CRE: Europe's liberalized gas markets far from goal

Doris Leblond
OGJ correspondent

PARIS, Aug. 3 -- The establishment of a single European gas and electricity market—and even regional markets— is still a distant goal, contends France's Energy Regulatory Commission (CRE) in its fifth annual report covering the period July 1, 2003 through June 2004.

Describing as "a key moment", the opening of France's natural gas market to 70% of its eligible clients, CRE is careful to point out that this must mark a further step in achieving the ultimate goal of a single market.

The actions of regulators in each member country, it insists, must be made in a European context. And, indeed, regulators are developing their cooperation within the Council of European Energy Regulators (CEER) to harmonize their positions on questions of common interest. Despite that, notes CRE as it details the different aspects of the current liberalization picture, a single market remains a far-off prospect.

The most significant drawback is that the "legal" opening rate of the market, based on the EU's directive, conceals extremely diverse situations in terms of actual opening. The UK, Germany, Denmark, Italy, Spain, Austria, and the Netherlands are officially 100% open to competition. However, while this actually is true in the UK, in Germany hardly 5% of large industrial clients have switched operators. In France, despite the 37% opening before July 2004, the actual volume switch to another operator was 20%.

Diversified unbundling
Under the EU June 2003 directive, member states have until July 1, 2007 to legally unbundle distribution from operators' other gas businesses, the only exception being integrated companies with fewer than 100,000 clients.

On the other hand, the same directive sets no unbundling obligation for LNG and gas storage, although third party regulated or negotiated access to storage facilities has been provided since July 2004. The directive obligations henceforth concern the 10 new EU member states, but Cyprus and Malta enjoy exemptions as emerging or isolated markets, and compliance for the Czech Republic is deferred to Dec. 31.

The introduction by Austria, Belgium, Denmark, France, Ireland, Italy, the Netherlands, and the UK of the in-out transport tariffs, which do not require identification of the distance between entry points and outlet points within a tariff zone, has sparked the emergence of "market places" such as Holland's notional hub, the Title Transfer Facility, or Italy's Punto di Scambio Virtuale, under which operators can exchange gas. Gaz de France, for its part, has set up Gas Exchange Points, regarded as an initial stage towards forming hubs.

Through temporary gas release programs, the regulators have forced historic operators for a limited time to put back onto the market part of their take-or-pay long-term contracts which account for a majority of the EU's gas imports (OGJ Online, May 7, 2004). This is designed to give new operators access to gas as well as help them acquire customers and know-how while they devise ways of obtaining their own resources. Such programs have been launched in the UK, Spain, and Italy—more recently in Germany and Austria—and will be in France in January 2005. They should partially help overcome the lack of transparency of the gas capacities available on the transport network and at LNG terminals, which otherwise would prevent new operators from entering the market.

Continuing obstacles
Another obstacle to competition is the difference in gas qualities, in particular in the UK where specifications prevent the import of some varieties of LNG, and in northern France where Holland's Groningen gas has a 15% lower calorific power than other imported gas, thus limiting the eligibility of some industrial companies to third party access.

Capping the EU's overall competitive picture, CRE worries, is the 2% drop in Europe's 2003 natural gas production simultaneously with a 4% increase in demand, primarily from the UK, Germany, Italy, France, and the Netherlands, countries that account for 80% of the EU's overall consumption. Europe's dependence on imported gas increased to 48% in 2003 from 46% in 2002 and will increase further as gas-for-electricity continues to fuel growth. With the entry of 10 new member states in the EU, moreover, dependence on Russian gas has risen by 50 billion cu m. Russian imports henceforth will account for 25% of Europe's needs, up from 18% in a 15-member Europe.

In addition, prices of long-term take-or-pay gas contracts linked to oil prices have increased, along with spot prices, mainly caused by tensions associated with the UK's depleting gas production and exports.

Power concentration
CRE points out that Europe's own gas production is concentrated 54% in oil majors and 34% in the national companies of exporting countries. Oil majors increasingly are taking over the marketing and transport of their gas to final clients, while Russia's Gazprom, Algeria's Sonatrach, and Norway's Statoil are adapting to the opening of Europe's gas market through partnership policies with their buyers.

Concentration is also strong among natural gas importers: the 10 leading gas importers in Europe account for 88% of imported volumes, with ENI, Ruhrgas, and Gaz de France accounting for 54% of the 256 billion cu m imported in 2002. Finally, CRE points to the increasing part played by Europe's power companies in the gas trade and in gas supply contracts, as they, too, concentrate through mergers and acquisitions.

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