Opening up the market

From the middle of next year, businesses across the European Union will have the freedom to choose their energy supplier. But will that bring any benefits to the already deregulated UK? Simon Napper assesses the potential impacts

At the beginning of June, the European Parliament agreed a package of measures aimed at establishing a single, deregulated market in energy across the European Union. The Council of Ministers in turn approved the final version of the directives on 16 June.

From 1 July 2004, all non-household electricity and gas customers will have the right to purchase energy from whichever supplier they choose. While this right already exists within the UK, it has been slow coming to other parts of the EU. Will the arrival of deregulation across Europe bring any tangible benefits for UK business customers?

In the UK, deregulation significantly lowered prices as competition took hold. The hope is that the same will happen within the EU as a whole as the new European directives aim to establish a level playing field. However, this may not happen overnight.

There are currently 15 separate individual markets with their own rules and regulations, and their integration – and those of the 10 new members that will join on 1 May next year – is likely to take some time.

Pan-European contracts

The biggest benefit may fall to the large multinational companies. According to the Electricity Association, pan-European supply agreements should now be possible. After all, the largest supply companies – RWE and E.ON of Germany, and EdF of France – already own many smaller businesses in other European countries. EdF, for example, owns London Electricity, SWEB and Seeboard in the UK alone.

The arrival of the single market for supplies should make these pan-European deals a fact of life. However, this will depend on the willingness of the companies to negotiate in this way.

Damien Cox, European research analyst at John Hall Associates, a major UK energy consultancy, says: “The single pan-European deal is the Holy Grail for large multinationals. A few of our clients have been looking seriously at this, but so far it has not been achievable in practice.”

A number of regional markets will have to be strengthened first – the Iberian Peninsula, the Nordic countries, and the UK and Ireland for example. Only after this regional amalgamation will there be full integration.

Lower prices

The expectation throughout Europe is that, overall, prices will fall as economies of scale occur and competition becomes keener. The word overall is important here. If country A has excess capacity, prices will generally be low. If neighbouring state B has less capacity and greater demand, it will be prepared to pay more for energy – and this could actually drive prices up in A.

This is precisely what happened in the UK when the gas interconnector was installed between Bacton and Zeebrugge – UK prices rose to continental levels. So while the average price across Europe may fall, individual member states may not see any benefit.

The UK already has relatively low prices so it remains to be seen what the impact will be. Mikhail Masokin, a senior analyst at the market research consultancy Datamonitor, believes the effect may be small.

“The UK is fairly isolated in European terms,” he points out. “The existing gas and electricity interconnectors are operating close to capacity. Even if the throughput is doubled, it will not have a great effect.”

Security of supply

According to Jeremy Nicholson, director of the Energy Intensive Users Group, competition should bolster the security of energy supply. “In open markets with

non-discriminatory third-party access to the transmission networks, the determinant is price,” he says.

“In the closed markets that we’ve had up until now, supplies can be controlled – and restricted – by political considerations.”

This process will be strengthened by the European Commission’s financial support for the construction of new pipelines and electricity grids across Europe and beyond, into Russia and North Africa.

However, Masokin can see other factors that could lead to less security. “In a competitive market, margins are reduced,” he says. “This cuts down the rate of return on infrastructure investment and makes it more difficult for utilities to raise finance.”

This issue is one that the European electricity trade body, Eurelectric, has been concerned about. It sees short-term benefits to consumers in lower prices, but long-term disadvantages if there is not sufficient funding for new power stations and transmission networks. And the results of that can be spectacular – as could be seen in the US just a few weeks ago.

So, liberalisation brings both opportunities and risks to the field of energy supply. But beneficial or not, the moves taking place over the coming months are one more step towards a single energy market from the Atlantic to the Urals.

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