General Overview:European Internal Energy Market

European Internal Energy Market

In the 1980s, the European governments faced with increasing competition by newly industrialized countries and emergent markets, came across the idea that the energy sector and, in particular, the electricity industry could be better—more efficiently—carried out by the private sector. High public expenditure and much interference with the market were thought to cut productivity in many instances and to blur the European capabilities of engaging in prosper international competition. In addition, from a macroeconomic perspective, there was significant theoretical and empirical evidence suggesting that liberalization of the electricity market would bring positive effects to network industries in terms of lower prices and better service levels. According to the microeconomic theory, liberalization and competition would result in internal (production) and external (market) efficiency and that the benefits would be passed on to customers and the economy in the form of lower prices and better allocation of costs (Jamasb and Pollitt 2005).

Especially relevant to the settlement of liberalization as a desirable objective of the EC was also the attitude toward opening the market in certain EU member states. Certainly, the good results of the reforms undertaken by the UK electricity sector, addressing the introduction of competition and the privatization of its elec- tricity vertically integrated company, led other governments, very especially those of Nordic countries, to replicate such operations (Newbery 2004). Spilling over from technologically advanced sectors, e.g., telecommunications, global privatization, and liberalization began to seize other infrastructures and network industries (Eberlein 2008). Eventually, a stronger legal basis for European economic integration was achieved in 1987 with the entry into force of the Single European Act, which amended each of the treaties for the three communities. Undoubtedly, the most important of these changes were made to the EEC Treaty. Indeed, the objec- tive of establishing an internal market by the end of 1992 was set, and more importantly, Article 100a removed unanimity regarding related legislation and adopted instead qualified majority in cooperation with the European parliament. Under this in crescendo influence, the EC crafted the idea of a common European market embracing energy and issued in 1988 the first concrete proposal on liberalization: a working document called “The Internal Energy Market” (EC-COM (88), 1988). This document reflected the Commission’s commitment to a more competition- oriented approach to energy market integration by the progressive removal of the existing obstacles, and, other than hydrocarbons, it included the electricity and gas sectors for the first time in the discussions concerning a community energy policy.

Still, any further EC’s attempts to pass legislative measures concerning electricity and gas were firmly clogged by the Council of Europe that has not yet achieved an open and competitive single energy market, with market failures corrected and external costs internalized, and for this reason, different measures are needed in order to reach that goal.16 Market failures include fragmented markets, low levels of competition, and significant external costs related to climate change, environmental pollution, security of supply, and technological innovation. To compensate for the market failures, Europe has a range of policy measures in place, including support schemes, standards, and administrative rules to promote renewable energy development. Undoubtedly, renewable energy for generating electricity must be integrated into the market. However, some of the major future renewable energy sources—mainly wind and solar power—have inherently different characteristics from conventional sources in terms of cost structure, dispatch ability, and size and cannot simply fit into existing market structures without any adaptation. Infrastructure investments are clear and urgently needed, and electricity grid operations also need to be updated.

One of the current problems that Europe is facing is that the region has not yet developed fully competitive internal energy markets within which the use of renewables for the generation of electricity can play an important role. Only when such markets exist, will EU citizens and businesses enjoy all the benefits of security of energy supply and lower prices. To achieve this aim, interconnections should be developed, effective legislative and regulatory frameworks must be in place and be fully applied in practice, and EC competition rules need to be rigorously enforced (Morales Pedraza 2008).

According to EU sources, today’s electricity network is the result of techno- logical and institutional development over many years, with most of the electricity generated in large central power plants and transmitted through high-voltage trans- mission systems. The power is then distributed to consumers via medium- and low-voltage local distribution systems. In this paradigm, power flows only in one direction, this means from the central power plant to the network and to the consumers. The system from power generation to consumers is often controlled by a monopoly national or regional supplier acting as both transmission system opera- tors (TSO) and distribution system operators (DSO).

As the market is liberalized, monopoly control of the system will change with multiple TSOs and DSOs operating it transparently under the governance of a regulator. To operate successfully, all players in the system must have a common set of guidelines. It will also require a more active role for DSOs in controlling network stability, optimizing central and distributed power inputs, interconnection and, of course, metering and billing.

The drivers for these changes are multiple and symbiotic. However, they all have their basis in the common concerns to use primary energy as efficiently as possible, with the least possible environmental impact while ensuring that energy supply is secure and safe and supplied at an agreed quality universally and at a competitive cost.

In general, distributed generation reduces energy transmission losses—estimates of power lost in long-range transmission and distribution systems are of the order of 7 % in OECD countries—and helps to bypass congestion in exist- ing transmission grids. It enables the use of waste heat (via CHP) improving overall system efficiency. Power quality and reliability can also be enhanced. From an investment point of view, it is generally easier to find sites for the use of renewable energy sources for electricity generation and other direct generation than for a large central power plant, and such units can be brought online much more quickly. Capital exposure and risk are reduced, and unnecessary capital expenditure avoided by matching capacity increase with local demand growth. Figure 1.18 shows today and tomorrow possible electricity network.

The current failure to modernize the electrical grid as the energy mix is changing is causing problems for the development of the internal market, technical

General Overview-0024

problems related to loop flows, grid stability, and growing power curtailment, and investment bottlenecks resulting from delayed connection of new power produc- ers. Arrangements and cost sharing rules for using the grid also need modernizing to reflect the changing nature of the electricity generation mix and progressively increase the balancing responsibility of renewable energy producers as dispatch- able electricity producers. The final aim should be that renewable energy is fully competitive and that producers act and are treated as equal market players (EC report SWD 2013; COM 2013).

Furthermore, the consolidation of the energy sector should be market driven if Europe wishes to respond successfully to the many challenges it faces and to invest properly for the future. The EU has the tools to help. It is the world’s second largest energy market with over 450 million consumers. The EU leads the world in demand management, in promoting the use of new and renewable forms of energy for electricity generation and in the development of low-carbon technologies. If the EU backs up a new common policy with a common voice on energy questions, Europe can lead the global search for energy solutions (COM 2006).

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