Long-term Contract Regulation in EU Electricity Markets
Loyola de Palacio Series on European Energy Policy
Chapter 2: Vertical de-integration and single market integration in the European Union: an incomplete transition
This second chapter turns to the analysis of long-term contracts in the specific context of the European Union. Traditionally, the regulation of network industries in Europe was based on sector-specific rules rooted in the theory of natural monopoly and justified the granting of exclusive rights. European energy utilities were mostly vertically integrated and enjoyed legal monopolies. The liberalization of electricity and gas markets really started in 1992, following the 1987 Single European Act, with a view to breaking national and regional boundaries and achieving a competitive single market. Apart from the early transparency and transit Directives, the first legislation defining common European rules for the implementation of a competitive retail model was enacted in 1996 for electricity, and was subsequently repealed in 2003 and 2011. Step by step, the European Union has been pursuing a top-down reform process leading to the gradual implementation of a truly competitive electricity market within Member States. A further complexity of the European experiment lies in the creation of a truly integrated market across Member States. Echoing the fundamental Treaty objective of single market integration (Art. 3(3) TEU), integrating European electricity markets has been a core goal of the Commission since the early 1990s and requires managing and increasing cross-border interconnection capacities. This has major consequences for our analysis as the necessity of matching supply contracts with a parallel access right to the network, a peculiarity of this industry, complicates further the problem of long-term supply relationships when they take place across Member States.
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