EC proposes legislation to enforce utility unbundling

Jan. 22, 2007
The European Commission has proposed enforcing full ownership unbundling of gas and electricity infrastructure via new legislation as one of its measures to help facilitate an internal energy market in Europe.

The European Commission has proposed enforcing full ownership unbundling of gas and electricity infrastructure via new legislation as one of its measures to help facilitate an internal energy market in Europe.

Unveiling a comprehensive energy policy package in Brussels Jan. 10, the EC said it was necessary to have a fully functional internal energy market to ensure competitive and secure energy supplies.

However, the European Union is likely to miss its deadline in July to have a fully opened internal market, as many member states are now involved in infringement procedures launched by the EC for failing to implement the directives to meet this objective.

According to the EC’s sectoral enquiry launched to investigate the progress of energy liberalization across the EU, European Commission Competition Commissioner Neelie Kroes said there was danger of discrimination and abuse when companies control energy networks as well as production or sales because they protect national markets and prevent competition.

Ownership unbundling

The EC said it has a “clear preference” for ownership unbundling meaning that network companies would be wholly separate from the supply and generation companies. It will carry out an impact assessment of this proposal before exploring a legislative route. The other option would be to implement an Independent System Operators (ISO) system, where vertically integrated companies remain owners of the network assets and receive a regulated return on them, but they would not be responsible for their operation, maintenance, or development.

An industry source told OGJ that having full ownership unbundling would be problematic for large international companies that invest in major infrastructure projects and need wide portfolios to negotiate with other partners. The proposal is “radical,” the source said, adding that the tone of the sectoral report was very negative and had not recognized the levels of progress made in improving competition by industry participants.

But the European Federation of Energy Traders welcomed the focus on unbundling, saying it was crucial “to achieving nondiscriminatory access to transmission infrastructure and services and to facilitating cross-border trade.”

According to an analysis by PricewaterhouseCoopers, the recommendations offer energy and utility companies various possibilities to restructure and expand their EU-wide position, bringing nearer the potential for customer-focused transnational energy and utility businesses.

Mark Hughes, European leader, utilities corporate finance and advisory services, at PricewaterhouseCoopers said, “The commission’s conclusions encourage infrastructure investment, particularly in a cross-border context, which provides opportunities for new entrants, large and small market participants alike, and which should benefit consumers and security of supply across Europe.”

Assessing infrastructure

The EC also will identify the most significant missing infrastructure up to 2013 and will try to rally political support to fill these holes under its Priority Interconnection Plan, also announced Jan. 10. About €150 billion of investments will be required for gas-fired electric power plants and €220 billion for gas infrastructure. The proposed Nabucco gas pipeline, which will bring Caspian gas to central Europe, will be treated as a priority by four new European coordinators, and new European energy projects planning and approval procedures will be fast-tracked under a 5-year program.

The EC said it would examine the need to increase funding for the Energy Trans-European networks and establish a new community mechanism and structure for Transmission System Operators, responsible for coordinated network planning.

Security of supplies

Imported oil and gas are expected to constitute a respective 90% and 80% of Europe’s energy mix in 2030. “Electricity generation will be heavily dependent on gas. Without a significant technology breakthrough, oil will continue to dominate transport. Therefore, security of supply of these fuels will continue to be paramount to the EU economy,” the EC said.

The package will promote diversity of energy suppliers, particularly among member states that are wholly reliant upon one supplier. Measures to achieve this include developing projects to bring gas from new regions, establishing gas hubs in central Europe and the Baltic states, improving the use of strategic storage possibilities, and encouraging the building of LNG terminals.

The package is yet to be approved by the EU’s 25 members, but this is the first time that Europe has formulated an energy policy, which has previously been left to individual member states to define and implement.