ricardo cardoso de andrade, dg comp b-1 6 september 2006 competition directorate-general energy...

6 September 2006

Competition Directorate-General

Ricardo CARDOSO DE ANDRADE, DG COMP B-1

Energy Sector Inquiry – findings and the way forwardPresentation for SVSE, Prague

Introduction and wider context

• Liberalisation: achievement and failure

• Energy markets have been increasingly in the news

• The Green Paper– Achieving a sustainable, competitive and

secure energy policy

Energy sector inquiry – timetable

• Sector Inquiry – launched June 2005

• Issues Paper – November 2005

• Preliminary Results – February 2006

• Final Report – by the end of 2006

• Objective– Gather information to identify possible

restrictions or distortions of competition

Preliminary findings

• (1) Market Concentration– High concentration– Strong grip of incumbents, little entry

Market Concentration - gas

• High levels of concentration at wholesale level

• Incumbents largely control imports and domestic production

• Traded markets dominated by incumbents

Incumbent share of importsIncumbent share of domestic production

Austria 80-90% -

Belgium 90-100% -

Czech Republic 90-100% -

Denmark - 80-90%

France 90-100% -

Great Britain 20-30% 40-50%

Germany 90-100% 80-90%

Hungary 90-100% 90-100%

Italy 60-70% 80-90%

Netherlands 50-60% 90-100%

Poland 90-100% 90-100%

Slovakia 90-100% -

Market concentration - electricity

• Incumbents control generation assets giving them scope to exercise market power by– withdrawing capacity or– increasing prices

• Scope for influencing prices exists at a number of power exchanges (examples: I, E, DK)

FranceAvailable installed capacity

86,7%

8,2%

2,5%

0,5%

2,2%

Undertaking A

Undertaking B

Undertaking C

Undertaking D

Otherundertakings

BelgiumAvailable installed capacity

17%

83%

Undertaking A

Otherundertakings


• (2) Vertical foreclosure– Long-term contracts and lack of

liquidity– “gatekeeper position” of incumbents,

foreclosure of new entrants

Vertical foreclosure – gas infrastructure

• Gas infrastructure remains mostly owned by incumbents and not sufficiently unbundled

• Long-term capacity reservations in “transit” pipelines and storage

Storage capacity booked long term

0%10%20%30%40%50%60%70%80%90%

100%

Cou

ntry

A

Cou

ntry

B

Cou

ntry

C

Cou

ntry

D

Cou

ntry

E

Cou

ntry

F

Cou

ntry

G

Cou

ntry

H

Cou

ntry

I

% o

f tot

al s

tora

ge c

apac

ity

Excluded from TPA booked capacity: less than 1 year

booked capacity: between 1 and 5 years booked capacity: 5 years and more

length not specified available capacity

Vertical foreclosure - electricity

• Many market participants complain about inadequate unbundling of network and supply activities

• TSO level:– Grid connection for new power plants– Interconnectors– Transparency

• DSO level:– Inappropriate switching procedures– Lack of ‘Chinese walls’– Discriminatory access tariffs


• (3) Lack of market integration– Markets are mainly national, with

incumbents staying in their own territory.

Market integration – gas import routes

Market integration – electricity imports

• Competition from imports is insufficient to erode market power of incumbents

• More interconnector capacity is needed• Many interconnectors are chronically congested• Long term capacity reservations reduce capacity

available for new entrants


• (4) Lack of transparency– Better access to information is

crucial for establishing a level playing field.

Lack of transparency - gas

Possible impact of the ‘3 or more’ rule on the Benelux-Italy axis

Assessment based on primary reservations only

Assessment based on primary and secondary reservations

Transparency provided Transparency refused

Possible impact of the ‘3 or more’ rule on the Benelux-Italy axis




Possible impact of the ‘3 or more’ rule on the East-West axis




Possible impact of the ‘3 or more’ rule on the East-West axis




• Gas market remains opaque and more transparency is needed

• Network users want reliable and timely information, beyond minimum requirements of EU legislation

• Confidentiality should not be used as a cloak to prevent proper disclosure

Lack of transparency - electricity

• The level of transparency varies widely between Member States

• 83% of market participants are not content with current levels of transparency

indispensable im portant or useful

not useful

TSO network 95.2% 4.8%

Interconnectors 91.8% 8.2%

Load 94.6% 5.5%

Balancing 90.7% 9.3%

G eneration (production) 86.2% 13.8%

G eneration (capacity) 94.1% 5.9%

Im portance of inform ation according to suppliers


• (5) Price formation– There is a lack of confidence that

wholesale prices are the result of fair competition.

