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Energy showdown on the cards

The European Commission’s new energy policy aims to liberalize the energy sector. Although good news for users, the large energy groups are less than thrilled.

By Heather Johnstone

The European Commission’s (EC) eagerly awaited energy strategy, which was unveiled on the 10 January 2007, includes ambitious proposals on reducing greenhouse gas emissions and boosting energy security. However, by far the most controversial proposal is the one recommending ‘ownership unbundling”, which means the large vertically integrated energy suppliers, i.e. companies that are energy suppliers and owners of network infrastructure such as power grids or pipelines, would be forced to give up their control of the transmission networks.

This proposal represents a significant step forward in Brussels’ plan to establish a single European energy market that will enable consumers and businesses to benefit from a fully liberalized energy market.

The recommendation to take ownership of the transmission networks away from the large energy groups stems from the findings of a 16-month investigation into the gas and electricity sector. The investigation was ordered by Neelie Kroes shortly after she was appointed European Union (EU) competition commissioner, and its findings indicated that there was a “serious competition problem”.

Brussels makes a stand against on what it sees as an anti-competitive energy market in Europe Union.
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Thus, the EC is keen to break what it sees as the stranglehold that a number of national energy companies have on the market, because it believes it is stifling competition and deterring new market entrants.

Unsurprisingly, the proposal has not been well received by the companies it would affect. RWE, which is one of Germany’s big four power companies, said that although it supported the EC’s move towards greater competition it opposed ownership unbundling. Eon, another large German electricity and natural gas supplier, felt that such radical intervention would lead to less competition and endanger security of supply in the end. While, Gaz de France and Electricite de France both believe that competitive energy markets can function without separate ownership of the transmission networks.

The response from the governments of some of the member states has been to support their national energy companies. Michael Glos, Germany’s economy minister, said the move would be “very difficult” and might breach Germany’s constitutional property rights. While Francois Loos, the French industry minister simply said: “Our system works.”

Ministers from all 27 EU member states are due to meet at a EU Summit in March. And in order for the Commission to push through this ambitious plans for a common energy policy it needs all members to give their support.

Thus, in what is seen as an attempt to avoid confrontation with some of the member states, the EC included an alternative option to the break up the vertically integrated companies. Called the “Scottish model”, it allows the large energy suppliers to retain ownership of transmission assets, while the management of the networks is taken over by independent companies.

If legislation for the break up of the integrated energy groups is given the go ahead, the majority of people involved in the industry believe it would take years before the asset unbundling took place.

However, Neelie Kroes, who has been a long-standing critic of non-liberalized nature of Europe’s electricity and gas sector, has indicated that she would be prepared to impose a break-up on individual companies as part of an antitrust decision, if, for example, a company was found to have violated EU competition rules. The EC was given the rights to break up companies that broke competition rules back in 2004, but has so far never used this power.

This would be of particular concern for a several of the large energy groups that are currently subject to a Commission antitrust probe. A number of companies have had their offices raided at least once over the last year, with the most recent raids occurring at Eon, RWE, EnBW and Vattenfall, which are Germany’s four largest power companies, in December of last year.

So what will the EC’s plan to unbundle the energy assets of the large energy suppliers mean for the various players in the market? For energy companies they will see their market power significantly curbed. However, the more efficient energy companies could well thrive in a more integrated marketplace. For industrial users, greater competition should result in lower prices, and with a greater network integration across Europe make supplies much more reliable. Consumers may see some price benefits from greater competition too, but it is unlikely to be to the same extent as industrial users. This is because in many European countries consumer energy prices are regulated. Finally, the governments of the EU member states will have a reduced power of intervention in the energy industry, with more decisions taken by the private sector, national regulators or even at a EU level. However, the Commission has so far kept away from challenging governments’ regulation of tariffs for consumers.

The EC’s plan to open up the European energy market to new players does raise the interesting point of what effect this will have on high level of consolidation that Europe is currently experiencing. PricewaterhouseCoopers’ recently published “Power Deals, 2006”, showed that there had been unprecedented M&A activity in Europe’s electricity and gas sectors in 2006. Will the EC’s recommendations put paid to the trend continuing in 2007 and beyond?

However, before we can speculate on that we must wait for the outcome from the upcoming EU Summit.