In less than a year all twenty-five EU member states are required to have fully competitive gas and electricity market sectors. This deadline of 1 July 2007 will, of course, be missed as have most deadlines imposed by the European Commission in its attempt to create a harmonised internal energy market.
The reason for perhaps stating the obvious is yet another new survey on European gas trading which continues to paint European gas market participants as highly sceptical of any timely improvement in gas trading opportunities. Two thirds of those polled in a recent APX Energy Viewpoints survey doubt there will be increased gas trading opportunities for two years while a near unanimity of respondents, 96%, believe there will be no appreciable improvement in gas trading opportunities for the next five years.
The results are hardly surprising. Successive investigations, both by the Commission and independent analysts, have broadly reached the same conclusion: Europe’s gas market is both uncompetitive and, believe some, the minimal competition levels seen today might just be about as good as it gets.
While competition is not the only factor that has a direct influence on trading it is not surprising that most survey respondents perceive market liberalisation, or the lack of it, as having the greatest detrimental impact on trading. Other factors cited as having a detrimental impact are poor market infrastructure and the lack of sufficient regulatory pressure on market participants to be more proactive in the market.
Structurally, Europe’s gas market is not conducive to competition. There are limited gas hubs and much of the market is still constrained by long-term gas contracts, which limits the re-tradability of this gas. Part of this problem is caused by Europe’s increasing dependence on gas imports, which is seeing an increase in long-term supply contracts from Russia. Clearly given the choice Europe would rather have secure supplies of gas than a competitive market with insecure gas supply. Indeed, markets are more likely to trade in a secure environment than an insecure environment.
One approach that may offer increased prospects of gas trading is the regional gas hub approach proposed by ERGEG, the EU energy regulators association, that has advised the Commission to put forward a framework for regional developments in both gas and electricity through the creation of a series of macro-regions within the EU-25, each with a lead regulator. For the gas market these regions comprise the northwest, with the Netherlands taking the regulatory lead, the north, with Germany as lead regulator, the south, with Spain as lead regulator and finally the south-southeast, with Italy and Austria co-sharing the regulatory lead. Over the summer a detailed timetable for the introduction of these ‘macro-regions’ will be produced with a progress report due by the winter ahead of a formal consultation at the Madrid regulatory forum.
On paper the division of the EU25 gas market into four regions has some merit, with those supporting the initiative believing the effective creation of four hubs will generate liquidity and transparent pricing at these hubs and, as a consequence, accelerate gas trading. But there are reservations. There is no certainty that regional hubs will create the required conditions to catalyse liquid trading as trading is driven primarily by commercial imperatives not regulatory doctrine. Of the four regions only the northwest, comprising Netherlands, Belgium, northern France, UK and Ireland, is likely to be successful as this is the most active gas trading region in the EU largely due to the UK-Belgium interconnector and the competitive nature of the UK gas market. For the concept of macro-regions to work requires the constituent member states of these regions to endorse trading. Just constructing a region will not in itself stimulate trading within that region.
There are more important structural issues to address in the EU gas market than dividing the market into macro-regions. One is ownership of transmission and distribution. Vertical integration through to distribution has been a major detriment to the development of trading and if the market is to become more trading orientated there has to be structural unbundling, not just legal unbundling. There also has to be increased access to transmission and storage for third parties and greater data transparency on capacity, transmission and storage. All these structural requirements are well known and broadly endorsed within the market, but the Commission continues to be lax in forcing those member states yet to implement these changes to do so. Only until these structural changes are enforced can the concept of macro-regions have any potential for success.
The role of the Commission, as EU over-regulator, is to create the market conditions that enable it to be more integrated and thus encourage more competition and trading. To date it has largely failed the market and, it would seem, is running out of ideas. Of the three energy policy imperatives of security, affordability (i.e. competition) and sustainability that of affordability/competition has largely been subordinated. When the first gas competition directive was introduced in August 2000 there were no concerns over market security and the bandwagon of sustainability and emission reduction had yet to gather any steam. In the six years since the Commission has put all its weight behind market sustainability, only to receive a wake up call in January with the Russia-Ukraine gas dispute that forced it, and member states, to redress the security issue.
Much as the Commission would like to achieve a fully competitive internal energy market its priority should be the development of external policy to ensure that the EU has secure gas supplies. Competition and trading will develop only when the market is secure and when companies identify the commercial benefits of implementing a trading programme. As regards gas competition and trading the role of the Commission should be to remove obstacles that limit efficient trading between those companies that wish to trade. Setting competition deadlines will not benefit the market. Trading will evolve at its own pace providing the market environment is conducive to trading opportunities.