“... those markets that want to ensure control by domestic companies have severely limited or prevented foreign investment ...”
On paper the progression to a single European market is on schedule, but in reality the expected values of a single competitive market, such as healthy customer switching, a reasonable spread of generation and supplier market shares, and reciprocity of trade throughout the EU member states, is not. The first annual benchmarking report of the new European Commission paints a picture of goals not being achieved which, given the importance the outgoing commission attached to the realisation of an internal European energy market, is surely tantamount to admitting failure. As the report concludes: “Whether the improvements made under the directive are adequate to achieve the objectives of the internal market remains to be seen, especially if member states take a minimalist approach to the transposition of the current legislation.”
Last year saw the deadline for the latest directive on full wholesale competition to be transposed by member states, and with regulation on cross border exchanges also coming into effect, progress during the past twelve months toward a competitive market has been slow and painful. The commission says that, “in October 2004, eighteen member states had to be sent a letter warning that they had still not fully notified to the Commission the legal measures taken to transpose the latest directives”. Calling this delay “unsatisfactory”, the Commission says competition has suffered with fewer than 50% of large users having switched supplier in most member states after five years of competition, adding that many are unsatisfied with the range of services being offered.
A brief analysis of the switching data provided in the report confirms that significant progress is required if a truly competitive market European market is to be achieved. The data provided by the report is of limited value for analysis purposes as it uses a barometer of 50% switching to quantify a ‘satisfactory competitive market’, with those countries achieving this level or greater (of which there are five in electricity and only the UK in gas) not having their actual switching percentage noted. Taking the EU15 as a block the average large customer switching is just under 30% for electricity and just over 25% for gas since the onset of competition, but in 2003 (the latest year for data) the average switching of large electricity users within the EU15 was only 8%.
The report identified three key issues to be addressed for competition to advance: the integration of national energy supply into a wider European market; concentrated market structures with one or two companies dominating; and the unbundling of network operators and the introduction of regulated thirds party access. Progress against these key issues is poor. In the electricity sector the commission says that just five Member States had no major obstacles to competition. Of the obstacles identified the most pertinent is market structure or lack of integration with twelve of the EU-25 cited in this category where the large user switching ranges from 0 to 35%. The report concedes this issue has been identified “in many previous reports of the Commission” and that “the issue of concentration is now the most important obstacle to the development of more vigorous competition”. It believes that, while this persists, consumers may lose confidence in the market and call for tighter regulation, adding: “In this respect, the Commission’s recent prohibition decision on the acquisition of GdP by EdP and ENI reflects the important precedent on how the Commission intends to deal with possible restructuring of the industry.”
Taking the EU15 as an average the largest market share of a single generator is 54% while on average the combined market share of the top three generators is 76.4%. Compare this with the UK market, which is widely recognised as being the most competitive of the EU15. The largest single UK generator has a market share of just 20%, or around a third of the EU15 average, while the combined market share of the UK’s top three generators is just 40%, just over half the EU15 average. A more telling statistic on the state of a single, internal, European market is provided by the data on foreign ownership of electricity supply with 50% of UK supply under foreign ownership compared to a EU15 average of just 17.4pc. The aim of the internal market is for reciprocity throughout the EU, but the data suggests that a competitive market (i.e. the UK) is a haven for foreign investment and ownership so those markets that want to ensure control by domestic companies have severely limited or prevented foreign investment. This argues against the ethos of a freely competitive market.
Another key Commission objective in the electricity sector is the development of wholesale market liquidity, and significant progress is also required here with the report conceding that power exchanges in most member states are still insufficiently liquid and that there is insufficient transparency concerning price formation in many wholesale markets. For the EU15 the average volume of electricity exchange trade (mainly futures) as a percentage of consumption was 19%, compared to an OTC trade average of 162%. This equates to futures volume around 10-11% of OTC volume, which is very low for a commodity market, which typically would expect to see around 25% of OTC volume going to futures.
For the new energy commissioner the report provides few positives. The choice faced by the commissioner before taking office was whether to make existing EU legislation work or re-write the legislation. Unfortunately for him this report does not make this choice any clearer. But on a more positive note it is difficult to see how the next benchmarking report can be any worse than this one