Europe’s energy market is not unified… yet. Many standards and procedures differ from one country to the next, there still are not enough grid interconnections and some markets operate as if national monopolies were not a thing of the past, particularly the gas market. We need a real Schengen area for energy.
Here are some ideas on creating one.

The opinion of Jean-Marie Chevalier

Jean-Marie Chevalier is a professor at the University of Paris-Dauphine, where he heads up the Center of Geopolitics of Energy and Raw Materials (CGEMP). He is also director of the Paris branch of Cambridge Energy Research Associates (CERA) and the author of numerous articles and books. In October 2007, as part of the independent economic advisory body CAE, he and co-author Jacques Percebois submitted a report to the French Prime Minister entitled Gaz et électricité, un défi pour l’Europe et la France [Gas and electricity, a challenge for Europe and France].

We need a single European energy market, a Schengen area for electricity and gas that would allow competition to really play its role, stimulating innovation and forcing suppliers to compete on prices. But we are far from it; the markets are still pretty much national. Electricity is well ahead of gas on all of the key issues, including regulations, power systems and complex exchanges, but there is still a critical lack of interconnections between national power grids. Grid interconnection is an essential condition for establishing a truly continental market. The grids become interdependent, allowing electricity to flow freely from one country to another. Prices can be arbitrated and competition flourishes, as is the case between France and the Benelux countries.

More interconnections and even excess capacity are urgently needed for truly seamless interchange on the European scale. The European authorities have clearly identified this as a goal,and it is one of the priority measures published in January 2007. From measure to decision, however, it takes time for interconnections to come into being.

Still very little competition between national energy markets

The markets themselves are dysfunctional. European electricity markets are extraordinarily complex, almost impenetrable, and a powerful electric utility can still influence the market considerably. Like the stock markets, there is a need for greater oversight. The issues are different for the changing gas industry. For the past fifty years, the European natural gas network has been designed to deliver gas directly from one fixed point – the deposit – to another fixed point – the consumer. But today’s gas grid is changing, becoming tighter and denser as it matures. Liquefied natural gas (LNG) is coming in from Norway, Qatar and Egypt, and pipelines are being built from new gas-producing countries, increasing the number of entry points. Slowly but surely, this trend will stimulate competition between natural gas suppliers.

Pooled storage gaining ground

Gas storage is still a problem. The grid was designed by and for national operators, and the storage areas they control give them a sizeable competitive advantage that is beyond the reach of small companies. Pooled storage is catching on, though. I think that, like the electric power industry, we will wind up with completely independent transmission system operators capable of investing Europe-wide. These independent operators are already emerging. Little by little, utilities like the German companies EON and RWE are thinking of selling their transmission systems. But we have to go further and faster. Ideally, we should create a single European transmission system. A single transmission company would necessarily mean a single regulatory authority and a single European market.

In every instance, the proliferation of national rules and regulations is an impediment to the creation of a single market. It is becoming urgent to harmonize the standards, procedures and regulations of European countries and to increase the independence of grid operators. They should have the same responsibilities and the same scope of operations in every country. European associations such as the European Regulators’ Group for Electricity and Gas (ERGEG), which brings together European regulators with European Transmission System Operators (ETSO), will be very instrumental in achieving this. The process is admittedly slower than initially planned, but we should have a single electricity market in ten years or so. For gas, it will undoubtedly take a bit longer.