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Skip to 0 minutes and 12 seconds Energy market liberalisation and energy transition are processes taking place worldwide. This lecture will take Europe as an illustrative example. Energy market liberalisation entails that energy producers, suppliers, and consumers will have a freedom of choice. Energy consumers are no longer bound to one supplier. Energy transition means to change from using fossil fuels to using renewable energy sources. The increased use of renewable energy sources can be of importance for reasons of supply security, but it’s also an important instrument for combating climate change, as it reduces CO2 emissions. Despite the beneficial effects of the energy transition, the process does not necessarily fit well with the process of energy liberalisation.

Skip to 1 minute and 6 seconds The process of energy liberalisation has a particularly significant effect on the network-bound electricity and gas sector, which consists of production/generation, transmission, distribution, and delivery to end consumers. Prior to liberalisation, the electricity and gas supply chains were vertically integrated. This means that one company was responsible for all or most parts of the supply chain. Such vertical integration could be based on a legal monopoly, when it is based on law, or a de facto monopoly, when it is based on a contractual or policy requirement. In Europe, these legal or factual monopolies were established after World War II.

Skip to 1 minute and 51 seconds However, the Treaty establishing the European Economic Community, now EU Treaty, aimed at abolishing such monopolies, as they are contrary to the main goal of the Treaty, which is the free movement of goods, services, capital, and persons without hindrance of competition. Still, these monopolies were tolerated for several decades. The reason being that the Treaty also provided that undertakings entrusted with the operation of services of general economic interests, such as electricity and gas supply, could be exempted from these rules if their application would obstruct them to perform the particular task assigned to them, indeed electricity and gas supply. The approach changed with the introduction of the Internal Energy Market Programme in 1988.

Skip to 2 minutes and 45 seconds Exemptions to these general rules are only allowed in special situations. Companies involved in electricity and gas supply need to meet the basic requirements of the Treaty. The European Commission therefore decided not only to apply more stringently the Treaty provisions, but also to enact specific legislation forcing member states to act. This legislation can either take the form of a directive, which needs to be transposed into national law, or of a regulation, which applies directly. To this end, the EU has adopted several legislative acts. The directives liberalising the electricity and gas markets distinguish between market activities and network activities. The free market applies to all producers, suppliers, and consumers.

Skip to 3 minutes and 39 seconds Any consumer can negotiate a supply contract with any supplier or producer, and vice versa. However, networks are natural monopolies, and therefore need to be regulated. The directives require the companies operating the networks, to be independent, at least in its legal form, from the companies operating in the market. These independent network companies are required by law to provide non-discriminatory access to all market parties. The conditions and tariffs for access are regulated by a national regulatory authority, usually part of the government. Energy producers also act on the liberalised market. Electricity production is no longer based on exclusive rights, but these producers have to operate in competition. They can attract customers by offering lower prices, or maybe a greener image.

Skip to 4 minutes and 41 seconds However, the primary fuel used is an important part of the energy price paid by the end consumers. Many producers have thus decided to use primary fuels with the least costs, such as coal. The trend to use coal contradicts the need for an energy transition. The European legislator has therefore issued a separate directive promoting the use of renewable energy sources, and requires EU member states, on average, to achieve 20% renewables in 2020. This is a binding target. In order to assist member states to achieve their goals, the directive provides for several possibilities to support renewable energy sources.

Skip to 5 minutes and 25 seconds Member states are thus allowed to provide financial support to cover the additional costs of renewables, and to introduce a regime of guaranteed or priority access to the grid. Last, but not least, it arranges for cross-border developments and joint initiatives, as some member states have easier access to renewables than others. Many European member states are struggling with the process of energy transition, as the liberalisation process has not yet been finalised and the renewable targets are difficult to achieve. Before discussing the role of law in relation to the promotion of renewable energy sources, we will discuss in the next lecture the role of the European Emissions Trading regime as a means for energy transition.

Energy market liberalisation and energy transition

In this video the focus is on energy market liberalisation. Martha discusses (a) the rights and duties of market parties and network operators and (b) how the goal of energy market liberalisation may contradict the process of energy transition.

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This video is from the free online course:

Solving the Energy Puzzle: A Multidisciplinary Approach to Energy Transition

University of Groningen