The Liberalisation of the Continental European Electricity Market - Lessons Learned

Energy Studies Review

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EnergvStudics Review Vol, 14, No, 2, 2lili6 f!f! 1-29

The Liberalisation of the ContinentalEuropean Electricity Market -Lessons Learned

REINHARD HAAS, HANS AUER, JEAN-MICHEL GLACHANT, NENAD KESERIC,and YANNICK PEREZ

ABSTRACT

The liberalisation of the elec tricity mark et in Co nt inenta l Euro pestarted in the late 1990 ' s and is still ongoing. In th is paper, past developmentsin this mar ket are ana lysed and co nditions necessary to enhance co mpetitionin thi s market in the long run are deri ved.

Our major conc lusion is that at a minimum, the fo llowing conditionswou ld be necessary to bring about effective co mpe tition in the long run : (i)co mplete ownership sepa rati on of the transmi ssion gr id from ge neration andsupply in all coun tr ies and sub- ma rkets ; (ii) adequate ca pac ity margin inge ne ration; and (iii ) a suffic iently large number of ge nerato rs sharing th iscap acity. As it is not likely that these co nditions will be fulfil led , thepro spects for a vibrant competition in Co ntinenta l Euro pe are doubt ful.

An earlier vers ion of thi s paper was presented at the zs" Annual IAEE Wo rldConference in Taipei in .June 2005.

Corresponding author: Reinhard Haas. Energ y Economics Group . ViennaUniversity of Technology , Gusshausstrasse 25-29/3 73-2, A- I040 Vienna, AUSTRIA.Tel .++43-1-58801-37352 Fax.++43-1-58801-37397,E- II /(/ iI :Reinh ard Haas. Hans Auer and Nenad Keseric are with the Energy EconomicsGroup. Vienna University of Technology. AustriaJean -Michel Glachant and Yannick Perez are with the ADIS-Groupe Resea ux Jean-Monnet, University Paris-Sud 11.

Haas et al.: The Liberalisation of the Continental European Electricity Market

Produced by The Berkeley Electronic Press, 2006

2 Energ v Studies Review Vol, 14, No, 2,

INTRODUCTION

The liberalisation of the electric ity market in Continenta l Europestar ted in the late 1990 's and is still ongoing . With the exception of Spain,which init iated an electricity pool in 1997, this process was triggered by the"Directive for a common elec tricity market" issued by the Europea nCommiss ion (EC) in 1996. The major mot ivation for this direct ive was theEC's beli ef that liberalization, price deregul ation and pr ivatization willdirectly lead to competition in generation as well as supply, resul ting in lowerprices throughout Europe.

The intention of the EC was and still is the crea tion of one commonEuropea n electric ity market. Curre ntly, th is area consists of at least sevendist inct sub-markets separated by partl y insu fficient transmi ssion capac ity anddi fferences in access conditions to the grid (Fi g.T .).

EUROPEAN ELECTRICITY SUB-MARKETS

IEurope I

'I. UK <111(111 eland2. Nordi c countnes3. lher i<111 Ill ... kef-t. h.lly5. Weste l ll ElIIol le6. E<1S1elll ElII ope7. South. Easte rnEurope

Figure 1. Electricity sub-markets in Europe in 2005

The objective of this paper is to ana lyze the evolution of the Continenta lEuropea n electric ity markets and discuss future development s with respec t tocompetition (See former treatm ent s in Glachant & Finon (2003) , Jamasb &Poll itt (2005 ), as well as the spec ial issue of the Energy JOI/I'/Io / (2005». Thepaper covers most of what is currently ca lled "Continenta l Europe" (CE)I. Itis organized as follows: Sectio n 2 prov ides some background informationwith major data on electricity supply and demand in the CE markets. Section3 describes EC and national governments' market liberal izat ion initiatives and

I Austria. Belgium, Czec h Republic. France . German y. Hungary. Italy. Luxemburg . TheNetherlands. Poland. Portugal. Slovakia. Slovenia. Spain. and Switzerland. For a list ofthe country acronyms see Tabl e A-2 in the appendix.

Energy Studies Review, Vol. 14 [2006], Iss. 2, Art. 3

http://digitalcommons.mcmaster.ca/esr/vol14/iss2/3

l laas. Auer. Keseric. Glachant & Perez 3

the major cha nges country by co untry. Sec tion 4 discusses the evo lut ion ofthe market s co rres ponding to the gov ernme nts' in itiati ves and the market ' sremaining problem s, foll owed by co nclusions in Sec tio n 5.

BACKGROUND

Before 1990, almos t every e lectricity supply indu stry in Continenta lEuro pe was vertica lly integrated with a captive franchise market, either state-own ed (the majority case) or und er price-regul ated mixed private/publicownership (in Belgium, Germ any and Switze rland). Regul ated areamonopolies preva iled in a ll countries.

Yet , ownersh ip structures and the degree of ver tica l integration werequit e di fferen t among the countries .

• In France , Italy, Portugal , the former Cze ch-S lova k Republic, Poland,Hun gary and Slo venia, a strong stat e-owned verti cally integratedmonopoly dominated the ES I. Thi s centralized structure typi cally led to asing le dominant player, such as Electricite de France;

• In Spa in and Switze rland, vert ica l integ rat ion was strong but with ahandful of companies;

• In Germany there we re about ten generators integrated w ith transmissionbut only parti ally integrated with supply (retail).

• In Austria there was one large genera tor integrated with transmission andabout 14 reg ional suppliers fu lly integrated with distribution.

• In the Ne the rlands there was an upward vertica l integration by thedistribution companies contro lling the grid and the generators;

• In Belgium, most of the power sector has been private for decades. Theprivate generator Elec trabe l is superv ised and contro lled by a mothercompany Tractebel linked to the gas monop oly Distrigas;

• Belgium, Germany, Spai n, and Swi tze rland we re the only countr ies in themid- 1990 's where pr ivate ow ners hip amo ng gene rators prevailed(tempered in Germany and Switze rland by the local public own ership ofdistribution and supply, and the form er "State enterprise" natur e ofEndes a in Spa in). Thi s contrasted with the state-owned enterpr ises inFrance, Italy, Portugal, and the remaining Centra l and Eastern countries.

