EC should continue to push EU market liberalisation

While the UK has pushed ahead with the liberalisation of its gas and power markets, in Europe the progress has been somewhat less than stellar by comparison. In fact, a recent survey* of more than 50 senior European utilities executives reveals that the consensus opinion is that while there will be a gradual realisation of open competition in the utilities sector, it is likely to take some prodding from the European Commission to ensure that individual governments and companies play ball. Unfortunately for consumers, the survey also revealed that executives expect energy prices to continue to rise.

Independent research company Datamonitor interviewed 56 senior European utilities executives to get their views on the future of competition in European energy markets. While most of the executives agreed that the market was heading towards a situation of increased market liberalisation, it was a widely held belief that the EU would eventually have to intervene to facilitate the switching process, and that EU regulatory influence would increase, with Brussels’ influence being more pervasive in the market.

Datamonitor senior analyst, energy and utilities Anton Krawchenko says the EU may have to step in to counteract the ‘national champion’ mentality that prevails and convince member states of the benefits of opening borders. “We have seen relatively recently that national governments are prepared to step in and use their legislative powers to prevent takeovers of their former state-run utilities. It seems that while some governments are happy for their own national champions to acquire other companies, they revert to protectionist measures when there is a threat of one of theirs being acquired.”

By stark contrast, British Prime Minister Tony Blair has publicly stated that he would have no objections to Russian utility superpower Gazprom gaining a stake in Centrica. “In a truly open market it is most likely that the larger players will acquire some of the smaller players,” Krawchenko says. “In fact our survey revealed that through continued consolidation, it’s expected that the eight leading European utilities will eventually hold a combined market share of more than 50% across the 32 European markets.”

NOT MAKING THE GRADE

While the European Commission has levied fines on a number of states for failing to meet the requirements of the Second Directive on utility market opening, it may need to get even tougher to usher the process along. Until recently the Germans had not even appointed a regulator to oversee the utilities market within their own country. Without a dedicated, proactive and competent regulatory function, the development of a competitive market will be curtailed.

The European Commission also recently found that the rate of utility network unbundling has fallen behind the rate of what it wants to be achieved by 2007. While some countries are complying with the letter of the directive, the Commission believes they aren’t complying with its ‘spirit’.

The research found that only 7 out of 26 European energy markets have fully complied with both electricity transmission and distribution unbundling, while only 4 gas markets have complied – again greatly hindering the progress of fair and competitive EU energy markets, Krawchenko says. “Our analysis shows that the political stance of each national government, rather than operational or technical factors, appears to be the key determinant of progress. This finding will only increase the pressure on the European Commission to take more robust action to increase unbundling compliance.”

The focus on unbundling is to facilitate a nondiscriminatory structure in European energy markets to enable third party access (TPA) to networks. Because traditionally and historically energy suppliers in Europe have been state-owned monopolies that controlled everything from the generation of electricity right through to the residential customer, unbundling is a key indicator of how open a particular market is, Krawchenko says. “Because of their tremendous size and influence, the former state-owned monopolies or ‘national champion’ players can afford to cross-subsidise in some areas of the market and push prices up in other areas, depending upon where in the supply chain competition is strongest. This obviously makes it very difficult for third parties to break into the market and bring about meaningful competition.

“When ignoring external factors and simply assessing each market’s compliance with the second EU Directive, Datamonitor found that only Estonia and Lithuania are fully compliant when unbundling both their transmission system and distribution systems.” Another key indicator of the lack of liberalisation is the small number of customers who have switched their utility suppliers.

In a competitive market, different companies will undercut their competitors to win market share, which will in all likelihood bring about some switching of suppliers. However, many of the executives believe that the EC may have to get involved to precipitate some switching in the marketplace, according to Krawchenko. “Even in the UK, the rates of switching are perhaps not as high as one might expect, especially in times of extremely high gas and power prices. However in comparison with the continent, our switching rates are relatively high.”

NUCLEAR BACK ON THE AGENDA

It also seems that the high prices customers are paying for their gas and power are likely to continue. With security of supply issues unlikely to be solved in the immediate future, prices paid by consumers will invariably remain high compared to prices in recent years. However, the UK government is looking to address security of supply issues in the long term through a new era of nuclear build, as revealed in its recently-released energy review.

Datamonitor has found broad acceptance of the review’s findings amongst major energy users in the UK market. In fact the review’s focus on energy efficiency, nuclear power and renewable energy found support with 75%, 66% and 55% respectively of the 600 large energy consumers currently being surveyed. The support for nuclear power is an aboutface amongst the same group from last year, who were then sceptical of nuclear’s value as part of the energy mix going forward.

While questions still exist as to whether nuclear is an economically sound option, especially if the price of carbon credits on the EU emissions trading scheme (ETS) remains low, the 50 European executives interviewed on the future of competition in the EU utilities market believed even before the results of the review were announced that the security of supply issue would put the nuclear question back on the table, Krawchenko says. “A new generation of nuclear build could provide for the future what is lacking right now – the security of supply of electricity. With the North Sea gas fields drying up, the UK has in the past few years become for the first time a net gas importer, a situation that is only going to be exacerbated as time goes on. And with gas fired power plants producing a large amount of the UK’s electricity, power prices going forward will be largely dependent upon and tied to wholesale gas prices.

“This situation is seen repeated all over the continent, where concerns over gas supply and prices from unstable markets have people looking at other options for power gneration, such as nuclear,"he says. "It is also allowing coal to re-emerge as an economically viable power generation source."

DRIVE FOR EFFICIENCY

Another by-product of the security of supply issue is the drive for more energy efficiency. Like any market, when supply is plentiful and thus cheap, using a product efficiently isn’t such a huge issue. However, when supplies begin to tighten up and prices therefore go up correspondingly, efficiency becomes more important. The UK government energy review came out strongly in support of increased energy efficiency, in the form of improvements in building codes, maintaining a household energy efficiency commitment and mandating the delivery of improved consumption data to consumers.

Across Europe, utilities executives also believe they will have to play a bigger part in a drive for more energy efficiency, at the behest of their respective governments. When asked whether: ‘Governments significantly increase the role of utilities in improving energy efficiency’, a majority of the respondents said it was a situation they ‘must pay attention to’. Just what some of these measures will be or how the utilities suppliers will be expected to tighten up on energy efficiency isn’t immediately clear – but what is, is that throughout the EU the trend or drive is to do more with less so far as energy production and consumption are concerned.

PRICES REMAIN HIGH

Perhaps the most concerning consensus amongst EU utility executives from a consumer’s perspective is that they see power prices remaining high in the foreseeable future, Krawchenko says. “I’m sure consumers are sick and tired of hearing that their utility tariffs, already at record highs, are going to continue to increase. However, until the security of gas supply issue is addressed, wholesale gas markets will remain very volatile.

“In the UK and throughout much of Europe, due to the heavy reliance on combined cycle gas turbine (CCGT) power plants, the volatility in the wholesale gas supply will invariably feed into the power market also. “Unfortunately for consumers, utilities cannot afford to swallow these high wholesale prices and any further increases will continue to be passed onto consumers.”