Member States share their efficiencies and inefficiencies, all to the benefit of overal social welfare. Yet, there are plans in some Member States to take steps to secure new generation capacity to ensure security of supply in the form of so-called capacity mechanisms. Normally, electricity producers only get paid for the electricity that they generate and sell. A capacity mechanism would change this by paying generators for keeping available their generation capacity in order to ensure there is sufficient capacity also when variable sources of electricity, such as wind and solar power, are not producing if this happens in an uncoordinated with only national interests being taken into account, we could end up with inefficient and incompatible market designs in different Member States, undermining the internal market. The Commission has launched a consultation on generation adequacy. In this consultation we ask whether and how we can work better together to ensure a more coordinated approach to the estimation of required and available capacity in the internal market. Also, support schemes for various fuels need to be carefully re-assessed as to their interference with the internal market. Wrong type of support can lock Europe into the wrong type of investments for the next 30 years.

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ADDITIONAL SLIDES

The share of oil-indexed contracts is decreasing… The difference in prices between the different gas contracts is an important issue, because the EU is continuing to buy a large proportion of its gas under long-term, oil-indexed contracts. However, according to surveys conducted by the International Gas Union since 2005 , it would appear that − along with the increase in traded gas volumes reported previously − the share of oil-indexed gas contracts is down (representing 68% of natural gas consumption in 2009, 59% in 2010) and is expected to decrease further.

National measures are insufficient in a European market Market coupling No market coupling No market coupling at this border "Volume coupling" at this border

The Commission is launching a consultation on generation adequacy There are plans in some Member States to take steps to secure new generation capacity to ensure security of supply, if this happens in an uncoordinated with only national interests being taken into account, we could end up with inefficient and incompatible market designs in different Member States, undermining the internal market. In this consultation we ask whether and how we can work better together to ensure a more coordinated approach to the estimation of required and available capacity in the internal market. The slide shows a way in which that can be done: i.e. by subtracting all the insecurities in capacity calculation.