DEVELOPMENT OF DEMAND AND SUPPLY

Total demand was approxima tely 2300 TWh in the CE area in 2004.Currently, the largest elec tricity markets are in Germany, Fra nce , Italy, andSpa in. The highest per ca pita demand is in Luxem burg, Belgium and

4 Energy Studies Review Vol. / 4. No. 2.

Swit zerl and . Th e lowest per capita demand is in Poland , Hungary, Portugal,and Slovakia. Demand growth per year is strongest in Spa in (+5.0%),Portugal (+4 .9%), and Austria (+3 .1%). In Poland and Germany demandincreased only by about 1%. In all CE, electricity consumption grew from 1%to 3% per yea r between 1999 and 2004. Detail s are depicted in Fig . 2.

Growth of electricity demand in CE10%

,.- - - Maximum /",8% ,. - , /-,.- <, / .... ,,,; <, / ......6% """'!t___-_--

4%Averaqe -

2% --- - -- - -

'i:' /'.?:' 0% -2.... 1998 1999 _ 2OQ.0 2001 2003 ' <.,004

-2% - ... ,./ -, ,,;

Minimum,,,;-4% L

/-6% - I - -

/-8% ,-I

Figure 2. Growth of e lectr ic ity demand in CE countries 1998-2004

GENERATION CAPACITY AND LOAD

Capac ity margin is di fferent among countr ies as can be see n from Fig.13. However not all gross capac ity is ava ilable for genera tion. Thi s isespeci ally true for hydro capacit y (Austria, Spa in) and old fossi l plants (It aly) .E.g. Italy, Austria and The Netherlands wh ich are net importers of energy alsoexhibit such an apparent exc ess capacity margin.

Figure 3 depicts the evolution of gross generation capacit y over the last10 yea rs in CEoThe growth in capacity is mainly from wind power and fossilpower plant s.

l laas. Aucr. Keseric. Glachant & Perez 5

450000400000350000

5 300000625000020000015000010000050000

o+. --...,-----"T---,------,--....,----;---.---r---j

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004o f-o/dro iii N.x:lear 0 Thermal coov, (J Other reneNables(wird .. .)

Figure 3. Evolution of generation capac ity in CE 1995- 2004(Source: UCTE. national reports)

IMPORTS AND EXPORTS

In 2004, the total amount of e lectricity exchanged between CE countriesstood at about 300 TWh. Thi s is equa l to about 13 % of consumption and isfrequently limited by the constrained cross-border transmission capac ity .Figure 4 and Fig. 5 show the physicaf electricity exchange between CEcountries. France is the biggest net exporter amon g CE countries wit h netexports of almost 67 TWh followed by Czech Republic and Poland. Themajor importing countries are Ita ly with 51 TWh follow ed by TheNe therlands and Hun gary with 17 TWh and 7 TWh respecti vely.

C So me of these flows are not due to co ntrac ts between countries but result fro m loop flows(e.g, from Germ any to Po land to Czech Rep ublic back to Germany)

6 Energy Studies Review Vol. 14, No.1,

---_ ._----.Net Imports

:;:3:: 50t:.40

01998 1999 2000 200 1

Austna

2002 2003 2004

Oklstria

• Spain

n Luxe rrtJourg

II Portugal

M Switze rland

Hungary

10] Germany

o Belgium

Figure 4. Evolution of net impo rts in CE over the period 1998-2004(Source: VC TE (1005)

Net Exports110

100D Austria

90• Switzerland

80Slovenia

70II Slovakia

60Gerrmny

50.; Belgium

\." Poland30

o Czech Rep .20

n France10

01998 1999 2000 2001 2002 2003 2004

Figure 5. Evolution of net import s in CE over the period 1998-2004(Source: VCTE (l005)

l laas. Aller. Keseric. G/ac//(/1I1& Perez 7

PAST AND CU R R ENT ISSUES OF TRANSMI SSION

The bulk of the transmission and distribution networks in Europehave been built prior to the introduction of market liberalization,between 1950 and 1990, with few addit ions in recent years.

MAXIMUM PERCENT USE OF TRANSMISSION CAPACITY

SLO - IT

SK - HU

Cl - DE

AT - IT

GH -IT

FR - DE

FR -IT

0% 50% 100%%/yea r

150% 200%

Figure 6. Majo r bottlenecks in CE transmission gr ids measuredas a percentage of use of transmission capac ity per yearin 2004(Source: uctt: (2005).

Figure 6 presents the highest percentages of Net Transfer Capaci ty(NTC) used in 2004 between CE countries . Due to the operating complexityof a European meshed network, commercial capacity and physical capacitydiffer. Hence, the interconnecti on capac ity is defin ed by ETS O as "NTC".The most congested lines are between Italy' and its neighbouring countries,

Th e values substantia lly exc eeding 100 % in Figure 6 require furt he r explanat ion: thetransmi ssion capacit y is the NTC defin ed by the UCT E. How ever the actu al thermalcapaci ty (th e real physica l ca pac ity ) of the line is higher. Yet, it depend s on thecharacteristics of the material and the ambient tem perature (i .e. season). For instance it ishigher in wi nter and lower in summer. Thi s leads to possible numbers higher than 100%as exhibi ted in Fig. 6.

8 Energy Studies Review 1'01, 14. No. 2.

and between Spain and Portuga l. But next are already the borders betweenGermany, Austria and the Czech Republic .

In pri nc iple , the conges ted lines need a spec ial mechani sm to bemanaged in an economic way (see Section 4). Th e ex isting CE network wasbuilt to guarantee a good level of technical reliability and to give some roomfor managing peak load problems. Now it is supposed to be used more in aneconomic way, und er opt imisation processe s of scarce capacity, and toproduce price convergenc e in a single European mark et perspective.

