Heightening

Heightening

Prof. Dr. Wolfgang Straburg

Senior Vice President,

RWE Aktiengesellschaft

Essen, Germany

It has been just a year since the new German Energy Law, opening the German electricity market to full-scale competition overnight, came into force. Since then, every electricity consumer, not just a few large customers, as stipulated by the European Directive for a Single Market in Electricity, has had free choice of energy supplier. This full-scale deregulation has already led to a rapid process of fundamental change in the German electricity industry. Germany is therefore the right venue for this year`s PowerGen Europe Conference `99.

The development of market forces has been much more dynamic than anticipated. Today, customers in industry and other large consumers of energy are increasingly renegotiating their supply contracts or changing their supplier; chain customers have begun to pool their demand, and even small consumers and private households have started to form electricity-buying groups by combining their demand. New players, like international energy utilities, IPPs, brokers and traders are also entering the market trying to get a slice of the cake. In this rapidly changing environment, German power utilities urgently need to find new strategies to compete successfully in the deregulated environment.

The RWE Group, Germany`s fifth largest company with operations in the energy, chemicals, mining, construction, waste management, mechanical engineering and telecommunications sectors, is on the right path to meeting these challenges successfully. The management company of the energy division, RWE Energie, is pursuing a strategy of strict cost management in order to safeguard and expand our energy business. Price reductions of more than Euro250 million will therefore be fully compensated for by significant efficiency gains in power generation from lignite and payroll cost savings. Additional steps, such as unbundling generation, transmission and distribution, as well as further efficiency improvements will ensure that RWE Energie continues to rank among the most competitive suppliers in Germany in the future.

Another key strategy is gearing our products, organization and corporate culture consistently to the needs of our customers. It is with this in mind that we have already reorganized our regional sales departments to sharpen our focus on the specific requirements of different customer groups. Our products are being tailored to exactly meet the demands of our customers. This strategy involves as essential elements the focused extension of contracting and activities that follow the customer as well as the development of industry-specific energy products, the integrated sale of electricity and gas as well as energy trading and the provision of flexible billing and information systems. Our vision is to become the leading all-round energy service provider in Europe. In pursuing this aim, we can perfectly bring to bear our Group-wide synergies as a multi-utility.

RWE`s successful start in the competitive environment is demonstrated by the net gain of approximately 400 GWh/a from competitors. Real competition has only just begun, however, and will heighten dramatically in the near future. In light of the growing importance of electricity trading, a German power exchange will be set up shortly. RWE welcomes this development as it gives us the opportunity to increase our market share. It also enables the company to offer new price and risk management services to our customers if the power exchange includes an index-based futures market.

As the margins in the competitive German electricity market have come under pressure, it is not only a must but a great opportunity for German utilities to use their excellent central location in Europe to extend their business operations across German borders. RWE is consistently making use of this position and has been pressing ahead with its international energy and other Group activities in and outside Europe for several years. The emerging markets of central and eastern Europe are a major focus of our energy commitments because we expect healthy profits there on a mid-term basis. Apart from a number of cooperative ventures and interests in Poland, Croatia and Russia, we are erecting a cogeneration plant in the Czech Republic and supply more than about 40 per cent of electricity requirements in Hungary. Furthermore, we are determined to strengthen our role in western Europe in order to extend our position as the largest privately-owned energy utility on this continent.

In sum, RWE is ready to assert itself in the face of heightening competition in the German and European markets and is looking forward to the challenges ahead.

What gives us cause for concern, however, is the absence of a level playing field as a result of some rules of the game that have either been proposed or have already been adopted. On a national level, this is, firstly, the intention of the Red-Green government to phase out nuclear power. This would place an enormous financial burden on German utilities and would significantly weaken our position in international competition. On a European level, we are concerned about a situation where players in countries that have fully deregulated their energy markets are put at a disadvantage versus those in less deregulated markets. Solutions are required here that guarantee a level playing field for all participants involved in the game.

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