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EU Liberalization Limps Forward

Posted in Electricity Transmission,Europe,Gas Transmission/Storage,Liberalization by Cheryl Morgan on the May 26th, 2008

Energy market liberalization in the EU has been a difficult process and is likely to remain so. While some countries, notably the UK, have gone full steam ahead into creating fully competitive markets within their own borders, other countries, in particular France and Germany, have concentrated on developing “national champions” that will be able to compete in the expected Europe-wide energy marketplace. It is no accident that most of the UK’s energy companies are now owned by large European firms.

But before that European marketplace can properly develop, the stranglehold of the national champions on their home territories has to be broken. Naturally, those companies see no reason to give up their privileged position, and have been happily cooperating with each other to divide up Europe between them. This has led the European Commission to open anti-trust proceedings – see for example this Forbes report on investigations into the behavior of E.ON, Gaz de France (GdF) and RWE in Europe’s gas markets.

On the political front, slow progress continues to be made. On Friday the EurActive web site reported a possible compromise deal that may point to a way forward. The leaked proposal that EurActive posted refers only to gas markets, but the general principles of the deal would be applicable to electricity transmission as well. The basic idea is that national transmission monopolies would be allowed to retain ownership of their pipelines (or wires), but that control of the day-to-day operation of those networks would be handed over to an independent Transmission System Operator (TSO). This much has been seen before, but the crucial new element of the deal is that strategic control of the transmission network would lie with a Supervisory Body whose members would be appointed in part by the utility that ultimately owns it. This is a significant climb-down from the EU’s previous position that appointment of the Supervisory Body members would be by an independent Trustee.

While this is good news for the EU regulators, their staff will also be taking comfort from the fact that E.ON appears to have broken ranks with its fellow utilities and is now accepting that some unbundling is inevitable. Having been embroiled in anti-trust disputes with the EU for some time, the German-based company, which claims to be the largest utility in the world, has announced its intention to sell off its power grid and some 4,800 MW of generation. This doesn’t indicate a strategy of downsizing – E.ON still has plans for an ambitious €60 bn acquisitions program through to 2010. However, the sales would decrease E.ON’s market dominance in its native Germany, and hopefully (from the company’s point of view) get it out of trouble with the EU.

The transmission grid sale has already attracted attention from one of the UK’s few remaining major utilities: National Grid. According to this Guardian article the specialist transmission operator is looking at adding the German grid to its existing international portfolio. The fate of the generating capacity is less clear. According to this Reuters report, the capacity for sale includes 1,700 MW of hard coal-fired plant and 600 MW of lignite-fired plant. A further 1,500 MW will come from rights to take power from E.ON’s existing (and therefore aged) nuclear plants. This may not be a portfolio that investors are lining up to purchase.

E.On’s proposals have not yet got the company off the hook. They still have to be scrutinized by EU staff and by E.ON’s competitors. If they are deemed insufficient to effectively reduce E.ON’s market dominance the company could yet be forced into additional divestments. In the meantime it will be interesting to see how the other major European utilities react. Will they follow E.ON’s example, or force the EU to take them to court?

One Response to 'EU Liberalization Limps Forward'

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  1. on June 20th, 2008 at 6:40 am

    […] month we reported on a possible compromise deal in EU market liberalization whereby transmission owners (in […]

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