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A Continent United? Some Thoughts on Prospects for a Single Energy Market in Europe

Fortnightly Magazine - January 15 2000

But unlike Germany, which has thrown open its market to unbridled competition, France has yet to comply with the E.C. directive and remains a closed market. Not only is its continued delay in meeting the directive's minimum requirements resulting in threatened enforcement action by the European Union, but other E.U. members are threatening legal action and retaliatory moves. For instance, some warn they might preclude the import of French power into their own countries unless France opens its domestic market to competition.

Forcing French compliance will be the most significant test thus far for the European Union because it will demonstrate whether there is the necessary resolve to assure that an open pan-European market becomes a reality, regardless of opposition or special interests. With the German market course now seemingly set, the pattern of the French transition is the key barometer to watch in projecting the ultimate pan-European market.

It is believed that the French market will be opened this year. In fact, most trans-European market participants are developing strategies based on the presumption of an early opening of the entire European market.

The French government has pledged to finalize by mid-February its long-delayed legislation to open the country's electricity market to competition. The difficulties for the French government in trying to reach consensus on restructuring legislation reflects the significant conflicting political party interests in that process. Also, the magnitude of EdF as a single entity complicates transition strategy development. France has a lot to lose and understandably wants to get it right.

Most observers expect EdF to be a global player, and EdF management views the new European marketplace as an opportunity. "EdF is fast becoming a global actor having as an aim to have a worldwide presence by making more than a third of its sales revenue abroad in a few years from now," says Dominique Ganiage, vice president for strategy, marketing and communications at the international division of EdF.

Given EdF's considerable size, financial strength and low-cost generation, that seems quite achievable - even probable.

The Trading Floor:

New Exchanges, in Cash

and Futures

If the move to competitive markets for Europe continues on the course that now appears likely, exchange-traded electricity futures contracts seem certain to develop. In Germany, the process is well underway with the new European Energy Exchange, or EEX, in Frankfurt now developing an electronic screen trading system to offer German electricity futures. The EEX, which is backed by the Deutsche Borse stock exchange and the Swiss-German Eurex exchange, plans to launch its new electricity contract this year. The new Leipzig Power Exchange also intends to launch electricity spot contracts in May 2000, with futures contracts to follow. These LPX contracts also will be electronically traded and use the proven technology of the Nord Pool power system.

"The implementation of revised German grid access procedures should make for ideal timing for the new exchange contracts. We plan to adopt much the same contract structure as the U.S. NYMEX electricity contracts," notes Carlhans Uhle, chief executive of the LPX.

Successful trading of electricity futures in Europe