Energy regulators keep the lights on and Europe’s energy markets working

Keeping the lights on and energy markets functioning is the normal job of the energy regulator. At no time is this role more important than during a global health crisis. Keeping the lights on and hospitals equipment running saves lives. Guaranteeing essential services such as gas, heat and power for household appliances and devices such as laptops enables people to work from home. Despite the crisis, the electricity and gas market integration process did not stall. This is good news. It also speaks of the value of having integrated well-functioning energy markets.

Building Europe’s green recovery and the role of market monitoring

In a post-COVID-19 era, achieving a sustainable and resilient recovery will be a priority. In this context, cost-efficient integration of the internal energy market supported by extensive market monitoring becomes more relevant than ever. Market monitoring captures the status of energy markets and identifies remaining barriers to EU market integration. In particular, the integration of power markets and the decarbonisation of gas are critical to meet the ambitious energy and climate policy targets set for Europe. In our view, the Green Deal is an opportunity to integrate sustainability objectives into Europe’s plans to economic recovery.

Key Findings and Recommendations

Europe’s clean energy transition must be built on an efficient and well-integrated IEM. Overall, keeping the focus in market integration is key to ensuring the EU energy union targets are met in a cost-efficient manner.

Electricity and gas market integration continued to progress in 2019

Progress in the functioning of Europe’s electricity wholesale markets is noticeable, though more advances are needed (in particular, finalising day-ahead market coupling). Available instruments must be utilised to increase the efficient use of interconnectors as required by the 70% cross-zonal capacity target and we are pleased to report that we will soon publish a dedicated report on this. Looking ahead, sizable security of supply benefits are expected as Europe shifts towards a better approach to assess resource adequacy.

Build upon the current gas market framework to decarbonise gas

Gas wholesale markets continue to function well based on the implementation of the current market rules. However, with the European Commission’s proposal to reduce emissions further for Europe to be on a responsible path to becoming climate neutral by 2050, as well as the resources earmarked for the EU recovery plan, the currently low uptake of carbon neutral gases will need increased attention. We recommend that any upgrade of the internal gas market rules, targeting an increasingly decarbonised sector, be built on the foundations of the current market framework. This to avoid the transition leading to new national market fragmentations, whilst at the same time retaining the significant benefits for consumers already in place.

Without efficient energy infrastructure investment Europe will not be able to deliver on the ambitious decarbonisation outlook set for Europe’s energy sector. ACER and CEER have recently set out a suite of recommendations to improve infrastructure planning and regulatory oversight in our joint ACER/CEER position paper on the review of the TEN-E Regulation. In the joint ACER/CEER Gas Bridge beyond 2025 Conclusions paper we also address important regulatory issues such as power to gas networks or repurposing existing gas networks for hydrogen.

Electricity prices for household and industrial consumers throughout Europe increased in 2019

Retail gas prices also increased for households but they fell for industrial gas consumers. Our monitoring shows that the state of retail markets is more disparate across the Union than for wholesale markets.

Tackling climate change will involve a profound transformation of our economy and will significantly influence the way we use and interact with energy in our everyday life. For the energy transition to be successful, consumers will need to be informed, supported and nudged throughout this transformation. Our market monitoring underlines the importance of ensuring that consumers have ample choice and that their rights are adequately protected, not least the more vulnerable consumer segments. This requires well-functioning retail markets. We are committed to continue monitoring progress towards the completion of a well-functioning internal energy market and to maintain the stability of the energy system as a whole during and after this time of crisis.

In 2016, different degrees of price convergence were observed across Europe. The average absolute dayahead (DA) price spreads ranged from less than 0.5 euros/MWh on the borders between Portugal and Spain, the Czech Republic and Slovakia, and between Latvia and Lithuania, to 10 euros/MWh or more on all British borders, the borders between Austria and Italy, and between Germany and Poland (see Table i). This confirms the relevance of maximising the amount of tradable cross-zonal capacity, particularly on borders with the highest price spreads.

