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Europe: Picture of a Stalled Competitive Model

Fortnightly Magazine - February 2005

where some of the power plants built during the Soviet era are in dubious condition, yet few alternate supply sources exist. The EU is particularly concerned about the older Soviet reactors and has explicitly stated that Lithuania's Ignalina, Bulgaria's Kozloduy, and Slovakia's Bohunice V1 should be closed. In addition, the EU wants reactors in Bulgaria, the Czech Republic, Hungary, and Slovakia to be upgraded, and the reactors in Romania and Slovenia to be closely monitored. Yet, given that these countries need alternate sources of supply and technical assistance before the plants can be closed or upgraded, timely compliance with these nuclear safety regulations will be challenging. 1

The encouragement to use renewable energy sources-long a goal of the EU-was translated into law in 2001 through Directive 2001/77/EC, which targeted increased production of electricity from renewable energy (from 14 percent to 22 percent in 2010). The EU endorses three main types of support mechanisms for renewable energy sources (RES). The first is a fixed feed in tariff for all renewable energy and a guarantee that all electricity generated by RES will be dispatched. Such an approach is used in Austria, France, Switzerland, and Ukraine. The second approach requires suppliers or customers to buy a certain amount of RES generated electricity, which can be in the form of a "green certificate." 2 If the required quota of renewable energy is not achieved, the supplier is fined. Italy, the Netherlands, and the UK use this approach. The third option is a direct subsidy from the government to cover a portion of either capital or operating costs. While the Accession countries are not as advanced in implementing RES policies (and are not subject to the same strict Kyoto Protocol targets as Western Europe), certain countries, such as the Czech Republic, Estonia, and Latvia, have started to implement active RES policies.

Wholesale Markets: Organized Exchanges Dominate

With wholesale market design under a deregulated framework, generators can sell their output into a wholesale market or to a specific customer, be that a power marketer (who then re-sells it to others), a retailer (who re-sells the output to end-users), or a direct customer (who then uses the electricity). Bilateral trading, also referred to as over-the-counter (OTC) trading, is the most common way for these sales to occur. In addition, many deregulated markets have established centralized exchanges to provide a transparent framework for energy sales and to create a benchmark price index for the region. While organized exchanges are usually more visible to the public, the volume traded on exchanges is normally a fraction of bilateral trading activity.

In Europe, OTC markets and organized exchanges are often used together to create a hybrid wholesale market. Western Europe has numerous organized exchanges. Nord Pool, the Nordic power exchange, is the oldest, the largest, and the most liquid exchange in the region, and it sets prices for all four Nordic countries (Denmark, Finland, Norway, and Sweden). In recent years, exchanges have developed in Germany (EEX), France (Powernext), Austria (EXAA), and the Netherlands (APX), leading to increased information about wholesale price indications in