Swedish power company Vattenfall has published a report on the European electricity market in which it identifies fundamental changes to the regulatory framework, competitive structure and environmental restrictions.

The report also suggests that long-term development of the European energy industry is influenced by four major trends: liberalisation and internationalisation of the energy markets, strengthening of the role of the European Union (EU) in setting the framework for the internal market, concerns for climate change and its implications and the volatile development of fuel prices.

Vattenfall says that the four factors could be of a magnitude sufficient to completely reshape the energy market and many of the preconditions and general frameworks for present energy policies. Potentially, they may lead to new regulation and increased pressure to invest in new technologies. The report covers the main areas where Vattenfall is active including the Nordic, Eastern European and German regions.

The Nordic electricity market continues to be characterised by expectations of low growth of around ~ 0.6 % annually, says the report, while the supply side continues to be strong under normal hydrological conditions with relatively low prices. A new market characteristic of Nordic electricity prices that has emerged during the period is the influence of the market price of ETS CO2 allowances

The German electricity market is also expected to continue to grow at a similarly slow pace and after 2010 demand growth is expected to slow further still. Wholesale spot price levels have been showing an increasing trend during 2005, driven mainly by high fuel prices and CO2 prices.

The Polish electricity market, meanwhile, is expected to continue to grow at a higher rate of 1.7 % but restructuring has continued to be slow, since new privatisation projects have not yet been carried through. As a consequence of EU membership, says Vattenfall, Poland will need to continue over the next few years to rapidly implement liberalisation, to enforce stricter environmental regulations (currently only met by a small proportion of the installed capacity), and to resolve cross-border trade issues.

The report concludes that electricity prices have gone up largely because of two entirely unexpected developments with fuel prices rising dramatically and the prices of CO2 allowances exceeding all expectations. These two factors in combination have caused electricity prices to rise rapidly to very high levels, a development much quicker and much more dramatic than expected. In addition, taxation levels have also increased.

On the other hand, liberalisation and market reform at the European level are progressing much more slowly than had been hoped. As a result of the high electricity prices, many people are beginning to question whether competition is working as intended.