Doubts Persist About European Gas Market
Doubts persist — barely a few weeks after the deadline for implementing legislation — about whether the European experiment with open gas markets will lead to truly open markets.
Most European Union countries passed laws that require competition in gas markets, including nondiscriminatory access to pipelines. However, the hard truth is anyone planning to develop gas-fired power plants in Europe with the expectation of buying gas at the field and paying a pipeline to transport it may find this model used in the United States is still not ripe for use in many parts of Europe.
EU Gas Directive
In 1998, the European parliament directed member states to implement by August 10, 2000 laws that would bring competition to the natural gas sector within the European Union as a whole and in each member state. This “gas directive” required each member state to ensure that at least 20% of its natural gas market is open to competition by August 2000. By 2007, that percentage is required to increase to 28% and, by 2020, the percentage is required to increase to 33%. “Eligible customers,” which are the entities that can contract for natural gas under the terms of the gas directive, must include all gas-fired power generators and other entities that consume more than 25 million cubic meters of gas per year.
In order to achieve this opening of the gas market, entities providing gas transmission, storage and distribution service, or “natural gas undertakings,” must provide eligible customers with nondiscriminatory access to their systems. The terms of such system access can be negotiated or established by a regulator and set out in public tariffs. However, a natural gas undertaking is exempted from the open access requirement if the gas company has no unsubscribed capacity on its system, or if the open access requirement would prevent the gas company from carrying out certain public service obligations or would cause financial harm due to take-or-pay commitments.
The gas directive also requires member states to establish a procedure whereby entities can obtain authority to construct natural gas facilities, including to bypass a distribution system and interconnect directly with a consumer. This procedure must be clearly defined, transparent, nondiscriminatory and verifiable.
As of August 10, 2000, only Germany, France and Luxembourg had failed to enact the legislation required to implement the gas directive fully. However, in Germany, legislation is in place that – while not meeting all requirements of the gas directive – has significantly opened the German gas market. In France, while legislation has languished, Gaz de France has voluntarily opened its transmission system in a manner consistent with the gas directive.
The EU member states have made significant progress toward creating a competitive gas market in Europe. The EU estimates that 80% of this market is now open to competition.
While in theory this may be the case, there are certain structural impediments in the European gas market that may hinder the development of a fully competitive market.
Competition remains thwarted or at least limited in many countries by the lack of multiple supply sources. Unlike the United Kingdom, where there are multiple suppliers competing in a market that has been open for a number of years, countries such as Germany, France and Italy rely on imports from three main sources – Russia, Norway and Algeria – with sales from these countries dominated by single-selling entities. Without multiple sources of supply, there is no pressure on existing suppliers to lower prices.
Existing take-or-pay contracts also limit the opening of the market. Many gas distributors and transporters in EU countries have entered into long-term, take-or-pay contracts in order to ensure a secure supply to meet their public service obligations. Because of the financial commitments under these take-or-pay contracts, gas distributors and transporters are often reluctant to open their pipeline systems to other sources of supply if it will prevent them from selling adequate supplies of gas to meet their take-or-pay commitments.
Although the gas directive may increase competition in the gas markets of member states, there is some question whether this competition will have any significant impact on overall energy prices in the EU. First, on average, gas consumption represents only 22% of total energy consumption in EU member states. While gas consumption is predicted to increase over the next 20 years, natural gas is not expected to become the dominant fuel source in most EU countries. Moreover, because the price of gas in most EU countries is tied to oil prices, actual price competition may be limited.
Finally, cross-border competition is limited by technical problems. For example, technical codes and specifications for the design and construction of pipelines differ among the member states, often making cross-border interconnection difficult. In addition, gas quality specifications often differ from one country to the next, limiting access to upstream pipelines. Finally, diverse approaches to metering and accounting standards cause difficulties in measuring delivered gas supplies.