Liberalisation of European markets
96. While there are few concerns about the availability
to the UK of reliable and relatively cheap overseas supplies of
uranium and coal, and while the political and economic problems
associated with the global oil trade are well known and need not
be discussed here, there could be considerable uncertainty about
gas imports in the long term.
The areas with the greatest gas reserves are Russia, North Africa
and the Middle East. Even setting aside political questions, the
transportation of gas from these areas to the UK poses problems
of long pipelines and (in the case of liquid gas) inadequate port
and storage capacity in the UK. There are also questions of price:
unlike the UK, most of our European neighbours have no gas reserves
and are already heavily dependent on imported gas, much of which
is supplied on the basis of long-term (10 or 20 year) contracts.
We do not intend to address here the question of whether the transmission
infrastructure within Europe has the capacity to carry all the
gas likely to be required by European countries,
but we do underline the effect that competition for capacity may
have on price.
97. Those witnesses who argued that security of energy
supply would best be achieved if left to market forces did, nevertheless,
almost universally agree that these would not operate effectively
without greater liberalisation of Continental European markets.
Indeed, some argued that even if the UK were to reverse its policy
and seek to meet all needs from indigenous supplies, energy prices
in the UK would still be influenced by gas and oil prices elsewhere
in the world.
As it is, energy prices in the UK have been increasingly affected
by prices in neighbouring countries: the gas Interconnector between
Zeebrugge and Bacton means that gas can flow out of Britain to
higher-priced Continental markets as well as inwards to meet domestic
demand; gas prices
on the Continent have historically been linked to oil prices (though
with a time lag in changes); and, with the 'dash for gas' to generate
electricity in recent years, electricity prices within the UK
may be increasingly influenced by gas prices here and elsewhere.
The UK cannot be immune from conditions prevailing in Continental
98. The advocates of market forces were in agreement
that the difficulty with the present situation was that, although
the UK is a highly liberalised, competitive market for energy,
many European countries and in particular such important
neighbours as France and Germany still have largely public-owned,
protected energy companies, often encompassing both supply and
transmission, some with extremely rigorous public service obligations,
many severely curtailing access by other companies both to their
domestic market and to their transmission networks. As far as
security of supply is concerned, the main obstacle is that UK
suppliers find it difficult and expensive to trans-ship electricity
and gas from sources beyond the EU to the UK.
The Gas Forum described the problems: first, the integrated supply/transmission
companies common within Europe (like the old British Gas) were
reluctant to give other competitors access to their network; secondly,
the companies did not publish access prices so it was often impossible
to tell in advance how much it would cost to bring gas across
their network; thirdly, trans-shippers had to pay charges at each
border; and fourthly, there was a danger that any gas being trans-shipped
might be siphoned off and used en route, as there was no real
recognition that national networks could be used simply as a transit
system. We understand
that there are also technical problems to greater interconnection
of national networks (though these appear to relate largely to
it is impossible to remove the supply and cost problems posed
by the UK's geographical position (although the provision of more
interconnectors to the Continent would at least ease the situation),
but the difficulties in transparency (over physical access, prices
and ownership of gas in transit) would all be eased by liberalisation
of the European transmission systems.
99. The need to liberalise European markets is widely
acknowledged: the European Commission has been pressing for greater
liberalisation for a number of years and, indeed, the Lisbon European
Summit in March 2000 resulted in a pledge by the EU Heads of State
and Government to speed the opening up of energy markets across
the EU. In March
the Commission published a report stating that the first targets
of liberalising 30% of the electricity market and 20% of the gas
market by 2000 had been met. The Commission has taken further
action by bringing forward a draft Directive, requiring third
party access to transmission and distribution systems on the basis
of published tariffs, requiring the legal separation of network
and supply companies, and setting dates by which internal markets
must be liberalised; and by proposing a draft Regulation on conditions
for access to the network for cross-border exchanges of electricity.
The UK Government believed that insufficient progress had been
made to date, but the Commission's proposals represented a big
The Minister doubted the wisdom of setting higher targets at present,
before it was certain even the existing ones could be met. Commentators
have expressed considerable doubts about whether those countries
that have not liberalised their markets really wish to do so:
public opinion is fearful about leaving such a vital product as
energy to market forces, and the large energy companies with substantial
vested interests in opposing liberalisation wield considerable
economic and political influence.
The Minister described these obstacles as "timetable"
difficulties experienced by France and "structural objections"
by Germany. The
result of these problems is that many witnesses to our inquiry,
even though they applauded the efforts of the Commission and the
UK Government in pressing for change, felt that progress was at
best likely to be slow and halting.
100. As far as security of supply for the UK is concerned,
the key element in European liberalisation is demolishing the
barriers whether financial or administrative to
using transmission networks.
We asked witnesses whether, if full-scale liberalisation of European
markets (including access to domestic consumers) was impossible
to achieve, partial liberalisation in the form of simply opening
up the transmission networks was feasible. The responses differed:
Mr Porter of the Association of Electricity Producers believed
that liberalisation of the transmission system could not proceed
without liberalisation of the rest of the market because only
consumer pressure (when offered the option of more choice in supplier,
greater competition and cheaper prices) would bring about the
political will to open up the market.
Dr Miller, also of the AEP, on the other hand, was more optimistic:
the crucial aspect for UK companies, cross-border trading arrangements,
was under discussion in the EU and, by implication, there was
a possibility of progress on these.
The Minister agreed with Dr Miller.
Some witnesses felt that opening up the supply market in Europe
would help to break the link between oil and gas prices: once
consumers were able to choose their supplier, they would desert
the old monopoly companies that were tied to long-term (ten or
20-year) oil-indexed contracts.
101. Our specialist adviser, Professor Odell, struck
a contrary note in a paper on the issue of liberalisation. He
maintained that the lack of enthusiasm of some European partners
for liberalisation need not be as detrimental as some witnesses
suggested. He went on to recommend a closer relationship with
Norway, whose gas supply, he argued, would be sufficient to supplement
any shortfall in UKCS indigenous resources. He further pointed
out that any additional challenges posed by peaks in demand could
be met by LNG imports from reliable alternative suppliers.
102. Liberalisation within Continental Europe would
enable the UK market to function more efficiently and effectively,
but there are grave doubts as to how quickly and completely it
can be effected. Both the UK Government and the European Commission
appear to be doing all in their power to speed matters up, but,
in a body like the European Union, sovereign states cannot be
forced to give up what they regard as vitally important national
interests against their will: argument and example are the only
weapons. In these circumstances, it would be sensible to concentrate
efforts on the most important areas: liberalisation of transmission
systems should take precedence over opening up domestic markets,
if the former is feasible without the latter. But for the short
term, it would also seem prudent for the UK's policy on energy
security to be based on the assumption that liberalisation is
not certain. The Government must take a view as to whether this
means that there must be a greater reliance on indigenous sources
of supply than may be either necessary or desirable in the longer
term; if so, then the recommendations we make elsewhere in this
Report about maximising the exploitation of UK fossil fuel resources
and removing barriers to the development of non-fossil fuel energy
become all the more urgent.