The Baltic, the Core (Central-West Europe (CWE))1 and the South-West Europe (SWE) regions recorded the highest annual increases in the frequency of intraregional full price convergence in 2016. In these three regions, the DA price differential was, respectively, below 1 euro/MWh in 71%, 39% and 30% of the hours in 2016. The factors explaining these developments include investments in new interconnector lines in the Baltic and SWE regions and the go-live of Flow-Based Market Coupling (FBMC) in the Core (CWE) region.

While FBMC does indeed contribute to increasing price convergence, recent experience in the Core (CWE) region illustrates that FBMC alone is not sufficient to deliver an integrated electricity market. Full price convergence dropped in this region from 48% in the first three quarters of 2016 to 11% in the last quarter, due to high DA prices in France and Belgium. These high DA prices were mainly the result of a significant number of nuclear reactors being offline in these countries, combined with a significant reduction in the level of tradable cross-zonal capacity during the second semester of 2016.

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

For the first time, the Report assesses the state of play in the implementation of capacity remuneration mechanisms in the different Member States. These developments are a source of concern to both the European Commission – which earlier this year launched a sector enquiry - and to the Agency – which has been working on this issue since late 2012 following a request from the ITRE Committee of the European Parliament for an Agency Opinion; that Opinion was delivered in February 2013 and the Agency has continued to work on the issue since. The Agency’s main concern was, and still is, the possibility that national, uncoordinated approaches to system adequacy might have a detrimental impact on the functioning of the IEM. Regional coordination of adequacy assessments and regional capacity remuneration mechanisms (or at least cross-border participation in such mechanisms) are ways to avoid, or at least minimise, any such detrimental impact. There is no evidence, however, that such regional coordination is implemented at present.

A further important challenge facing the European energy sector is the integration of an increasing share of renewable-based generation, part of which is not as easily programmable as “conventional” resources. This calls for greater system flexibility, primarily in the electricity sector, but also in gas, given that gas-fired power stations may offer a source of flexibility for the electricity system. Short-term markets – and in particular Intra-day and Balancing markets in electricity – are becoming increasingly important in this respect. The Agency welcomes the recent breakthrough in the deadlock which has delayed the Cross-Border Intra-Day (XBID) project for almost three years and notes the new expected date for go-live in Q4 2017. The Agency urges the European Commission, whose intervention was instrumental in breaking the deadlock, to maintain its involvement to ensure that this target date is respected and, if possible, brought forward. The Report analyses the functioning of the Intra-day and Balancing markets, confirming that the implicit allocation of cross-border capacity in the intra-day timeframe delivers a more efficient use of such capacity.

In the gas sector, we focus on the functioning of gas hubs and on trading between them. Earlier this year, the Agency published its revised and updated Gas Target Model. That Model calls for a self-assessment by National Regulatory Authorities of the functioning of their national gas markets and proposes measures – including regional integration – to overcome those situations in which the structure of the national sector is not conducive to competition and liquidity in the market.

A further important section of this Report assesses the functioning of retail markets, where consumers can directly reap the benefits of the liberalisation and market integration process. It is clear that our objective should not be the creation of a EU-wide retail market, where consumers will be able directly to access suppliers located in any of the Member States, but rather to ensure that sufficient competition is created in national retail markets. This should be pursued by facilitating the entry of new suppliers and promoting the engagement of consumers, so that they can take full advantage of greater choice and better prices. The results presented in the Report still show a mixed picture in this context: consumers continue not to switch even in the presence of significant potential savings. While switching rates do not themselves provide conclusive evidence regarding the functioning of retail markets – for example, low levels might be consistent with both highly competitive and immature markets – the picture emerging from a newly developed “composite indicator” is a very varied one across the EU, with some national markets clearly exhibiting scope for improvement. CEER has launched its own considerations as to what constitutes a well-functioning retail market. Work will therefore continue to pinpoint any remaining retail market barriers and to identify how they can be removed. Until then, we will have not have fulfilled our mandate of establishing an internal energy market for the benefit of consumers providing them with the “New Deal” envisaged by the Energy Union Strategy.

The data used for compiling this Report have been collected 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 at EU, regional and national level to contribute towards the establishment of a well-functioning, competitive, secure and sustainable internal market in energy to the benefit of Europe’s consumers and to play our role in the implementation of the Energy Union Strategy.

