ELECTRICITY AND GAS MARKET OPENING IN THE EU NEW MEMBER STATES

Transcription

1 ELECTRICITY AND GAS MARKET OPENING IN THE EU NEW MEMBER STATES by professor Vidmantas Jankauskas, Chairman, Energy Regulators Regional Association (ERRA) Abstract New Electricity and Gas Directives (approved in 003) require opening electricity and gas markets for all non-residential consumers until July 004. Unfortunately, the EU new member states are lagging behind of the old member states, especially, in opening of the gas market. When analysing electricity markets in the Central-Eastern European countries, one can find specific reasons why there is market not functioning still or functioning not sufficiently competitively. The main reason is that the national markets are too small and large generators are dominating in the market. For example, only one generator produces more than 75 % of electricity in and the Baltic countries, two - in the Czech Republic, four in and only in there is competition in generation. Alas, this competition is heavily restricted by the stranded costs caused by the long-term power purchase agreements (such problem exists not only in, but in and also). On the other hand, there are rather favourable conditions for the regional electricity trade in the CEE region. There are very good interconnections among the Baltic Countries (enabling to import and export more than each country s peak demand), and, only has less interconnection lines, but still more than 0 % of its peak demand - the goal defined to be reached by the old EU member states in 00. Therefore, regional electricity trade my help to resolve the dominant generators problem and give consumer a choice. In the gas sector situation is much worse as almost all CEE countries have no indigenous sources and the only one external supplier is Russian Gazprom or its subsidiary, the and the Baltic Countries import 00 % or almost 00 % of natural gas from one source. In this situation market opening and liberalisation may cause adverse problems - increase in prices to final customers. Diversification of gas supplies by finding some other routes or sources is rather expensive and will not happen soon. The only hope is liberalisation of the Russian gas market with the third party access granted to other than Gazprom s gas suppliers. National Control Commission for Prices and Energy Algirdo 3 LT Vilnius Tel , Fax vidmantas.jankauskas@regula.is.lt

2 . Introduction Eight countries from the Central and Eastern Europe (CEE:,,,,,, and ) joined the European Union on the st of May 004; this was an important milestone in the integration of the former communist countries with the Western Europe. During the tenth decade of the previous century as also at the beginning of the new century these countries made a huge jump from the command and control system to a free market. Economic growth rates in these now new EU member states were much higher than in the old member states (for example, in the old EU member states growth rate was only 0.5 percent in 003, and consequent growth rates in the above mentioned Central and Eastern European countries was about 4 %, with the very fast growth in the Baltics more than 9 % in, 7,5 % in and 5 % in []). Nevertheless, GDP per capita in the new member states is only % of the EU average (comparison using purchasing power parities). The region inherited from the fast vertically integrated gas and electricity monopolies, extensive energy use, rather high pollution levels and neglected energy efficiency. With the gradual introduction of market relations, all countries started to restructure their energy industries, allowing some private capital participation and gradually moving towards liberalised operations. In the mid nineties countries in the region started negotiations with the European Union for the accession. This made a significant impact on the restructuring and liberalisation of the energy sectors, as European legislation was transposed into the national ones. EC Electricity and Gas directives (6 and 8) and their new versions passed in 003 were driving changes in the electricity and gas industries. We will further analyse the recent changes in the gas and electricity sectors of the CEE countries, successes and failures in creation of liberalised market as also possible future developments.. Electricity market development Successes of the liberalisation of electricity markets in the U.K. and Scandinavian countries were well known to the CEE countries, they were trying to restructure and liberalise their electricity markets in a similar way. Other important driving force was accession negotiations with the EU and consequent gradual implementation of the Aquis comunautaire into the national legal frameworks. In the mid-nineties privatised its electricity distribution and major part of generation, later privatisation process came to,, and the. Private investors always ask for transparent rules of the game in order to reduce their risks. This speeded up a process of establishment of independent regulatory agencies in the CEE countries. Obviously, the first autonomous energy regulator was established in in 4, as this country was privatising its energy assets. Until 00 all the CEE countries had established energy regulators with significant authority and independent from the sectorial ministries. Liberalisation process was going slowly, sometimes painfully, and implementation of the EC Electricity Directive (004/54/EC) requiring the full market opening for all commercial consumers until July, 004, was postponed in many countries. Report of the EC Directorate General for Energy and Transport published in July, 004, has shown that electricity market was not functioning in and, only initial steps towards the market were made by all other new member states except for where some progress was found []. There are several reasons why market is not working or working inefficiently in the new member states. First of all, there is not enough of competition in generation as incumbent generation companies are heavily dominating in the market (Table ).

