Energy liberalisation surges towards full power up

Date: 07/01/1999

Although the Union's electricity liberalisation strategy was designed to let countries open up their markets only gradually, most governments have decided to speed ahead towards full competition. However, many industry bodies have reservations about their real ability to shop around for the cheapest source of power. Chris Johnstone reports.

Anticipation is the most important part of pleasure, according to Danish existentialist philosopher Soren Kierkegaard who, to prove his point, promised his family a slap-up meal and trip to the opera only to dash their hopes an hour before the event.

If Kierkegaard was right, European Commission energy officials are occupying an earthly paradise ahead of the launch of electricity liberalisation across most of the EU on 19 February.

What's more, for the Commission, unlike Kierkegaard's unfortunate family, anticipation and reality promise to more or less coincide.

Even so, there are some negative currents circulating. Heavy energy users in a series of EU countries point out that the rules for sealing contracts with new power suppliers are still not clear and claim existing monopolies are legitimately taking steps to tie up markets before they are liberalised.

Commission officials vetting national plans for electricity liberalisation say governments are showing every sign of wanting to push ahead with an ambitious market-opening programme, which makes its cautious plans for staged liberalisation look redundant. Member states appear to be on a liberalisation roll and have thrown the road map out of the window.

The latest estimates from the Commission point to around 65% of the EU electricity market being thrown open to competition from the start, well above the target set by energy ministers in 1996 for only 25% to be liberalised from next year, rising to 33% by 2006.

Belgium, which alongside Greece and Ireland is one of the three countries which could have exercised an option to delay liberalisation, has chosen instead to go with the flow and join the other 12.

"The directive has created a real impetus. There is every reason to be extremely optimistic," said one top Commission official.

In support of this claim, he cites a series of market opening choices made by EU governments when they could have opted for alternatives which would have braked the process; a sharp drop in electricity prices ahead of liberalisation; a wave of mergers and the development of electricity exchanges, like Rotterdam's, in several member states.

The 1996 directive offered governments wide latitude in deciding how to pave the way for competition - a fact which helped to win it initial support from countries seeking to hold back the tide of liberalisation and protect existing monopolies, such as France, and the likes of Germany and the UK, which wanted to power ahead.

Two years after the original deal, it is clear that most of the opportunities for 'divergent' implementation have not been taken up. Most EU governments have opted for a relatively simple system for authorising new power stations and all apart from France, Germany and Austria have chosen to create fully independent electricity transmission networks. In France, Electricité de France (EdF) will continue to run the high-voltage transport network.

On the key issue of who masterminds liberalisation, the directive offered two options: a single national buyer acting as a purchaser of power and middleman between generators and suppliers, and a freer system whereby customers buy their electricity freely from domestic and foreignsuppliers (negotiated third-party access). The latter is widely judged to be the option most likely to promote competition.

"Everyone apart from Germany is looking to opt for third- party access," said a Commission official. "Even Germany has chosen a modified form of this."

Most governments, according to the Commission, have also moved to create independent regulators with wide powers to police market opening.

But although lukewarm liberalisers in France have not, as was expected, taken every opportunity to slow down the process, they are not going much further than meeting the directive's minimum demands.

The French government will only allow companies representing 26% of national consumption to choose their suppliers from February, rising to around 33% by 2003. EdF's potential rivals, such as generalised utility Vivendi, Suez-Lyonnaise des Eaux, and Air Liquide, complain that France is failing to keep up with the rest of Europe.

Belgium's large users of electricity and industry federations, grouped together in the Federation of Large Industrial Energy Consumers (FEBELIEC), also complain that many of the details of liberalisation are not clear.

Transmission costs for electricity still appear prohibitive, according to the federation, which counts industrial giants such as steelmakers Cockerill Sambre and Sidmar, glassmaker Glaverbel, and chemical companies BASF and Dow Chemical amongst its members.

FEBELIEC is worried that transmission costs could be inflated further if electricity companies are given permission by the Commission to compensate themselves for some of the extra costs of liberalisation by imposing a surcharge on the transport of electricity. "We are really concerned about this," said a spokesman.

The Commission has yet to rule on how these 'stranded costs', sometimes totalling millions of euro, can be reclaimed.

In spite of the Commission's protestations about independent regulators, FEBELIEC says it is still waiting to learn to what extent the current Belgian model of electricity industry supervision, dominated by representatives of unions and existing electricity giants such as Electrabel, will be changed to meet the new competitive circumstances.

It is worried that the reforms may be little more than cosmetic, with an unholy alliance between trade unions and existing companies aimed at braking competition and the impact of new entrant power companies.

"Will the regulator be really independent and really push for lower prices? If the current situation is not changed, then we will have a problem," said the federation spokesman.

Nonetheless, he is happy to concede that electricity prices have shown marked reductions in the past few months. Belgium's dominant electricity producer, Electrabel, has contributed to the fall by offering considerable discounts to companies which sign relatively long-term supply deals.

However, while big Belgian companies are exploring the possibilities of alternative supply deals, few - if any - appear to have dumped their existing suppliers.

"It is dangerous because there is still a lot of legal uncertainty. There is still no electricity regulation. No one should sign any contract under these circumstances," explained the FEBELIEC spokesman. "It will take years before there are real opportunities."

FEBELIEC's equivalent in Italy, UNAPACE, cautions that big business will probably not be rushing to escape the grips of ENEL, the peninsula's dominant electricity company.

"Large consumers already receive heavy discounts on their prices," said a spokesman, who added that some adjustments to these favourable tariffs might be forced by liberalisation, but only in the medium to long term.

Italy highlights one of the stumbling blocks on the road to liberalisation - the fact that its national grid is poorly connected with the rest of continental Europe, with a limited margin for cheaper electricity to be imported into the country. Only about 15% of Italy's energy needs can be bought from outside. Portugal, Greece and to a lesser extent Spain share the same problem of poor connections.

The UK has recently highlighted concern that its electricity companies will not be able export power to the continent, because nearly all the capacity of the undersea cable to France is taken up by imports from Electricité de France. That link is able to meet around 7% of the island nation's energy needs.

Germany's Federation of Large Energy Users and Self Producers (known by its acronym VIK-D) says electricity prices have fallen by 3% since March in a country which has some of the highest prices in the EU. It adds that companies renewing supply contracts are seeing price reductions of between 10% and 15%.

But it too complains that transmission costs are high at the moment and do not show early signs of coming down.

Major feature.