Mr Christos Papoutsis, Member of the European Commission responsible for Energy Conference: "Energy and Gas Liberalisation: A win-win position for Europe", "Milestones on the way to Energy Liberalisation A Commitment to Europe's citizens"

Brussels, 9 October 1997

Ladies and Gentlemen,

The liberalisation of the energy markets is not a goal in itself. It is, however, a very important tool, contributing to the development of the European economy towards its goals of efficiency and competitiveness.

Today, the most important problem facing Europe is unemployment. This is of concern to us all. 18 million European citizens, or about 11% of the work force, is now out of work. This is not acceptable. All governments, and the Community institutions, must concentrate their efforts to reverse this trend.

The Single Market has contributed to growth, competitiveness and employment. It has been responsible for an increase in EU income of between 1.1% and 1.5%, and for the creation of between 300.000 and 900.000 jobs. But its full potential has not yet been realised. Barriers still remain. Europe needs a better Single Market for more growth, more innovation and more jobs.

The Action Plan for the Single Market, which was adopted by the Commission this spring, and endorsed by the European Council in Amsterdam, points out a number of targets and actions to be taken. One target is to remove the remaining sectoral obstacles to market integration, and the realisation of the internal market for electricity and natural gas. These objectives are viewed by the Commission as amongst the most important steps in order to develop a true Single Market.

Comparisons of the price of European electricity with our main competitors show the present disadvantage. Electricity bought in Germany is approximately 25% more expensive than in the United States. In Australia the price of electricity is less than half of the price in Germany.

Today, most companies are exposed to international competition. The rapid changes in information and process technology imply for many industries that they have to compete in an ever-expanding global market place. Reasonable and affordable energy prices are therefore very important. The competitiveness of the European industry needs to be improved, and one important tool is to liberalise the energy markets. This will strengthen the competitiveness of the energy consuming industries, as it will force the energy producing industries to be as efficient and competitive as possible.

Industry is, however, not the only one to gain. Even if the efficiency gain is mainly transferred into lower industry energy prices, small consumers will gain. Better energy prices for industry imply better prices of final goods.

Due to the improved competitiveness of its industry, Europe can expect that new jobs will be created, and existing jobs will be retained; the incentive to move production to third countries diminishes. Such job creation increases consumer income and restores confidence to the European economy.

I understand that Professor Schulz, from the University of Cologne, will present later today the results of a study on the impact of increased competition for electricity and gas on energy prices and on consumers' disposable income.

Improved competitiveness is not the only consequence of the opening of the energy markets. The security of supply will also increase. In the case of electricity, the individual Member State will be less dependent on its own generation capacity, because it can, to a much greater degree than at present, rely on other Member States. Supply shortages and price changes on specific fuels will therefore be less dramatic, due to the increased inter-connections between the systems.

We are now closer than ever to liberalised energy markets. The Electricity Directive was adopted by the Council of Ministers last December and the Member States are now busy transposing the Directive into national legislation. They have two years to do this, with the exception of Belgium and Ireland, which have three years, and Greece which has four years.

The negotiations on the gas directive are at present very intense and I hope and expect that we will reach a conclusion in the very near future. But as you probably all know, this is the result of a long process. The Commission anticipated this, and therefore suggested a step-by-step approach to progressive completion of the internal energy market.

Let me point out some of the milestones in this process. The first milestones were in 1990 and 1991, when the energy ministers adopted two Directives on electricity and gas transit, and another Directive on price transparency for gas and electricity prices.

A further step was taken during 1994 when the ministers adopted a Directive which liberalised the market for the exploration and production of hydrocarbons. This, together with the Directives on public procurement in the excluded sectors, brought the upstream part of the natural gas market within the scope of the internal market.

The negotiations on the internal market for electricity and gas started back in 1992 when the Commission presented its proposals. These proposals introduced the concept of mandatory third party access to energy networks. This would enable consumers and producers to enter into direct contractual relationships with each other throughout the European Union.

In 1993, the proposals were amended after receiving many modifications from the European Parliament, which was concerned about the mandatory nature of the third party access. The Commission therefore re-centered its proposal, permitting equally a system of negotiated Third Party Access. It was decided to postpone the discussion on gas until agreement had been reached on electricity.

