The European Commission issued its annual report Wednesday on the functioning of the internal market in electricity and gas. The report concluded that governments need to step up efforts to implement the market opening measures in the gas and electricity directives. Only greater integration of national markets can bring the required improvements to competition in the energy internal market.

“The report shows a huge variation in the success of market opening by member states, but I expect a significant improvement once the directives are fully implemented. In the new global environment of higher primary energy prices, it is more important than ever for the community to live up to its commitment for competitive gas and electricity markets,” said Andris Piebalgs, commissioner for Energy.

The report shows continuing progress in many member states, although some still have work to do before the new directives are fully operational. Eighteen out of 25 member states failed to respect the deadlines for implementation of the directives (July 2004). As a consequence, a number of infringement procedures were launched in October 2004.

According to the report, some countries, such as the UK (in electricity and gas) and the Nordic countries (in electricity) have already well developed markets with a robust level of customer activity and generally lower prices as a result. For the other countries, the situation is less satisfactory and progress has been slower.

One main obstacle to the successful implementation of a competitive market is insufficient integration between national markets. In a number of cases insufficient interconnection infrastructure exists between member states and congestion is still not being handled satisfactorily.

Furthermore, full independence of transmission system operators and an adequate level of separation of distribution system operators have still not been fully achieved in all instances.

Despite this unfinished business, market opening is nevertheless having a positive impact. Significant productivity gains have been achieved by the sector and, despite the recent price increases, electricity prices have fallen in real terms by 10-15% compared with 1995 figures. In most countries more than 25% of large customers have changed supplier since the process of market opening started but switching rates never reach 50%. Furthermore, switching is made often only to another domestic supplier. In fact, foreign suppliers’ share in national markets is, in most cases, less than 20%.

In 2005, the Commission will undertake a further in-depth review of progress in creating the internal electricity and gas market. On the basis of this market analysis the Commission will assess the need for additional measures to improve the functioning of the market.