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Energy market liberalisation and energy transition

Energy market liberalisation provides for the introduction of competition. This is especially challenging in the network-bound electricity and gas sector. Instead of developing parallel and competing networks, market liberalisation in Europe requires a separation of production and supply on the one hand and the networks on the other. In order to provide consumers, producers and suppliers non-discriminatory access to the grid, it is a prerequisite that the networks are exploited by independent network operators. This article will discuss the legal measures introduced in the European Union (EU) to guarantee that network operators act independently and how they deal with the increasing levels of renewable energy sources.

The need to create independent network operators is a key element of market liberalisation. In the EU a gradual trend towards more regulation of network operators can be noted. The first Electricity Directive (Directive 96/22/EC) required companies to keep separate accounts for each of their production, transmission, distribution, and supply activities. Such accountancy or administrative unbundling provides a limited degree of transparency. Since administrative unbundling proved to be ineffective, it was supplemented in the 2003 Electricity Directive (Directive 2003/54/EC) with the requirement of legal and functional (or managerial) unbundling. The aim was again to create greater transparency and more independent operators. The regime of legal unbundling required vertically integrated companies (‘VIC’) to legally separate the transmission and/or distribution network activities from the production/supply activities so that one of these functions was carried out by a separate company which, however, could belong to the same group or holding of companies. In addition, these VICs had to implement a set of detailed rules to ensure the effective independent operation and decision-making of those subsidiaries dealing with network activities within the integrated group of companies (= functional unbundling). These unbundling rules aim at creating proper independence of the various companies, and in particular that the day-to-day operations of transmission and distribution networks lies with the network operator.

‘The 2009 Electricity Directive and unbundling options

Despite these stricter rules, the European Commission reckoned that legal and functional unbundling did not result in the required level of independence, as network companies could still treat their affiliates more favorably than their competitors. Therefore the 2009 Electricity Directive introduced three new types of unbundling, which only apply to transmission networks[1]. The preferred and most far-reaching unbundling model is ‘ownership unbundling’, which provides that producers and suppliers cannot own companies operating transmission networks and vice versa. As a second best, it introduces the independent system operator (ISO), i.e. a model where the owner of the transmission system does not run the network itself but appoints an ISO to do so. As a third alternative, Member States can opt for an independent transmission operator (ITO), which means that the network company remains legally unbundled and thus remains within a VIC, but independence is achieved by adding several strict rules to prevent the mother company from interfering in the decision-making process of the network company.

Following the entry into force of the 2009 Electricity Directive all Member States had to opt for one of these unbundling models. Once opted for a specific unbundling model a Member State is allowed to apply a higher degree of unbundling but once a regime of ownership unbundling has been introduced there is no longer the possibility to return to an ITO or ISO. In order to verify whether these system operators actually comply with the new rules of unbundling, the 2009 Electricity Directive also introduces a certification process[2]. Such certification is issued by the national energy regulator on the basis of an opinion by the European Commission on a preliminary certification decision. In the EU most Member States have opted for ownership unbundling (28 companies) followed by a few examples of appointing an ITO (6 companies) or an ISO (2 companies)[3].

Independent network companies are a prerequisite for achieving non-discriminatory access to the grid. Consequently, all system users (producers and consumers) have to be treated similarly. Since 2003 Member States need to provide regulated third-party access to the transmission and distribution grids, which means that both transport tariffs and transport conditions need to be non-discriminatory and transparent. Whereas transport conditions can be set by the network operators, the transport tariffs, or their methodology, also need to be approved by an independent energy regulator.

The Renewable Energy Directive and renewable energy goals

In order to be able to reach the goal of 20% renewable energy consumption in 2020, the EU legislator has introduced a special regime for producers generating electricity from renewables. The Renewables Directive (Directive 2009/28/EU) requires network operators to ensure that their grids are reformed in such a way that they are technically able to receive energy from renewable electricity production facilities. Moreover, Member States also need to ensure that electricity produced from renewables has guaranteed or priority access to the grid. Network operators have thus a duty to keep the electricity from renewables flowing at all times and not to interfere with this for system or operation reasons. Likewise Member States must ensure that when network operators dispatch electricity generation installations, they give priority to generating installations using renewable energy sources. It requires that appropriate grid and market-related operational measures are taken in order to minimise the curtailment of electricity produced from renewables.

It follows from the above that the establishment of independent network operators and non-discriminatory access are key to the process of market liberalisation. One important exemption to the rule of non-discriminatory access applies to electricity from renewables. The EU legislator provides for renewable energy sources having priority access to the grid in order to promote the use of renewables. In this particular situation discrimination is allowed in order to enable energy transition and to combat climate change.

References

[1] Article 9 Directive 2009/72/EC Link.

[2] Article 10 Directive 2009/73/EC Link.

[3] Commission Staff Working Document – Report on the ITO Model of 13 October 2014 (SDW (2014) 312 final The internal energy market. Commission working document

Literature:

Interesting policy documents for further reading can be found here.

Furthermore, some original legislation has been added as well, for learners to investigate how the European Commission formulates this.

  • Directive 2009/72/EC (Electricity Directive). Link.

  • Directive 2009/73/EC (Gas Directive). Link.

  • Directive 2009/28/EC (Renewables Directive). Link.

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This article is from the free online course:

Solving the Energy Puzzle: A Multidisciplinary Approach to Energy Transition

University of Groningen