[BETA] Fortnightly

Once trailing, but now the frontrunner, Germany attempts to remake its fragmented energy markets - with no new federal bureaucracy.

Here's a timely recommendation for U.S. electric power executives: Maybe it's time to brush up on those long-forgotten high school German lessons. Suddenly, the German electric power market has become the fastest changing in the world. It all happened in less than the two years passed since Germany enacted a new energy law, which became fully effective on April 28, 1998.

At the time the law was introduced, Germany's electric consumers were paying among the highest electric rates in Europe. Figures from the U.S. Energy Information Administration show that for 1997, when the law was debated, the average German residential customer was paying 16.1 cents per kilowatt-hour. Compare that with 13.4 cents paid by their French neighbors and 8.5 cents per kilowatt-hour prevailing in the United States. The new law removed exclusive franchises for electricity and gas, and opened the retail market for both energy forms to competition. The German law was passed to comply with directives for energy liberalization that will apply to all 15 members of the European Union over the next few years.

This introduction of competition in electricity and gas supply in Germany is referred to as "liberalization." Liberalization, also known in Europe as "third-party access," or TPA, is similar to the concept of "retail access" in the United States.

In Germany, these developments have produced two major effects in the country's electricity market. First, German electricity consumers have seen an increase in competition and a real decrease in prices. Second, the new market has led to mergers among Germany's largest energy concerns and the possibility of commercial alliances with other European electricity providers, such as the French electricity giant, Electricité de France, or Edf. This lively competition is due in part to excess capacity in generation. (Some estimate this excess capacity at 30 percent.) However, it also stems from fragmentation in the industry and the availability of cheap power imported from France and Eastern Europe.

Of course, any thorough understanding of the profound changes occurring in Germany requires an appreciation for the structure of the German electric power industry, the German federal legislation and the immediate impact on the German energy market. Once gained, however, that understanding may hold implications for the U.S. market as well.

The Industry: Many Small Players

The German electricity market can be viewed as extremely fractured. There are more than 950 local electric utilities owned by the municipalities and states. These entities often provide gas and transportation services as well. Add to that some 50 regional electric systems and eight large integrated electricity companies, which serve the smaller electric distributors. In still a third sector, the eight major companies that own the transmission grid produce more than 75 percent of the electricity supply - about 84.7 gigawatt-hours annually. Partial ownership of smaller distributors gives these companies a hand in the entire electric service chain, from production, transmission and distribution to retail sales and other energy services.

Germany's "Big Eight" includes the following