Over the next year (or years), companies in Canada and the U.S. will make the transition towards adopting International Financial Reporting Standards (IFRS). These standards will have a...
Acceding to Succeed
How joining the EU may transform the Central and Eastern European electricity sectors
It is not coincidental that energy assets are for sale across Central and Eastern Europe the same year that 10 new countries join the European Union (EU). New member states had to demonstrate significant sector reforms to qualify for EU membership. These sectors have historically had miserable economic results due to artificially maintained low prices, poor and often corrupt management, and significant political interference. On this dawn of EU expansion, we assess accession countries' progress in meeting the EU energy directives, the remaining hurdles to further liberalization, and obstacles for private investors.
European Union Framework
The objective of EU electricity legislation was to create an internal market for energy, thereby maximizing competitive forces in generation and supply and developing a non-discriminatory environment in transmission and distribution, with the ultimate ambition of improving efficiency and reducing costs for end consumers. Directive 1996/92/EC served as the key legislative catalyst for market deregulation. Electricity Directive 2003/54/EC replaced it and put in place more explicit regulations regarding regulators and the independence of grid operators. Other EU energy legislation addresses environmental issues, such as meeting the EU's commitment to the Kyoto Protocol by increasing the amount of renewable energy used and reducing environmentally harmful emissions from power plants.
Member countries are moving ahead of the legislated schedules, with some states such as Sweden, Finland, Germany, the United Kingdom, and Austria having achieved full market opening. EU accession states need to implement these energy policies by 2007 as part of their commitment to , the process of implementing all EU legislation into national legislation. 1
Electricity Markets in Central and Eastern Europe
In Europe, generation, transmission, distribution, and supply traditionally were integrated, and massive energy companies functioned almost as branches of government ministries. Indeed, economically, energy companies were not necessarily meant to make profits but rather to meet the public's need. At the same time, while all EU member states (and candidates) are striving toward the same goal of an increasingly open and competitive energy sector, the path toward this goal is not necessarily the same. The different original market structures in each country, their varying geographic composition and natural resources, and any potential social and economic constraints all affect which path is chosen.
An effective way to compare electricity markets in the accession countries is by looking at their market structures (whether vertically integrated or fragmented) and their supply arrangements-whether supply is organized by a single buyer or is non-centralized, that is, where eligible consumers (including distributors and suppliers) can buy from any generator directly.
This matrix results in four categories of market approaches that can describe all electricity markets. Three of these categories exist in the accession countries: the fragmented single buyer model, the fragmented non-centralized model, and the non-centralized vertically integrated model. 2 The fourth category, the vertically integrated single buyer model, is not present in the accession countries but is seen in other regions of the world, such as Quebec.
The first approach is the fragmented single buyer model, which has