PSIRU University of Greenwich www.psiru.orgESF FirenzeNovember 2002

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Energy liberalisation and concentration in Europe

• By David Hall
• PSIRU, University of Greenwich
• October 2002
• (thanks to Anthony Froggatt for some charts)

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Summary

• The companies
• Dimensions of concentration
• Market power
• Employment and prices
• Central and eastern Europe
• Some conclusions

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The oligopoly
3 leaders

• Disappeared or leaving
• UK companies most taken over
• Fortum (Finland) retreats to Scandinavia.
• Others not expanding Portugal, Austria, Denmark
  Netherlands
• US companies most gone or leaving Europe Enron
  NRG Reliant Southern TXU Entergy.
• AES leaving UK reviewing rest.

Others
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Company restructuring in electricity and gas

• Concentration
• In each country internationally and across
  sectors
• Strategies of defending home dominance, buy into
  other countries/sectors
• Political and economic means eg France, Germany
• German energy company mergers are central
• RWE, E.ON affect all parts of Europe
• Elimination of competition is a key motive
• Not competing for same customers

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Germany electricity liberalisation and
concentration
March 1999
Dec 2001
Source Bower et al, Energy policy Oct 2001
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Electricity in Germany liberalisation and
concentration
March 1999
Dec 2001
Source Bower et al, Energy policy Oct 2001
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EdF/GdF (France) (state 100)

• EDF/GDF 114,389 employees
• Largest in Europe, state-owend
• Semi-integrated electricity/gas operations
• Active in Europe (UK, Sweden, Switz, Hungary,
  Czech etc)
• Active worldwide (Brazil, Argentina, China, etc)

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RWE (Germany) (priv)

• 154,000 employees, Euros 60 billion sales
• 1 German electricity company
• Europe no.3 in water (Thames Water), waste
  management
• (sold chemicals, telecomms)
• New purchases Transgas (Czech), Innogy (UK)

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E.ON (Germany) (priv)

• E.ON 186,000 employees, Sales Euros 93 Billion.
  
• 1 German electricity company, formed in 2000 by
  merger of Bayernwerk/Preussenelektra (Veba/Viag)
  
• Europe UK (Powergen 2001), Sweden (Sydkraft),
  Switzerland, Hungary, Czech republic, Latvia
  (gas), Russia
• Gas buys Ruhrgas, 1/3 share in Slovak Gas

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4 Dimensions of concentration

• Internationalisation
• RWE, Eon, EdF spread into Scandinavia, Baltic,
  UK, Switzerland, Austria, Italy, central Europe
• gas and electricity takeovers in central Europe
  Czech, Slovak gas Czech, Hungarian, Slovak
  distributors Czech, Hungarian, Polish generators
• Vertical integration eg UK, Sweden
• Electricity and Gas combines
• Eg E.ON-Ruhrgas, Fortum, Tractebel, EdF/GdF
• Also Italy - Enel and ENI crossover UK
  multi-energy suppliers Centrica etc and
  merged grids.
• Multi-utilities Suez, RWE, Eon, Vivendi

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Vertical (re)-integration

• Scandinavia (Norway, Sweden, Finland)
• Vertical integration Vattenfall, Fortum buy
  distributors
• France
• Vertically integrated state monopoly (EdF)
• Belgium
• Tractebel/Electrabel own stakes in distributors

• Eon CEO says vertical integration essential

• UK
• Vertical re-integration of generators and
  suppliers
• British Energy, AES not vertically
  integrated,crisis
• Germany
• RWE, Eon dominate generation, transmission, and
  retail supply

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Concentration of multi-utilities
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Some joint ventures
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Controlling the markets

• California market gaming by 7 companies
  controlling 49 of generation
• Similar dangers in Europe
• Sweden Nordpool prices double in year,
  Vattenfall raises prices 40 in 4 months
• Spain investigation into price surges
• UK retail household market does not reflect fall
  in generation costs
• Germanycorporate strategies to gain market
  share, cut capacity, then raise prices

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California crisis prices and revenues
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Power companies and political connections
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Not real competitionrecent events in the UK

• Retail prices fall for business, not for
  households
• Crises of AES, British Energy, TXU
• Only 10-15 of electricity traded, rest is
  long-term tied
• System needs override market
• Eg rush approval of Eon purchase of TXU

• State subsidies and privileges remain
• Eg UK subsidise British Energy,
• Expansion by merger, not competitive entry
• EdF, Eon, RWE buy companies (and customers)
• Bad selling techniques
• Difficult to manage

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Some social effects of liberalisation

• Prices most affected by fuel costs, not
  liberalisation
• Prices fall as much in 1990s in less liberalised
  markets
• Gains to business consumers lower prices
• No gains to domestic consumers zero sum?
• Less easy to develop renewables, green energy
• Employment losses
• Costs of competition - 730m (1170m) in UK
• Problems of instability, power cuts, price spikes
• Fines in Scandinavia, Spain fear of California

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Financial issues Paying for energy

• Financial distortions
• to finance tax cuts (UK model)
• to reduce debts (eg Berlin)
• MNCs use local finance or World bank, not own
  capital
• Multinationals get guarantees from public sector
  Power Purchase Agreements (PPAs)
• Public sector can raise finance

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Contradictions in privatisation in CEE

• Keep integrated monopolies to maximise value of
  sale
• Czech republic re-integrates CEZ and distributors
  for sale
• Privatisations can conflict with competition
• Eg Hungary, Croatia, Poland IPPs, also India,
  Dominican Republic
• Creation of regional markets or regional system
• Trading may destabilise, not create synergies
• Trading may cut capacity to maximise
  opportunities for profit
• Cf Estonia/Latvia discuss merged state company
  (cf privatisation to NRG)
• Hungary tensions between privatisation, prices,
  employment, profits
• Disputes over employment, pay
• Legal action by companies to protect profits
• Tensions over price rises

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Colonisation or development?

• Colonial model
• CEE energy just extends market for existing and
  future energy companies from western EU
• Liberalisation and privatisation open markets
• Eliminate potential competitors eg Hungary MVM
  fragmented and bought by competitors (UK)
• Development model
• Devloping fair and sustainable sytem
• Envisage possibility of regional/subregional
  cooperation
• Long-term planning, social considerations allowed
• Avoid destabilising effects of trading

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Some ways forward (WRI recommendations)

• reform to achieve public aims
• Fairness, price, renewables, security
• finance to support public aims, not to lead
• State holds risk privatisation needs guarantees,
  subsidies
• Evaluate all options for raising finance
• Avoid selling for highest price
• transparent, public debate and governance
• Build social consensus before investors
• build reform on public benefits agenda
• Eg user efficiency gt social and environmental
  gains
• (eg Sofia public buildings)
• Evaluate security, cooperation

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