The EU: on a slow boat to the internal electricity market
By Stefano Sturaro and Adrian Savin, Regulation of Markets and Competitive Economy Directorate
The EU’s Energy Union has five strategic dimensions. Building a fully integrated European energy market is one of them; a fully integrated internal electricity market that functions well is a key component of this. Considering the complexity of electricity, ranging from its creation to distribution to storage, this is easier said than done. The EU’s energy rules are set at European level but in practice, there are 27 national regulatory frameworks in operation. In this article, Stefano Sturaro and Adrian Savin, Head of Task and Deputy Head of Task for this audit, provide insights on several aspects. They discuss how to start an audit on such a complex topic, and they describe their main findings. They talk about the frustrations of slow progress, and reveal how this audit ties into macro‑economic and social concerns, such as the ones the volatile energy market brought to light last year.
Igniting the audit
A few days before the 2020 Christmas holidays, a good half year before the energy crisis swept into our lives, our director, Ioanna Metaxopoulou, entered our offices to inform us that we would be carrying out an audit on the European Union’s internal electricity market. We took stock of our knowledge about this area. The first thing that was clear to us was that the task was going to be challenging.
We had to become familiar with a complex market, split into two broad layers, retail and wholesale markets. These in turn are structured into four segments: day‑ahead, intraday, balancing and forward markets (see Annex I of special report 03/2023). Specific conditions apply in each member state, and the number of involved actors and stakeholders is high. We also had to become acquainted with a broad set of legislation: three Regulations, one directive, and eight pieces of secondary legislation (Network Codes and Guidelines, which are the European Commission’s implementing Regulations).
The process of building an internal market for electricity has been going on for a long time. It started more than a quarter of a century ago, when markets were still domestic in scope and largely dominated by monopolies. In successive waves of legislation (known as ‘energy packages’) the EU attempted to break up those monopolies and build up an EU‑wide market. An internal market for electricity means that electricity can flow freely through the EU, with cross‑border electricity trading allowing the cheapest power to be dispatched to businesses and citizens irrespective of internal EU borders. This strengthens competition and market efficiency, with lower and converging prices to the benefit of consumers, while increasing the security of EU’s energy supply, with greater ability to share resources if unforeseen disruptions occur.
We met Mihails Kozlovs, the reporting member for this audit, to discuss the audit’s direction and scope. Following this meeting, we decided to include the state of progress of the electricity market integration in the scope of our work, picking up from where a previous ECA audit left off in 2015¹. We also decided that our audit should cover the implementation of the Regulation on market integrity and transparency (REMIT) to prevent electricity market manipulation, a topic which the ECA had not previously audited.
Our auditees were therefore the European Commission, in particular the Directorate‑General for Energy (DG ENER), and the EU energy regulator, the Agencyfor the Coordination of National Energy Regulators (ACER). DG ENER is responsible for developing and implementing European energy policy within the scope of Article 194 TFEU. ACER promotes the completion of the internal electricity and gas markets and coordinates the work of NRAs on issues with cross‑border relevance.
The budget for our audit included a training course on the functioning of the wholesale electricity market for the audit team and the cabinet staff involved, as well as for expert support to cope with the most technical details of the audit matter. Both initiatives were indeed helpful, even if the process of procuring them was time‑consuming. Two colleagues, Marc Hertgen and Satu Levelä‑Ylinen, joined the team in May 2021, and we were supported by a trainee.
Information exchanges with auditees were a major challenge during the audit. Auditees often provided data and information late; they also frequently delivered incomplete information, leading us to have to ask them again. As far as possible, we tried to obtain the information we needed from ACER’s website. However, this turned out to be difficult: key documents for stakeholders and the general public are not easily accessible, or have not been published at all. The website lacks the transparency needed for a communication tool. In certain cases, it does not even comply with regulatory requirements².
Both DG ENER and ACER asked for an extension to deal with our preliminary audit findings, due to their work overload relating to the energy crisis (ACER’s assessment of the wholesale electricity market, DG ENER drafting the REPowerEU plan). This crisis had already been brewing since 2021, but had been precipitated by the breakout of the war in Ukraine in February 2022. In the spirit of good interinstitutional cooperation, the ECA accommodated this request.
After our audit fieldwork was finished, we had enough material to write two special reports. We condensed the various issues we found into a single report, preserving the key messages. The clearing process for our report with the auditees was delayed because the Commission was reportedly overstretched by the work it needed to do to design proposals to cope with record high gas prices. So one of our findings, namely slow progress in integration and implementation, eventually affected our own reporting: the urgent energy crisis requiring precisely this integration and implementation to better address the situation. On 31 January 2023 we published the report; it was presented by Mihails Kozlovs, reporting member, at a well‑attended press conference.
What we found
Volume and price
In special report 16/2015, the ECA had concluded that the EU’s objective of completing the internal energy market by 2014 had not been achieved. There was still a long way to go before the third energy package, launched in 2009, could be deemed to be fully implemented. We started from this point and looked at whether and how much the Commission and ACER’s efforts from 2015 onwards contributed to implementing the third energy package.
The focus was on the wholesale electricity market, and we tried to measure progress by looking at two key indicators: volumes of electricity traded cross‑border and price convergence. We found that from 2015 onwards traded volumes had not increased (Figure 1), and prices had not converged (Figure 2).
