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Policy Review

Structural Reforms in Europe: Update on unbundling of TSOs [free access]

October 14, 2016

Europe is among the leading regions in undertaking widespread reforms and restructuring efforts in the energy sector to promote competition and investments. These reforms aim to provide a level playing field and ensure greater competition and fair access to networks. Structural reforms have led to unbundling of network operations from generation and supply activities to ensure non-discrimination in true spirit as well as to ensure adequate investments in the networks.


Much of the success in unbundling vertically integrated utilities (VIUs) to form independent transmission system operators (TSOs) in Europe is a result of the Third Energy Package, approved in 2009. In terms of unbundling of networks, energy utilities were required to separate their production/supply activities from transmission operations. The rules on unbundling apply equally to private and public entities. The utilities have been offered three equal options for unbundling: ownership unbundling (OU), independent system operator (ISO), and independent transmission operator (ITO). In addition to these, there is the ITO+ model under which exceptional cases qualify for a derogation based on the criteria in the Directive for Third Energy Package.


Under the first option, or the OU model, transmission networks cannot be owned or controlled by undertakings that carry out production or supply activities as well. The TSO owns and manages the network. Under the second option, the ISO model, the transmission network is owned by a production or supply undertaking, but the operation of the transmission network is transferred to a designated ISO. Under the third option, that is, the ITO model, the transmission network is owned by a production or supply undertaking, but must have a framework that ensures the independent operation of the transmission network. In essence, this model is subject to ‘ring-fencing’ rules to ensure non­discriminatory access and independent operation of the network.


In April 2016, the Council of European Energy Regulators (CEER) published its review on the implementation of the TSO unbundling provision of the Third Energy Package. Of the 33 CEER members, 26 participated in the survey for this status review.


In terms of the experience so far, majority of the countries have transposed the Third Package provisions regarding TSO unbundling into their national laws. Further, the relevant unbundling models have been or are still being implemented by national regulatory agencies (NRAs) and TSOs and are monitored by NRAs and the European Commission (EC).


So far, 109 TSOs in Europe have been certified as compliant with one of the approved unbundling models. Among these, the most prevalent unbundling model implemented is OU, with 70 per cent of electricity TSOs spread across 17 countries certified under this model, followed by the ITO (12 per cent across 7 countries) and ISO (6 per cent across 2 countries) models. It may be noted that in the cases of Austria, Germany and Great Britain, which have multiple TSOs, both ITO and OU models are prevalent. Besides this, three countries—Cyprus, Luxembourg and Malta—have been exempted from applying the unbundling provisions to their electricity TSOs.


An example of the ITO+ model is that of Ireland where the functions of the TSO are shared between the Electricity Supply Board or ESB (the owner of the VIU) and EirGrid Plc (an independent company). Based on its assessment, the NRA has stated that ESB qualifies for certification as the current arrangement may be more beneficial than the ITO model. The EC has to further verify in this case that the arrangements being certified guarantee more effective independence than the ITO model.


From the experience so far, TSOs seem to prefer to have full control over all system and asset operation. At least four countries that experimented with the ISO model opted out of it. This includes Italy, which chose the ISO option in 2000 but changed to OU in 2005 due to lack of investments. Other examples include Switzerland, Spain and Greece. The ITO model, though adopted by fewer nations, has been somewhat successful. For instance, France’s Réseau de Transport D’Electricité, which has opted for this option, continues to be a wholly owned subsidiary of Électricité de France, but is managed independently from its shareholder and has complete economic and financial autonomy as per the EU rules for ITOs.


Another observation is that in the majority of countries, the TSOs are owned by public entities. Only in Great Britain and Portugal are the respective TSOs fully privately owned. In Austria, Belgium, Germany, Spain, Romania, Finland, France and Luxembourg, there is a mix of private and public ownership for electricity TSOs.


In most of the countries with state-owned TSOs, to ensure an effective structural separation, different state authorities control generation, supply and transmission activities. Examples of this are Czech Republic, Estonia and Finland, where transmission is controlled by a separate ministry from that which controls generation and supply activities. A strict separation among the responsible ministries in such cases is necessary.


It may be noted that certifications are granted by NRAs with due consideration to the opinion given by the EC on its proposed decision. In cases where cross-border certification was required, such decisions were taken as coordinated NRA decisions on the basis of a prior agreement between the concerned NRAs. For instance, the regulator for gas and electricity markets in Great Britain, the Office of Gas and Electricity Markets (Ofgem), has been involved in certification procedures for several interconnections with NRAs of the Netherlands, Ireland and Belgium.


So far, the cooperation between NRAs (in cases of cross-border certifications) as well as between the NRAs and EC has been effective. This is evident from the fact that in none of the certification procedures has the EC asked the Agency for Cooperation of Energy Regulators for its views.



The process of structural reforms is a long drawn one, which needs to be reviewed periodically. While the EC indicated that the full OU is preferred, it recognised that a strict application of the related rules could hamper investments. In view of the practicalities, the EC has made clarifications to ensure that potential investors are able to obtain and maintain interests in European generation, supply and transmissions assets simultaneously.


On their part, the NRAs are required to monitor the continuing compliance of TSOs with the unbundling requirements. In this respect, TSOs are obligated to notify the NRAs about any planned transaction that may require a reassessment of the TSO’s compliance with the unbundling requirements. Most of the countries in Europe have undertaken or are undertaking structural reforms in the true spirit of the Third Energy Package to remove the risk of conflicts of interest, promote investments in network infrastructure and ensure fair network access as well as transparency in the market.