POLITICAL ISSUES OF RESTRUCTURING

The restructuring of the CE electricity market was mainly triggered bythe EU dire cti ve on 'Common Rules f or the Internal Market in Electricity'which came into force in February 1999 . The major obj ect ive was to create acommon European elect ricity market , EC (1997).The major issues dealt withby this Directive (o fficiall y named 96/92) were:

• Min imal requirements for unbundling of genera tion andtransmission:

• Minimal market opening, expressed by the consumption size o f the"eligible customers":

• Di fferent approac hes for access to the grid (negotiated or regul ated,third party access (TPA) or Single Buyer).

However each national gove rnment within the EU had to " transpose" theEU Directive into national law and national rules. An overview on the majormil estones of reforming the electricity sector in CE is provided in Table I.

In practice, the major area of action within the European liberalizationproj ect was "prov iding access to the market" . Far less attention was paid tothe issues of restructuring generation & supply and designing marketplaces aswell as ensur ing adequate ge nera tion and transmission capacity. Independentenergy regulators were introduced in all countr ies exce pt Germany andSwitzerland. Environment al issues were also treat ed very prominentl y .

However , as ide from minimal unbundling, the restructuring of utili tiesand the design of market places was not tackl ed comprehensively by thegovernments in most countries (few exceptions: Spain created a centra lizedpool , Italy divested ge neration capac ities).

Haas. Alle r . Keseric. Glacliant & /' £'I"£'2 9

Table 1. Restructur ing milestones in Continenta l Eur ope

February1997

EU- 15

European Council of Energy Ministers and Parliamentreached agreement on a market liberalisation directive

This "Directive concerning COIll Il IOII rules [ or III£' interna lmarket ill elec trici ty" (Directive 96 /92 /EC ) became validwhile waiting up to two more years for its transposition bycountries

1998 Spain

1998 Poland

1998 Gcrrnanv

February EU- 151999

Introduction of a Spanish centralised pool

Introduction ofT PA (market opening: 22%,)

100% market opening in one step

Directive went into force after a 2 years transposition delay:Market opening due the directive in Austria. Belgium.France. Italy. Spain. Portugal and The Netherlands between30% and 35%

Austria

EU- 15

EU15+ 10

Portugal.Thc Netherlands

100% market opening (in a second step)

Approval of the "D irective oft he European Parl iament andIII£' Council 0 11 III£' promotion of electricity FOIII renewableenergy sources i ll III £' interna l electricity market (RES-EDirective)" (European Parliament and Council. 200 I -Directive 200 1177/EC)

Approval of the "Directive concerning common rulesfor 1111'internal market in elec tricity (officially Direct ive 2003/54 :usuallv named "the Second Directive" )

100% market opening

Extension of the EU to 25 member countries, new CEmember countries to open their market with 30 % minimum

Electricity Directive 2003/54 due to be transposed bymember states:

All non domestic customers made eligible in the EU in July2004

An EU Regulation on cross-border electricity trade cameinto effect (Regulation 1228/2003) in July 2004

100'% market opening

Due to Electricity Directive 2003/54 , 100 % market openingin all EU-25 countries in Julv 2007

10 Energy' Studies Review Vol, 14, No, 2,

Table 2. Types of unbundl ing of Transmission System Operators (TSO) andaccess to the grid in CE (as of 3 Ist December 2004* )

Country

Austria

UnbundlingTSO+)

Legal (APG):Management(TI\VAG. VKW)

APG (90%).TIWAG(6%).VKW(4%)

Ownership

100 'Yo public.100 % public.51% publ ic

Access to th e gr id 2004

Legal (2005: 100%, ElectrabclBelgium Ell A (2005: 100% rTPAOwnership) floated)Czech Legal CEPS (5 1% CEl. 49% rTPARepublic publ ic)France Legal RTE 100% EdF rTPA

R\VE Netz. 100% R\VEE-ON-Net. 100%, E.ON

Germany Legal EnBW- ct. 100% EnB\V nTPAVattenfall 100% VattenfallTransmission Europc

Hungary Legal MAV IR 100 %, public. rTPA

rTPA ...eligible customersItaly Ownership GRTN 100% public SB(rTPA)...captive

customersEllA (BE) 100% EllALuxembourg Management R\VE-Nctz 100% R\VE rTPA(DE)

Netherlands Ownership TcnncT 100% public rTPAPSE (Polskic

Poland Legal Sicc i 100% public rTPAElcktrocnergetycznc S,A. )

rTPA ...eligible customersPortugal Ownership REN 100% public SB(rT PA)...captive

customersSlovenia Ownership ELES ( 100% public) rTPASlovakia Legal SEPS rTPASpain Ownership REE 100% public rTPA

Regional

Switzerland No vertic ally Nointegratedcompanies

(Source: CEC (2004), cOlIIlH IIIY reports, POI I'er in Europe and the author ',I' investiga tions)

") rTPA...regulated third party access. nTPA...negotiated third party access, SB...Single Buyermodel). Source: CEC 2005") Legal. .. legal separation of transmission and generation

Haas, Auer, Keseric. Glacliant & Perez II

PROVIDING NON-DISCRIMINATORY ACCESS TO THE MARKETAND TO THE GRID

Th e first important requirem ent for a co mpe titive electric ity mark et isnon-discriminatory access to the grid. Th erefore a prerequ isite for co mpetitionis the unbund ling of gen eration and supply from transmi ssion . This meanstha t access to transmission and distribut ion should be offered to all marketpart icip ants at reasonable and non -di scr iminatory prices.

So far the ex pe riences with respec t to unbundling between ge nerationand transm ission in CE are diverse. In Belgium , Spa in, Portugal and Italy,unb undl ing of ge neration and tran smissio n by ow nership was achieved eitherby fu ll independence of the transmi ssion company or by flotation of atra ns mission subs id iary. In othe r countries, espec ially in Germany and France,only legal unbundling took place . In Switzerla nd, so far unbundl ing was onlydone by means of inte rna l managem ent mea sures . No structura l gua ranteeex ist for avoidi ng discrimination in access to the gr id, particular ly as noindependent regul ator can monitor the behavior of the grid managers.

