Electricité de France has unveiled a new strategy to take it forward to full market opening in 2007. Siân Green examines how the utility is facing up to the future.
It seems that Electricité de France (EDF) has started the new year by turning over a new leaf and facing up to the inevitability of competition in its home power market. The French national electricity giant – the enfant terrible of the European power market – has outlined plans to become a focused, competitive European energy company.
The plans outline the company’s ambitions, priorities and challenges in the period running up to full opening of Europe’s electricity markets in 2007. Its aim is to be a profitable, balanced energy company with a strong focus on Europe and an ability to identify good business opportunities and control risks.
This does not sound like the EDF we know, and the utility’s competitors and European counterparts will doubtless be examining the “EDF 2003-2007 Project” with great interest. They will be keen to know how the new-look EDF is planning to operate in the competitive market.
France’s electricity market will be one of the last in Europe to open fully to competition. As of February 2003, 37 per cent of the market was open, representing 123 TWh. In July 2004, this will rise to 70 per cent of the market (242 TWh), and finally in 2007 the market will be 100 per cent open and all 31m electricity customers in France will be eligible to switch supplier.
This rate of opening is slower than most EU countries and has been the main cause of differences between EDF and other European utilities: while EDF was able to expand into key liberalized markets such as the UK, Germany, Italy and Sweden, its own home market remained closed to its competitors.
EDF is also accused of having the comfort of a security blanket in the form of the French state. Its competitors believe that its status as a French state-owned company and the presence of state guarantees have given EDF an unfair advantage, and have been pushing for change for several years.
That change is about to begin. In December 2003, the European Commission announced that the French government had agreed to bring an end to EDF’s unlimited state guarantee by December 2004. The agreement is a major step forward for the Commission in its drive to achieve a level playing field across Europe’s energy markets.
The Commission has also ordered EDF to repay g889m plus interest to the French state relating to the treatment of tax during the transfer of the transmission network to EDF in 1997. According to the Commission, EDF should have paid g889m in tax when g2.15bn of provisions were incorporated into its capital. The tax concession granted to EDF constituted unjustified operating aid, said the Commission.
“The European Commission is determined that there should be no preferential treatment – for example, state guarantees or tax breaks – for utilities such as EDF,” said Mikhail Masokin of Datamonitor. “It doesn’t care about its state-owned status, but wants to see a genuine level playing field. Let’s not forget that several other utilities in Europe are state-owned – Vattenfall, for example – and no-one is concerned about their activities.”
Nevertheless, in order to meet its commitment of withdrawing the state guarantee, the French government has decided to turn EDF into a limited company and privatize it. While no timetable for privatization has been set, it is thought that the government was planning to reform EDF’s statutes in early 2004 and then sell a stake in the company by the end of 2004.
Privatization of EDF will not be so straightforward, however, as the government has already encountered stiff opposition from labour unions. One union – CGT – called a strike in December 2003 and together with other unions is planning further strikes in early 2004.
It appears that the government is already succumbing to this pressure. It has postponed the privatization and it is unlikely that EDF will be sold in 2004. Such a delay will antagonise the European Commission over the state guarantee issue.
But in spite of this uncertainty, EDF is preparing to get itself in shape for competition. Its new business plan is the result of consultation with a wide range of associations, customers, employees and unions, and it has also analysed the business models and strategies of other major European electricity companies, including E.On, RWE, Enel, Endesa and Vattenfall.
EDF has noted that models such as the pure generator and pure supplier have failed, as have attempts to create value through trading alone. It has observed a number of trends within Europe’s utility industry, such as the fact that operators are moving into countries adjacent to their home country, and targeting traditional, rather than new, customer bases; utilities are putting ambitious programmes in place to increase productivity, reduce costs and sell assets; they are acquiring gas skills; and are moving away from the “multi-utility” model.
One of the key factors for success identified by EDF is having sufficient size and financial weight in order to gain from economies of scale and resist crises. In terms of international development, EDF believes that a European presence is important. It has identified its priority countries as: France, Germany, UK, Italy and Spain. In each territory it will aim to have a critical size in generation and supply, a balanced generation portfolio and activities in trading to optimize its operations. It believes that a balance between regulated and non-regulated activities will ensure stable revenues.