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EU’s energy market reforms making a difference

By Siobhan Hall in Brussels

January 23, 2013 - It’s nearly two years since the EU’s third package of energy market reforms took effect, so what difference have they made?

At the political level, perhaps not as much as they should, given that 11 of the 27 EU countries have still to notify the European Commission that they have implemented the reforms. (See related table: EC's open legal cases for not notifying transposition of EU energy legislation).

But at a technical level, they have prompted fundamental changes in Europe’s electricity and gas markets, the impact of which is only just beginning to be felt.

The aim of these reforms, set out in two EU directives and three EU regulations, is to break down national barriers to gas and power trade, improving security of supply and forcing traditional incumbent national monopolies to face cross-border competition, thus improving choice and services for consumers.

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The ultimate goal is to have harmonized EU rules governing electricity and gas markets, creating a level playing field and allowing energy flows to be determined by supply and demand rather than local rules. EU leaders have committed to completing this internal energy market by 2014.

Table: EC's open legal cases for not notifying transposition of EU energy legislation

Platts has put together an overview by country of the key elements of implementing the third electricity and gas directives, including notification to EC, transmission system operator unbundling, regulated prices, and national energy regulators.(See related table: Selected third EU electricity/gas directive implementation by country). The full versions are updated regularly and published in Platts EU Energy.

Tracking the new EU network codes

One of the most visible changes brought about by the third package is that there are now three new EU bodies with a formal role in developing detailed EU-wide technical rules for all electricity and gas network operators and users known as network codes.

They are the European transmission system operators’ bodies for electricity and gas – Entso-e and Entsog – and the EU energy regulatory agency ACER. (See related table: Selected changes brought by the EU third energy package).

All three officially started work on March 3, 2011 – the day the EU’s third electricity and gas regulations and a new regulation establishing ACER took effect, and the deadline by which national governments should have implemented the EU’s third electricity and gas directives in the package.

These three bodies are so far developing nine electricity and four gas EU network codes under a process set out in the EU’s third energy package.

This process involves the European Commission setting priorities and inviting ACER to develop high level framework guidelines on a particular topic within six months. Then the EC invites the relevant Entso to develop detailed network codes based on the framework guidelines within 12 months.

ACER checks the resulting codes to see that they are in line with its framework guidelines, and gives an opinion on it within three months. ACER eventually submits the code to the EC with a recommendation to make it binding.

The EC can make the codes binding by gaining approval from an EU committee of national government officials, a process known as comitology. There is no deadline for achieving comitology approvals.

The process is illustrated in Platts EU network code process key, broken into seven stages. This also enables progress on the network codes to be tracked, as shown in Platts EU network codes in process tracker, which is updated and published in each issue of Platts EU Energy. (See related table: Platts EU network codes in process tracker).

Chart: Platts EU network code process key

The process includes a stage for the Entsos to respond to ACER’s opinion, but there is no fixed deadline for this in the third package.

In practice, ACER asked for changes in both the first draft gas network code, on capacity allocation mechanisms, and the first draft electricity network code, on grid connection requirements for generators.

For the gas code, it took more than five months after ACER’s original opinion in June 2012 to come up with a version ACER was willing to submit to the EC, albeit still with recommendations for changes. Entso-e is still considering its response to ACER’s October 2012 opinion that called for changes.

Both these first codes show how such codes can make important changes in market conditions. The first electricity code, for example, sets minimum safety standards to ensure grid security across borders and to improve market integration.

The first gas code includes rules for designing harmonized auctions for capacity products of various durations, bundling cross-border capacity, developing capacity booking platforms, and aligning interruptible capacity.

The conditions for bundling cross-border gas capacity, known as “the sunset clause”, were particularly controversial. The EC originally wanted to force all cross-border capacity to be sold as bundled capacity within five years of the code becoming binding, which could have forced companies with existing long-term unbundled capacity contracts to renegotiate them before they expire.

But under pressure from industry the EC said in October 2012 that it plans to revise the sunset clause during the comitology approval process so that unbundled capacity contract holders must simply make “best efforts” to reach an agreement on bundled capacity, and that existing unbundled contracts cannot be renewed or rolled-over.

The first comitology committee meeting to discuss the draft gas code is planned for January 24, and the EC hopes to be able to adopt the code into law around August.

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