EU member countries have until August 2000 to start moving towards a more competitive market in gas. The EU gas directive — which was finally passed in 1998 after nearly ten years of debate and opposition from some of Europe’s biggest gas companies — sets out a timetable for the gradual opening up of Europe’s gas markets to competition. At least a third of the market in many countries will be able to choose its own supplier by 2008, but progress could be limited by the directive’s failure to solve the key problem of third-party access and the legacy of long-term ‘take-or-pay’ contracts.
Without guaranteed third-party access to the European pipeline grid for independent suppliers and marketers, it will be difficult for a truly competitive market to develop. However, Europe’s existing gas suppliers and marketers are reluctant to grant access to competitors, because they have signed take-or-pay contracts with producers that require them to pay for gas supplies even if they do not take delivery. Moreover, the EU gas directive allows gas pipeline companies to refuse access if they lack spare capacity or would suffer ‘serious economic and financial difficulties’ because of take-or-pay contracts.
Both the US and the UK — which have moved close to a fully-competitive market in gas over the past ten years — initially failed to tackle the problem of take-or-pay contracts, but eventually discovered that it had to be resolved whatever the cost. In order for a competitive market in gas to flourish, regulators must ensure that the production, transportation, storage and marketing activities of gas companies are clearly separated so that consumers can choose fairly between the various different services. Although the EU gas directive requires companies to publish separate accounts, it does not go far enough in requiring integrated companies to ‘unbundle’ these activities.
Unless the mainland European governments are prepared to take similarly strong action, the take-or-pay loophole could delay the introduction of truly competitive gas markets in Europe for many years to come. In practice, the greatest pressure for change is likely to come from the strong competitive forces unleashed by the combined effect of the gas and electricity directives. With many electricity generators in Europe now able to choose their own gas supplier and growing competition in the European electricity market, member states will find it difficult to defend gas companies that use take-or-pay contracts to refuse third-party access. However, without mandatory third-party access and an early resolution of the take-or-pay problem, European gas markets could take another decade to catch up with those in the UK and US.