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Integrating the EU energy market

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PowerInnerBy Alexis Thuau, EU Issue Tracker

Completing the EU internal energy market would bring economic benefits of between €16 billion and €40bn per year and encourage cost-efficient decarbonization, says the European Commission.

However, recent efforts to open up the market have been undermined by a lack of connections, in addition to non-physical obstacles to cross-border trade such as restrictions on exports and disproportionate license requirements.

What is needed, says the Commission, is investment in infrastructure, simpler and more transparent rules, and greater regional integration in order to further integrate the EU energy market.

These conclusions are contained in a recent Commission Communication. While a degree of progress has been made towards full energy market integration, the Communication outlines and examines the key obstacles that must still be overcome.

The Communication

The Communication is divided in three main sections, which focus on the following topics:
• Market integration in progress and delivering concrete results;
• market integration requiring more infrastructure and transparent, simpler and more robust rules, and;
• implementation and deeper integration based on regional integration.

The Communication is also supported by a number of Staff Working Documents covering:
• Energy position of the EU and recent developments in the EU wholesale markets of gas and electricity;
• state of play of the implementation and functioning of the energy market in the 28 member states;
• report on the Independent Transmission Operator (ITO) model;
• investment projects in energy infrastructure, and;
• implementation of the Trans-European Energy Network (TEN-E), European Energy Plan for Recovery (EEPR) and PLI projects.

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Progress towards Market Integration

The emergence of an integrated energy market is seen as key to securing energy supplies. A wider, integrated market will enable variability of renewable electricity sources to be better counterbalanced.

With regards to gas, the Communication highlights progress made in dealing with potential supply disruptions through increased efforts to build more flexible pipelines, more storage capacity and more diversified supply sources. However, the Communication reminds Member States that if they want the gas market to operate soundly, they must treat market participants fairly within a transparent and stable legal framework. Finally, the Commission emphasises the importance of well-working hubs and power exchanges.

However, despite the fact that wholesale prices have decreased significantly with regards to electricity and have remained in check with regards to gas, consumers have not directly experienced these benefits due to taxes and surcharges on their energy bills.

More Infrastructure and Transparent Rules

The Third Energy Package has initiated an investment climate that makes sure that the most needed hardware is built. In addition, the EU has supported – both financially and administratively – the development of electricity and gas interconnections through the adoption of a list of 248 Projects of Common Interest (PCIs). Finally, the implementation of the 2010 European Energy Plan for Recovery (EEPR) has accelerated the implementation of critical infrastructure projects.

However, the Communication underlines three major areas for improvement. Several geographic areas face transmission issues: the Baltic States, Central-Eastern and South-Eastern States with regards to gas and the Iberian Peninsula, the Baltic region and Ireland and the United Kingdom with regards to electricity.

Secondly, more effort should be directed at making grids smart. Thirdly, access to finance remains an issue while building transmission infrastructure; it is capital intensive and therefore requires stable and predictable regulatory frameworks. The Communication therefore recommends a quick implementation of the Trans-European Energy Network (TEN-E) programme in order to identify and complete the most important PCIs.

The Third Energy Package has also enabled energy regulators to assist in the creation of Network Codes, which will contribute to the development of a harmonised legal framework at the EU level. Significant progress has also been made in cross-border energy flow management.

Such efforts have resulted in the inception of a ‘day ahead market coupling’ mechanism in the field of electricity and the PRISMA-platform in the field of gas. However, the Commission stresses that uneven progress has been made between electricity and gas – for which a set of legally binding network codes have already been formalised – as well as between regions. Further progress must be made to facilitate short term trading and allow participation in the electricity and gas markets by new actors, including renewable energy producers.

In addition, efforts should concentrate on the predictability of network tariffs. Finally, the Commission predicts that the development of smart grids will transform the way in which electricity is produced, transmitted and consumed and therefore will require further changes in the regulatory framework.

Implementation and Regional Integration

As regards the implementation of the Third Energy Package, infringement cases remain pending only against two member states. The Commission has turned its attention to checking whether or not member state measures correctly transpose the Third Package and recalls the Member States’ obligation to address any uncoordinated and counter-effective measure that could damage the internal market.

As regards the existence of capacity mechanisms within member states, the Commission requires them to be open to capacity abroad, to promote and reward demand side solutions to the same extent as generation solutions and to encourage flexibility of production and demand.

The Commission encourages the development of regional initiatives as co-operation in a smaller group than the entire EU can go faster and be better suited to address the particular challenges of the region concerned. In addition, regional initiatives are also proving their concrete value in the early implementation of network codes. However, the Commission expresses concerns over staff and budget cuts at regulators in several member states.

While some network codes are already in place, especially with regards to gas, the Commission wants to see the development of further codes, particularly in view of facilitating short term trading and allowing participation in the electricity and gas markets by new actors, including renewable energy producers.

Once these rules enter into force, efforts should then be directed at making sure that they are enforced correctly and that actors play the right role at the right level. The Commission finally calls for further integration of the energy market, which could be achieved through renewed commitments in the new climate and energy policy framework for 2030.

Next Steps

The Communication has been sent to the European Parliament and the Council. These institutions may decide to formally respond in the coming months. The first network codes related to electricity are expected to be adopted in the first quarter of 2015. Following the endorsement of the 2030 Framework, the Commission will come forward with related legislative initiatives during the course of 2015.

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