Plans to separate Europe's energy companies from their transmission networks in 27 countries were announced by the European Commission this week.

A wide-ranging energy competition package promises enforced British-style "unbundling" for energy giants such as Electricité de France and E.ON in Germany in effort to drive down gas and electricity prices.

A battle has been brewing in Europe recently, a battle among European nations for and against the unbundling of transmission and supply of electricity and gas.  France thinks the European Union (EU) needs vertically integrated energy giants that both provide the juice and also transmit if they are to be able to stand up to Russia's Gazprom and other big producers.  France already has two giants, Electricité de France (EDF) and GDF Suez, and is planning to create a third through a link-up between Areva, the world's biggest nuclear company, Alstom, an engineering group, and Bouygues, a construction and telecoms conglomerate.

"WHAT is important is that Europe defends its own interests. It is absolutely not a question of protectionism," said Jean-Pierre Jouyet, France's European affairs minister. He thinks the separation or "unbundling" of energy production and transmission assets, as advocated by the European Commission, would weaken the competitiveness of operators without guaranteeing lower prices to consumers. And he warned that Europe does not want a market that will be structured "in a way that punishes European operators with regard to others, and I mean in particular the big Russian operators."

Not only France is stonewalling, but Germany, Austria, Bulgaria, Cyprus, Greece, Luxembourg, Latvia and Slovakia are too. These nine sent a letter to the commission in July rejecting unbundling after a group of eight other countries, led by Denmark, fired off a letter to support it. All the countries in the Danish group have already introduced ITSO, or full unbundling.

France's most powerful ally among the antis is Germany. In a recent speech Wulf Bernotat, boss of E.ON, compared the commission's pursuit of unbundling to the hunting of a mythical beast, and called for strong European energy companies. Michael Glos, Germany's economics minister, thinks unbundling is not a "cure all".

France's energy strategy is diametrically opposed to the commission's plan to make the market more competitive. After months of consultation and investigation, Andris Piebalgs, the EU energy commissioner, concluded that big vertically integrated firms such as France's EDF and GDF and Germany's E.ON and RWE are the main reason why Europe's energy market is so dysfunctional. They keep prices high, shut rivals out of their transmission networks and avoid reinvesting their profits in improving their networks because to do so would increase competition.  Breaking them up, says Mr Piebalgs—seconded by Neelie Kroes, Europe's competition commissioner—would make the market more efficient and improve security of supply.

Coming to a compromise

However, in a move seen as a concession to France and Germany, the long-awaited proposals will allow companies the option of retaining ownership of their power lines or pipes, provided the day-to-day running is handed to an independent system operating company (ISO). In the case of state-owned companies, the ISO could also be state-owned.

The European Commission presented this as a Scottish solution following the model where the National Grid operates the networks of the electricity companies ScottishPower and Scottish & Southern Energy.

As a massive sell-off of assets is expected under the new rules, the plans would also block companies from outside the EU from buying a controlling stake in European energy transmission networks unless their country signs a bilateral agreement with the EU guaranteeing that their home markets are similarly open for competition from European companies.

This is not protectionism, an EU spokesman insisted, but "to protect the openness of the market". He added: "Conditions must be put on ownership of assets by non-EU companies to make sure that all companies play by the same rules."

Taming the Russian Giant?

Under the new rules, Gazprom, the huge Russian state-controlled company, which is the biggest single supplier of EU gas, will be left free to buy up European production companies but would be barred from acquiring any transmission networks.

José Manuel Barroso, the European Commission President, denied that the plans had been designed to stop Gazprom – or other Russian companies – taking a tighter grip on the EU energy market. He said: "This is not against Russia. Let’s be clear, we want the market to work in a fair manner.

What we have is third countries buying our networks but European countries cannot do the same. So this is a balanced proposal."

Mr Barroso added: "If a company sells electricity and gas and at the same time owns the network it has every incentive to make sure that its competitors do not get fair access to its grid. This includes, of course, refusing to build the new lines and inter-connectors that will bring more competition on its home market."

Mr Barroso admitted that the ISO approach was more complicated than full ownership unbundling and would involve an increased regulatory burden. "This is the trade-off for those member states that choose this option. It is somewhat ironic that some of those arguing for the ISO are the same people who on other subjects argue for cutting red tape and berate the Commission for imposing excessive administrative burden."

Separation of generation and transmission is already required in 11 of the 27 countries for electricity and seven for gas.

Neelie Kroes, the Competition Commissioner, said that wholesale German energy prices were 10 per cent lower than in Britain from 2004-06 but German consumers paid on average 31 per cent more for their electricity. "Companies use their control to keep competitors out of the market and consumers are paying the price," she said.

The proposals, which include plans to strengthen national regulators and set up a European Agency for the Cooperation of Energy Regulators, must now be debated by the 27 member states and pass through the European Parliament before becoming EU law, possibly late next year.

— The French Government set itself on a collision course with Brussels yesterday as it announced plans for a golden share in the €90 billion (£63 billion) group to be formed by the merger between Gaz de France and Suez, the Franco-Belgian utility.

Sources: http://business.timesonline.co.uk | http://www.economist.com/business

For savings on your Business Energy see our Business Electricity and Business Gas pages.

Go Back to Utilities News >>