IEA Commends Austrian Market Reform and Use of International Energy Trade to Enhance Security and Reduce Costs

(Vienna) — 2 July 2003

"Austria has made progress in electricity and natural gas market reform. Its effective use of international energy trade will continue to help the country develop a cheaper, more secure energy sector," said Claude Mandil, Executive Director of the International Energy Agency (IEA), today at the launch in Vienna of "Energy Policies of IEA Countries – Austria 2002 Review."

But the country faces a number of challenges, such as ensuring that the benefits of market reform reach smaller customers as well as larger customers. Lower distribution tariffs and the ability for new entrants – both foreign and domestic – to compete in the market will ensure this happens. Austria's emission obligations under the Kyoto Protocol remain challenging and the country should implement, as a matter of urgency, the measures included in the Klimastrategie, the government's national climate strategy. Austria should also incorporate Kyoto flexible mechanisms into the climate strategy, particularly the EU emission allowance trading scheme.

International Energy Trade and Co-operation Lowers Costs and Enhances Energy Security
Austria makes good use of international energy trading and co-operation to enhance its energy security and lower the cost of providing energy to its citizens and industry. In the oil sector, Austria is compliant with its IEA oil stock obligation. The recent revisions of the Stockholding and Reporting law will help Austria to reliably and consistently report their stock levels above 90 days of domestic consumption. The steps taken to diversify natural gas supplies from Russia to include supplies from other countries – notably Norway and Germany – will increase natural gas security. Substantial electricity trade also increases security and cuts costs, and is particularly helpful, given the seasonal variations of Austria's hydroelectric production. The increase in transmission interconnection between Austria and Italy will prove helpful in this regard. International energy trade and co-operation are options that should be further explored.

Market Reform in Electricity and Gas Sectors
Austria is to be commended for fully opening its electricity and natural gas markets to competition well in advance of the EU timeline and before most other European countries. The reform process also includes establishing an independent regulator, regulated access to distribution networks and account unbundling in integrated electricity and natural gas utilities. Such market reform can improve the sector's efficiency – thus lowering costs – and enhance energy security.

A fully competitive market and its numerous benefits cannot be realised overnight, however. While larger consumers have enjoyed reduced power prices in the electricity sector, smaller customers have seen little or no change in their overall bills. The process requires continued efforts to extend the benefits of reform to all market participants, particularly smaller customers. Distribution tariffs for both electricity and natural gas are substantially higher in Austria than in comparable countries. Such high tariffs can inhibit competition in a number of ways and need to be dealt with. The possibility for further utility unbundling, or more significant separation of regulated and competitive activities within integrated utilities, should not be precluded.

Development of large newly-formed companies in both the natural gas and electricity markets requires close monitoring so that viable competitors do not face barriers when entering the market.

Experience has shown that markets which are dominated by one or two companies have been difficult for new entrants to penetrate, thus limiting competition and its benefits. Oversight of market power issues by the national and EU competition authorities is a positive step. It is essential to ensure that sufficient capacity on the transmission and distribution networks is offered at non-discriminatory terms to all players.

Meeting Climate Change Obligations
Austria faces a serious challenge in achieving its emissions target under the Kyoto Protocol. It must reduce greenhouse gas emissions 13% below 1990 levels by 2008 to 2012. In 2001, CO2 emissions, which make up over 80% of total GHG emissions, were approximately 16% above 1990 levels, rising 6% from 2000 to 2001 alone. While 2001 may have been a slightly anomalous year due to cold weather and low hydroelectric production, these figures clearly show that considerable work remains to be done.

Passage of the Klimastrategie in June 2002 is a commendable step. The strategy includes a wide range of measures in all relevant sectors. The emissions and economic forecasts done in conjunction with the Klimastrategie showed that emission-cutting measures would help to improve macroeconomic performance for Austria. This conclusion is at odds with similar projections made by other countries and may warrant a review of the forecasts, to better understand the effects these measures will have on different sectors of the Austrian economy. The use of international flexible mechanisms should be further explored to determine how they can best be employed in conjunction with domestic measures. The EU emissions allowance trading scheme provides an opportunity to use international means to achieve emissions cuts at the lowest possible costs.

The support scheme for renewable energy has prompted an increase in renewable energy investments, particularly wind power. It is commendable that the responsibility to set the feed-in tariff has been moved from individual Land to the federal government, to secure consistency across the country. Austria should further consider introducing a digression scheme that gradually lowers feed-in tariffs to provide an incentive for producers to improve efficiency.

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