The German energy industry faces increasingly tough international competition. According to the latest report of the European Commission on the completion of the electricity and natural gas market, some 70 per cent of the electricity and 80 per cent of the gas market is open to competition. The national markets are increasingly converging and this process will be further accelerated by the package of liberalization measures adopted by the EU Council of Ministers on November 25, 2002.

Since the beginning of liberalization in 1998, some 200 new, often foreign, market participants have positioned themselves in the German electricity market. Companies with direct or indirect foreign ownership today supply almost 7 million electricity customers. With a total of 44 million households in Germany this represents a market share of 16 per cent. The signs of international competition are also clearly recognizable on the German electricity exchange. A third of the approximately 120 players on the exchange are from abroad.

Switch rate

Liberalization has also led to a strong consolidation in the German market. Since 1999, more than 30 major mergers involving more than 80 companies have taken place in Germany. Additional mergers at regional and municipal levels are planned. Besides this phenomenon, a strong trend towards company alliances and partnerships is being established. More than 300 of the 970 municipal energy providers operating across Germany have a private partner. According to research by the German electricity industry federation, VDEW, almost 1200 German and foreign companies are active in the German electricity market.

The 1998 revision of the Energy Industry Act with the complete and immediate opening of the German electricity and gas markets has led to changes in the German energy market. Some 40 000 MW of over-capacity in Europe led to a dramatic fall in wholesale prices, at times up to 60 per cent, at the end of the 90s. The competition in the electricity industry has led to cost relief to the economy of more than G7.5 billion per year.

Industry, commerce and domestic users have taken advantage of competition to reduce electricity bills. Almost all major customers have in the meantime either changed supplier or concluded new contracts with their present supplier, negotiating price reductions of up to 50 per cent and more. Some 10 – 20 per cent of commercial and household customers have gone the same way. Thus, according to the latest benchmarking report of the European Commission – of all 15 EU states, only the UK and Sweden report higher switching rates than Germany.

In view of limited possibilities for internal growth in a generally saturated market environment, the companies were initially only able to counter this development in the market with rigorous cost management. At RWE alone, cost saving measures of G2.6 billion per annum were adopted for the period 2000 to 2004. Currently, we have already achieved G1.8 billion per annum or 70 per cent. If one were to take the cost reduction plans of the companies in the German electricity and gas industry together, the result is a savings target of over G10 billion per year.

The market opening for electricity and gas is much criticized in Germany because, after the gains made at the beginning of liberalization, electricity and gas prices have nearly returned to the levels of 1998.

Tax burden

One factor important to the determination of current gas prices is the price of oil on international markets. Since 1998, the price and state levies in Germany, in the case of both electricity and gas, has increased dramatically.

Harry Roels is RWE’s chairman
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For German household customers, these levies – including value-added tax – now represent over 41 per cent of electricity prices. By comparison, in 1998 it was still only 25 per cent. Without these additional burdens, and with strongly reduced costs for electricity generation, transmission and sales, the price would be almost a third lower than it is today. The real winner in the liberalization of the electricity and gas markets is thus the German government.

Potential additional burdens for Germany’s energy industry are expected to spring from the decision of the EU Environmental Council on 9 December 2002 to establish trading with greenhouse gas emissions in the EU’s emissions trading. Of critical importance to this decision is the conversion of the EU framework requirements into national allocation plans, for therein lies the truly explosive nature of the emissions trading instrument. Political standards will decide how many emissions rights are allocated to, or imposed on, the individual companies.

These allocation plans are being worked on. Everything will depend on the outcome. After all, we are facing decisions on major investments such as the world class BoA II project in the Rhine coalfield which has an investment volume of more than G1 billion.

Power-Gen Europe

To the extent that competition will take on a European dimension, we need a political framework tailored precisely to this EU-wide competition; it also must promote European competition in terms of equal opportunities for all market participants. Fair market opportunities for all does not mean, however, that the same rules apply in all 15 Member States without exception. The individual states must have the opportunity to give proper consideration to national factors and structural differences. Therefore, we need a clear allocation of responsibilities between the EU and the Member States.

Against this background, this year’s Power-Gen Europe is not just a market and showcase for the newest technological developments, but a forum for the debate necessary on the future of European energy provision.
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