Gas price formation – indexation

Heavy fuel oilLight fuel oil and gasoilGas price

Electricity price

OtherCoal price

Crude oilGeneral inflationFixed

UK

14,6%

16,2%

16,5%

40,1%

0,6%

2,9%

1,1%

7%1,1%

Western Europe

50,1%

0,6% 30%

2%

4,9%

4,6%2,6%5,2%

Eastern Europe

47,2%

2,1%

0,8%0,7%

48,1%

1,1%


Electricity price

OtherCoal price


UK

14,6%

16,2%

16,5%

40,1%

0,6%

2,9%

1,1%

7%1,1%

Western Europe

50,1%

0,6% 30%

2%

4,9%

4,6%2,6%5,2%

Eastern Europe

47,2%

2,1%

0,8%0,7%

48,1%

1,1%


Electricity price

OtherCoal price

Crude oilGeneral inflationFixedHeavy fuel oil

Light fuel oil and gasoilGas price

Heavy fuel oilHeavy fuel oilLight fuel oil and gasoilLight fuel oil and gasoilGas priceGas price

Electricity price

OtherCoal priceElectricity priceElectricity price

OtherCoal priceOtherCoal priceCoal price


Crude oilCrude oilGeneral inflationFixedGeneral inflationFixed

UK

14,6%

16,2%

16,5%

40,1%

0,6%

2,9%

1,1%

7%1,1%

Western Europe

50,1%

0,6% 30%

2%

4,9%

4,6%2,6%5,2%

Eastern Europe

47,2%

2,1%

0,8%0,7%

48,1%

1,1%

Electricity price formation

• Increase of fuel prices cannot fully explain price increases in all Member States

• CO2 allowance prices influence electricity prices, however analysts disagree as to the extent

Wholesale electricity and gas price developments in the UK

0

10

20

30

40

50

60

70

80

90

Jan-01

Mar-01

Jun-01

Aug-01

Nov-01

Jan-02

Apr-02

Jun-02

Sep-02

Nov-02

Feb-03

Apr-03

Jul-03

Sep-03

Dec-03

Feb-04

May-04

Jul-04

Oct-04

Dec-04

Mar-05

May-05

Aug-05

Oct-05

€/M

Wh

0

5

10

15

20

25

30

35

40

45

€/M

Wh

UK power year-ahead base in €/MWh (left scale)

UK NBP natural gas year-ahead in €/MWh (right scale)

Wholesale electricity and coal price developments in Germany

0

10

20

30

40

50

60

Aug-01 Jan-02 Jun-02 Oct-02 Feb-03 May-03 Oct-03 Feb-04 Jun-04 Oct-04 Mar-05 Jul-05

€/M

Wh

0

20

40

60

80

100

120

€/t

German electricity year-ahead base in €/MWh (left scale)

Coal ARA 90 day forward in €/t (right scale)

Way forward (competition)

• Merger control– EU-wide competitors, rather than dominant

national players

• Antitrust investigations– Vertical foreclosure, capacity hoarding, etc.– Further analyse price-setting mechanisms on

electricity wholesale markets

• State aid control

Inspections

• Unannounced inspections, in May, at the premises of gas and electricity companies in 6 Member States:– Germany, France, Belgium, Italy, Austria and

Hungary

• A considerable amount of information has been collected, and this must now be studied in detail

• Inspections constitute only a preliminary step

Way forward (regulation)

• Ensuring transposition of liberalisation directives

• Strengthening transparency obligations

• Access to capacity on cross-border transport infrastructure

• Regulation of the international segments of the grids

• Unbundling of infrastructure and supply

Conclusions

• First reactions– Positive feedback on inquiry findings– Divergent view on the way forward

• The security of supply issue

• High energy prices

Thank you for your attention.

ricardo cardoso de andrade, dg comp b-1 6 september 2006 competition directorate-general energy...

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