The Communication from the Commission of 25 February 2015 on “A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy” set out the Commission’s strategy to achieve such an Energy Union. Moreover, the European Commission’s vision is intended to deliver a “new deal for energy consumers”, as set out in the Energy Union Strategy. An important aim is to use Europe’s electricity and gas infrastructure better so that energy flows from low- to high-price areas and EU consumers fully benefit from market integration. In addition, the European Commission is soon expected to present a legislative initiative on an improved energy market design. This Report provides factual insights that could be useful for the definition and implementation of such a design.

The Report shows that, in many jurisdictions, wholesale energy prices have been declining since 2008 as a result of improved gas-to-gas competition, underpinned by the hub-to-hub model that has been established in many parts of Europe, but not everywhere yet. Market fundamentals – including weak gas demand and declining oil prices - also play a key role. Overall, gas wholesale markets in all Member States perform better and better, and are becoming more integrated, even though a range of barriers persists. Moreover, the Report points to an increasing performance gap between the more advanced markets and the less performing ones, often located on the fringes of the Union. For the first time the assessment of wholesale gas markets has also benefitted from the use of aggregated REMIT data, further enhancing the analytical rigour.

In electricity, low wholesale prices in 2015, compared to 2008, are mainly the result of generation overcapacity in several jurisdictions and of the increased penetration of renewable energy sources with zero or very low marginal/variable costs. Low prices, and their negative impact on the economic viability of conventional generation capacity, exacerbated adequacy concerns and, in response, some Member States have introduced or are considering the introduction of capacity mechanisms (CMs). The Agency is tracking this trend in this Report and is concerned that national, uncoordinated approaches to system adequacy might have a detrimental impact on the functioning of the IEM.

Moreover, the Report concludes that there are significant potentials to address adequacy concerns by removing existing barriers to the functioning of the electricity wholesale markets and improve the way in which they work. For example, the level of capacities made available to the market for cross-border trade could be increased already by enhancing the methodologies used to calculate these capacities. After the successful development of day-ahead market coupling, the improved use of existing infrastructure will enhance cross-border competition rendering better prices for EU consumers.

The Report shows that the declining wholesale prices for gas and electricity have finally resulted in lower energy costs for EU consumers. This is an important benefit of a well-functioning IEM. In electricity, however, the total price EU consumers pay has, on average, not decreased, due to the increase of a number of non-contestable charges in the consumers’ energy bill. These charges relate, for example to the funding of capacity mechanisms, of the support for renewable resources or other services. The continued increase of these non-energy related charges in consumer’s invoices do not promote consumers’ active participation in the energy market and can prevent them from taking advantage of greater choice and better prices.

For the first time, this Report also assesses the state of play in the implementation of dynamic pricing. Dynamic prices reflect to a varying degree the marginal generation and/or network costs and could in theory deliver energy efficiency benefits. A closer relation between wholesale and retail prices could further engage consumers. However, today, the penetration of dynamic pricing for households is limited, partly due to the fact that its implementation requires the deployment of enabling technology, which is still limited across the EU.

Consumer protection should ensure that all consumers benefit from a competitive market. This entails swift switching procedures, adequate and transparent information on offers and bills and sufficient protection for vulnerable consumers, merely to name a few aspects covered in this Report. In this context, the Report shows that Member States advanced somewhat in the areas of Customer Protection and Empowerment albeit selectively in terms of jurisdiction or legal requirement. However, overall progress in implementing and promoting Customer Protection legislation seems to stall.

The data used for compiling this Report have been collected internally or provided by the European Commission, National Regulatory Authorities, and the European Networks of Transmission System Operators for electricity and gas. We are grateful for their contribution and cooperation, and in particular to colleagues in National Regulatory Authorities who have played a key role in assessing national developments. Above all, our sincere appreciation goes to our colleagues in the market monitoring team at the Agency for their sustained effort in continuously monitoring market developments and in producing this Report.

The Agency and National Regulatory Authorities stand committed to continue their work to promote the establishment of a well-functioning, competitive, secure and sustainable internal market in energy to the benefit of Europe’s consumers, and to support the implementation of the Energy Union Strategy