The case for a pan-European energy regulator

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5 October 2012, Gas, Electricity

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Datamonitor sees two sets of issues in creating a single EU energy market: the "structural" or physical infrastructure, and the "virtual" or policy/regulatory infrastructure needed to integrate the national markets and allow energy companies to compete outside of their home market. Both require the supervisory powers of a single regulator that transcends national borders.

Recent analysis by Datamonitor largely supports Galan's comments. Many European utilities have identified insufficient investment in grids and interconnectors as a problem, as well as the barriers to entry to other markets, all of which prevent the creation of a single EU energy market. The barriers are such that Datamonitor considers a single regulator to be the most expedient way to accelerate progress in harmonizing the markets.

Where cross-border projects are concerned, a super regulator is clearly required. A common strategy, network codes, and oversight of those codes are needed, which is best implemented at an EU level. In particular, a regulator could make sure that utilities can access cross-border capacity and ensure transparency in interconnection trading. In the absence of transparent and fair cross-border regulation, it is likely that investment in interconnection capacity will remain insufficient.

For an efficient EU energy market, the physical infrastructure - interconnection capacity and effective grids - is integral. Yet such infrastructure is highly capital-intensive, complex, and in particular, long term, and thus calls for planning to ensure the infrastructure is fit for purpose in the future. At present there are bottlenecks in interconnection capacity in continental markets, making it difficult for companies to sell power to end users in neighboring countries as many national wholesale markets remain illiquid.

Once the structural barriers are tackled, the second step for a central regulator is to create the conditions to harmonize the virtual structure, including myriad tax laws, subsidies, renewable energy support mechanisms, and market reform packages. The regulatory and policy landscape in Europe is sufficiently complex and diverse that it requires a central regulator to gain sufficient strategic perspective and enforce compliance. A central regulator could hope to create the conditions for efficient inter-European trade, ensure stability to encourage investment, and allow prices that reflect supply and demand. It would therefore be a decisive step toward a common European energy market.

Source: MarketLine

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