Speech Kroes: "Wat zijn knelpunten in Europa's energiemarkten" (en)

Energy Sector Inquiry Conference, Austrian Chamber of Commerce

Vienna, 1st March 2006

Ladies and Gentlemen,

I am very pleased to be here in the beautiful city of Vienna during this, Austria's second Presidency of the European Union.

This conference is dedicated to the problems in European energy markets and possible ways to tackle them. I am encouraged by the great interest this is generating: so many of you are here today! But I am not surprised. I know just how much energy issues - security of supply, developments in prices - impacts directly on business and industry. Energy is a key input in the commercial process. Energy related questions have to be a core part of anyone's business strategy.

I would therefore like to use my time to update you on the first findings of the European Commission's energy sector inquiry, and to share some ideas on the way forward.

Why a sector inquiry?

As you are all very aware, reliable energy supplies at reasonable prices are key to the performance of any economy. Europe is no exception, especially because of our pressing need to deliver the growth and jobs on which our future sustainability depends. Over the past decade, the EU has gradually opened the internal energy market to competition with two waves of liberalisation Directives. The objective was to increase efficiency in the production, transmission and distribution of energy. To reinforce security of supply and the competitiveness of the European economy whilst respecting environmental protection.

Despite the efforts made, these objectives have clearly not been achieved. A single, competitive European energy market is still not a reality. But it is equally clear that efficient energy markets are key for European competitiveness. That is why, shortly after coming into office, I was pleased that my Commission colleagues backed my suggestion for an in-depth assessment of the energy markets. Over the past nine months, we have used a new tool - the sector inquiry - to find out more about the barriers to free competition in energy.

We identified the first issues last November and presented them to the Energy Council. What we found was rather worrying. It indicated real market distortions.

Interim results

The Preliminary Report we presented in Brussels two weeks ago confirms that we were right to be concerned. On five key grounds:

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  market concentration;

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  vertical foreclosure;

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  market integration;

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  transparency; and

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  price formation.

(1) Market Concentration

First, there is a high degree of market concentration in the energy sector.

Most gas and electricity markets still reflect the old, concentrated market structure of national or regional monopolies. Despite liberalisation, the old incumbents appear to remain the top dogs. There is very little new entry. In Austria, for example, the largest player covers around half of the electricity, and three-quarters of the gas supplies to final customers.

(2) Vertical foreclosure

Second, there is a related problem: vertical foreclosure.

New entrants can't get access to the markets, so they can't offer their services to consumers. Long-term contracts and a lack of liquidity reduce the amount of gas and electricity available to alternative providers.

More needs to be done to get the market moving. For example, the plan to develop a gas hub at Baumgarten could be the kind of project to help create a more liquid and transparent market.

(3) Market integration

The third problem is lack of market integration in Europe.

Basically, gas and electricity markets still work on national terms. The top dog incumbents do not seem keen to compete on their neighbours' territory.

At the same time, developments in one national energy market do have a direct impact on others. I understand that Austrian power prices are very closely linked to those in Germany. This underlines the importance for Austria that the German power market is fully competitive. Any improvements in Germany would also benefit Austrian consumers.

Markets will only work effectively if gas and electricity are able to move. I am aware of the continuous effort being made in Austria to develop relevant bits of the high-voltage transmission network. This not only helps markets integrate, but most importantly contributes to reliable supplies to Austrian customers - industry and consumers alike.

As for gas, investments bringing new gas sources to the market can enhance competition and benefit consumers. But this should not be an excuse for long-term reservations, which set incumbents' market shares in stone and discourage new entry. This is why the Commission is favourably predisposed towards projects such as the planned "Nabucco" pipeline, due to link Iran and the Caspian region with Austria. But obviously each case has to be subject to a proper individual analysis.

(4) Transparency

Our fourth area of concern is transparency - or rather, lack of transparency!

Market actors told us that better access to information is crucial for establishing a level playing field. This is not just a barrier to entry. It also undermines confidence in trading, and stops market participants from making informed choices.

