Ministers Meet on Unbundling Package; Gazprom Requests "Consortia" Approach to Grids

Will They or Won't They?

Today's meeting in Brussels, Belgium (the seat of the European Union—EU), of Europe's energy ministers is scheduled to decide on the future shape of unbundling energy networks. Already there have been reports that if a decision is not made today, discussions may be stalled for six months or more. The meeting is the last scheduled before France takes over the EU's rotating presidency on 1 July. With French officials known to be cool on the planned unbundling, and with parliamentary elections scheduled for next June, the meeting is viewed as a last chance to agree on a compromise.

Opposition to Unbundling

The EC's unbundling proposals have been controversial, with opposition coming from both member states and Europe's vertically integrated energy players. National opposition has been spearheaded by Germany and France, although Austria, Bulgaria, Slovakia, Greece, Luxembourg, and Latvia have also argued against such an approach, with these eight countries together tabling the “third way” option in a bid to avoid compulsory network sales. With these national opponents holding a blocking minority within the European Council, the EC has had to treat their concerns seriously, with this fact no doubt being one of the key drivers of the EC’s willingness to strike a compromise on the inclusion of a modified third way option in a final package. Meanwhile, opposition to ownership unbundling from the vertically integrated companies themselves was initially fierce, but recent concessions from German firms E.ON and RWE to sell their grids to avoid ongoing antitrust proceedings from the EC has weakened the stance of the companies somewhat, suggesting that they too may be happy with an outcome that sees the modified third way proposal included as a derogation option to full ownership unbundling.

Gazprom's Optimism

Yesterday, Russian President Dmitry Medvedev proposed that Europe's energy pipelines be operated by "international consortia" including Russian companies, the EU, and transit countries. Speaking at talks in Berlin, the capital of Germany, with German Chancellor Angela Merkel he said: "We are ready to look into the possibility of creating international consortiums which would operate the transit pipelines with the participation of Russian companies, the EU, and the transit nations. It would be an example of the interdependence of which one speaks in Europe and the globalising world," he added.

The EC has introduced the so-called "Gazprom clause" into the energy liberalisation package, amid fear of the Russian giant buying up European grids. For her part, Angela Merkel was less bullish about opposition to Gazprom's involvement in her country (no doubt triggered in part by the countries' partnership in Nord Stream), saying that she would not block investment by Gazprom in Germany's energy grid network because this would be a purely economic decision. Confusingly, she also said that Germany was still opposed to unbundling, denying that this would prompt Gazprom's investment.

Focus on German Gas

Global Insight believes that the real key to European gas-market liberalisation lies with Germany. The country is so important because it is the second-largest European gas market, which means that its actions will be important in determining how its neighbours trade. Likewise, Germany is geographically located at the heart of the European gas market, where gas from all key sources of European gas (the Netherlands, Norway, Russia and to a lesser extent, Algeria) meets.

Numerous participants have argued that sourcing gas on the continent is very difficult at any time, as is bringing that gas to the United Kingdom’s National Balancing Point (NBP). As such, the lack of a liquid and transparent German market is seen as a contributory factor in keeping forward liquidity at the NBP low. If it was having this effect on the NBP, it certainly must be having a similar effect on more fledgling markets.

Recent developments in the German market suggest that our assumptions on progress towards full liberalisation might be brought forward by a couple of years from the forecast period to 2015. As well as the decisions by RWE and E.ON (see above), the German regulator BNetzA has introduced from October a switch from hourly to daily balancing to simplify workflow between suppliers and transmission-system operators (see Germany: 2 June 2008: Regulator Announces October Switch to Daily from Hourly Balancing). In addition, the number of market zones is set to reduce.

Unbundling Made Simple

Three main options will be under consideration by EU Energy Ministers at today's meeting. They are:

• Full ownership unbundling. The EC considers full ownership unbundling to be the most effective way of ensuring non-discriminatory access to energy networks. Under this model, networks would be owned and operated by an entirely separate entity than production and supply actvities, with no significant cross-ownership between the entities performing the separate tasks. Implementation of this option would require Europe's vertically integrated utilities to sell off their gas- and power-transmission networks.
• Independent system operator (ISO). Under the ISO model, the network is operated by a completely independent entity with no production or supply affiliations, but network assets remain owned by a vertically integrated company. The network operator can require investments from the network owner. Permanent regulatory monitoring is needed to ensure the network operator's ongoing independence. The ISO model was originally proposed by the EC as the fall-back option; i.e., those countries unwilling to move directly to full ownership unbundling could implement the ISO model as a transitory measure. However, the model has failed to garner strong support among member states.
• Modified "third way". The third way proposal was originally tabled by eight member states, led by France and Germany, that were opposed to both full ownership unbundling and the ISO approach. The EC was critical of the model as initially proposed, however, and a series of negotiations between the EC and member states has seen a modified version of the proposal emerge. This compromise proposal was unveiled by EU presidency holder Slovenia at a meeting of diplomats on 14 May, and support for the option appears to be building. As it currently stands, the proposal would allow vertically integrated companies to retain ownership of their power and gas networks, but would require them to hand over management of the networks to an independent subsidiary with "effective decision-making rights" over day-to day activities. However, the subsidiary would be subject to scrutiny by a supervisory body "in charge of taking decisions which may have a significant impact on the value of the assets" of the parent company. Members of the body would be appointed by both the parent company and by "third party stakeholders", although the proportions appointed by each are still to be decided. A further outstanding issue is a review clause, with the EC initially arguing that after a five-year period the third way option should be phased out while unbundling opponents have sought to have a more flexible review after this time with no associated phase-out requirement.

Outlook and Implications

The EC has indicated that it might consider the third way option, but some member states have hinted that this would only be acceptable if a so-called "sunset clause" was introduced to see that this option was phased out in favour of full unbundling. If the compromise plan were to be adopted, after five years the commission would assess whether the separation had been "full and effective" and changes could be proposed.

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