1. Completing the Internal Energy Market in Europe A Presentation Given by the EU Commission to EU Accession Country Representatives at an EU/World Bank Workshop in Prague April 26- 27, 2001 Retold and Commented Upon to Baltic Regulators and Transmission System Operators, Washington, DC, June 7, 2001 Bjorn Hamso Sr. Energy Economist The World Bank

2. Baltic Representatives at the April 26-27, 2001, Workshop in Prague: Estonia: Robert Laane, Kalle Maandi, Erki Peegel, Viive Savel Latvia: Janis Akmens, Dace Bite, Ainars Cunculis, Kalvis Vitolins Lithuania: Zita Adomaitiene, Anicetas Ignotas, Rimantas Sukys, Algimantas Zaremba

3. European Commission C ompleting the Internal Energy Market Short presentation of the Commission’s proposals: March 2001 Communication Draft Directive revising the Electricity and Gas Directives Draft Regulation on cross- border trade in electricity Directorate General for Energy and Transport

4. To reap the full benefits of the internal energy market Further measures Why? Conditions are right for a significant further step in opening Most Member States are opening further anyway European Heads of State and Government requested it at To ensure competitive prices To provide a real level-playing field To increase standards of service for customers Further measures are justified Directorate General for Energy and Transport their meeting in Lisbon, March 2000

5. Texts proposed by the Commission A revision of the Electricity and Gas Directives The draft Directive proposes qualitative as well as quantitative measures to create a truly operational internal energy market A Regulation on cross-border exchanges in electricity The draft Regulation sets rules for cross-border trade in electricity: tarification and congestion management. A Communication: “Completing the internal energy market” The Communication takes stock of the progress of the internal energy market: degree of opening, prices, environment, security of supply and employment. Directorate General for Energy and Transport

6. Electricity market opening State of play 0102030405060708090100 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom Legal minimum in 2000:30% EU average in 2000: 66% % Legal minimum in 2003: 35% Communication Directorate General for Energy and Transport

7. 0%20%40%60%80%100% Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom 2000 2003 2007 Electricity market opening Member States’ current plans Communication Directorate General for Energy and Transport

8. 102030405060708090100% Legal minimum in 2000: 20% EU average 2000: 79% Legal minimum in 2003: 28% 0 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom Gas market opening State of play Communication Directorate General for Energy and Transport

9. 0%20%40%60%80%100% Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden United Kingdom 2000 2008 Gas market opening Member States’ existing plans Communication Directorate General for Energy and Transport

10. 60,0 70,0 80,0 90,0 100,0 110,0 199519961997199819992000 1995 = 100 100% less than 100% less than 40% Market opening The greater the opening, the greater the price reductions Electricity Price Development for Industry 1995 - 2000 Communication Directorate General for Energy and Transport

11. Evolution of average electricity prices for industrial consumers Communication Directorate General for Energy and Transport

12. 2000 in € cents per kWh (VAT and energy taxes excluded) 1995 0,00 0,02 0,04 0,06 0,08 0,10 0,12 0,14 0,16 BELGIUM DENMARK GERMANY GREECE SPAIN FRANCE IRELAND ITALY LUXEMBOURG NETHERLANDS AUSTRIA PORTUGAL FINLAND SWEDEN* UNITED KINGDOM EU average Evolution of average electricity prices for households Communication Directorate General for Energy and Transport

13. Jan 2000 in € cents per GJ (VAT and energy taxes excluded) Jan 1999 Jan 1998 Jul 2000 0,0 1,0 2,0 3,0 4,0 5,0 6,0 7,0 DENMARK GERMANY SPAIN FRANCE ITALY LUXEMBOURG NETHERLANDS AUSTRIA FINLAND UK BELGIUM Large disparities in prices Clear effect of increased oil prices Evolution of average gas prices for industry Communication Directorate General for Energy and Transport

14. Environment: the impact so far positive To complement measures taken at national level the Commission has launched the following initiatives: Proposal for a Directive on electricity from renewables Combined Heat and Power: Communication in 1997 Energy efficiency: 2000 Action Plan Energy taxation Greenhouse gases emission trading Green Paper Emission standards: Large Combustion Plant Directive and Directive on Integrated Pollution and Control Declining prices might encourage consumption Communication Directorate General for Energy and Transport

