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Electricity market integration in Europe


Leonardo Meeus, Ronnie Belmans, University of Leuven (KUL), Leuven, Belgium

Keywords: energy markets and regulations

Abstract

Europe is preparing for a third wave of legislation to further reform electricity markets. The energy sector
inquiry conducted in preparation of this third energy package concluded that there is lack of market integra-
tion. Even though this is true, it is important to put this in perspective. For the moment, electricity markets in
Europe are indeed not the most harmonized or fine-tuned of the world. However, in some regions promising ini-
tiatives have already been launched and even when only integrated regionally, these markets will be the largest
in the world, which indicates how ambitious the target of a single electricity market for Europe really is.

Rsum

LEurope se prpare une troisime vague de lgislation pour poursuivre la rforme des marches de llectricit.
Lenqute prparatoire auprs du secteur nergtique a conclu un manque dintgration du march. Bien que
cela soit exact, il est important de mettre ces conclusions en perspectives. Pour linstant, les marchs de llectricit
ne sont, bien sr, pas les mieux harmoniss du monde, ni les mieux ajusts. Cependant, dans certaines rgions,
des initiatives prometteuses ont t lances, et mme si lintgration nest que rgionale, ces marchs seront les
plus grands au monde. Ceci indique lambition du but dun march lectrique unique en Europe.

Samenvatting

Europa bereidt zich voor op een derde wetgevingsgolf die de hervorming van de elektriciteitsmarkten moet
voortzetten. De voorbereidende studie van de energiesector leidde tot het besluit dat de markten onvoldoende
gentegreerd zijn. Dit klopt weliswaar, maar het gegeven moet wel in perspectief worden geplaatst. Op dit ogen-
blik zijn de elektriciteitsmark-ten in Europa inderdaad geen toonbeeld van harmonisatie en zijn er in de wereld
markten te vinden die beter op elkaar zijn afgestemd. In bepaalde regios werden evenwel veelbelovende initia-
tieven genomen en ook al beogen deze slechts een regionale integratie, toch zullen hieruit de grootste markten
ter wereld ontstaan. Dit toont hoe ambitieus de doelstelling van een eengemaakte elektriciteitsmarkt voor
Europa eigenlijk is.

Introduction gather information to identify possible trary, many issues indeed still need to
distortions in competition. The energy be tackled in order to create a level
January 2007, the European sector inquiry was launched in 2005, playing field in Europe [3]. The inten-
Commission published the third energy which required companies, trade asso- tion of this paper is rather to put the
package, i.e. a set of roadmaps, progress ciations and government agencies to conclusions of the energy sector inquiry
reports and the final results of the supply information or state-ments. The in perspective. When discussing elec-
energy sector inquiry. The package also final report of the energy sector inquiry tricity market integration in Europe, it
proposed future objectives, targets and [2] concludes that the lack of electricity is important to consider where we come
actions. September 2007, the market integration mainly results from, where we are and where we are
Commission consequently proposed its from insufficient interconnecting infra- going with the creation of a single mar-
new legislative package, which still structure between national electricity ket for electricity in Europe.
needs to be approved by the representa- systems, insufficient incentives to
tives of the Member States in the im-prove cross border infrastructure,
European Parliament and Council inefficient allocation of existing capa- Where do we come from?
before it can be endorsed [1]. cities, and incompatible market design
between TSOs and/or spot market While the first reforms were mainly
The most critical and controversial operators. motivated by the European internal
report of the third energy package has market policy, the reforms that followed
been the energy sector inquiry. The The contribution of this paper is not to were trig-gered by the in 2000
main objective of such an inquiry is to question these conclusions. On the con- approved Lisbon Agenda, in which

