European utility competition under observation – new report identifies continuing differences across markets
25 mars 2003
The competitive intensity within European electricity markets still varies significantly from one country to another according to the level of market openness, extent of cross border trading and the size of the largest generators, according to a new report from Cap Gemini Ernst & Young. The latest edition of the European Energy Markets Deregulation Observatory* shows that in some regions, i.e UK and Germany, the main players have not more than 25% market share, while in others (France, Belgium) the former monopolies still retain market shares above 90%.
The report shows that cross-border trading is not yet sufficient to create a single European market, with continuing differences in wholesale prices between neighbouring countries (e.g. Germany and France). Current interconnections were primarily designed to provide cross-border support for system security and reliability. Progress has been made in developing cross-border capacity auctions to allow greater trading access to the interconnectors. However, as the report explains, there are four different types of auction being used and for the most part, these still tend to favour the pre-existing long-term contracts. European organisations such as ETSO and EFET are trying to develop a more harmonised approach which could encourage a significant increase in trading between national markets, and also make clear where expansion of the interconnector capacities would be commercially viable.
The report also looks at the progress of deregulation within European energy markets and highlights that Germany and UK have the greatest volume of power open for competition on both the Industrial/Commercial and Residential markets. In light of the European Union’s recent major policy change regarding market liberalisation, all Industrial & Commercial markets must now be fully opened by 2004, with full retail competition by 2007. This will pose significant challenges for those Continental European countries where today’s market opening is still limited.
Bill Easton, Executive Consultant, Utilities Market Restructuring, Cap Gemini Ernst & Young commented: “The new targets for the liberalisation of markets are certainly demanding, especially for those countries which had not previously fully committed to the introduction of full retail competition. The key will be to learn lessons from those markets which are already open, and to start working towards these deadlines as early as possible, in order to minimise the risks and allow time for the new arrangements to be adequately tested.”
The survey highlights the impact of deregulation on price and shows that residential prices continue to fall in deregulated regions, particularly in newly deregulated markets such as Austria. In the UK, the NETA mechanisms have led to a decrease in electricity prices in wholesale and retail markets. However, the research also showed that market openness is not the only factor to affect price – many other parameters are also seen to impact prices, including supply/demand balance, generation fuel mix, and weather conditions.
The report also looks at renewable capabilities and finds that real progress has been very limited in this period (Apr-Oct ’02), emphasising the significant gap between the current position and the European Directive on Renewable Energy Sources targets. The recently published UK White Paper indicates that governments are beginning to take this issue seriously and similar developments could be seen in other European countries.
Other key findings of the report include:
- Customer mobility - End users churn is only weakly correlated to the level of market opening. it also depends on the number of years the clients have experienced this market opening – mobility takes time to develop, as customers must first come to understand the value and potential of switching suppliers. Other factors that impact on customer mobility include ease of switching. Customers can also benefit from competition without changing suppliers, with incumbents reducing prices.
- Physical infrastructure – Different cross-border transmission capacity allocation mechanisms have been experienced in order to improve the congestion constraints. However, ETSO and other European organisations are still looking for a unique, efficient and non-discriminatory mechanism.
- Organisation of markets – Despite Enron’s collapse, trading activities have continued, with an increased use of organised markets, such as NordPool, EEX and Powernext. These markets have, in turn, experienced an increase in liquidity.
Colette Lewiner, Senior Vice President & Global Leader of Energy, Utilities and Chemicals Practice, Cap Gemini Ernst & Young commented: “This report is based on data for the traditionally quiet summer period, but in fact emphasises how much is going on. The sheer volume of activity is evidence that the European utility industry is facing a number of significant challenges, that will only get more pressing as time goes on. We expect there to be increasing focus on cross-border trading and the differences between competitive intensity across national markets. Companies have already made major changes in response to deregulation, but the EEMDO report emphasises that they have a significant amount still to do.”
Notes for editors
*The report covers the period from April to October 2002.
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