Ta ble 2 pro vides the curre nt sta tus of unbundling. Th e second issue is theregi me of access to the gri d. Ta ble 2 shows access to the transmiss ion gri d invarious Western European countr ies (CEC (2005)). Access to the grid wasreg ulated in a ll co untries except Germany w here it was introduced in June2005 .

MARKET OPENING100

90 - - -- - -

..-, '! iii[]2005-80 I- F- I- - II I-

.2e ! 0 2003

01 70 - - - - I- - I- 0 2001 -.!: ,ft . 1999e 60 ·i 1- -

'------Ql - - - - -c. ),0

-Qi 50 §'- - - -

£i- -

"" OJ.. CI1lE 40 - - .- - - - - - - -., - - - - - - - c:? Q). C.

30 - - - - r:c - 0

I.i OJ20 - -- - - - - I;? -=ro

E10 - - - - - - - - - I- - - - - - 0c.0

DE AT ES NL PO BE PL IT SL FR HU SK LU CZ CH

Figure 7. Elect ricity market opening in CE co untries. Source: EC.

/2 Energy Studies Review Vol. / 4. No, 2.

The third issue is market op en ing. The different market op enin gs, inlocation and in time, have led to some distortions regarding free choice ofsupplier. Fig. 7 depicts the opening of the market in differ ent EU membercountries from 1999 to 2005. Some countries like Germany, The Ne ther lands,Spai n, Portugal and Austria have legall y fully op ened the ir market whi leothers like France, Luxem burg, and Cze ch Republ ic have only partiallyopened their markets. In Sw itzerla nd (which is not member of the EU) there iscur rently no competition in supply.

THE NEW INSTITUTIONAL AND REGULATORY ENVIRONMENT

In all countries, except Ge rmany and Switze rland, independ entregul atory authorities have been created. Th eir powers vary wide ly from onecountry to another but their common core tasks are:

• to en sure that unbundling is achi eved ;• to regul ate access to the grid; and• to regul ate tari ffs for the use of the tran sm ission & distribut ion

grid.In pract ice, the cur rent Euro pean regul atory governance consists of a

decentralized framework at the nati onal level and an incomplete pro cess ofconve rgence across countries. Countries-l established nationally-ba sedregulatory authorities administe red by nati onals. Th ey regulate acc ess to thenational TSO's gri d and operating sys tem. A ll thi s is done within the laws ofthe country and with reco urse to its courts, while the European Directives andRegul at ion s provide only a broad common frame. However the EuropeanCommission or the Europea n Cour t of Justice can intervene on a case by casebasi s.

THE PROMOTION OF RENEWABLES

Currently, the promotion of electr icity from renewable energy sources(RES-E ) plays an important role in the energy policy of the EU. Th e majo rpoli cy reasons are: (i) reducing the dependence on energy imports; (ii)reducing greenhouse gas emissions . To meet this target the EU has defin edambitious obj ecti ves whi ch we re form ali zed in the "Directive of the EuropeanParliament and the Council on the promotio n of electricity Fall/ renewableenerg y sou rces in the internal electricity market (RES-E Di recti ve)" (EC2000) . As a result of th is directi ve, RES-E genera tion should reach a totalshare of 22% of electric produ ction in 20 I0 from a level of 12%) in 1998 (EC,2000).

-I Except Germany and Swi tzerland .

Haas, Auer. Keseric. Glachant & Perez 13

COMPARISON OF DEVELOPMENTS BY COUNTRY

Th e development s towards co mpe tition in the countries and sub-ma rke tsso far were quite different as can be see n from Tabl e 3,

Table 3. Differences in re forming and market design in va rio us CE CountriesProcess of Cent ra l- Vo luutary Futures Privati- Divest me nt Takeover.market ized Day market atio n of ' Jergeropening pool Ahead pr ocess rarion within thc

Exchange capacity country

AT Fast No YES No Moderate No Under(EXAA) discussion

BE Slow No No No *) No No

CZ Moderate No Yes No No No No(2004 )

DE Very fast No YES Yes *) No YES. halfelectricitygenerationplus Ruhruas

FR Slow No Yes No No No YES, 2fringegenerators

H Moderate No No No Moderate No NoUIT Slow No Yes No Yes Yes YES, mainly

(since abroad20( 4 ) (ENEL in SK)

LU Slow No No No No No No

NL Moderate No Yes No Yes No YES. mainly(APX) from abroad

PL Fast No Yes No Moderate Yes Moderate

PO Moderate No No No Yes, Moderatemoderate abroad

SK Moderate No No No Yes No No

SL Mode rate No Yes No Moderate Moderate No(2003)

ES Moderate Yes No No *) No No

CH No No No No *) No No

14 Energ y Studies Review Vol. 14. No. 2.

Major differences between the countries refer to:* Market openin g (see also Fig. 7): differs between 1999 (Germany) and

probably 200 7;* Introduction of centralised pools (only in Spain) , spot market s

(Germany, Austria, The Netherlands, Poland , Sloven ia, Italy, CzechRepublic), futures market (only in Germany) ;

* Privat isat ion (most aggressively pursued in Italy, The Netherlands andSlovakia);

* Dives tment of capacities (Conducted only in Ita ly and Po land)Mergers and takeover s: main ly in Germany and cro ss-border takeovers

and share purchases (of EdF, E-ON, ENEL, ELECTRABEL, RWE).

THE PERFORMANCE OF THE MARKETS

Today, the EC has success fu lly initiated an ambitious project forbuilding a new electricity market. But there are no guarantees that thedynamics of this con struction will not dis sipate, as in the United States, orthat the inte rna l market wi ll not remain fractured in "nationa l or loca l blocks"which may persist for a long time (G lachant & Leveque 2005; Glachant &Finon 2005). Moreover, as has been argued by (Haas et al (199 7) andHaa s/Auer (200 I», the expec tation of lasting competition in a " free" marketis based on ve ry simplified assumptions on the strateg ic behavio r of electric itygenerators and network operators. Similarly we note the caveats expressed byBanks (1996) C'the market is a wandel/it! thing and it should be exp loited asfar as possible but it also has its limits") and Newbery (2002) that are basedon the exp erienc es in the UK and the No rdic market (Norway, Sweden. .. ).

