Energy liberalisation and concentration in Europe

PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002

Energy liberalisation and concentration in Europe

By David HallPSIRU, University of Greenwich

October 2002(thanks to Anthony Froggatt for some charts)


Summary

• The companies• Dimensions of concentration• Market power• Employment and prices• Central and eastern Europe• Some conclusions


The oligopoly

3 leadersEDF/GDF FranceRWE GermanyEON Germany

OthersSuez-Tractebel FranceEndesa SpainEnel ItalyVattenfall SwedenGazprom Russia

Disappeared or leaving•UK companies –most taken over

•Fortum (Finland) – retreats to Scandinavia.

•Others not expanding: Portugal, Austria, Denmark Netherlands

•US companies –most gone or leaving Europe: Enron; NRG; Reliant; Southern; TXU; Entergy. •AES: leaving UK reviewing rest.


Company restructuring in electricity and gas• Concentration

– In each country; internationally; and across sectors• Strategies of defending home dominance, buy into other

countries/sectors– Political and economic means eg France, Germany

• German energy company mergers are central– RWE, E.ON affect all parts of Europe

• Elimination of competition is a key motive– Not competing for same customers

Germany electricity – liberalisation and concentration

Dec 2001 (est)

Eon26%

RWE24%Vattenfall+

15%

EdF+13%

Municipal16%

other6%

March 1999VEW6%

VEAG9%

Viag10%

Bewag3%

EdF4%

EnBW5%

HEW3%

NWS4%

Preussenelektra

14%

RWE19%

Municipal17%

Other6%

March 1999 Dec 2001

Source: Bower et al, Energy policy Oct 2001


Electricity in Germany – liberalisation and concentration

Dec 2001 (est)

Eon26%

RWE24%Vattenfall+

15%

EdF+13%

Municipal16%

other6%

March 1999VEW6%

VEAG9%

Viag10%

Bewag3%

EdF4%

EnBW5%

HEW3%

NWS4%

Preussenelektra

14%

RWE19%

Municipal17%

Other6%

March 1999 Dec 2001

Source: Bower et al, Energy policy Oct 2001


EdF/GdF (France) (state 100%)• EDF/GDF – 114,389

employees • Largest in Europe, state-

owend• Semi-integrated

electricity/gas operations• Active in Europe (UK,

Sweden, Switz, Hungary, Czech etc)

• Active worldwide (Brazil, Argentina, China, etc)


RWE (Germany) (priv)

• 154,000 employees, Euros 60 billion sales• 1= German electricity company• Europe no.3 in water (Thames Water), waste

management • (sold chemicals, telecomms)• New purchases Transgas (Czech), Innogy

(UK)


E.ON (Germany) (priv)• E.ON – 186,000 employees, Sales Euros 93 Billion.

• 1= German electricity company, formed in 2000 by merger of Bayernwerk/Preussenelektra (Veba/Viag)

• Europe: UK (Powergen 2001), Sweden (Sydkraft), Switzerland, Hungary, Czech republic, Latvia (gas), Russia

• Gas: buys Ruhrgas, 1/3 share in Slovak Gas


4 Dimensions of concentration

• Internationalisation– RWE, Eon, EdF spread into Scandinavia, Baltic, UK,

Switzerland, Austria, Italy, central Europe– gas and electricity takeovers in central Europe: Czech,

Slovak gas; Czech, Hungarian, Slovak distributors; Czech, Hungarian, Polish generators

• Vertical integration – eg UK, Sweden• Electricity and Gas combines

– Eg E.ON-Ruhrgas, Fortum, Tractebel, EdF/GdF– Also Italy - Enel and ENI crossover; UK multi-energy

suppliers – Centrica etc – and merged grids.• Multi-utilities – Suez, RWE, Eon, Vivendi


Electricity Market Shares in Western Europe 1998-2002

20 20 20 19 19

7 7 9 10 128 8

9 911

10 10 9 884 4 3 68

3 3 24

43 3 4

44

3 3 43

4

3 3 33

3

39 39 37 3427

0

10

20

30

40

50

60

70

80

90

100

1998 1999 2000 2001 2002*

OtherIberdrolaEndesaElectrobelNational PowerVattenfallENELEoNRWEEdF


Vertical (re)-integration

• Scandinavia (Norway, Sweden, Finland)– Vertical integration –

Vattenfall, Fortum buy distributors

• France– Vertically integrated state

monopoly (EdF)• Belgium

– Tractebel/Electrabel own stakes in distributors

• UK– Vertical re-integration of

generators and suppliers– British Energy, AES not

vertically integrated,crisis• Germany

– RWE, Eon dominate generation, transmission, and retail supply

•Eon CEO says vertical integration ‘essential’

