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Europe: Picture of a Stalled Competitive Model

EUROPE
Fortnightly Magazine - February 2005

EUROPE

Several hurdles remain to further liberalization and full competition in the electricity sector.

Two major trends can be observed in Europe's electricity sector. First, the increasing importance of private-sector participation in a sector that was traditionally viewed as belonging to the state. In the 15 years since the UK started to privatize its electricity sector, there has been a complete about-face on this issue, with almost all European countries privatizing certain elements of their electricity sector, whether through the introduction of private independent power producers (IPPs), or the opening of state-owned companies to private investment, or the outright sale of energy assets. France, which has politically struggled with its ambition to open EdF's capital to private investors and has delayed this step in recent years due to fierce union opposition, is a notable exception. However, other countries, such as Greece and Italy, have succeeded in selling portions of their state-owned utilities (PPC and Enel, respectively) without undue public opposition. The Accession countries (which include the 10 countries that recently joined the EU as well as those that hope to do so in the next few years), with only a few exceptions, also are selling assets.

The second major trend in Europe is that of the massive amount of merger and acquisition (M&A) activity across the continent. In the mid to late 1990s, major national European utilities started to buy assets and companies in other Western European countries, with the objective of becoming powerful regionwide actors. The winners of this phase were the German actors RWE, E.On, French EdF, Italian Enel, Spanish Endesa and Iberdrola, Finnish Fortum, and Swedish Vattenfall. The second phase of M&A activity has been the attempt by these companies to position themselves in Eastern Europe in anticipation of EU Accession.

At the same time, several hurdles remain to further liberalization and full competition in the European electricity sector. First, the wave of M&A activity has resulted in an oligopoly of large European utilities on the European continent, which ultimately could stymie the development of full competition. Second, the continued persistence of regional markets, such as the Scandinavian area, the Iberian Peninsula, and Southeastern Europe also prohibits the flourishing of full competition across the entire continent. Finally, concerns about the level of actual competition in these markets continue, due to difficulties that new entrants have in accessing and keeping customers in a profitable manner. These are all issues that the EU will continue to address as it refines its policies and attempts to drive forward the integration process.

Europe's Resource Mix: A Mixed Bag

In general, the structure and composition of the generation sector differs among most European countries, whereas the market design for wholesale trading, transmission, and distribution is becoming more similar across the region. The following four sections delineate our cross-European comparison: generation, wholesale markets, transmission and distribution, and retail supply. Several characteristics define the structure and status of the generation segment in a given country or region: the amount of installed capacity related to current peak demand and expected peak demand in coming years; the

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