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Europe Rewired: A Giant Awakens

EU nations are taking slow steps toward an integrated energy market, but they are many paces ahead of U.S. efforts.
Fortnightly Magazine - February 2004

Regional Markets, Then a Unified Grid

The tide of political and legislative change is moving more rapidly than the physical modernization of transmission systems and power markets, and the trend in Europe is to solidify the workings of regional markets in advance of the creation of a single grid structure. One such proposal envisions as many as eight potential regional electricity markets within Europe by 2008 (see Map 2).

As expected, some areas are moving faster than others, with the Nordic market already operating in such a unified manner. The advantages of creating regional markets are especially apparent in the Baltic region, says Vidamantas Janauskas, chairman of the Lithuanian National Control Commission for Prices and Energy. Each of the three nations comprising a Baltic market-Lithuania, Estonia, and Latvia-are liberalizing their power utilities at the same time and trying to coordinate their rules. However, Janauskas points out, each country is too small for its own internal market to function efficiently, and the generation mix is "far from optimal," with a single generator dominant in each of the local markets.

Energy regulators from the three nations signed an agreement in November 2002 that establishes common pricing and payment principles, and a strong interconnection already exists. "This could be a good school to learn from before entering the bigger markets," Janauskas says.

Reviewing the status of other Eastern European accession states that will become EU members beginning in May, Janauskas foresees the possibility of stronger ties and interchanges-but not until new transmission interconnections can be built. "To have a real market we need regionalization," he concludes. But we cannot interconnect with the other assession countries. There is no connection."

Forging a regional market might not be any easier, even when it involves just two countries, as with the planned Iberian market that will link Spain and Portugal. Jose Luis del Valle, director of strategy for Iberdola, says several barriers to regional integration remain, even though the two nations have committed to creating the Iberian Electricity Market (MIBEL) beginning April 20, 2004.

On the surface it would appear that Spanish and Portuguese generation markets are reasonably complementary, he says. However, the Spanish market is "totally and effectively" liberalized, with at least six viable competitors, while Portugal's market is currently controlled by a single company-EDP-that holds nearly three quarters of the market. This domination has caused a slowdown in creating the rules needed for market integration, he says. "I think it's because EDP wants to be reinforced before it can compete with the Endessas and Iberdolas," del Valle says. "If they can gain some time from that process to be better prepared, I think that's what they are trying to do."

Another barrier to competition and regional integration is the need to fix and allocate stranded costs of investment in existing power plants, which del Valle estimates to be in excess of 1 billion Euros. The desire of incumbents to receive compensation for those investments is understandable, he says. "What we are saying is, whatever allocation we do, please do not let that allocation affect the formation