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energy was considered one of the criti-
cal fields to improve competitiveness of
European undertakings. Meanwhile,
energy and a common energy policy for
Europe are even higher on the agenda.
The first legislative package that
started the reforms only included the
Directive 96/92, the second included the
Directive 2003/54 and Regulation
1228/2003 and the third proposes
amendments to the existing Directive
2003/54 and Regulation 1228/2003 and
an extra Regulation to establish an
agency for the cooperation of energy
regulators in Europe. While the first
Directive allowed virtually everything,
except a single electricity market in
Europe, the second gave less freedom to
the Member States and had shorter-
term deadlines. Furthermore,
Regulation 1228/2003 for the first time
explic-itly addressed cross-border Fig. 1: Day-ahead price differences in Europe for base load (Energy Sector
issues. Note that in contrast with a Inquiry [2])
Directive, a Regulation does not need to
be transposed into national law, which institutions. The EC Directive 96/92 rulings, arguing that the developments,
allows less room to maneuver for hardly addressed these issues and the leading to wider than national electri-
Member States. EC Directive 2003/54 only partly with city markets, are uncertain and not
somewhat stricter unbundling require- fulfilled in the short term [9].
Note that a uniform harmonization of ments between network and other
all relevant national legislation across activities and the requirement to When will we have a single electricity
the European Community rarely appoint a regulator who has to approve market in Europe? Often quoted neces-
occurs. Direc-tives therefore typically tariffs, monitor congestion manage- sary conditions are a level playing field
only provide a framework that leaves ment methodologies and act as a and adequately available network
some room to maneuver for Member dispute settlement authority. capacity. It is however not clear to what
States, but the Directive 96/92 clearly extent this for instance implies a stan-
left too much room to maneuver. As dis- Due to a lack of a European-wide dardized market design and/or a single
cussed in [4], the first draft of this energy regulatory authority, market price for Europe. In the following two
directive was published in 1991, but on integration in Europe has been mainly paragraphs we discuss the overall elec-
successive occasions the Commission driven by informal regulatory networks tricity market integration status and
was asked to devise a less radical between network operators, standardi- some regional successes that are
approach to the market reforms. zation authorities and national regula- promising for the future.
tors. The establishment of the Florence
As commented in [5], the EU market forum, which is academically supported Overall status
reform process has been very different by the Florence School of Regulation,
from elsewhere in the world as it has allowed these informal regulatory There are still large wholesale price dif-
included retail competition from the networks to meet and discuss twice a ferences between countries in Europe.
start. Directive 96/92 introduced the year since 1998. For a more detailed Fig. 1 illustrates for 2005 that for
concept of eligible customers who have discussion of the Florence process and instance the prices in Italy, Ireland and
the legal capacity to contract volumes its relative success, see [6] and [7]. the UK are almost double the prices in
of electric energy from any supplier. Finally, an EU-wide academic network Norway, Sweden, Finland, Poland,
This Directive however included a slow has formed, for example via the SESSA Slovakia, Austria and Slovenia. Note
and gradual market opening, which has (currently renewed in CESSA) program that these are even average day-ahead
been accelerated by Directive 2003/54: and with the establishment of a prices for a base load contract, which
all customers became eligible from 1st European Energy Institute. averages out the even larger hourly
July 2007, while for all non-households price differences.
customers this was already the case
from 1st July 2004. Where are we? Interconnection capacity is scarce
across Europe and little progress has
To benefit from this freedom to choose a Do we have a single electricity market been made (see for instance [8] for a
supplier, retail customers or their sup- in Europe? Note that the Commission more detailed discussion). The
pliers need an appropriate wholesale itself has so far nearly always defined European Council in Barcelona in 2002
market organization, non-discriminating the rele-vant market as being national set as a target for 2005 that all Member
network access and transparent pricing in scope in merger and acquisition States should have an import capacity

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of at least 10 % of installed generation
capacity, which is for instance still not
the case for Italy, UK, Ireland, Spain
and Portugal.

As discussed in the introduction, there


is also still a lot of room for improve-
ment in terms of creating a level
playing field, but there has also been a
promising evolution. Largely thanks to
Regulation 1228, transit transmission
charges on cross border exchanges and
non-market conform allocation of cross
border transfer capacities have been
abolished. Physical cross-border
exchanges in Europe have increased
from 7.6 % of electricity consumption in
1998 to 10.3 % in 2005 [10].

Regional successes

Fig. 2 illustrates the 3 regional markets


which are leading the way to future
electricity market integration in
Europe. Fig. 2: Existing regional markets in Europe