Currently, the major obstacle for Europ ean common market(s) is ageneral lack of competition in vir tua lly all local and national who lesa le aswe ll as retail electricity mark ets because the number of competitors is toolow , or because barriers to entry and incentives to collude remain too high.Th ese aspects are reinforced by (at least) two others: 10 insufficienttran smi ssion capacity avail able between the submarkets, and 20 increasinghorizontal integration with natural gas supply.

Hence, the paramount object ive is still to construct competitive marketswhile - at the same time - ensuring a reasonable level of grid reliability andsupply adequacy.

ACCESS TO THE MARKET

There are three major prioriti es for improving access to the CE gr id:

Haas. Auer. Keseric. G/ac//(IIII & Perc: /5

i) regulate the TP A. Pfaffenb erger et al (2004) emphas ize this issue,especia lly for Germany which has so far not regulated access to thetra nsmiss ion grid:

ii) ob ta in non-di scriminatory, open, and competinve balancingarrange ments. Balanc ing arrange ments must not handicap the arri valof new entrants or ex isting ope rators that are not vertica lly integrated,and they should be open to all potential competitive sources of supply(Glac hant & Leveque 2005).

iii) harmonize national tran sm ission access pricing schemes and crossborde r pric ing . Th is would contribute to lower tran saction costs ininternat ional co mpet ition.

MERGERS, TAKEOVERS AND MARKET CONCENTRATION

For effective competition, a large number of companies are needed. Noother model has so far been successful. This was proven clearl y by theexa mple of Eng land & Wa les where the numb er of ge nerators was increasedseveral times by the regulatory aut hority (as we ll as by investors, notably theregional distribution & supply co mpa nies , the RECs). The "me rger- mania" inCE after the start of liberalizati on indic ates that the major strategy of thebigge r incumbent ut ilities is to compete by mergin g to purchase marketshare s.

In many Eastern Euro pean countries, nation al companies have been so ldto strateg ic investors from abroa d, with EdF, E.On, RW E, Electrabel andVattenfall all bein g particul arly active. In reac tion, some countries , like CzechRepublic , Slovakia & Slovenia have chosen to retain national champions.Th ese nation al champio ns have the size to stay alive alongside the largerEuro pean groups with unfortunate con sequ ences for the level of co mpe titionwit hin their res pec tive national markets and for the globa l Europeancompetitive ga me. The vested interests of the dominant incumbents in thereg ion would enco urage them to fight against greater compe tition pu shed byfurth er refo rms .

With res pect to market shares in CE , in 1998 ten generators owned 60%of the generatio n capac ity wh ile in 2002 th is share was co ncentra ted in sixgenerators (see Codognet et al (2005)). Thomas (2003) suspec ts that in theend only "seven brothers" will rem ain as large generato rs within Euro pe. Ofparticular co ncern with respect to co mpetitio n is the situa tio n in Centra lEurope (France , Germany, BeNelux , Austria) . The concentration process inthe electric ity ge neration market was espec ially fulminous in Germany. Mez(2003) provides an impress ing and detailed descr iption of this process. Adifferent but converging picture is described in Finon (2003) . He portrayshow a domi nan t player like EdF in France can benefit from liberal izat ion by

16 Energ y St udies Review Vol. 14. No. 2.

exerting market power in the home mar ket while at the same time anagg ressive acquisition poli cy is pursued abroad. Verbruggen et al ( 999)show the same for the Elec trabe l - Distrigas group in Belgium.

As can be see n from Fig. 8, from the 13 largest ge nerato rs which ex istedin 1999 - the year liberal izati on sta rted - in CE five years late r only 9remained . Now in Conti nen tal Europe, seven large conce rns dominate themarket : EdF-EnBW, RWE, E.ON, Va ttenfa ll, Endesa, ENEL, and Electrabe l(Haas et al 2002). Anothe r interesting fact is that in the rank ing of the largestge nerators public ownership prevails.

Largest ContinentalEuropean

generators 2005

Endesa

lberdrol a

Electrabel

Largest ContinentalEuropean

generators 1999

Vattenfall EU .......ENELRWE. _ RWEENEL E-GN

EdF EdF/EnBW

Endesa

Iberdrola

Electrabel

Bayernwerk JIII_ll--=- ---J

Vattenfall

PreussenElektra

100 200 300 400 500TWh

100 200 300TWh

9 ,•Figure 8: Largest Continenta l Euro pea n Elect ric ity Ge nerators in

1999 & 2005 . (Source: authors' Ol l"l/ investigations)

Table 4 depicts the curre nt market struct ure in CE countries. In mostcountries, market structure is highly probl emat ic pa rticularly when thenat ional grid is poo rly co nnec ted with adjace nt markets and the importpotential is limi ted.

Haas. I III<'/". Kescric. Glach ant & Perez 17

Table 4. Market shares of largest generators in various count ries 2004(Source: cOIl/pam ' r ep0rls. Power in Europe. personal in formation }

T hree ImportLargest largest

purcntlul Lar 21ld largest 3rtl largest .tIll largest(%)

(%)rrwn , gene rator generator generator generator% )

AT 53 76 VERBUND T IWAG ( 13%. W IENST EStAG37.7 (53%. 29.8 6.7 TWh) Rm.t (9%•. 5.0(73%) TWh) ( 10%.5 .8 TWh)

TWh )BE 85 94 40.3 ELECTRABE SPE (9%. 8

(46%) L (85%. 75 TWh)TWh)

CZ 73 82 30.7 CEZ (73%) Prazska Energotra Dalkia

(50%,) tep larc nska ns(4%1) (3'%)(5IYo)

DE 34 71 122.6 RWE (34%) E-ON (23%) Vattenfall EnBW(28%) ( 14°;',) (10%)

FR 89 94 106.9 EdF (89%. CNR (3'%. 16 SNET

( 19% ) 487 TWh) TWh ) (2%.9TWh )

H 46 65 27.2 i\ IVivi (46%)U (71%)IT 46 65 52.6 ENEL (46%. Edison ( 12%. Edipower Endesa