3 Table. Market concentration in generation Largest producer by the capacity, % Share of the dominant player in the wholesale market, % Number of gencos producing 75 % of electricity 4 8 State owned generation companies heavily dominate in all countries, except in and where one may find sufficient member of companies to compete in the wholesale market. Alas, this competition is restricted by the long-term power purchase agreements (PPA) between producers and the grid company. In long-term PPAs were set in the midnineties, during the privatisation of the generation assets and in order to attract new investments, PPAs were also used to contract long-term imports and stimulate major greenfield developments. Consequently, the Hungarian transmission company MVM, buying electricity under the long-term PPAs and also from the Paks nuclear plant heavily dominates in the electricity market [3]. In long-term PPAs were made seeking to attract investments for the modernisation of the existing power plants: all they are burning coal and improvements in order to meet environmental standards were necessary. Consequently, 65 % of electricity generated in is sold through the long-term PPAs. If you add more than 0 % of electricity produced at the cogeneration plants which is mandatory to purchase by the Polish transmission company, also some green electricity share for free market shrinks to a very small number [4]. In the dominant producer, Ignalina Nuclear Power Plant, has about 75 % of the wholesale market and additionally about 5 % is an obligatory purchase by the market operator from cogeneration plants and renewable electricity. Understanding unfavourable conditions for a market all countries are trying to find some solutions, first of all, to solve a problem of the long-term PPAs. Both and defined certain measures, but implementation will take a long period during which competition will be restricted. Table. Favourable conditions for the regional trade Source: ERRA Installed capacity 7,0 3, 8,3, 6,5 34,6 8,0 3,0 Surplus capacity 6,,5,3,0 0,3 Import capacity 3,6,0,8 3,6 6,6,6

4 Nevertheless, there is a way to speed-up market development by creating regional electricity market. Technical preconditions for the regional market clearly exist (Table ), as import/export capacities among these countries are much higher than among the West- European countries. Unfortunately, due to different historic developments, the Baltic countries are not directly connected by the electricity lines with the other countries from the CEE region. So, a separate Baltic regional electricity market should be developed first and with the new planned interconnections (as -Finland, links) it could join the bigger market. 3. Gas market Gas markets in the new member states were liberalised following restructuring and liberalisation of the electricity markets. Unfortunately, there are too heavy barriers to the competition in the gas sector. Competitive market requires a sufficient number of companies participating in production and import of gas. This is possible when there are local resources and imports from several sources. But natural gas network in the CEE countries was developed for one purpose to import Russian gas or for its transit further to Western Europe. Indigenous resources are rather small (they exist in and only) so heavy dependence on import from Russia is a key feature of the gas markets in the CEE countries. Table 3 shows that in all countries the national gas monopoly is heavily dominating in the % of gas imported Source: EC Benchmarking Report, 004 Table 3. Gas market structure No. of import sources 3 No. of comp. with at last 5 % share of gas % of available gas controlled by largest comp market and only, and are importing some gas not only from Russia. Another problem is that Russia does not allow other shippers than Gazprom to export gas using the Gazprom s pipes. The third party access, if introduced in Russia, would enable other gas owners from Russia or in Central Asia to transport natural gas and enable some competition. Some steps towards this direction were made several years ago when Itera company registered in the U.S., started to transport its gas and sell it abroad. The Russian Government abolished this practice and Gazprom is the sole owner of the transported gas. New member states, implementing the new Gas Directive, have unbundled their gas companies and started to open the markets. But even in countries with possible other supply sources and occurrence of non-connected with Gazprom suppliers, like, there are very limited activities in a free market. In theoretically all non-household consumers are eligible, but supply is insufficient, especially for eligible consumers and supplier (the public utility) holds back capacity and does not provide a sufficient quality, therefore eligible consumers are unable to switch from public utilities. Unclear capacity allocation rules reduce willingness to take a risk and enter competitive market; therefore only about 5 % of gas was traded in a competitive market [5]. In market opening resulted in price increases to eligible consumers: independent supplier buys gas from the same Gazprom but sells it to the eligible consumers at

5 significantly higher price and public supplier has a limited volume of gas dedicated to the regulated consumers only. Further market opening was therefore met with the consumer protests. Road towards competitive gas market in the new member states seems to be long. Addition of new cross-border transmission lines, lines connecting new sources, new storages is necessary to reduce bottlenecks and get some free capacity in the market. More flexible and transparent rules for access to the transmission and transit networks are necessary. And for the Baltic countries where transmission capacities are sufficient the most important is implementation of the third party access to the grid in Russia: it would allow other gas producers than Gazprom to enter the gas market. 4. Conclusions. Electricity markets in the EU new member states are functioning badly due to the domination of the incumbent wholesalers and stranded costs caused by the long-term power purchase agreements.. Existing technical preconditions rather good interconnection capacities allow development of regional electricity markets with a consequently better competition conditions. 3. A way to a competitive gas market is even longer as gas is mostly supplied from one source and dominant supplier leaves only a small share for a competitive market. Introduction of the third party access to the grid in Russia with the development of clear market rules in the new member states is a prerequisite for a competitive market. References. Revue Elargissement, Towards a competitive and regulated European Electricity and gas market. EC DGTREN, June, Report of the activities of the Hungarian Energy Office in 003. July 004, Budapest. 4. Report of the President of the URE. Biuletyn Urzędu Regulacji Energetyki, 004, Nr G. Szorenyi. Experiences of opening of the markets so far. Presented at the Hungarian Energy Office 0 th year anniversary conference, October, 004.