The 3rd Package has moved the European energy sector an important step closer to establishing a single energy market in Europe, not only by strengthening the provisions in areas already addressed by previous Packages – for example, on network unbundling; powers and independence of energy regulators; and consumer rights – but also by envisaging, for the first time, a more significant EU dimension in the planning of energy networks, the development of detailed EU-wide rules on network and market operation, and the establishment of ACER and ENTSOs with their respective responsibilities. In 2011, the European Council agreed on 2014 as the target date for the completion of the internal energy market, a goal recently reaffirmed. At the same time, the objective of removing energy islands by 2015 was set.

A well-functioning single internal energy market must deliver tangible benefits to European energy consumers, in terms of greater choice and better prices. This requires the timely and complete transposition of the 3rd Package into national law and the full and effective implementation of its provisions. EU-wide network codes and market rules must be developed and adopted. Monitoring is essential to assess the way in which energy markets actually operate, both at wholesale and retail level, and to highlight where improvements are needed. This Report provides an indication of the degree to which rules are implemented in practice and of the barriers which must still be overcome, particularly relevant given the approaching 2014 deadline. It also provides a level of transparency that should instil confidence in energy consumers throughout Europe.

Overall, our findings show a continuing internal market development and improvements in line with the EU’s energy objectives. In particular, our analysis of wholesale electricity markets shows that market coupling has facilitated price convergence and intraday markets have made it easier for renewables to become a successful market player. However, the growing phenomenon of ‘unscheduled flows’ in parts of Europe constitutes a barrier to the further integration of the internal market, arguably giving rise to wholesale price divergence and reduced market efficiency. In gas, although price correlation between European hubs remains high, price differentials in parts of Europe remain significant, leading to substantial welfare losses.

With a few exceptions in North-West Europe, the liquidity of gas hubs is still unsatisfactory, whilst congestion remains a significant feature at a number of interconnection points and in some cases contractual congestion is not reflected in physical congestion.

Barriers to entry persist in many national retail markets, thus hampering retail competition and consumer choice. Moreover, despite the economic downturn, consumer prices for electricity and gas have increased in the majority of Member States. These prices differ remarkably across national markets, with no sign of convergence. Finally, regulated prices remain a prominent feature of European retail energy markets, with little progress towards their removal recorded last year. Imperfect integration and retail market fragmentation throughout the EU have led to significant social welfare losses for European energy consumers, in the order of several billion euros in 2012 (gross of the cost of any required investment in new transmission or transportation infrastructure). Our findings therefore highlight the need for a renewed effort towards the removal of barriers to market efficiency.

The data used for compiling this Report have been collected and provided by National Regulatory Authorities for energy (NRAs), the European Commission, and the European Networks of Transmission System Operators (ENTSOs) for electricity and gas. We are grateful to all of them for their contribution. Our most sincere appreciation also goes to our colleagues in the market monitoring team at the Agency for their sustained effort in continuously monitoring market developments and to those in CEER examining consumer issues, and to both in producing this Report. The Agency is committed to continue monitoring progress towards the completion of a well-functioning internal energy market. From next year, it will also start monitoring, together with NRAs and ENTSOs, the implementation of network codes to ensure that the new EU-wide rules to support the integration of the electricity and gas markets are fully and correctly applied.

The Agency is also looking into whether the Electricity and Gas Target Models, which are common visions for the internal electricity and gas markets, need enhancing to address future challenges. For its part, CEER is also committed to dedicating significant resources to monitoring complementary market issues, including LNG access and gas storage transparency; TSO and DSO unbundling; the roll-out of smart meters; the various possible approaches to smart grids; the levels of renewable energy and energy efficiency support schemes across Europe and consumer access to information on the cost (and sources) of energy supplied. Working nationally, regionally and at European level with policy makers – in collaboration, notably, with the European Commission and Parliament – together with the industry, all energy regulators remain committed to putting the legal, regulatory, and operational framework in place that will deliver an internal energy market for Europe’s consumers.