Consolidation Seen Driving German Power Prices Up

July 19 2002 – German wholesale power prices will be driven higher in the second half of 2002 as a result of supply side consolidation, a senior executive of leading Dutch utility group Essent’s German operations said.

“There are fewer and fewer players, who are all determined to achieve greater revenues from power sales,” Alexander Heckmanns, the managing director of Essent Energie GmbH told Reuters in an interview in Hamburg on Wednesday. “There is increased vertical integration (of power generation through to distribution to end consumers) and capacity utilitisation is used as a lever to hike prices. “As a result, we could envisage the price of Calendar Year 2003 power to rise by 20 per cent by the first quarter.”

The position, called Cal 03 in the German over-the-counter (OTC) electricity market, Europe’s biggest, currently costs around Euros23.6-23.7 per MWh in baseload and just under Euros35 in peakload.

Essent, which operates a 70-strong international energy trading floor from Den Bosch in the Netherlands, ranks among medium-sized European power utilities.

Its energy turnover of $5.94 billion in 2001 placed it well behind Germany’s three market leaders RWE, E.ON and EnBW, but ahead of the German number four, Swedish-led Vattenfall Europe.

Essent Energie is the group’s Duesseldorf-based energy sales venture, which complements Essent’s German strategy of gaining customers through utility acquisitions.

Heckmanns said the power of the large German groups and their trading operations was boosted by the exodus of US utilities from European markets.

“The dominance of German players becomes even greater amid diminishing liquidity while the influence of traders without generation capacity of their own is dwindling,” he said.

Last month Aquila , Dynegy and Williams , which were all active in Germany, cut jobs in Europe as their US parents sought to shore up investor confidence amid concern about credit ratings and sliding stock prices.

The collapse of Enron last December halted strong volume growth in the German OTC power market since liberalisation in 1998, with volumes now estimated to have halved this year.

Meanwhile, the top four German utility groups bought and restructured retail operations to create what Heckmanns called “homogenous supply structures.”

E.ON in March said it would raise retail power prices by between five and ten per cent this year, in line with similar statements by rivals which aimed to boost profitability after power price slumps between 1998 and mid-2001 weighed on results.

E.ON and RWE account for 70 per cent of German power generation. Heckmanns said the market had now moved from a price recovery into “an unhealty situation without fair competition.” He did not believe the EEX power exchange, which trades six per cent of annual German power demand, was significant enough to help revive liquidity.

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