Wednesday, September 19, 2007

Catching the Second Wave Towards Regional Energy Markets

It is important to understand the movement towards regional electricity markets in Europe. How the coming period of regionalization is quickly becoming a second wave of company and market consolidation in Europe. The goal of a single European energy market must be seen as only achievable if there are smaller steps taken that can eventually lead up to a pan-European market. Let me briefly reflect on the first wave of company expansion in the EU energy market then lay out why the second wave may have the momentum for completion.

The collapse of the Iron Curtain and the subsequent flow of investment into Eastern Europe’s energy sector, chiefly by Western European utilities in the 1990s can considered the first wave of consolidation. While the assets like distribution and generation of these Western companies may have been less interconnected, they existed in countries that would one day join the EU. The expansion of the EU held the possible advantage of enabling coordination among the different units – whether on management and technical expertise or economies of scale in energy production.

The EU took steps in 2001 with Directive 1228 and later with accession in 2004 to promote an ease of energy commerce across the union’s borders. It is best to view the Directive 1228 as an initial step to opening up national markets to competition and indirectly holding out hope that cross-border trade would develop. In 2006 and 2007 it is clear that the intended consequences are not being fulfilled and a stronger regulatory response is needed to crack both national markets open and to spur energy companies to compete.

This prompts the second wave of pan-European change which is just beginning to rise up. The lack of success in the liberalized EU energy market has prompted the EU Commission to take stronger action to ensure competition replaces state controlled monopolistic markets. The call for ‘regionalization of energy markets’ emerges as the cornerstone of the second wave. There should be optimism and less cynicism for such efforts. Here is why.

First, the ducks are lining up. The EU Commission is seeing regionalization as an interim step towards their goal of a single European energy market. This places the considerable resources and prestige of the EU behind the effort of regionalization, lending credibility to the effort and helping to shape policy to enable regional cooperation to go forward. Existing regional groups, like the mini-for and ERGEG, gain extra impetus through verification of a regional approach.

Second, utility companies after their wave of acquisitions in Eastern Europe and a heavy round of investment and restructuring along with the commonality that exist across EU states, can restructure their operations to function in a more regional manner. This may be limited to management and/or technical operations but the possibility may even exist for them to gain greater economies of scale from better coordination in generation.

The third point sits on unstable ground and involves the opinions and permission of national governments. Do they see regional markets as benefiting their citizens, economies and companies (including energy companies)? Their questions are legitimate, mainly, can regional markets provide the benefits that exist in national markets, predictability, stability and control? The recent sector enquiry and the push towards competitive markets are now making governments realize they have limited control over their energy markets. In addition, some countries and their energy companies may be able to benefit from exporting their energy regionally and within a common market.

Moving towards regional integrated markets in Europe may becoming more possible as various interests are seeing the economics advantageous in scaling up energy markets. A single energy market may be a long ways off, but regional markets with neighbours where cooperation exists can be done to provide benefits for the end users and most market participants.