Concentration of multi-utilities

Electr-icity

Gas Water Waste

Suez X X X X

RWE X X X X

Eon X X

EDF/GdF X X

Vivendi (x) X X


Some joint ventures

Country Operation Partner1 Partner2 Partner3

Belgium BASF Antwerp elec supply

RWE Tractebel

Switzerland Atel RWE EdF

Slovakia SPP (Slovak Gas)

Ruhrgas/Eon GdF Gazprom


Controlling the markets

• California – market gaming by 7 companies controlling 49% of generation

• Similar dangers in Europe– Sweden: Nordpool prices double in year,

Vattenfall raises prices 40% in 4 months– Spain: investigation into price surges– UK: retail household market does not reflect

fall in generation costs– Germany:corporate strategies to gain market

share, cut capacity, then raise prices


California crisis – prices and revenues


Power companies and political connections

Company Country InfluenceRWE, E.ON Germany Mergers allowed; finance

minister resigns over nuclear/tax issues;

EDF France State-owned industry

Gazprom Russia Connections with ministers and media

Enron USA Political donations, appointments


Not real competition…recent events in the UK

• Retail prices fall for business, not for households

• Crises of AES, British Energy, TXU– Only 10-15% of

electricity traded, rest is long-term tied

• System needs override market– Eg rush approval of

Eon purchase of TXU

• State subsidies and privileges remain– Eg UK subsidise

British Energy, • Expansion by merger,

not competitive entry– EdF, Eon, RWE buy

companies (and customers)

– Bad selling techniques• Difficult to manage

Some social effects of liberalisation

• Prices most affected by fuel costs, not liberalisation– Prices fall as much in 1990s in less liberalised markets

• Gains to business consumers: lower prices– No gains to domestic consumers: zero sum?

• Less easy to develop renewables, ‘green’ energy• Employment losses• Costs of competition - £730m (€1170m) in UK• Problems of instability, power cuts, price spikes

– Fines in Scandinavia, Spain: fear of California


Financial issues: Paying for energy

• Financial distortions:– to finance tax cuts (UK

model)– to reduce debts (eg Berlin)

• MNCs use local finance or World bank, not own capital

• Multinationals get guarantees from public sector – Power Purchase Agreements (PPAs)

• Public sector can raise finance

Turow IPP

MNCs World bank etc Local


Contradictions in privatisation in CEE• Keep integrated monopolies to maximise value of sale

– Czech republic re-integrates CEZ and distributors for sale• Privatisations can conflict with competition

– Eg Hungary, Croatia, Poland IPPs, also India, Dominican Republic

• Creation of regional markets or regional system– Trading may destabilise, not create synergies– Trading may cut capacity to maximise opportunities for profit– Cf Estonia/Latvia discuss merged state company (cf

privatisation to NRG)• Hungary: tensions between privatisation, prices,

employment, profits– Disputes over employment, pay – Legal action by companies to protect profits– Tensions over price rises


Colonisation or development?

• Colonial model– CEE energy just extends market for existing and future

energy companies from western EU – Liberalisation and privatisation open markets– Eliminate potential competitors eg Hungary MVM

fragmented and bought by competitors (=UK)• Development model

– Devloping fair and sustainable sytem– Envisage possibility of regional/subregional cooperation

• Long-term planning, social considerations allowed

– Avoid destabilising effects of trading


Some ways forward (WRI recommendations)

• reform to achieve public aims – Fairness, price, renewables, security

• finance to support public aims, not to lead– State holds risk: privatisation needs guarantees,

subsidies– Evaluate all options for raising finance– Avoid selling for highest price

• transparent, public debate and governance– Build social consensus before investors

• build reform on public benefits agenda– Eg user efficiency > social and environmental

gains • (eg Sofia public buildings)

– Evaluate security, cooperation


Level of Employment in EU Electricity Sector

0

100000

200000

300000

400000

500000

600000

700000

800000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

UKSwedenSpainPortugalItalyIrelandGermanyFranceFinlandDenmarkBelgium


Employment Levels in Czech and Hungarian Energy Sector

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1995 1996 1997 1998 1999 2000 2001

Czech Rep.Hungary


Investors into Energy Sector in Prospective EU Members

0

5

10

15

20

25

30

Edf/Gdf RWE Eon/Ruhrgas Vattenfall InternationalPower

Tractobel Gazprom

SloveniaSlovakiaPolandLithuaniaLatviaHungaryEstoniaCzech Republic

Energy liberalisation and concentration in Europe

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