Household customers and small businesses also demand more price transparency and easier comparability of offers - a message that came out very clearly from a recent Austrian market survey. In any event, the relative size of markets is no excuse for not releasing information.

(5) Price formation

Finally, there is the key issue of how prices are set.

There are of course several reasons for the gas and electricity price increases of the last months. My concern is to make sure that price increases are not due to anti-competitive practices.

Most long-term supply contracts link gas prices to oil or oil derivatives. While hub prices adapt to changes in supply and demand, long-term contracts do not.

For electricity, many large consumers think that prices on spot and forward wholesale markets do not result from fair competition. I should also mention that in a number of cases, co-existence between regulated and free market prices causes distortions and can be an obstacle to full market opening.

Way forward

So there you have the problems. We now need to find solutions. What comes next?

Lasting concentration is a major problem in energy markets. This is why we have to ensure proper merger control in this sector. We may even have to review the EU's merger rules, in order to make sure that merger cases get the same strict investigation everywhere, be it at national or European level. And as you know, constant vigilance is the Commission's duty in the field of state aid control. This is ever more important as the energy sector moves into a period of major investments.

If we want to tackle the problems we found, this requires a proactive approach. The Commission will launch individual antitrust investigations where this is appropriate, for example, where there is vertical foreclosure caused by long-term downstream contracts, or hoarding of capacity on pipelines, gas storage and interconnectors. We will probably also take a closer look at the price-setting mechanisms on electricity wholesale markets, including power exchanges.

We also know we can count on national competition authorities - Mr. Barfuss here, in cooperation with energy regulators - Mr. Boltz, to act decisively where they find problems within their own jurisdiction. Of course it may be the case that the jurisdictional rules on questions such as mergers need to be kept under review, to ensure that they remain the best rules for today's economic reality. But there is no competition amongst competition authorities here! We are all working towards one shared objective - the enforcement of the EC competition rules - and none of us can do the job alone. The Commission very much appreciates the help and support of all our partners in the European Competition Network.

We also need to have a think about the rules applying to energy. The inquiry suggests that the existing Community Directives are not fully implemented. The Commission has already said that, by the end of this year, it will review the implementation of the gas and electricity liberalisation directives and consider the need for further proposals. From a competition perspective, there are several issues to be considered, such as strengthening transparency obligations and addressing "grandfather rights" of incumbents in order to eliminate bottlenecks created by reservation of capacity on cross-border transport infrastructure. I know that some of Austria's borders are affected by this problem. I would therefore encourage the competent national authorities, here and everywhere in Europe, to tackle this issue and release capacity where appropriate. This would also be in line with a recent decision of the European Court of Justice on long-term import capacity reservations to the Netherlands.

In addition, further progress is certainly needed as regards regulation of the international segments of the gas and electricity grids. In this respect I would like to note the ambitious international approach of E-Control and its Managing Director Walter Boltz, which is recognised and appreciated.

Finally, market structure remains a real concern. Generation, supply, pipelines and grids, and distribution are bundled. Owners and operators of critical networks often compete with companies that need to have access to these same networks. Perhaps it is not always the case that integrated companies will treat competitors in a completely fair manner, as their own interests may lie elsewhere. I for one find the case for full structural unbundling rather convincing, and I am pleased that some of our Member States are going down this route.

Conclusion

Ladies and gentlemen,

It is well known that if you want quality products out of a system - any system - you have to put quality components into it in the first place. We all want to see Europe move quickly down the path of more economic growth and more and better jobs. That is the path to environmental and social stability.

An open, effective and competitive single EU energy market would be a crucial input to the Lisbon process. But because of the problems we have identified, the energy input to our growth and jobs machine is not yet as it should be.

We know how some of the problems can be addressed, and Austria provides some stimulating examples. I can only encourage your national bodies, competition authority and regulators, as well as those operating in the markets, to continue to move in the right direction.

As for our part of the homework, in the European Commission, we will continue to use our policy tools to enforce fair competition in liberalised markets. We will be active in ensuring the proper application of the liberalisation directives. And we will think carefully about whether further regulation may be appropriate in the future.

Thank you for welcoming me here to Vienna, and thank you for your attention.