An Integrated European Electricity Market 

New from Monitoring European Deregulation

The experience of liberalisation of the electricity industry in Europe shows that it works. A report from the Centre for Economic Policy Research and the Swedish Center for Business and Policy Studies notes that the technical breakdowns predicted by sceptics in the European Union have not happened. But the experience has produced a wealth of evidence that new policies and radical changes are needed if markets are to be integrated and further liberalised across Europe. The report is particularly timely in view of the legal problems of ensuring compliance with the European Commission’s Electricity Directive and its implementation in France.

At the national level, the report calls for a reduction in concentration of generation capacity: ‘The distribution of ownership appears to matter more than its public or private character.’ Among many other radical reforms suggested in this area the experts insist that third party access to networks should be regulated: this would be more transparent and generally preferable to negotiated third party access or the single buyer model. There are also far-reaching recommendations on transmission system ownership and universal service requirements.

Environmental policy is both a national and Europe-wide concern. A combination of licensing requirements, taxes and emission permits and emission trading is needed. A systematic approach to emissions trading is needed. If a single market in electricity is to become a reality, there has to be agreement on four key areas of transmission pricing. These include simple, transparent charges which depend on the point of connection; uniform allocation of charges between entrance and exit points; some geographic differentiation of access charges to relieve congestion and reduce transmission loss, and a scheme for financial compensation between transmission and distribution networks.

The report argues that the European Commission should consider supplementing its Electricity Directive with three new measures. These comprise a requirement to separate ownership between generation and distribution; imposing strict competition criteria between generation and supply, and harmonising non-tariff conditions for access to transmission and distribution networks. Finally, there needs to be a new body in charge of identifying the need for new interconnection facilities and allocating the costs.

If the single European market for electricity is to become reality it must be as easy to trade electrical power between countries as between different parts of the same country. Access charges are the key to an integrated electricity market, the Report argues.

This report is the second in an annual series of reports on network industries.

CEPR is a network of almost 500 Research Fellows based throughout Europe, who collaborate through the Centre in research and its dissemination. CEPR helps its Research Fellows and Affiliates to develop projects, obtain their funding, administer them and disseminate their results. The Centre’s research ranges from open economy macroeconomics to trade policy, from the economic transformation of Central and Eastern Europe to regionalism in the world economy. For further information about CEPR, please contact Rita Gilbert, Tel: (44 20) 7878 2917 or email: rgilbert@cepr.org, or contact James Morgan, Tel: (44 20) 8225 7262. Web page: http://www.cepr.org

SNS – the Swedish Center for Business and Policy Studies – is a private, non-profit organization with the aim of promoting research on economic and social issues of importance to public decision-makers, and making it readily accessible to a broad audience. To this aim, SNS engages social scientists at leading universities in applied research on topical policy problems. It is also one of Sweden’s major publishers in the social sciences.

SNS was established in 1948 as an association of concerned individuals in the Swedish business community. Today, SNS has 4,000 individual members organised in 50 local chapters in Sweden and abroad. An important source of funding is annual contributions from 270 subscribers, including Sweden’s largest corporations and most important government agencies. Other major sources of funding are research grants, book sales, and conference fees.

For further information about SNS, please contact Christina Rosengren, Information Officer, Tel: (46 8) 507 025 73 or email: christina.rosengren@sns.se.  See also www.sns.se

Neither CEPR nor SNS take any institutional positions.

The Authors:

Lars Bergman, Professor, Stockholm School of Economics; SNS, Stockholm. Gert Brunekreeft, researcher, Albert-Ludwigs Universität, Freiburg. Christopher Doyle, Director Telecoms, London Economics; Associate Fellow, Department of Economics, University of Warwick. Nils-Henrik M von der Fehr, Professor, University of Oslo. David M G Newbery, Professor, University of Cambridge; Research Fellow, CEPR’s Industrial Organization, Public Policy and Transition Economics research programmes. Michael Pollitt, researcher, Judge Institute of Management Studies, University of Cambridge. Pierre Régibeau, Professor, University of Essex; Research Fellow, CEPR’s Industrial Organization research programme.