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.

The 3rd Package has moved the European energy sector one 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 and the development of detailed EU-wide rules on network and market operation and by providing for the establishment of the Agency and the European Network of Transmission System Operators (ENTSOs) with their respective responsibilities.

European energy consumers and citizens must benefit still more from the single internal energy market. The 3rd Package must be transposed and implemented fully and effectively into national law and EU-wide network codes, and market rules must be developed and adopted. Monitoring is essential to indicate the way in which energy markets actually operate, both at the wholesale and retail level, and to highlight where possible improvements are needed. The report seeks to provide an indication of the real degree to which rules are implemented in practice. It also provides a level of transparency that should instil confidence in energy consumers throughout Europe. To ensure that market integration proceeds as smoothly as possible, the Agency is also tasked with identifying any barriers to the completion of the internal markets in electricity and natural gas. The Agency must propose to the European Parliament and the European Commission measures that could be taken to remove such barriers.

Overall, our findings show continuing internal market development and improvements in line with the Union’s energy objectives. The report also points to persisting gaps and to the need for further progress in the real implementation of rules in practice in the full spirit of the law. This observation applies to consumer rights and to the need for further measures to tackle barriers to market integration and greater transparency. These conclusions have, to a significant extent, been reflected in the future Work Programmes of both CEER and ACER. However, effective transposition of the rules by Member States and concerted action from all stakeholders are needed to help exchange best practice.

Part of the Report’s analysis is focused on how consumers are faring as a result of the changes in energy policy – is there a choice of supplier and are consumers switching? How have prices evolved during the year? Are prices regulated or subject to market pressures? How are consumer rights and consumer protection measures implemented in practice nationally? CEER’s continuing commitment to address such issues, coupled with ACER’s monitoring duties, should serve as a constructive input for further market improvements, in particular in the context of its initiative to build a 2020 vision for Europe’s energy customers.

In this regard, the report assesses the presence of regulated retail prices and the implementation of a number of consumer rights provisions, including complaint handling procedures, supplier of last resort and the time needed to switch supplier. In particular we note that, in 2011, the majority of Member States (MS) still maintained regulated retail prices for electricity (17 MS) and gas (15 MS). Regulated prices may reduce the scope for effective competition. Meanwhile, our analysis of electricity wholesale markets shows that market coupling has facilitated price convergence. However, the growing phenomenon of “unplanned flows” in parts of Europe constitutes a barrier to the further integration of the internal market. In gas, although price correlation between European hubs was high, price differentials in parts of Europe still remain significant. With a few exceptions in North West Europe, the liquidity of gas hubs was found to be unsatisfactory, while contractual congestion remained a significant feature at a number of interconnection points, even if it was not always reflected in physical congestion. Further analysis of cross-border congestion and access charges is therefore required to identify any possible barriers to entry, and to ensure that interconnection capacity is used in the most efficient way.

The data used for compiling this Report have been collected and provided by National Regulatory Authorities for energy, the European Commission, and the ENTSOs for electricity and gas. We are grateful to them for their contribution. Our most 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.

In the future, the Agency intends to work towards deepening the coverage of the Annual Market Monitoring Report. The timeliness and consistency of the available data is also an aspect on which the Agency wishes to focus to ensure that the quality and value of the results of its monitoring activities are continuously enhanced. For its part, CEER will dedicate significant resources to monitoring complimentary market issues, including LNG and gas storage transparency; implementation of the Gas Target Model; Transmission System Operators (TSO) and Distribution System Operators (DSO) unbundling; the roll-out of smart meters; the various approaches to smart grids; and consumer access to information on the cost (and sources) of their energy. Working nationally, regionally and at European level with policy makers (notably, with the European Commission and the European Parliament) and the industry, all energy regulators remain committed to putting the legal, regulatory and operational framework in place that will truly deliver an internal energy market for Europe’s consumers.