( 16%) 165 TWh) 20 TWh) (7%. 10 (6%.5TWh) TWh)

LU 65 90 8.8 Ccgede l Sotel (25%,)( 139%)

NL 25 80 Eleetrabel- ESSENT NUON E-ON4 1.2 Ned ( 17.9 (14 .65 TWh) ( 14.5 Benelux(37'YcJ) TWh) TWh) (9.9

TWh)I'L 30 52 30.7 BOT (30%) I'KE (13%) Kozienice PAK

(21%) (9%) (9% )

PO 65 80 8.8 SEI' SENV( 19%)

SK 84 89 26.3 Slovenske I'I'C ( 3.5 % ) TE KO

( 101%) Elektrarne (26 (1.4 % )TWh . 84%)

SL 54 98 18.4 HSE (7.1 ELES /GEN TET (0.6

( 150%) TWh.54%) (5.2 TWh. TWh.5% )39% )

ES 39 78 19.3 Endesa (39%) Iberdrola Union Hid rocant

(8%) (28%) Fenosa abrico( 11%) (7%)

CH 26 53 74.9 NOK (25%. BKW(15%. ATEL EWZ

(137% ) 15.9 TWh) 9.4 TWh) ( 13%. 8.3 (7%. 4.3TWh) TWh)

18 Energy Silldies Review Vol. 14, No. 2.

Of course , an easy so lution with respec t to the number of generators ineac h relevant market would be to have more generators and some divestmen t.Yet, with some minor exceptions (Spain, Italy) current ly the re are no signs inany country pointing in this direction.

Anot her issue is that privatization is often see n as more important thanca refully designin g the compe tition mechani sm s. However, as Newbery( 1998) asserted for Eng land, "co mpe tition rather than privatization is thesource 0/ the benefits". And und er competitive pressure, public utilit iesperformed reasonably in the Nordic count ries.

Of particular relevance in th is context is the ownership future of EdF.For years the privatization of EdF has been under discussion and a publicshare offering was held in the Fa ll of 2005. However , given the limitednumber of generators engaged in this market it is unli kely that a part ialpr ivatization of EdF would add much to the Fren ch "fringe competition"(G lachant & Finon 2005) .

WHOLESALE ELECTRICITY PRICE EVOLUTION

Of greater interes t is how electricity prices developed afte r restructuring.Figure 9 depicts the pri ce evolution in CE in 1999-2004. Wi th the exceptionof Italy in 2004 there was some conve rgence of who lesa le electricity spotmarket pr ices. Moreover, whi le volati lity in 2002 and 2003 was rather high itmoderated dur ing 2004. In the first half of 2005, prices in Western marketsincreased, while prices in Poland remained on the level of 2004.

From Fig . 9 we derived the following effec ts:

(i) In Weste rn Europe prices increased relative to the start ofliberalizat ion;

(i i) the price level is highest in areas where capacity margin issma ller and cross-bo rder transmiss ion capacity congested (Italy,The Ne therlands) ;

(iii) prices have been highest in yea rs with low hydro or low nuclearava ilability ;

(iv) however wholesale prices go up and are converging to the topin markets connected by sufficient transmission capacity.

llaas . :/lIer , Keseric , Glacliant & Perez 19

90 90 ,--- - - - - - - - - - - - - ---,

o00 00 00 M 00 00 00 M M 0

Figure 9. Evolution of electricity prices in CE 1999-2005(Source : Homepagcs ofthe power exch anges)

Therefore a maj or question for furt her investigations is, whether thesepric es are a compe titive out come. Th at is to say, wh eth er these prices dorefl ect the marginal costs of the ge nerat ion set or whethe r they are increasedby some kind of market power.

RETAIL ELECTRICITY PRICE EVOLUTION

T he major expectation of final cu stomers with respect to theliberal ization of e lec tr icit y markets was that prices would drop substantially.Fig ures 10 and 11 dep ict the price ev olution in CE from 1995 to 2004 forhouseholds and large indu strial cus tomers. As ca n be see n from Fig. 11, largeelec tricity users were see ing - at least temporari ly - lower prices. Ye t as Fig.10 shows, househo lds elec tricity prices in 2004 we re already at the same levelas before liberali zati on started or even higher. With the exception of Polandsince 2003 (and for most co untries eve n earlier), prices start ed to increase.Moreover , neither for ho useho lds nor for industrial cus to mers was thereco nverge nce in prices, whic h was one of the expectations for a co mmo nEuropea n market.

20 En ergy Studies Review Vol. 14. No. 2.

HOUSEHOLD ELECTRICITY PRICES (EXCL. TAXES)16

...lI'.14

----12

10 • • ---. -- -• • •• • ...

.<: 8s ?"'"U6 -- -

4 -- - -- -

I -m-cz - DE _ FR ..... IT -.!I- PL I0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 10. Evo lution of households ' e lectricity prices in some CE excl. taxe s((Source: CEC (2004). CEC (2005). based 0 11 EUIWS7il T Dc.

average electricity consumption: 3500 kWh),"')'")Notc that the situation for Italy is specific. Averagc con sump tion is lower than 3500 kWhlyrand e lectrici ty prices for lower consumption are significantly lower (about 40'X,).

INDUSTRY ELECTRICITY PRICES (EXCL. TAXES)

8 '1- - - - - - - - - - - - - - - - - - - - - - - - - - 1

-- • ..

4 -- - _ ;:s: _3 '1 - - - - - - - - - - - - - - - - - - - - - - - - - -1 1

..... IT-DE2 nJ -m- cz1 T'-- --- - - - - - - - - - - - - - - - - --- - --'1 1

o -!-,1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

F igu re 11. Evo lut ion of large industrial customers' elec trici ty pricesin some CE countries exc l. taxes(Source: CEC (2004). CEC (2005), based 0 11 EUROSTAT Ig,average electricity consumption: 24 CIJ'h),

llaas. Aller , Kcseric. Glachaut & Perez l I

Fig. 12 shows the typica l patt ern of pric e deve lopm ent afterliberalization. After liberali za tion is annou nced price s drop . But soon after themark et has sett led suppliers sta rt to increase prices aga in.

