The European Union (EU) electricity directive was widely hailed as a significant achievement when it was passed in 1996, but seen from today's perspective, it was only a timid policy initiative. It called for nothing more than nominal competition in 33% of the EU's power market by consumption volume. Fortunately for liberals and customers in markets where reform has worked, free-market arguments have won the day since 1996 and the directive has been left far behind by market reformers:

• In the EU as a whole, current legislation has freed customers accounting for no less than 77% of EU power consumption.

• As of February 2003, all customers in Austria, Denmark, Finland, Germany, Spain, Sweden and the United Kingdom (with the exception of the small system in Northern Ireland) are free to choose their suppliers. All Dutch customers will be free to do so by January 2004, at the latest.

• Among remaining member states, Belgium, Ireland, Italy, Luxembourg and Portugal have already exceeded the market opening requirements of the directive.

• Only France and Greece have chosen to restrict market opening to the directive minimum.

The market opening process is not complete, but the end is in sight. In November 2002, France finally joined the majority in favour of full market opening, allowing the Council of European Energy Ministers to reach an agreement calling for all customers except households to be free to choose their suppliers from July 1, 2004. Freedom of choice will be extended to households by July 2007, at the latest.

It is vital to note that nominal market opening is not necessarily synonymous with intense competition. Industry ownership concentration, poor market design and limited interconnection capacity with foreign power systems can deny real choices to theoretically “freed” customers. The directive does not address this qualitative issue directly, leaving effective opening measures to member states and further policy action at the European level. In fact, one can argue that only the United Kingdom and the Nordic region have secured intense competition, as demonstrated by customer-switching rates well ahead of those seen in other member states. Nevertheless, at least the stage has been set for free trade and successful European supply market integration — the ultimate goal of European liberals.

Power Trading Markets

Integration is more advanced in wholesale markets. Power exchange prices in the core continental markets of France, Germany and Austria move broadly in line with each other. In the Nordic region, the Nord Pool power exchange sets the pace for all four Nordic markets. Markets with limited interconnections to major international hubs, such as the United Kingdom and Spain, do at least see active cross-border trading on available capacity and are affected by core market trends, if not led by them.

Nonetheless, trading market fortunes diverged in 2002 as new U.S. entrants came under intense pressure. They had been important providers of liquidity, but falling credit ratings prompted most of them to leave trading altogether. Some European markets took this development in stride, but others were hit hard.

In descending order of trading volume importance, major markets fared as follows in 2002:

• The Nordic market, Europe's largest by trading volumes, saw exchange and OTC volumes combined rise by an estimated 9%. This was a pedestrian performance by the high-growth standards of the region but still creditable in a year of turmoil.

• Volumes doubled in the U.K. trading market. U.S. companies were major players in the United Kingdom, but their positions have been filled by incumbents with relatively strong financial positions and clear incentives to trade in a highly competitive power industry.

• German trading volumes dropped an estimated 41%. EEX, the German power exchange, had a good year, but its gains were outweighed by plummeting OTC volumes. In fact, the withdrawal of new entrants was felt most keenly in Germany, where they had been leading market developers as well as liquidity providers. Austrian and Swiss volumes dropped an estimated 20% in sympathy with their far larger pace-setting neighbor.

• France may be conservative in energy policy debates, but in trading, it has finally started to make a mark. Volumes quadrupled in this market in 2002. Business levels are still nowhere near as high as they are in major trading hubs, but the market was a remarkable bright spot in 2002.

• In Spain, power exchange trades make up the bulk of trading volumes. These trades are supported by regulatory mechanisms which make them more attractive than bilateral deals. This is the reverse of the situation elsewhere in Europe, where exchanges enjoy little or no regulatory support and OTC trades dominate. In 2002, Spanish exchange volumes rose by 4%. As the OTC sector collapsed, total Spanish volumes dropped 1%.

• In the Netherlands volumes dropped by an estimated 10%. As in Germany, the power exchange performed well, but its gains must be balanced against larger falls in OTC business.

Overall Western European trading volumes rose by an estimated 5% in 2002, reaching three times regional power consumption. This is a far cry from the spectacular 86% growth rate seen in 2001 and the high trading/consumption ration achieved in mature markets, but still better than some market stakeholders had feared at the peak of the new entrant credit crisis. If the European trading market has weathered the wild storms of recent months, it should be able to face the challenges of 2003 and beyond.
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