23 February 2006

Competition Directorate-General

Sector Inquiry on the gas and electricity markets

Dominik Schnichels, DG COMP

Inquiry under Art. 17 Regulation 1/2003

• Launched June 2005

• 3000 questionnaires sent

• One of the most extensive investigations under EU competition law

• Issues Paper

Preliminary Report

• Market concentration• Vertical foreclosure• Market Integration• Transparency• Price formation

Preliminary Report - Gas

Introduction

Hub Prices

02468

10121416182022242628

J an-02 J ul-02 J an-03 J ul-03 J an-04 J ul-04 J an-05 J ul-05

Price

(€/M

Wh)

NBP Day ahead Zeebrugge Day ahead TTF day ahead

Border Prices

02468

10121416182022242628

J an-02 J ul-02 J an-03 J ul-03 J an-04 J ul-04 J an-05 J ul-05

Price

(€/M

Wh)

Waidhaus EmdenTroll Baumgarten

Concentration

• High levels of concentration at wholesale level

• Incumbents largely control imports and domestic production

• Traded markets dominated by incumbents

Incumbent share of importsIncumbent share of domestic production

Austria 80-90% -

Belgium 90-100% -

Czech Republic 90-100% -

Denmark - 80-90%

France 90-100% -

Great Britain 20-30% 40-50%

Germany 90-100% 80-90%

Hungary 90-100% 90-100%

Italy 60-70% 80-90%

Netherlands 50-60% 90-100%

Poland 90-100% 90-100%

Slovakia 90-100% -

Vertical foreclosure – infrastructure • Gas infrastructure remains mostly owned by

incumbents and not sufficiently unbundled

• Long-term capacity reservations in “transit” pipelines and storage

Storage capacity booked long term

0%10%20%30%40%50%60%70%80%90%

100%

Cou

ntry

A

Cou

ntry

B

Cou

ntry

C

Cou

ntry

D

Cou

ntry

E

Cou

ntry

F

Cou

ntry

G

Cou

ntry

H

Cou

ntry

I

% o

f tot

al s

tora

ge c

apac

ity

Excluded from TPA booked capacity: less than 1 year

booked capacity: between 1 and 5 years booked capacity: 5 years and more

length not specified available capacity

Transit capacity– East/West axis

East/West axis: largely sold out until 2015

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Less than 2 years Btwn 2 and 5 years Btwn 5 and 10 years More than 10 years

Prim

ary

ca

pa

city

re

se

rve

d / u

tilis

ed

(%

of m

axim

um

te

ch

nic

al c

ap

acity

)

Incumbent-affiliate Producer Without contract Average unsold

Maximum utilisation

Prices – indexation

Heavy fuel oilLight fuel oil and gasoilGas price

Electricity price

OtherCoal price

Crude oilGeneral inflationFixed

UK

14,6%

16,2%

16,5%

40,1%

0,6%

2,9%

1,1%

7%1,1%

Western Europe

50,1%

0,6% 30%

2%

4,9%

4,6%2,6%5,2%

Eastern Europe

47,2%

2,1%

0,8%0,7%

48,1%

1,1%

Heavy fuel oilLight fuel oil and gasoilGas price

Electricity price

OtherCoal price

Crude oilGeneral inflationFixed

UK

14,6%

16,2%

16,5%

40,1%

0,6%

2,9%

1,1%

7%1,1%

Western Europe

50,1%

0,6% 30%

2%

4,9%

4,6%2,6%5,2%

Eastern Europe

47,2%

2,1%

0,8%0,7%

48,1%

1,1%

Heavy fuel oilLight fuel oil and gasoilGas price

Electricity price

OtherCoal price

Crude oilGeneral inflationFixedHeavy fuel oil

Light fuel oil and gasoilGas price

Heavy fuel oilHeavy fuel oilLight fuel oil and gasoilLight fuel oil and gasoilGas priceGas price

Electricity price

OtherCoal priceElectricity priceElectricity price

OtherCoal priceOtherCoal priceCoal price

Crude oilGeneral inflationFixed

Crude oilCrude oilGeneral inflationFixedGeneral inflationFixed

UK

14,6%

16,2%

16,5%

40,1%

0,6%

2,9%

1,1%

7%1,1%

Western Europe

50,1%

0,6% 30%

2%

4,9%

4,6%2,6%5,2%

Eastern Europe

47,2%

2,1%

0,8%0,7%

48,1%

1,1%

Conclusions

• Wholesale markets in the EU generally maintain the high level of concentration of the pre-liberalisation period

• Lack of liquidity and limited access to infrastructure prevent new entrant suppliers from offering their services to the consumer

• Transit capacity, crucial for market integration, could be used much more efficiently

• There is a lack of reliable and timely information on the markets, essential for healthy competition

Preliminary Report - Electricity

Introduction

• Prices increase significantly since 2003• Prices differ significantly between Member States

Electricity prices on the rise all over Europe Wholesale electricity price developments 2000-2005

year-ahead base load in €/MWh

0

10

20

30

40

50

60

70

80

90

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05

€/M

Wh

Germany

The Netherlands

UK

France

Nord Pool

UK

The Netherlands

Nord Pool

France

Germany

Concentration

• Incumbents control generation assets giving them scope to exercise market power by– withdrawing capacity or

– increasing prices

• Scope for influencing prices exists at a number of power exchanges (examples: I, E, DK)

FranceAvailable installed capacity

86,7%

8,2%

2,5%

0,5%

2,2%

Undertaking A

Undertaking B

Undertaking C

Undertaking D

Otherundertakings

BelgiumAvailable installed capacity

17%

83%

Undertaking A

Otherundertakings

Vertical foreclosure

• Many market participants complain about inadequate unbundling of network and supply activities

• TSO level:– Grid connection for new power plants– Interconnectors– Transparency

• DSO level:– Inappropriate switching procedures– Lack of ‘Chinese walls’– Discriminatory access tariffs

Market Integration

• Competition from imports is insufficient to erode market power of incumbents

• More interconnector capacity is needed• Many interconnectors are chronically congested• Long term capacity reservations reduce capacity

available for new entrants

• Revenues from auctions not used for interconnector expansions

Transparency

• The level of transparency varies widely between Member States

• 83% of market participants are not content with current levels of transparency

indispensable im portant or useful

not useful

TSO network 95.2% 4.8%

Interconnectors 91.8% 8.2%

Load 94.6% 5.5%

Balancing 90.7% 9.3%

G eneration (production) 86.2% 13.8%

G eneration (capacity) 94.1% 5.9%

Im portance of inform ation according to suppliers

Conclusions

• Markets remain highly concentrated giving incumbent operators scope for exercising market power/influencing prices

• Competition from cross-border trade does not so far reduce incumbents’ market power

• Market participants complain about insuf-ficient unbundling of network and supply activities which calls for further reflection

• There is a general consensus that more transparency is needed urgently

Closing remarks

Context

• Growth and Jobs strategy (Lisbon)

• Green Paper on energy announced

• High Level Group

Way forward for discussion

• Competition case priorities

• Review of regulation

• Unbundling

H