The oldest and most well-known day-ahead operations. Apart from this, Regional strategy
regional market is the Nordic market they also use the internal border capa-
(Nord Pool). Norway is not part of the cities to optimize clearing of orders In 2004, the Commission communicated
European Union, but started reforming introduced to their day-ahead auctions, for the first time that regional mar-
already before the European Union and like in the Nordic market. In contrast kets may be a necessary interim stage
is following the European electricity to the Nordic market however, they are in its medium term strategy paper [11].
market reform process. Nord Pool started for the moment only allowed to use a With this communication, the
as the Norwegian power exchange in small fraction of the available border Commission basically transferred what
1995 and its day-ahead wholesale auc- capacities. was happening anyway in some regions
tion trading system has extended to into a strategy for all regions. Fig. 3
Sweden in 1996, Finland in 1998, The long awaited Iberian market illustrates the regional strategy as
Denmark in 2000 and partly also into (MIBEL) was finally launched in 2007. originally communicated by the
Germany in 2005. The day-ahead auc- In contrast to the Central Western Commission. Note that it includes 8
tion system uses the internal border European market, the existing regions that do not overlap. Note also
capacities to optimize the clearing of exchanges in Spain and Portugal have that the in 2004 already existing
orders introduced in the different coun- divided responsibilities. The Spanish Nordic and the announced Iberian mar-
tries. Every country corresponds to one exchange OMEL takes care of the day- ket are indeed included as a region.
or more price zones. The Nordic coun- ahead auction market for both coun-
tries have for instance also started har- tries and the Portuguese exchange The Commission also started to actively
monizing their intra-day and real time OMIP organizes the futures market. As promote regional markets with the
market systems. in the Nordic market, all border capa- organization of Florence mini-forum
city between Portugal and Spain is meetings between December 2004 and
Much more recently conceived and available to the day-ahead market. February 2005, addressing congestion
relatively fast to launch is the Central management on a regional basis. In
Western European market for the 2006, the European Regulators Group
moment including France, Belgium and Where are we going? for Electricity and Gas (ERGEG) in
the Netherlands, launched in 2006 cooperation with the Commission then
(TLC). When a cooperation agreement In relation to where we are going with renewed the regional strategy by set-
was first signed in 2003, both France the market reforms in Europe the fol- ting up the seven regional initiatives
(Powernext, started in 2001) and the lowing two paragraphs discuss two indicated in Fig. 4 [12]. In every region
Netherlands (APX, started in 1999) had interesting developments. The first is there are now regular meetings on
already well-established power more related to the path we will follow issues as day-ahead, intra-day and real
exchanges and Belgium was in the towards a single market and the second time market operation, but for instance
process of launching its own exchange. to the moving target of what is also coordinated transmission expan-
They have chosen to coordinate their Europe. sion planning, etc. Note however that in
existing trading systems, instead of contrast with the original regional
choosing one single system for their strategy, the regions are different and

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Germany and Luxemburg to join the
Central Western European market. The
difference with the US is that the
existing re-gions in Europe have not yet
harmonized their rules to the same
extent. As discussed in [13], EU market
design in general is less fine-tuned as
for instance the PJM design. For newly
joining entities the rules of the game in
the European regional markets are
therefore less predefined, which should
make it easier for them to expand.

There is however always the risk that


several strong regions develop which
Fig. 3: Regional strategy as originally communicated in 2004 by the European then become more difficult to integrate.
Commission (DGTREN, [11]) A first sign is perhaps the delay of the
coordination of the day-ahead market
operations of APX with Nord Pool. This
has been planned since the approval of
the cable project interconnecting
Norway with the Netherlands in 2004
(NorNed), but meanwhile the
Netherlands is part of the Central
Western European regional market
with France and Belgium which has
recently officially prioritized the exten-
sion to Germany and Luxemburg [14].

Energy community

The single electricity market undertaking


is becoming increasingly ambitious in
terms of size. First, at the start of the
electricity market reforms in 1996, the
European Union included 15 countries.
Anno 2007, it already includes 27 coun-
Fig. 4: Regional strategy as renewed in 2006 by the regulators group (ERGEG, tries. Second, since 2005 the Energy
[12]) Community is larger than the
European Union. In 2005 the European
overlapping. In practice countries illustrates the regions that the FERC Union signed the Energy Community
involved in more than one region can of suggested, but which have not been Treaty with several countries from
course not be equally committed to supported by the federal authorities. In South-East Europe that are not (yet)
every region at the same time. the US, there is no commitment to work part of the EU. In the framework of
towards a single market, not even to their general collaboration with the EU
Also in the US, regional markets are introduce market reforms in every state. (and perhaps future membership), they
increasingly becoming a reality with Many states in fact have not even started agreed to implement the same electri-
some of them even covering part of reforming their electricity markets, as city (and gas) market reforms as the
Canada, as illustrated in Figure 5. indicated by the blanks in Fig. 5. Member States of the EU. It is also the
Similar to the Nordic market, these intention of the Commission to extend
regional markets are the result of one The author in [7] uses the metaphor of this policy to other countries like for
system that has been ex-tended to an agglomerative magnets to point out instance Turkey who was involved but
increasing number of states. The best that the existing regions in the US will did not yet step in with the first group
example is PJM that started ten years tend to expand further, but for newly of countries. Note that for instance also
ago as the market operator of Pennsyl- joining entities the rules of the game Norway and Switzerland have been
vania, New Jersey and Maryland and are predefined by the existing model. observing members in this process.
has gradually extended to 13 states and Also the most developed regional mar-
the District of Columbia that includes kets in Europe may function as agglome- For the moment the largest market in
the capital Washington. The Federal rative magnets for other countries in the world is PJM (Fig. 5). A single elec-
Energy Regulatory Commission the future. The Nordic market has tricity market in Europe would of
(FERC) also tried to transfer what was indeed already been extended on several course be much larger (Fig. 7). Note
happening any-way in some regions occasions and there is for instance also that if Germany joins the Central
into a strategy for all regions. Fig. 6 already a political agreement for Western European market initiative,

