Old habits die hard for the CEECs

On their accession to the European Union (EU) on May 1, the biggest challenge facing the eight central and east European (CEE) new entrants is how to create meaningful competition in their respective gas and electricity sectors. In almost all cases, the markets face the same fundamental restrictions to competition - restrictive market size and complete or near-complete dependence on one source of supply for gas and power. Martin Burdett reports.

All eight former Communist states have worked near miracles over the last 15 years in reforming their energy sectors to comply with EU legislation, notably the electricity and gas directives of 1996 and 2003. Only two states - Estonia and the Czech Republic - have transitional arrangements agreed for the original directives. Estonia has until end-2008 to open its electricity market, while the Czech Republic has until end-2004 to open its gas market to commercial customers.

The European Commission (EC) is now looking at requests from new member states for extra transitional arrangements on the amended directives, which come into force on July 1, 2004. These require all member states - including the new ones - to open up their gas and power markets to commercial users by July 2004, and to all remaining consumers, including domestic, by 2007.

The reality for many of the new entrants is that even if the current required market opening is achieved, eligible users in these markets have little choice but to remain with their existing supplier, given the absence of alternative suppliers.

Long shadow of Russian gas

In terms of gas, six of the CEE entrants have no domestic production to speak of and rely exclusively on imports, while both Poland and Hungary import over two thirds of their requirements. Four (Estonia, Latvia, Lithuania and Slovakia) depend, and will continue to depend, for the foreseeable future on one supplier - Russia's Gazprom.

Poland and the three most southern CEE states (Czech Republic, Hungary and Slovenia) have slightly more room for maneuver, with supply via Italy and Austria, though all still remain deeply dependent on their giant eastern neighbor, Russia.

Even in the case where alternative suppliers could emerge, given that most national pipeline network operators, such as Slovakia's Slovenský plynárenský priemysel (SPP), have long-term take-or-pay contracts for Russian gas, they are not legally obliged at present to grant network access to other gas suppliers.

Thus while large consumers in five (Estonia, Lithuania, Poland, Slovakia and Slovenia) of the eight states have been free to switch supplier since 2002, according to research, not a single consumer has exercised this right.

In terms of electricity, the size of many of the accession states' power markets and the dominance in certain markets of either one producer or one generation source is the main obstacle to competition - a point highlighted by Vidmantas Jankauskas, head of the region's regulatory body, the Energy Regulators Regional Association (ERRA).

"For most countries, the problem is that they are not big enough to have a sufficient number of players and this is a hindrance for competition," he told Platts in an interview earlier this month. "In terms of gas the issues are more severe since in most cases the accession countries are tightly bound into one supplier - Russia - and even unbundling doesn't make sense because what is the point of separating supply when there is only one supplier?" he commented.

These issues are particularly pertinent for the three Baltic States, which, unlike the other CEE entrants, were absorbed into the former Soviet Union during the Second World War and whose economies are still attempting to escape Moscow's grip after having been inextricably linked for the best part of half a century.

For gas there is no immediate solution - at least until Gazprom and its potential European partners put their plans for the North European gas pipeline into action. The proposed line would run from Vyborg in the Gulf of Finland across the Baltic Sea to a landfall in Germany, with branch lines from the offshore system to Sweden and Finland, and potentially allowing the three Baltic States to take gas from Norway and German suppliers.

Regional answer?

For the three Baltic power markets, the problem is one of market concentration - a problem, which Jankauskas, as chairman of Lithuania's energy regulatory office, knows only too well. "If you take my own country, Lithuania, there is one dominant nuclear generator producing low-cost electricity and apart from several smaller generators, no real competition. Latvia and Estonia are in the same boat with just one major generator, which begs the question how can you have a competitive market?"

Unlike gas, though, there is a more immediate answer, he says, and that is to create regional markets, along the lines of the Nordic market, NordPool. "For the Baltics as with the central and eastern European countries their own regional market could be a solution to the lack of competitors in their individual domestic markets," he commented.

This concept, he said, was also gathering support in Brussels. "The European Commission is also changing its mind; at the outset the idea was to have a common European market but this is not realistic when only 10% of electricity can be traded as a result of a lack of cross-border capacity," he added. "Now they are advocating regional markets and the success of the Scandinavian market provides an example of the way forward."

Created: June 3, 2004

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