Germany’s new power grid agreement is designed to aid competition, but has drawn criticism from the European Commission and foreign companies active in the market.

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On January 1, 2000, Germany implemented a revised power grid agreement for the transmission of electricity. It sets out the regulations for market players – domestic and foreign – using the high voltage network, and simplifies market access, according to the German Electricity Association (VDEW).

Certain aspects of the agreement – most notably the division of Germany into two transmission ‘zones’ – have caused controversy among foreign players active in the country. Europe’s competition authority in Brussels has also voiced – albeit unofficially – concerns over the system’s impact on competition.

The agreement is a ‘voluntary’ solution for the implementation of the German Energy Law of April 1998 which liberalized Germany’s electricity market. It was negotiated between the VDEW, the association of German industries (BDI) and the association of industrial power plants. It avoids the need for further legislation and will be re-examined at the end of 2001.

It is this ‘voluntary’ approach that has allowed the market to open so rapidly, says the VDEW.

One of the most important changes introduced by the agreement is a move away from the point-to-point tariff system to a single point tariff system. This opens the way for the handling of mass customer business and exchange trading, and also removes the distance-related elements of transmission tariffs.

In addition, Germany has been divided into two zones for transmission purposes: a north zone incorporating utilities HEW, Bewag, VEW, Veag and PreussenElektra, and a south zone consisting of RWE, EnBW and Bayernwerk. Transmitting power across this internal ‘border’ involves a charge of Pf0.25/kWh, as does transmitting power across Germany’s international borders.

The eight regulatory zones in the country have been retained. For balancing purposes, players specify ‘balance areas’, which cannot cross the borders of the regulatory areas.

The agreement has been approved by the German competition authorities and the economics ministry. It has been submitted to the European Commission (EC), which can raise objections and ask for the agreement to be reviewed or revised.

Although the EC has made no formal objection to the agreement, it said in January that it has reservations over certain elements. While it believes that the new agreement is an improvement of the initial agreement of May 1998, it said that the north-south divide and the associated tariff would discriminate against foreign companies. The EC is reviewing the agreement and says that it will also examine its impact on competition in light of the proposed merger of Viag and Veba.

The EC’s concerns are echoed by foreign companies active in Germany’s electricity market, including Fortum. Finland-based Fortum is currently constructing an IPP plant in Germany, has obtained a license to supply electricity there and recently purchased regional utility Elektrizitatswerk Wesertal.

Fortum believes that the agreement will affect competition in Germany’s market, according to Katarina Simola, Fortum Power and Heat’s vice president for continental Europe. While Fortum believes that this agreement is an improvement on the last, it does not approve of certain elements.

Of particular concern, says Simola, is the combination of a north-south divide and the proposed mergers of Viag and Veba, and RWE and VEW. If these mergers are approved, the merged groups will be very sizeable and located on both sides of the dividing line. Fortum believes that this will enable them to transmit electricity by ‘swapping’, something that other energy companies will not be able to do. “It would strengthen their dominant position,” said Simola.

Fortum also believes that the balancing mechanism will prevent the development of liquidity and energy trades. Market participants must buy all their balancing power, reserve power and ancillary services from the energy company controlling the regulatory area in question. Fortum would like to see a system more like Nord Pool, where such services can be imported.

In addition, Fortum sees the international border tariffs as a barrier to free trade, and is concerned that the agreement is not legally binding.

German energy companies and the VDEW believe, however, that the model is non-discriminatory and allows full competition. Prof. Dr. Wolfgang Strabetaburg, senior vice president of international corporate relations for RWE AG, pointed out that to take a discriminatory or protective stance would disadvantage all players in the market, domestic and foreign, large and small. “We have to be in favour of free competition,” said Strabetaburg, “and so we need a fair and balanced system.”

According to Strabetaburg, the north-south divide creates an even playing field for German energy companies operating in a liberalized European market, and will not favour the big players. Germany is the largest market in Europe, and so dividing it in two makes it comparable in size to other countries’ markets, and with the Pf0.25/kWh tariff, compensates for the transmission of electricity over large distances. It could also encourage new capacity to be constructed close to demand centres. “It is not artificial to separate [the market] north-south,” said Strabetaburg. “It is fair play to compare it with other competitors in Europe, and with other countries.”

In response to foreign companies’ concerns over the transmission charges, Strabetaburg agreed that it is understandable for these companies to want to reduce operating costs, but maintained that the high voltage grid infrastructure is an important asset that must be maintained properly. Users of the system must help meet this cost, he said. He also argued that Germany’s cartel office had not voiced concerns over this issue.