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this regional market would even
already be larger than PJM, although
still less fine tuned and harmonized in
terms of design. As indicated in Fig. 5,
PJM has a 145 GW peak load and 728
TWh annual consumption. Belgium,
France, Germany and the Neterlands
have a 191 GW peak load (13 + 81 + 80
+ 17 GW) and 1246 TWh annual
consumption (90+478+559+116 TWh).

Conclusion

Market reforms in Europe have until Fig. 5: Regional realities in North America, with illustration based on [15]
recently been mostly national and
divers as the European legal framework
allowed Member States to maneuver
even more than what is normally the
case with European Directives.
Meanwhile the framework is becoming
more stringent and the European
Union is increasingly committed
towards creating a single electricity
market as part of a common European
energy policy.

Even though it is not fully clear what a


single market means in terms of for
instance wholesale price equality Fig. 6: Regional markets in US as envisaged by the FERC
across Europe or interconnection capa-
city, it will require further harmoniza-
tion and coordination of market rules
and operations. In some regions there
are already some positive develop-
ments, especially in the Nordic, Central
Western European and Iberian mar-
ket. Faced with what was happening
anyway in some regions, the
Commission has even started promote
a regional strategy for all regions as an
interim stage towards a single electri-
city market in Europe.

For the moment electricity markets in


Europe are therefore not the most har- Fig. 7: Energy Community Treaty signed in 2005 extends the Internal Energy
monized or fine-tuned of the world, but Market of the European Union towards South-East Europe
they will soon become the largest. If the
Central Western European market [4] L. Hancher: Slow and not so sure:
References
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and informal regulatory networks: elec- Meeting, Tampa, USA, 2007, 5 pages Ronnie Belmans
tricity market design convergence in [14] A Memorandum of Understanding on received the M.S.
USA and Continental Europe, RCAS Electricity Market Coupling and degree in electrical
2007/15, http://hdl.handle.net/1814/6772 Security of Supply in the Central engineering in 1979,
[8] D. Dobbeni: Regulatory and technical Western European Region was signed on the Ph.D. in 1984, and
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Markets, 2007, Vol. 2, Issue 1, p 77-107 K.U.Leuven, Belgium
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July, 2006; pp. 49-56. Les auteurs and variable speed drives. He is apointed vis-
iting professor at Imperial College in London.
[10] Report on the experience gained in the Leonardo Meeus He is also President of UIE. He was with the
application of the Regulation (EC) No received a master Laboratory for Electrical Machines of the
1228/2003, available at: http://ec.europa. degree in commercial RWTH, Aachen, Germany (Von Humboldt
eu/energy/electricity/publications/index engineering in 2002 Fellow, Oct.88-Sept.89). Oct.89-Sept.90,
_en.htm and the Ph.D. degree in he was visiting associate professor at Mc
[11] DG TREN: Strategy Paper, Medium electrical engineering Master University, Hamilton, Ont., Canada.
Term vision for the Internal Electricity in 2006, both from the During the academic year 1995-1996 he
Market, 2004, http://europa.eu.int/ KULeuven, Belgium. occupied the Chair at the London University,
comm/energy/electricity/florence/doc/flo Currently, he is a senior offered by the Anglo-Belgian Society. Dr.
rence_10/strategy_paper/strategy_paper researcher of the Belmans is a fellow of the IEEE and the IEE
_march_2004.pdf KULeuven Electric (United Kingdom). He is the chairman of the
[12] ERGEG: Electricity Regional Initiative, Energy Research Group ELECTA. He is also board of Elia, the Belgian transmission grid
2006, http://www.ergeg.org/portal/page/ the scientific coordinator of the KULeuven operator.
portal/ERGEG_HOME/ERGEG_RI/ERI Energy Institute and the European Energy
Institute (EEI). Since 2006, he is the chair-
[13] L. Meeus, R. Belmans: Is the prevailing
man of the CIGRE Task Force C5-7.1 on
wholesale market design in Europe and
power system investment incentives in a mar-
North America comparable? ENERDAY
ket environment.
2007, Dresden, and IEEE PES, General