Reality Bites

In this issue EM examines the progress of Dutch market reforms, which illustrate the problems of good ideas coming into conflict with intractable realities.

In so many areas, and social policy in particular, we are accustomed to thinking of the Netherlands as a nation in the forefront of innovation. The Dutch are, fundamentally, a culturally conservative people, often surprisingly so. But at the same time Dutch society has repeatedly demonstrated a great tolerance and respect for the individual and a generous, liberal attitude to new ideas.

In this regard, the Dutch electricity sector has been no exception. Since 1998, the Dutch electricity industry has been restructured in line with EU Electricity Directives and, as might be expected, Dutch policy was initially in the lead as compared with its European partners.

In July 2004, the European Commission singled out the Netherlands for praise as one of only two member states (Slovakia being the other), which met the deadline for implementing the second set of EU Energy Directives.

But as any innovator can attest, it’s not always easy being out in front. In 1998, the relevant Dutch law was the Energy Act of 1989. That Act was originally framed to achieve two simultaneous goals: competition in supply and efficient and coordinated generation. Industry realities, however, soon demonstrated serious inconsistencies in the means to achieving those ends, and an amended legislative framework was required.

A government white paper published in 1996 anticipated the EU electricity market liberalization directive. It concluded that the existing law was incompatible with existing realities and aims, and outlined the principles of what became the E-Act of 1998.

The first articles of the new law came into effect in August 1998, establishing the Dutch electricity regulator, DTe, to oversee the market and regulate network tariffs. It also established TenneT, which would become the system operator and manager of the national transmission grid.

The law also mandated the unbundling of networks and tariffs into network charges. Finally, the law outlined a gradual liberalization of the demand side of the market. The 650 largest users (which represented nearly one-third of demand) became free to choose their suppliers in 1998, while the middle segment (another one-third of demand) became entitled to do so in January 2002, with the remaining market to be fully liberalised by July 2004.

The original intent of the Electricity Abroad In this issue examines the progress of Dutch market reforms, which illustrate the problems of good ideas coming into conflict with intractable realities. Act 1998 was that the four largest generators would merge to create a single national entity. However, a number of distribution companies owned some of the generators, which gave rise to conflicts of interest on which the national merger idea ultimately foundered. As a result, the Dutch generation market is still not as concentrated as the 1998 law envisaged. On the contrary, there has been a trend to vertical integration between generation and supply.

By 2005, the European Commission was tempering its earlier praise with criticism, citing the lack of market integration as the major issue for the Netherlands.

In the transmission sector the main problem was to make TenneT, the manager of the national transmission grid, independent of the generating companies. Although the original idea was that TenneT would be privatised, ultimately it ended up as a state-owned firm. Privatisation proved to be a major issue for distribution as well. The various municipalities and provinces which had owned the 23 Dutch distribution companies, no longer saw a role for that ownership after the 1998 law.

Although these local authorities wanted to sell their shares, the national government feared that DTe, the industry regulator, did not have sufficient powers to ensure that the privatised companies would act in the public interest. DTe also came into conflict with these distribution companies over its price regulation scheme.

In supply, too, problems emerged with the liberalisation of the residential retail market, with demand-side subsidies Pictured Windfarm in Holland. Problems emerged with the liberalisation of the residential retail market, with demand-side subsidies being used to reach Kyoto Protocol targets proving to be both expensive and ineffective.

In short, the Netherlands electricity market liberalisation remains a workin- progress, where good ideas have been occasionally thwarted by conflicting interests. For good or ill, the Dutch approach has been a pragmatic and problem-oriented process, rather than a sweeping, policy-driven, top-down reform. Along the way, the EU’s praise of 2004 has become the criticism of delay.

The market regulator, DTe, remains committed to making the market work, while protecting consumers against the dominant position of electricity providers. Still to be achieved, however, are the conditions, which will make an efficient and sustainable market possible.
EM