Figure 1 — Annual volumes of cross‑border trade in electricity in the EU (TWh)
Figure 2 — Annual average prices on day‑ahead electricity markets (€/MWh)
Note: Trade volumes for 2021 were not available at the drafting stage of the report. Electricity prices before 2015 were not available.
We also found that, despite certain significant achievements made over the last ten years, progress with integration had been slow and uneven across market segments and regions within the EU. From this starting point, we set out to understand what had gone wrong.
Complex legal architecture
To cut a long story short, the Commission had put in place a complex legal architecture, which had resulted in delays to the adoption of the market rules. Indeed, adopting network codes and guidelines was not the last step in the process of setting out harmonised cross‑border trade rules. The implementation of network guidelines required the adoption of further technical detailed specifications through terms, conditions and methodologies (TCMs), which was delegated to national regulatory authorities (NRAs) and ACER.
EU law on cross‑border trade in electricity consists of a three‑tier system, implementing article 194 TFEU (see Figure 3).
Figure 3 — The three‑tier legal structure implementing Article 194 TFEU on electricity cross‑border trade
By the end of 2021, none of the network guidelines had been fully implemented. Delays in implementation were caused by the high number of TCMs, delayed agreements on TCMs by NRAs and transmission system operators (TSOs), and inefficient approval processes set out in the network guidelines.
In its impact assessment, the Commission had not sufficiently analysed the impacts of the market design and governance mechanisms in place. In particular, this concerned key aspects related to the delegation of regulatory work to NRAs and ACER, and the coherence of market design; for example, the implications of pricing methods for price levels in crises with disturbances on input markets and in view of the growth in renewable energy.
Transmission capacity is a bottleneck
As well as the lengthy legislative process, transmission capacity was also a bottleneck. Member states have been stubbornly missing the deadlines for increasing cross‑border electricity transmission. This capacity is critical: no matter how coupled power exchanges are, a lack of transmission capacity means that cheaper electricity produced abroad cannot be transported on the domestic power exchange. In other words: electricity markets remain fragmented. Delays for achieving interconnection targets (70 % of installed interconnection capacity to be made available for cross‑border trade; interconnection capacity to reach at least 10 % of generation capacity by 2005 — then extended to 2020 — then replaced with a new target of 15 % by 2030) are measurable in years, if not decades.
How is it possible that the process cannot be sped up? Resistance by member states, driven by national interests, combined with inefficient decision‑making, poor monitoring and lack of powers at EU level, is our diagnosis. In particular, we found that ACER’s monitoring of the consistent implementation of market rules across member states and its reporting were insufficient. This was particularly due to a lack of information and data, a lack of follow‑up, absence of a monitoring strategy, limited resources, and poor coordination with the Commission in terms of monitoring.
CER’s monitoring did not result in robust recommendations for NRAs, nor did ACER provide possible measures to foster market integration by issuing opinions to the Commission and the Parliament. Finally, ACER also lacked an appropriate governance structure and the necessary competences to effectively coordinate national authorities’ actions in completing ambitious integration projects.
Market surveillance is still incomplete
Market surveillance, intended to detect and deter market abuse and manipulation, was also incomplete. ACER’s surveillance became fully operational at the end of 2017 (see Figure 4), but data collection was not comprehensive and the assessment of data collected covered a limited number of types of abusive behaviour. ACER also allocated insufficient resources to analysing the collected data, which further hampered its assessment capabilities. Furthermore, ACER was unable to support investigations into the growing number of potential cross‑border market abuse cases. Finally, ACER did not possess the appropriate tools to ensure that rules on market surveillance were applied properly at national level. Ultimately, for these reasons, ACER’s surveillance has not led to many sanctions.
Figure 4 — Timeline of REMIT market surveillance
Outcome and follow‑up
Our report identified several issues jeopardising the integration of the electricity market under normal circumstances, issues which will also have implications for the new challenges stemming from the energy transition and the fallout of the war in Ukraine. To address these issues we made recommendations (see Box 1), which were generally accepted by the auditees. The report was published at a suitable point in time: just one week after the Commission had launched a public consultation on the reform of the electricity market. Our special report can now contribute to the policy debate and will hopefully help policymakers to address the issues and challenges we identified.
The report raised also considerable media interest: 329 news articles and 742 social media posts referring to this special report were published between 24 January and 14 February 2023.
What we learned — challenges and audit ideas for the future
Energy is a key production input and an essential commodity in our everyday life. Dysfunctional energy markets can result in consequences of macroeconomic (e.g. loss of competitiveness for businesses, increase of sovereign debt to finance support schemes) or social relevance (e.g. energy poverty). This audit can pave the way for the ECA to conduct additional audits on possible weaknesses in the design and implementation of the internal energy market.
We also see the scope for possible cooperation with supreme audit institutions, which could complement our EU‑level audits at member state level. Such cooperation could, for example, cover the actual implementation of market rules, especially for retail markets, or REMIT enforcement by the national regulatory authorities.
Finally, we want to take the opportunity to say a big ‘thank you!’ to all of our colleagues in ECA support services who at different stages of the audit supported us with their hard work and commitment: professional training, the procurement service, ECALab, the translation and publications services, and communications. Every good audit is the result of great teamwork!
¹ Special report 16/2015 Improving the security of energy supply by developing the internal energy market: more efforts needed.
² Special report 03/2023 paragraphs 72, 151 and Annex IX.
This article was first published on the 1/2023 issue of the ECA Journal. The contents of the interviews and the articles are the sole responsibility of the interviewees and authors and do not necessarily reflect the opinion of the European Court of Auditors.