Long-term Contract Regulation in EU Electricity Markets
Loyola de Palacio Series on European Energy Policy
Chapter 4: Long-term contracts across Member States: the problem of priority access rights to interconnectors
Competitive reforms in Europe were based on the fundamental insight that the gains from a competitive electricity trade would increase with the size of the market. A cross-border transmission network with optimal capacity between Member States is thus essential. The cross-border transmission network increases the effective number of competitors and limits market power by providing links between otherwise isolated areas, and thus reduces prices. Increases in transmission capacity indeed create a threat of competitive entry and thus constrain dominant operators to produce nearer competitive levels, even when new imports in fact do not occur. A network functioning correctly also facilitates the transmission of power from areas with concentrated and cheap resources of energy (being for instance nuclear, wind or even coal) to match demand and supply efficiently at different network locations and achieve economic and reliability goals. Integrating electricity markets in the European Union is thus a legitimate objective from an economic point of view. Our economic analysis of long-term contracts (Chapter 1) has shown that they are needed as a complement to vertical integration and short-term trading to increase trade and investment, but that the efficiency gains for contracting parties have to be weighed against potential anti-competitive effects, primarily customer foreclosure. From the point of view of European competition authorities, cross-border long-term contracts have the advantage of bringing the same efficiency gains to contracting parties but without yielding the same foreclosure effects, at least in most cases.
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