Europe’s electricity markets hamstrung by mergers

Competition in the European power markets is being hampered by the spate of consolidation in the sector, according to research by Reinhard Haas and Hans Auer of the Vienna University of Technology, presented at Energy & Power Risk Management magazine’s annual European congress in Amsterdam last week. Haas and Auer added that the lack of rigorous unbundling of the European power industry is "a major obstacle for a real competitive electricity market".

Unbundling the power markets’ players to increase competition is key to an effective market, Haas claimed, but it must be the correct form of restructuring. The unbundling of generators and transmission grid is the correct approach, not the separation of generators and suppliers.

Citing the Californian energy crisis as an example of the problems caused by incorrect unbundling, Haas and Auer said that generators should be separated from the transmission and distribution companies to ensure new generators are not discriminated against as they start out, and prevent the cross-subsidisation of generation by transmission.

Currently the worst affected markets are those of Germany and France, where the private ownership of large vertically integrated utilities makes it "virtually impossible to achieve rigorous unbundling", said Haas and Auer. They also believe that the situation is unlikely to change in these two countries as "the incumbent generators will retain power over the transmission grid over the coming years".

Another major concern is the effect on the market of the large number of mergers in the European energy industry. The strategy of many large players is not to compete, claimed the professors, but to merge with others and set prices as high as possible.

The current low price of European power will not be sustainable in the medium term, particularly in Germany, since mergers will probably see generation plant numbers reduced, which in term will lead to higher prices, Haas and Auer claimed.

The pair said that while privatisation, as seen in the restructuring of the UK market in the 1980s, is not absolutely necessary, the European Commission – the originator of legislation within the European Union – must act. "Unless the European Commission takes regulatory steps to ensure that there is a sufficient number of competing generators in western Europe it is unlikely that effective competition can be retained in the long term," they said.