May 21, 2010
Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
Europe's utility regulatory model is now unfolding. But the process hasn't been an easy one as commissioners there have wrestled with how to dislodge national interests.
For more than a year now, the European Commission has forced utilities to legally separate their generation assets from their transmission lines. The goals have been to increase the opportunities for alternative and greener energy suppliers while also enabling the flow of technology, reducing inefficiencies and, perhaps cutting costs.
"All EU markets are formally liberalized," says Harald Thaler, research manager of Frost & Sullivan's European Energy & Power Systems practice. "However, in practice the dominance of some generators continues in various countries where the market share of the previous incumbent monopolists remains high."
The Scandinavian countries along with the United Kingdom are arguably the most liberalized, he adds, noting that competition is strong there on both the generation and retail sides of the equation. The former, for example, have been pioneers in electricity industry reform by abolishing end-user tariffs, increasing price transparency and simplifying the procedures to be used by alternative energy suppliers. Interestingly, Thaler adds that the Nordic countries have a mix of privately-held and state- or municipally-owned electricity companies -- all of which compete in deregulated markets.
European Union regulators assert that the $60 billion utility market there is rife with inefficiencies and that open markets would work to the benefit of commercial, industrial and residential customers. A united system would increase trading activities, thereby allowing wholesale buyers better odds of buying cheaper.
While Eastern Europe remains the least open, others like France and Germany with their state-owned mega-utilities are also tough to crack. To appeal to those Western nations, the commission will allow their utilities to own their pipelines and transmission grids. But that infrastructure must be managed by independent transmission operators that will allow free access to their systems and preside over investment decisions.
According to Thaler, Germany has made lots of strides. It formed a market regulator known as the Federal Network Agency, which has been instrumental in bringing down transmission tariffs for third-party access. Germany also hosts the European Energy Exchange, the leading energy exchange in Continental Europe.
Under the EU plan, commercial and industrial customers have been able to choose their electric and gas suppliers since July 2004. Residential users, meanwhile, have had the opportunity to select their provider since July 2007.
National Interests
Not surprisingly, EU regulators are fighting a pervasive attitude -- one that wants to protect national interests while also taking advantage of increased opportunities abroad. Outsiders still have difficulty investing in France and Germany's energy sector, even though the two are home to utilities that have been expanding abroad. Other critics, such as the European Trade Union Confederation, contend that the forced separation of utility assets could undermine the transmission network and make it more difficult to maintain.
At this point, the results are tepid. Altogether, the amount of electricity flowing among the European countries hovers around 11 percent of all consumption -- up only slightly since 2004 when liberalization there first began. But that does not tell the whole story.
Keep in mind that continuing the existence of transmission and distribution monopolies with "open access" requires "national public utility commissions," says Branko Terzic, Global & U.S. Regulatory Policy leader in Energy & Resources for Deloitte Services. While the European nations have established such regulatory bodies, he says that they need time to develop laws, practices and expertise.
"The EU was established to bring the benefits of a large and competitive 'single market' to Europe in all sectors of industry," says Terzic, who is also chairman of a fossil fuels committee for the United Nations Economic Commission for Europe. "Electricity and natural gas are among the last and most recent two sectors to be liberalized."
The logical question is whether the European experience is worth emulating or whether the circumstances surrounding it are too uncommon. Critics maintain that at best it is too early to tell if liberalization there is working. Concern still exists that the behemoths would be able to control world markets while insulating themselves from competition.
True, market reforms will provide the opportunity to grow and to increase revenues. But advocates of such restructuring say that they also result in superior technology transfers as well as economies of scale. That, in turn, will create greater productivity and more efficiency with the potential to drive down costs. Building identical power generation plants or ordering a large number of wind turbines, for example, will give companies new-found leverage over the supply chain
"As with any other business, you will get a much better overhead cost spread over a larger revenue stream," says Martin Gross, region division manager for ABB Power Systems, North America. "From a utility point of view, there are certain advantages associated with size such as financing large investments like nuclear plants or large offshore wind farms."
And while it is a 10-company effort, he points to those European utilities that are now focused on building a super grid in the North Sea at a cost of $64 billion -- something made possible through regulatory reform. The aim is to transport offshore wind power throughout the continent so as to diversify fuel sources and to bring down energy prices.
While liberalization of Europe's electric markets has spawned turf wars, it has also resulted in the deployment of innovative power generation technologies. That, of course, is what the EU ministers had hoped for -- advances that would eventually make their way to their own consumers who would have cleaner energy and more choices.
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