15. Employment a socially consensual process Competitive energy prices boosts the competitiveness of the EU industry and creates employment Reduction in workforce in the traditional electricity and gas companies Commission study in the electricity and gas sectors: Encouraging exchange of best practise, retraining and monitoring developments in candidate countries Community action Communication To date no forced redundancies New skills are required: retraining Directorate General for Energy and Transport

16. Public hearing of 14/09/2000: results Greater market opening Strengthened legal unbundling Regulated access to the network Public service obligations Independent regulator All agreed standards increased except one trade union Large majority in favour Communication All agreed except trade unions and gas companies All agreed except gas companies Directorate General for Energy and Transport

17. Revision of the Directives: Objectives Quantitative Greater opening of the market higher level of unbundling regulated third-party access independent regulators improve public service provisions safeguard security of supply Full opening of national markets by 2005 Revision of the existing Electricity and Gas Directives Directorate General for Energy and Transport Qualitative Better functioning of the market

18. Quantitative Full opening of the energy market All EU consumers free to choose electricity and gas suppliers All EU companies free to choose electricity supplier All EU companies free to choose gas supplier 2005 2004 2003 A new timetable for market opening Revision of the existing Electricity and Gas Directives Directorate General for Energy and Transport

19. Qualitative Unbundling and third party access Member States to ensure that transmission is carried out via an independent system operator, legally and functionally separate from energy generation and sales activities. Independent Distribution System Operators Also a legally and functionally separate undertaking. But Member States may exclude small distribution companies (100 000 consumers) Tariffs to be published and regulated for transmission, distribution and access to LNG Revision of the existing Electricity and Gas Directives Unbundling Independent Transmission System Operators Third party access Directorate General for Energy and Transport

20. Qualitative Independent regulators Regulators Independent regulators are pivotal in ensuring non- discriminatory access to the network. Nearly all Member States have established regulatory authorities, save Germany. power to set/approve tariffs power to implement EU agreed trading arrangements Regulators will need to:  be independent of the electricity/gas industry  have a set of minimum competences including: Directorate General for Energy and Transport

21. Universal service obligation to supply electricity to all at reasonable prices Protection of vulnerable consumers Better protection of consumer rights contractual terms, disputes settlement Continuous benchmark exercise of service levels in Member States Qualitative Improving standards of service Public service The impact so far on service standards has been positive: standards have gone up. The Commission proposes to increase their level further: Directorate General for Energy and Transport

22. Qualitative Security of supply obligatory pool prohibition of bilateral agreements to hedge risks no tendering for new capacity excessively strict planning procedures (7 years) no internal market in the US no effective trading arrangements The situation in California resulted from inappropriate structures: Such structures do not exist in the EU market careful monitoring at EU and national level tenders where necessary internal market harmonised network security standards Additional safeguards in new proposals Comparison California/EU Security of supply Directorate General for Energy and Transport

23. Number of customers having switched suppliers UK Finland 20% 30% France Germany Portugal 5% Most opt for another national supplier Highest where market opening started early Still 15 separate national markets Trade in electricity:around 8% of electricity production Cross border trade tarification rules Congestion management rules Increased interconnection capacity, where Missing elements Regulation: objectives Regulation on cross-border exchange in electricity Create a single EU energy market Directorate General for Energy and Transport Spain economically justified

24. New cross-border trade rules Tarification rules Compensation between Transmission System Operators TSOs TSOs will receive compensation or pay for transit flows Cost-reflective compensation Fragmented national cross-border tariffs and pancaking abolished Detailed implementing rules through comitology procedure Regulation on cross-border exchange in electricity Interconnection capacity Information on available interconnection capacity to be made public Better information exchanges between TSOs Allocation of capacity in case of congestion Harmonised market-based approaches to reduce trade distortions Congestion management Directorate General for Energy and Transport

25. New interconnection capacity UK/France: one interconnector and limited capacity Interconnection from France, Switzerland and Austria to Italy is insufficient Iberian peninsula isolated: lack of interconnection capacity with France Regulation on cross-border exchange in electricity The Commission will present a European interconnection plan Scandinavia: limited capacity Benelux: frequent congestion Main interconnection bottlenecks Directorate General for Energy and Transport