International energy companies are making a bee-line for Italy where prices are healthy and opportunities abound. This bubble could be burst by competition, but Siân Green finds that Europe’s new hot spot shows no signs of cooling.

The first quarter results of Italian power company Enel show that electricity market liberalization is working. While total group revenues remained stable at €7347m ($6717m), just a 0.1 per cent decrease on the same quarter last year, revenues from electricity generation and sales declined.

Import capacity and congestion: Lack of interconnector capacity in Italy will limit competition in the market
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The fall in electricity-related revenues is, says Enel, due to a decline in fuel prices and reduced tariffs. Nevertheless, the company’s performance in this market is the start of a trend that reflects the erosion of its market power in the deregulating market.

This may not be good news for Enel’s new management line up, which will include Piero Gnudi as chairman, but they will at least be grateful that the outgoing management had the foresight to implement a diversification strategy to keep revenues up. Greater revenues from telecommunications, international activities and new businesses compensated for the decline in revenues from the electricity sector.

Since market liberalization became a reality for Italy, Enel has worked hard to implement a multi-utility strategy incorporating gas, electricity, water and telecommunications. It has also consolidated and reinforced its international role through subsidiaries such as Enelpower, Chi Power, EGI and Enel.FTL.

Enel hopes that these activities will compensate for the sell-offs it is being forced to make under the Bersani decree, which states that no single company can account for more that 50 per cent of electricity production and import, and that in distribution, only one authorization per municipality is allowed. Enel therefore has to divest 15 000 MW and 1.6m customers.

The sale of Enel capacity has given Italian and foreign energy companies the opportunity to gain a strong foothold in the deregulating market. The latest round in the sale has attracted 19 expressions of interest. In the first round, a consortium headed by Edison, which is controlled by Electricité de France and Fiat, won control of Eurogen. The second round saw Spain’s Endesa taking over Elettrogen for €2.6bn.

Edison has ambitious plans for the Italian electricity market. It will make energy a core business by merging its energy subsidiaries, and will sell all of its other business units. It has outlined a five-year plan under which it will increase its current generating capacity to 14 GW from 6 GW.

Several companies are implementing plans to take part in Italy’s competitive generating market through new build. International Power, for example, has made Italy a key target market. The company is aiming to build three or four combined cycle power plants, and has applied for permits for seven plants across the country.

Like many other companies, International Power is attracted to the Italian market by the high wholesale prices and a stable market structure. Electricity demand is forecast to grow at an annual rate of 2.5 per cent until 2007, which means that new capacity is needed.

But with competition looming and numerous new players entering the market, how long will this bubble last? Most European countries have seen downward pressure on electricity prices after the implementation of competition.

According to Standard & Poor’s analyst Daniela Katsiamakis, in spite of the erosion of Enel’s position, the utility’s influence in the market will help to keep prices and margins at higher levels in the short term. Enel has a stable cash flow, a sizeable position in a growing market and a robust financial profile. In addition, Katsiamakis says that there are no large players that currently pose a threat to Enel’s business. These factors mean that Enel will be able to continue making its presence felt in the market for at least a year.

And even beyond a year, prices are likely to remain high. In fact, there is unlikely to be significant downward pressure on prices until 2005.

“The Italian electricity market is not quite the same as others in Europe because it is a little bit isolated,” said Katsiamakis. “There is limited generation capacity and limited import capacity. What that means is that the generators are in a positive position.” And although generating capacity is being built at the moment, most of it will not be on line until beyond 2005.

“International interconnector capacity increases are a long way off,” added Katsiamakis. “It is going to take a lot of capital and time, and there just isn’t the interest in [increasing capacity] if there is no return.”

In addition, competition will be slow to develop in the market. “Medium sized companies such as Endesa and Edison will increase their capacity and market share, and that’s when competition will start. [Competition] will be gradual in the short term, but eventually the market could get quite competitive. … Beyond 2005, when new capacity comes into play, companies will be striving to get market share so will be competing quite heavily.”