DEVELOPMENT OF ELECTRICITY PRICES IN L1BERALISEDMARKETS

AnnouncementHistorical of competition:;t area confusion andmonopolies prices drop--......-..... Demand

increases

Market powerincreases

Continental Europe2005

Settlement,Competition

Figure 12.Time

Typic al price development in a liberal ised mark et withnon -regul ated final custome r prices(Source: l laas 1'1 a l (2000) . l laas/Auer (l OOI))

PERSPECTIVES FOR ADEQUACY , RELIABILITY AND SECURITYOF SUPPLY: GENERATION AND TRANSMISSION CAPACITY

As in many electricity market s that have bee n libe ra lized, most CE countriesstart ed liberalization with significa nt exc ess genera tion capac ity - bui ld up inthe time of regul ated area mon op olies. Thi s was a co mmo n moti vation anddriver for introducing co mpetitio n. Yet , excess capac ity in ge neratio n plays acore role in the restruct ur ing proc ess of an ESI. With exc ess cap ac ity ingene ration - whic h also depends on transmi ssio n capacity - if utilitiescompete the price they rec eive for elec tricity will be equal to their short termmargin al cost. Under per fect compe tition without rem arkable exc esscapac ities , the price will be equa l to the long-run margin al costs (LRMC). Butif there is no compe tit ion, or capacity is too tight , the price can besubstantially high er than both margin a l costs especially wh en dem and isinelastic to pr ice.

Energy Studies Review Vol. 14. No. 2.

Fig. 13 depicts the current ly looming de ve lopments of load and ge ne rationcapac ity'. In recen t years spare capacity decreased co nti nuous ly in CE sub-markets (spare capaci ty = net capac ity minus maximum load ). This picture isnot the same in various countries . In Italy, load has alrea dy surpassedavailab le net capacity. In Spain & Portugal , the danger of sho rtages hadalready ex isted ((Crampes & Fabra (2005) : "With no p lant entering intooperation fro nt J998 to 2002 and a steep increase in demand .. . the systemlias opera ted below accep table adequacy indeed since 2000"). In WesternEurope (FR, DE, CH. AT), the current trend implies ge ne ra tion capacitynee ds by 20 08 or 2009.

ITALY: TRENDS IN LOAD VS GENERATIONCAPACITY

80Gross capacity

40s:Cl30 -----

01995 2000 2005 2010 2015 2020

20202015201020052000

DE+FR+AT+CH: TRENDS IN LOAD VS.GENERATION CAPACITY

........, Gross capacity- .... _- - ...... ,

80 i - - - - - - - - - - - - - -I

160 !:;:H :;eolII""'-""--- - - - - --"""A.,;;

s:e120 i - - - - - - - - - - - - - - I

Figure 13a: Current and future trend ofgeneration capaci ty (excl. wind) & load inGerman " Austria, France and Switzerland

Figu re 13b: Current and future trend ofgeneration capacity (exc l. wind) & load inItal '

5 The figures for load forecast are taken from UCTE (2005) . The figures for the trend ingeneration capac ities are based on exis ting capac ities. approved new capaci ties.decom missioning of nuclear due to IAEA and a limited lifetim e of foss il plants of 40year s

Haas. All cr . Keseric. Glachant & Perc: ':3

SPAIN&PORTLGAL: TRE/IDSINLOADVS. EASTER-lEl..fO'E: TREJIllS INLOADVSGENERATION CAPACfTY GENERATIONCIlPKHY

70 70- - ... - - .... Gross'4BitY

60 60-.-.. ....

- ...... ....... ......- -50 ... .L" 50

40 '....

40:: loaj <,o

30 30 -

10 10 - - -

001995 2000 2005 2010 2015 202C 1995 2000 2005 2010 2015 202C

Figure 13c: Tre nds of ge nerat ion capacity Figure 13d : Trend s of ge neration capacity(excl. wind) & load on the Iberian (ex cl. win d) & load in Eastern Europepenin sula

I BENELUX: TRENDSINLOAD VS.I GENERATIONCAPACITIES

40Gross capacity

35.... -- .......-

... -30 - --.".

25 ----- --- -

0I 1995 2000 2005 20 10 20 15 202C

Figure 13e: Trends of ge neration capacity(exc l. wind) & load in BENELUXcountries

Eas tern Europe (CZ, HU, PL , SK, SL) has adequ ate generation capacityfor the foreseeable future, and will continue to be heavily weight ed towardscoa l and nuclear power (see Auer et a l 2005 ). One remaining majo runcertainty in Eas tern countries is the magnitude of demand growth.

Currently, tra nsm issio n constraints have a substantial impact on theseparation of sub-markets in Continenta l Europe. I-Ience, another importan tprerequisite for a suffic iently wide market wo uld be that there is sufficient

14 Energy Studies Review /'0/. /4 . No.1.

tra nsnuss ion capacity to neighbor regions, increa sing the number ofpotentially competi ng generators.

