1

The Changing Fortunes of the EU’s Energy Market

Antony Froggatt

2

Unrestructured Electricity System

Regulator

Generation Transmission Distribution (Integrated Utility)

Customers

3

Restructured System

Regulator Electricity

Exchange

Transmission System Operator

Customers

Distribution System

Retail

IPP Utility Producers Electricity

Import

Municapal Utility

4

EU Legislation

• Directive 96/92/EC concerning common Rules for the internal market in electricity.

• Transposition by February 1999

• Directive 98/30/EC concerning common rules for the internal market for natural gas

• Transposition by August 2000

5

Opening of Energy Markets in EU

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Austri

a

Belgium

Denmar

k

Finlan

d

Franc

e

Germ

any

Greec

e

Irelan

dIta

ly

Luxe

mbo

urg

Nether

lands

Portu

gal

Spain

Sweden UK

Market opening -Electricity

Market Opening - Gas

Minimum Requirement -Electricity

Minimum Requirement - Gas

6

New Directives 2002

• The Energy Council will discuss on 25th November, next version of Directive.

• This will then be sent to European Parliament for Second Reading

• Then possibly to Conciliation, if difference occur between Parliament and Council

7

Main Points of New Directive• Commission proposing to merge electricity and

gas directives.

• Market Opening: Non domestic by 1st January 2005, domestic 1 year later.

• Legal separation of TSOs and DSOs

• PSO

• Electricity Labelling

• Ownership

8

Impact on Price• Electricity prices for domestic consumers

fallen 2% on average in last decade; but for commericial consumers by 12%

• Gas prices, increased for domestic by 15% but for commercial by 40%

• In UK, wholesale price fell by 18% between 2000-1, but prices for domestic fell by 2.5%, giving retails additional profit of €600 million

9

Development of Energy Prices in EU - 1991-present

0.05

0.06

0.07

0.08

0.09

0.1

0.11

0.12

1991

Jan-Ju

n

1991

Jul-D

ec

1992

Jan-Ju

n

1992

Jul-D

ec

1993

Jan-Ju

n

1993

Jul-D

ec

1994

Jan-Ju

n

1994

Jul-D

ec

1995

Jan-Ju

n

1995

Jul-D

ec

1996

Jan-Ju

n

1996

Jul-D

ec

1997

Jan-Ju

l

1997

Jul-D

ec

1998

Jan-Ju

n

1998

Jul-D

ec

1999

Jan-Ju

n

1999

Jul-D

ec

2000

Jan-ju

n

2000

Jul-D

ec

2001

jan-

Jun

2001

Jul-D

ec

2002

Jan-Ju

n

Eu

ro/k

Wh

3

4

5

6

7

8

9

10

Eu

ro/G

igaj

ou

le Elec - Industry

Elec - Domestic

Gas - Industry

Gas - Domestic

10

Employment Levels

• According to EPSU, over last decade over 250 000 jobs lost in electricity sector.

• Similar losses might be expected in Gas sector.

• More losses in EU expected, as major firms, such EdF and GdF are partially privatised.

11

Level of Employment in EU Electricity Sector

0

100000

200000

300000

400000

500000

600000

700000

800000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Job

s

UK

Sw eden

Spain

Portugal

Italy

Ireland

Germany

France

Finland

Denmark

Belgium

12

Employment in Central Europe

• The introduction and preparations for liberalisation directives is expected to have bigger impact in CEE than in EU.

• In the period 1995-2001 there has been a 30% loss in jobs in Czech Republic and Hungary, compared with an EU average over the same period of 20%.

13

Employment Levels in Czech and Hungarian Energy Sector

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1995 1996 1997 1998 1999 2000 2001

Czech Rep.

Hungary

14

Mergers and Takeovers

• In past years a few companies have increased their dominance of the energy and utilities sector.

• This concentration dynamic has reached a dramatic level during the last two years with acquisitions amounst largest EU companies rising from €3.5 billion to €42 billion, a 12 fold increase.

15

Combined Acquisitions of EdF, Eon, RWE, Enel, Vattenfall, Endesa and Electrabel, 1996-2001

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

1996 1997 1998 1999 2000 2001

Mill

ion

€

16

Electricity Market Shares in Western Europe 1998-2002

20 20 20 19 19

7 7 9 10 12

8 89 9

1110 10

9 884 4 3 6

83 3 2

4

4

3 3 44

4

3 3 43

4

3 3 33

3

39 39 37 3427

0

10

20

30

40

50

60

70

80

90

100

1998 1999 2000 2001 2002*

Other

Iberdrola

Endesa

Electrobel

National Pow er

Vattenfall

ENEL

EoN

RWE

EdF

17

Mergers in CEE

• The same dominant countries are active in CEE, either directly or through strategic alliances for example with Gazprom

• In many ways the region is being divided up between French and Germany companies.

18

Investors into Energy Sector in Prospective EU Members

0

5

10

15

20

25

30

Edf/Gdf RWE Eon/Ruhrgas Vattenfall InternationalPow er

Tractobel Gazprom

No

of

com

pan

ies

Slovenia

Slovakia

Poland

Lithuania

Latvia

Hungary

Estonia

Czech Republic

19

Security of Supply

• The liberalisation of gas and electricity industry has resulted in dominance of gas in new build of electricity.

• This is because, gas and inparticular Combined Cycle Gas turbines, are quicker to build, cheaper to run and cleaner than other conventional power stations.

20

Capacity of New Power Plants within the EU in August 2002

62220

2012 8002659

1000

0

10000

20000

30000

40000

50000

60000

70000

CCGT Coal Gas Cogen Nuclear

21

Impact on Renewables

• In 2003, Member States must transpose the renewable energy directive into national law.

• This set, non-binding, targets of the EU, of 12% of energy (22% of electricity) from renewables by 2010.

• Wind power has been particularly successful in recent years.

22

Wind Power Cumulative Capacity in EU

629 8441211

16832515

3469

4772

6458

9645

12822

17319

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

23

• Despite this, renewables are not significantly increasing their share of electricity production.

• Because electricity demand is still increasing

• New renewables only play minor role in EU electricity

• Directive, targets are ambitious, but essential

24

Development of Renewables in EU Electricity

12

12.5

13

13.5

14

14.5

1991 1992 1993 1994 1995 1996 1997 1998 1999

%