July 1, 2001
L.A. Loves a Loophole
There's no getting around it...
A Continent United? Some Thoughts on Prospects for a Single Energy Market in Europe
Deregulation in the E.U. is racing ahead, posing a challenge for U.S. firms. Yet the outcome is uncertain, as EdF, the giant of Europe, has yet to show its hand.
Eighty percent of the European power market will be open to retail competition, or liberalized, by 2003. The fundamental framework for shifting to a competitive market in Europe has some striking differences to the transition in the United States. Some primary contrasts with the U.S. transition include
* the startling speed of change, especially in Germany;
* the central authority of the European Union to mandate an open pan-European market;
* a known date-certain for opening European markets;
* the distinct national cultures and business practices that characterize each E.U. member state; and
* the greater concentration of ownership of generation and transmission assets in European countries relative to the United States.
These fundamental factors will profoundly affect the transition and outcomes of the European and U.S. restructuring initiatives, as well as define and explain their differences. Comparison of these restructuring processes, and the strategic business models being adopted in each market, provides valuable lessons and opportunities for companies in the global power market.
The Grand Tour: Germany, UK, Spain et al.
The pace of transition is the first glaring difference between the United States and Europe. The speed of the move toward a free market in Germany is quite surprising to most U.S. companies, and a shock to many European market participants. For the German market to shift from a complete monopoly to open competition in less than one year is unlike anything seen in U.S. power. The final results of the German free market experiment and the strategic responses of industry participants, of course, are not yet known. Some conclusions, however, can be drawn from the experience of German power companies and applied to other power environments in transition.
Germany's decision to open its power market much faster than required by the European Commission was based on consensus among the government, power industry and consumer groups that Germany and its economy would benefit from a competitive market - in terms of energy costs and industry efficiency. "The German power industry opted to drive the restructuring process rather than have it controlled and mandated by the government," notes Kevin Casey, head of trading at PreussenElektra in Hannover, the second-largest German utility.
As the economic engine of Europe, Germany chose to be the leader in opening continental power markets. The German power industry has set the precedent for the new energy order, and its accelerated opening will create momentum for change throughout Europe.
Unlike in the U.S. market, there has not been a protracted debate regarding stranded-cost recovery for German power generators. There was some early opposition to the market opening, but the prevailing attitude now is that delaying tactics are futile and the emphasis should be on finding the best new corporate strategies and advantages for the future market.
The speed of power industry restructuring has varied among E.U. member countries during the last year. As noted, the German market opening