The negotiations on the amended proposal started in January 1994. It took nearly three years before the Directive was finally adopted by the Council of Ministers on 19 December 1996. The result reflects a broad degree of consensus and compromise between the Member States and the institutions of the European Union.

The Directive sets out the basic principles for an internal market, which the Member States will have to include, and follow in their national systems. But the Directive does not create one uniform system throughout Europe. It provides subsidiarity and flexibility for Member States, when applying these rules to their particular national situation. This is clearly reflected in the number of options and models Member States can choose.

The environmental dimension has also been strengthened. The Directive gives Member States the possibility of requiring the operator of the transmission system to give priority to electricity from renewable energy sources, and from combined heat and power generation. We hope they will give this priority.

Our policy is to support renewables and the use of combined heat and power. If the right accompanying measures are taken, a more open electricity market will provide more opportunity for renewables. It will also be possible to impose public service obligations related directly to the protection of the environment.

I am certain that all these possibilities will be used. But we have to insist that this is done in a transparent and non-discriminatory way, so as not to frustrate the market opening objectives of the Directive.

Public service obligations must not be used as an excuse for closing the market to foreign-produced electricity. On the other hand, the Directive should not be the reason to undermine the growth of promising, environmentally friendly energy services, such as renewables.

Member States have flexibility in applying the Directive but they must respect the degree of gradual market opening, based on a minimum percentage for the whole European Union. On 19 February 1999, approximately 22% of the market will be liberalised. This market opening will progressively increase to 33% in 2003. This degree of market opening is a minimum level, but Member States are, of course, allowed to go further on a national basis if they so wish.

I will not go into detail with the transposition of the Directive, as Mr. Jones will give a presentation on the state of play right after my speech. I will, however, add that the feedback we get from Member States is very encouraging. I am confident that in many Member States we will see that more than 22% of the electricity market is liberalised in February 1999.

Let me now turn to the negotiations on the gas proposal. We are,at the moment, at an advanced phase. As a result of the experience from the electricity Directive, discussions have proceeded more rapidly. Important progress has been made since negotiations resumed about a year ago.

In July this year, the Luxembourg Presidency tabled a new compromise proposal which has been the subject of intense and constructive negotiations over the last month.

The European gas sector is characterised by a large degree of diversity - more than in the case of electricity. This will of course have to be respected when opening the gas markets. I am confident, however, that the proposed gradual but significant market opening can be achieved to the benefit of all.

Sufficient protection of take-or-pay contracts is built into the proposed gas Directive. The proposed Directive will satisfy security of supply, and protect against possible serious economic problems of gas companies, when opening the market.

However, strict criteria will be applied by Member States and the Commission, in order to ensure that take-or-pay contracts are not being used as a non justified reason for refusing third party access.

As you all know, the Presidency has called an extraordinary meeting of the Energy Ministers on 27 October in Luxembourg, with a view to solving the outstanding issues, and arriving at a common position.

There are still differences of view on some points, but there is also a strong will to reach a compromise agreement. Based on the recent progress made, and the will to come to an agreement, I am very optimistic about the outlook for a breakthrough in Luxembourg.

The agreement on a common position by the Council does not, however, constitute the final adoption of the Directive. The European Parliament will have another reading on the proposal. Only after this, assuming that the Council and the Parliament are in agreement with each other, the Directive can be finally and fully adopted. It could then come into force in 1998.

The electricity Directive already adopted by the Council of Ministers and, hopefully, an agreement on the gas proposal in the near future do not, however, imply that we can sit back, self-satisfied, with the feeling that we have reached our ultimate goal. The markets are still only partly liberalised. It is possible and perhaps even necessary to go further. The experience from Norway, New Zealand and the United Kingdom points in this direction.

The electricity Directive contains a review clause, which requires the Commission to re-consider the application of the Directive in the light of the experience gained. To consider new proposals for further market opening. The gas Directive will probably contain a similar review clause. The experience from Member States and other countries, who are planning a more thorough liberalisation, will be very valuable in this context.

Ladies and Gentlemen,

I would like to re-emphasize that a more open market within the Union, for energy as well as for other products and services, should be seen as an important tool for improving competitiveness, employment and quality of services. Our commitment is not to the concept of liberalisation for its own sake, but to the improvement of the quality of life of Europe's citizens.

I would like to wish you all an interesting conference. Thank you for your attention.