The European Union needs to do more to integrate electricity markets between member states.
The European internal electricity market should enable businesses and consumers to produce, sell, or purchase electricity in any country within the European Union, regardless of the member state in which they are established.
The electricity sector includes activities that can be fully opened up to competition, such as the production and supply of electricity. By contrast, transmission and distribution networks, for high- and low-voltage respectively, are natural monopolies, which are managed more efficiently by a single company. In the late 1990s, the European Parliament and the Council of the European Union liberalized the production and supply of electricity. In contrast, transmission and distribution networks are managed under exclusive rights, as befits their status as natural monopolies. Networks may be privately owned. In fact, the same business group may produce electricity, own distribution networks, and market and sell energy to end consumers. For this reason, in order to ensure fair competition and non-discriminatory access to the networks, European regulation requires that transmission and distribution networks be subject to a regime of ownership, legal or functional unbundling. At the same time, the right of access to the networks for producers, suppliers and consumers, at regulated prices, is also recognized.
Wholesale electricity markets are organized under a marginal pricing system—a system in which prices are set based on the most expensive energy source required to meet demand, which favours renewable energy. Supervision of the sector has been entrusted to independent national authorities.
These rules should have led to the formation of a single European electricity market. After almost three decades, however, there is no European market but rather national markets, with national operators, acting in accordance with rules that are only partially harmonized at the European level.
One explanation for this failure is that energy policy is not the exclusive authority of the EU. The Treaty on the Functioning of the European Union recognizes the member states’ competence to regulate the use of their energy resources, the choice of energy sources, and the general structure of their energy supply. Many key decisions are made by the authorities of the member states in accordance with their national interests, rather than by the EU.
International electricity interconnections remain insufficient to support significant energy exchanges, which restricts competition between producers and, in turn, consumers’ freedom of choice. European legislation recognizes the need for greater grid integration but sets the modest target of at least 15 percent interconnectivity by 2030. It will not be easy for member states to set aside their national interests to make progress on interconnection.
Electricity prices in Europe are highly volatile and higher than in other parts of the world. This, too, reduces consumers’ purchasing power and hampers the competitiveness of the European economy. The latest reforms to the electricity sector aim to alleviate this problem by shortening the timeframe within which renewable energy producers can sell their energy on the intraday market. The reforms also reduce the minimum amount of energy that producers must offer on short-term markets, making it easier for smaller companies to participate in these markets. Furthermore, the reforms encourage long-term power purchase agreements, which ensure price stability and facilitate investment.
But more work is needed to protect free and fair competition in the energy sector. National energy policy determines each country’s energy mix, which differs from one member state to another. Germany has closed its nuclear power stations, while 70 percent of the energy consumed in France is of nuclear origin. This asymmetry means that electricity producers with substantial cost differences due to the primary energy sources and technologies used—nuclear, hydroelectric, gas, renewables—must compete in the same market. In addition, energy policy favors certain types of energy, such as renewables, which distorts the conditions of competition between the different technologies.
The EU also must ensure that prices are set correctly in wholesale markets, preventing the use of inside information and the occurrence of abusive practices and market manipulation. EU legislation does not require complete ownership separation between the various stages of the energy market. Consequently, energy groups may be involved in generation, distribution, and supply, with the sole requirement being that these activities must be organized and operated as separate entities.
State-owned companies continue to operate in some member states. In some cases, they are the main operators in their respective countries, such as Électricité de France. These companies are formally subject to the principle of equal treatment, but their presence makes it more difficult for third-party operators to enter the market. An imbalance arises whereby these public enterprises can acquire private electricity operators in other countries, but the latter cannot acquire public enterprises, which can only be privatized by government action.
It is true that the introduction of competition in the sector gives consumers greater choice, allowing them to select their supplier, contract type, or even the type of energy to be used. However, the market is complex to understand, so the transfer of its benefits to consumers is not straightforward. In fact, it could be said that only the electricity companies, more sophisticated than many consumers, have benefited from the introduction of competition in the sector. In contrast, residential consumers have yet to fully appreciate the advantages of an opaque and complex market, which does not result in lower electricity prices and may confuse uninformed consumers into entering risky contracts.
In short, the integration of the electricity sector at European level has so been a disappointment, achieving only modest results. In general, this assessment can be extended to other major economic sectors, as the 2024 Letta and Draghi Reports, recent economic reports commissioned by the EU, clearly state. Progress has been made, but not enough. Major economic sectors have not become integrated. Integration is not straightforward, but it is impossible without political will. Member states have very different interests and are reluctant to relinquish control over sectors they still regard as strategic. The price paid for this is a reduction in economic freedoms, harm to consumers’ interests, reduced competitiveness of European industry and, in the current unexpected geopolitical situation, reduced strategic autonomy in an essential sector.
