Published
in February, the European Commission’s interim report of its Energy Sector
Inquiry makes intriguing, if rather depressing, reading for proponents of
gas market liberalisation across Europe, and indeed for UK gas consumers,
whom British energy regulator, Ofgem, believes have already paid £3.5bn too
much for their gas as a result of the slow pace of liberalisation in most
European gas markets. The report paints a picture of European markets closed
to new entrants by five major barriers outlined below.
Market concentration
European
markets, with the exception of the
UK
, remain dominated by former (or in some cases still actual) monopolies.
There are very limited signs of liberalisation actually leading to
significant customer switching in most markets. The dominant national gas
suppliers largely control gas imports (and often indigenous gas production).
A key stepping stone to effective gas-to-gas competition would be the
emergence of liquid gas trading hubs, which would give new entrants a viable
source of gas supply. However, one of the noticeable features of the report
is the extremely low level of short-term gas trading, outside the hubs that
serve the
UK
market. The figures below compare the level of trading linked to the UK gas
market (trading spot and forward at the NBP and the UK beach terminals,
trading futures contracts on the IPE NBP gas futures contract, and trading
spot and forwards at Zeebrugge, which although located in Belgium, primarily
serves the UK gas market), with the level of trading at all other
significant European trading locations. Although the figures are based on
surveys and are not a complete picture of European gas trading, the overall
message is striking – the total volume of gas traded short-term in or
based on the
UK
gas market in 2003-2004 was almost 100 times the volume traded at across the
rest of
Europe
.
Vertical foreclosure and market integration
The
tiny volumes of gas traded outside the
UK
market is crucial because of two other characteristics of the European gas
markets – the high level of vertical integration and the low level of
market integration. If new entrants are not able to purchase sufficient
volumes of gas by liquid spot markets, they must access to other supply
options. However, the Commission believes that the network of long-term gas
supply contracts between the gas producers and the major European gas
companies, makes it very difficult for new entrants to gain access to gas.
In addition the lack of effective arrangements for new entrant access to
transportation and storage infrastructure, and the lack of market
integration between different member states, mean that even where new
entrants have managed to obtain gas supplies, it is very difficult for them
to transport it to market or purchase the flexibility (typically through gas
storage) necessary to market it effectively to end-users. The Commission’s
report include a fascinating study on available capacity on key gas transit
routes across
Europe
. It finds that new entrants are locked out of key pipelines by long-term
contracts with incumbents that have sold almost all primary capacity until
at least 2015. The lack of effective congestion management arrangements
(arrangements for allowing other players to access on an interruptible basis
pipeline capacity that the primary owners are not using) means that new
entrants can not use these pipes, despite the fact that in physical terms
there is often significant spare capacity on them.
Transparency and price formation
Other
problems indication by the Commission include lack of transparency and price
formation structures, notably the oil price indexation common in most
European long-term gas contracts. Without timely and accurate information it
is very difficult for new players to plan and operate their businesses, or
indeed for regulators to assess what’s going on in the market, as Ofgem
has recently complained of in its investigation into high
UK
gas prices and low Interconnector flows in November 2005.
What will happen next?
The
Energy Sector Inquiry has already pointed out major shortcomings in the gas
(and electricity) markets across
Europe
. The inquiry still has a way to run, however, with a final report only due
at the end of 2006. In the meantime battle-lines are starting to be drawn.
Last week Competition Commissioner Neelie Kroes, speaking at a conference in
Brussels
, hinted that the Commission may push for full structural unbundling of
transportation and supply businesses, which would see huge changes to many
European companies. The actions of companies and national governments in the
proposed mega-merger of GDF and
Suez
and the ongoing battle between Gas Natural and E.ON to acquire Endesa have
also raised hackles at the Commission, with allegations of protectionism and
attempting to forestall competition. Elsewhere competition action is
beginning to take effect, such as with the recent fine of 290 mn Euros
imposed on Italian gas company, ENI, for its failure to comply with
competition conditions. 2006 looks like being a crucial year for European
energy.
The
European Commission’s interim report of its Energy Sector Inquiry can be
found at:http://www.europa.eu.int/comm/competition/antitrust/others/sector_inquiries/energy/#16022006
By Nick White. MJMEnergy Ltd