CONCLUSIONS

While the liberal ized CE electricity market is still und er construct ion,major concl us ions regarding the development s so far can alrea dy be drawn .Firstly, Liberalisat ion in CE started abo ut a decade after the forerunners in theUK and Norway. However, it seems that the CE countries did not learn muchfrom the UK and No rwegian expe riences regarding conditions forcompeti tion. Instead of divest ing generation capacity and increasing thenumber of competitors (as rec ommended by Newbery & Poll itt (1997) mostcountries pursued mergers (DE , NL), reta ined ol igopolies (NL, ES, AT , CH),private monopoly (BE), or supported the concept of national champions (PO,FR). Only Italy has chose n a quite different strategy of divestment of theforme r national champion ENEL. Second, the CE electr icity market is thelargest reg iona l market in Euro pe and its geographical positi on implies thatfurther prog ress toward an integ rated e lectricity market in Europe will dependstro ng ly on the develo pment of this market (Jamasb&Pollitt (20 05)). Fra nceand Germany p lay a key role within thi s market because of their size andcentral geog raphic position. Third ly, currently the major ob stac le for acommon market that works rea sonabl y is a gene ra l lack of compe tition invirtua lly all local and national wholesa le as we ll as reta il e lectr ic ity marketsbecause the number of competitors is too low, or because barriers to ent ry aretoo high or ince nt ives to co llude are too high . This aspect is rein forced by (atleas t) two oth er s: an insufficient transmission capaci ty avai lable between thesubmarkets and an increasing horizontal integration with natural gas supply.Fourthly, the EC itself is in an ambiguous position. On the one hand, it stilladvoca tes the goal of a Europea n-wide common electricity market to bereached by 20 12. On the other hand , only very weak light-handed measuresare being imp lemented at the European sca le. One of the major problems sti llis and will be that the market power of the large - and still growing -incumbent ge nerators cannot be tackl ed by the EC. The second one is thebehavior of TSOs that are not unbundled from ge neration or from the interestsof the ir nat ional block of stakeho lders. Th e EC acts wea kly because stronge raction would require dramatic changes to Member States ' institutions andpolicy. As Newbery (2002) arg ued "the EU lacks the necessary legislativeand regulatory power to mitigate generator market power. Unless marketsare made more contestable, transmiss ion capacity expanded and adequategeneration cap aci ty ensured, liberalization may lead to higher prices". Onlythe Europea n Competition Authority and the European Court of Ju stice havesome power to pu sh national governments and national enti ties further.

I/II IIS, Aller, Keseric. G lllc!W II I & Perez 25

Exactly how this might be done remains an open question.In addition. a very ambiguous role is currently being played by

privatization . On the one hand, there is currently a strong majority in Europewhich sees privatization as the politically correct solution regardingownership. On the other hand, privatization frequent ly simply means amaximizat ion of the market value of the shares sold to one of the largeincumbent players (the "seven brothers" depicted by (Thomas (2003)). Thisproblem partially applies to EdF, the most important looming privatizationcase. Of course, the French government is not looking towards reducing thepotential value of its EDF shares (50 to 60 billions of euros ). Therefore, it hasno economic incentive to strengthen competition at home and it should preferstrengthening the position of its champion in France as well as in the EUmarkets.

Finally, it is stated that current ly in most regions there is still sufficientspare capacity in generation and transmission available. The definiti ve litmustest for liberalization will come in every sub-market in CE at the point-of-timewhen the bulk of excess capacity has disappeared and demand comes close toavailable capacity. That is to say, the most important problem is to providelong term incentives for investments in the upgrade and in new generation andtransmission capacities, as well as in demand-side efficiency and demandresponsiveness measures. This issue is especially relevant in the context offurther development of the electricity supply system and the decentralized l'S

centralized choices.

ACKNOWLEDGEMENTSFindings or work presented in this paper have been financed within

projects of the European Commission (SESSA, a 6th FP R&D project) and theAustrian Nationa l Bank (ONB) . Views expressed here are the soleresponsibility of the authors and absolutely not of these institution s.

The authors are grateful for valuable contributions and discussions to:Julian Barquin, Peter Kaderjak, Jacek Kaminski, Jaroslav Knapek, StephenLittlechild, Arturo Lorenzoni, Miroslav Maly, Ignacio Perez-Arr iaga,Wolfgang Pfaffenberger, Gustav Resch, Alena Salamonova, Fereidoon P.Sioshansi, Maria Isabel Soares, Miha Tomsic, Aviel Verbrugge n, TwanVollebregt. However, the authors are solely responsible for any remainingerror.

26 Energy Studies Review floI. 14. No. 2.

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l laas. Auer. Keseric. Glacliant & Perez 19

APPENDIX :Table A- I. Population, Electricity consumption, generat ion (by source )and capacity in CE countries in 2004. (Source: DECD (1005). UCrE 1( 05))

CH 7..l 60.4 64.5 0.5.1 I 3

(T\Vh) (1\1W)(1\IW I (1\ IW )

0 18 270 I." 446 S 962

44 .9 15668 12 700 I." 70S

24.S 16 425 11 7 16 10 157

426.8 116 ."SO S4 0 16 SI 400

158..l 126 53 1 79 989 77 200

11.2 7 99 S 5S 11 60 12

0 78 o.5 S 4 8 148 53 606

0 1 645 I 205 994

"'.6 20965 16408 15 601

0 .,,1 7 16 255 11 21 14(,

0 11655 S 10.7 S 261

16..l S 059 5227 4 .,,1 9

5.2 2772 2 IS5 2 D06

60.9 6." 932 40 96 1 .,, 7 724

25.4 17300 12278 9656

Xct con - Total Other

Co u ntrv Popu- sum ptio G en- IIY'd1'Il*) Rcnclati on \I-

n cration ahl cs

(1\lio) rrwi» (T Wh) (T\Vhl (TWill

AT 8.1 5 1.8 56.5 .,, 7.(' 0.9

BE 10..l 87 .5 8 1..J 1.6 1.2

CZ 10.2 6 1..l 77.9 0

FR 61.5 445.1 548.2 64.5 1.5

DE 82.5 554 570. 1 26.7 25

IIlJ 10.1 38.2 "' I.D 0 .2 0.2

IT 58.1 -" ."OD..l 4 ,,7 7.27_ _

LlJ 0.5 6.3 4.0 0.9 D

NL 16.2 106.1 94.1 0.1 4

PL JS.2 144.8 154.1 -, 1.2.'l . _

PT 10..l 45.5 39..l 9.9 1.7

SK 5.38 26 2S.9 3.5 0

SL 2.0 12.3 10. .2 2.7 0

ES 40.S 234 .5 257.1 33.3 15

Thermal

(TWill

244..l

"'.186..l

xucle aTotalgrosscap a-city

Avail-ahlc netca pa ci ty

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COUNTRIES' ACRON YMSAcr onym Co untry;\T Au striaBE Bel giumCZ Czech Repub licFR FranceDE GermanyHU HungaryIT ItalyLU LuxemburgNL Th e Ne therlandsPL PolandPO PortugalSK Slovak iaSL Slov eniaES SpainCII Switze rland

The Liberalisation of the Continental European Electricity Market - Lessons Learned

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