The European Commission has warned Europe's big gas and electricty companies that some of them will face legal action for damaging consumers and businesses through anti-competitive behaviour.
The EU's top competition authority said in a long-awaited report that inefficiency, high cost and possible cartels posed 'serious competition problems', blocking newcomers to the market.
'This report will make uncomfortable reading for many energy companies,' Competition Commissioner Neelie Kroes said in a statement, though she did not identify any firms.
Her report is part of the Commission's long-term overhaul of its energy strategy, dealing with issues ranging from industry competition to climate change and renewable sources of fuel.
Kroes said she planned to act against individual companies by using the legal tools available to her under cartel rules, merger controls and state aid rules.
The Commission has already raided the offices of some German utilities including E.ON and RWE, suspected of anti-competitive behaviour, since the report's inquiry was launched more than a year ago. Companies found guilty of cartel activities can be fined huge sums.
Under merger regulations the Commission has the final say over large cross-border takeovers and can demand that companies sell off units before merging.
In addition to collusion, the report cited problems in market concentration, the intertwining of producers and distributors in one company, insufficient investment in infrastructure and denial of competitive access to electric and pipeline distribution networks.
Kroes has been a firm advocate of breaking up incumbent energy companies into production and distribution firms. That would allow new entrants - for example, producers of alternative energy supplies - to gain easier access to distribution networks. It might also tempt big companies to enter markets in adjacent countries.
The Commission is expected to propose that utilities 'unbundle' or spin off their distribution networks, but only as a suggestion alongside a softer option.
The Commission also announced what it says are the world's most ambitious targets for fighting climate change, proposing that the EU cut greenhouse gases by at least 20% by 2020 from 1990 levels.
It set out a vision of a common energy policy for its 27 nations that would seek to ease dependence on foreign suppliers.
'If this was adopted it would be by far the most ambitious policy ever - not only in Europe but the world - against climate change,' European Commission President Jose Manuel Barroso told a news conference.
The new plan goes beyond an existing target for an 8% cut in emissions from 1990 levels in the 2008-2012 period adopted by the 15 members of the EU before its 2004 enlargement and which several countries are already struggling to meet. The energy plan must now be approved by EU governments.
IBEC director of policy Danny McCoy said : 'Given Ireland's peripheral location, small size and lack of significant indigenous resources the integration of policy across the EU will have clear benefits'.
However, the employers group said the European Commission's proposal for an EU 20% emissions reduction target by 2020 would only work if the US, Australia, China and other emerging economies work together.
'In the absence of an international framework, a unilateral EU target is unlikely to drive investment in low carbon technologies in Europe but could result in investment outside the EU. This may lead to higher global emissions and less economic prosperity in Europe', IBEC said.
Friends of the Earth said the EU energy package is good news for the energy industry, and bad news for the planet.
'Ignoring its own scientific and economic analysis, the Commission proposes to stick to a business-as-usual energy policy, instead of making a paradigm shift to renewable energies and energy efficiency', the environmental group said in a statement.
FoE added that the plan aims at improving the functioning of the internal energy markets, but leaves billions of euros of subsidies for fossil and nuclear energy untouched.
