Energy liberalisation and concentration in Europe

1. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 Energy liberalisation and concentration in Europe By David Hall PSIRU, University of Greenwich October 2002 (thanks to Anthony Froggatt for some charts)

2. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 Summary • The companies • Dimensions of concentration • Market power • Employment and prices • Central and eastern Europe • Some conclusions

3. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 The oligopoly 3 leaders • 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. Others

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

5. Germany electricity – liberalisation and concentration March 1999 Dec 2001 Source: Bower et al, Energy policy Oct 2001

6. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 Electricity in Germany – liberalisation and concentration March 1999 Dec 2001 Source: Bower et al, Energy policy Oct 2001

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

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

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

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

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

12. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 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 Vertical (re)-integration • Eon CEO says vertical integration ‘essential’

13. Concentration of multi-utilities

14. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 Some joint ventures

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

16. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 California crisis – prices and revenues

17. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 Power companies and political connections

18. PSIRU University of Greenwich www.psiru.org ESF Firenze November 2002 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 Not real competition…recent events in the UK

19. 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 Some social effects of liberalisation

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

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

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

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

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

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

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