1. Energy

2. Intrinsic to all economic and human activity Complacency vs. crisis (currently crisis) Three themes of energy policy –Competition –Sustainability –Security of supply

3. Shifting Priorities 1951-73: balanced supplies and competition 1973-85: security issues dominant 1985- : market-led but increasingly complicated by emergence of environmental concerns Noughties - security resurgence?

4. Integrated aspect of EU policy Energy and SEM EnvironmentTransportTENscompetition Third countries EnlargementTaxR&D

5. Energy pillars Competition: the case of electricity

6. Electricity should, as far as possible, flow between Member States as easily as it flows within Member States. European Commission, ‘Medium Term Vision for the Internal Electricity Market, 2004

7. Why electricity? Key inputs for many businesses - costs, competitiveness Big integrationist role → TENs and deregulation Pre-SEM - heavy regulated markets Examples of transformative power of liberalisation and competition but a long way to go General and sectoral specific aspects to liberalisation

8. Market integration: electricity Massive changes in EU utility landscape underway from: –changes in energy markets - e.g. shift to gas –environmental concerns –response to EU liberalisation - 1996 Directive → reconsideration of strategies – industrial restructuring – extension of geographical scope – extension of activities

9. Problems with liberalising electricity A strategic sector Most markets closed –regional or national monopolies –mostly state – some private monopolies Resistance of incumbents All stages of electricity production seen as ‘natural monopoly’ – i.e. from generation through to supply Public service obligations End of long term contracts? Investment impact?

10. Why liberalisation breakthrough? ‘natural monopolies’ view eroded via disaggregation of activities & liberalisation in some states - e.g. electricity: –generation (production) –transmission (long distance, high voltage transport) - tends to remain monopoly activity –distribution (last stage, low voltage transport to end user) –supply (trading) - e.g. sales, metering, etc

11. Stage One: 1996 Electricity Directive Classical SEM/liberalisation rationale –end of closed national markets → competition, choice, competitiveness and lower prices. One third of market to be free by 2003 By 2001 – 66% of EU market open – from 100% in UK, Finland, Sweden, Germany etc to less than % in France, Ireland, Portugal, Greece

12. Stage 2: 2003 Directive Deadlines for full opening of market –1 July 2004 for all business customers –1 July 2007 for households –Other technical measures to help market operate more effectively

13. Prior to 19961996 Directive2003 Directive GenerationMonopolyAuthorisation Tendering Authorisation* Transmission & distribution MonopolyRegulated TPA Negotiated TPA Single buyer model Regulated TPA UnbundlingNot requiredAccountsLegal CustomersNo choiceChoice for eligible customers -33% Choice of supplier: : commercial – 2004; all customers -2007 RegulationNational ministriesNot specifiedIndependent regulator in each member state. * Tendering still possible if insufficient capacity to ensure supply security or to promote new technology in the cause of environmental protection. Evolution of electricity rules

14. Impacts of liberalisation Increased competition Increased trade Price Restructuring - geographical and M&A –Emergence of European utilities with global ambitions - RWE, E.On, EdF Risk Marketing Convergence and multi-utilities

15. Levels of effective competition (European competition - March 2004) Level of competition Not functioningGreece, Estonia, Latvia Initial steps onlyBelgium (Walloon), Luxembourg, Portugal, Poland, Czech, Slovenia, Slovakia, Lithuania Some progressGermany, Spain, Belgium (Flanders), Ireland, Italy, France, Hungary Well developedAustria, Netherlands CompleteUK, Sweden, Finland, Norway, Denmark

16. Source: European Commission, SEC(2004) 1720 – 5 January, 2005 Openness of Europe’s electricity markets - 2004

17. Competition indicator Switching of suppliers –Well functioning industrial market – 15-20% of customers switching every year –Households benchmark of 10% About 15-20% industrial consumers have changed supplier since EU opened, ranging from 0% for Greece to 5-10% for Belgium and over 50% for Nordic countries and UK

18. Market shares of foreign owned suppliers Austria – 2% Belgium – 10% Finland – 25% France – 8% Germany – 20% Greece – 0% Hungary – 97% Ireland – 12% Spain – 8% Sweden – 40% UK – 50% Estonia – 3% Latvia – 0% Lithuania – 0% Poland – 17% Portugal – 33% Source: European Commission, 2005

19. Increased trade Electricity trade exists but constrained by inadequate interconnections – reduces competition possibilities –Matter of physical infrastructure –Question of regulation of cross-border trade Import capacity less than 10% of installed capacity - France, Greece, Ireland, Italy, Portugal, Spain, UK (Germany – 11%)

20. Recent restructuring examples 2004: E.ON & GdF acquire gas businesses in Eastern Europe 2004: proposed sale of Slovenske Elektrarne to Italy’s ENEL Sept 2005: Spain’s Natural Gas launches hostile bid for Endesa 2006: E.ON bid for Endesa – Spanish government intervenes – Commission challenge. French government blocks ENEL takeover of Suez – promotes merger with GdF Future - Privatisations of EdF and GdF

21. Risk Long term contracts - declining importance Power as a commodity - emergence of power exchanges –e.g. Nordpool, Amsterdam Power Exchange, Spanish pool, Germany, Austria Transfer of risk to producer dominance of engineering gives way to discussion of risk/financial instruments

22. Marketing changes: –Pre-liberalisation - no need to build brands –Post-liberalisation - brand building via home services Virgin Home Services - all-round utility provider (phone, water, electricity, gas) Bundling of services - British Gas (Synergies - Goldfish, AA and British Gas)

23. Extension of value chain - e.g. gas well to light socket Customers - emergence of single energy buyers for large industrial groups

24. Emergence of multi-utilities? Common corporate identity, expansion strategies and marketing channels Common customer records More efficient use of financial resources and management information systems Synergies in HRM and training Technical: asset management, procurement, meter reading, house connections, etc Some retreat from this position

25. RWE’s strategy in liberalised markets Cost leadership and core businesses Gas and electricity – synergies (customers, cost and competences). Regional focus – Germany, UK, CEE, N. America Vertical integration

26. RWE’s position in key markets ElectricityGas No 2 in the UKNo 3 in the UK No 3 in EuropeNo 6 in Europe Source: RWE Facts and Figures

27. Competition - the future? Further opening required plus enlargement Commission legal challenges to open markets properly Utilities – one of least internationalised sectors – liberalisation is changing this No genuine pan-European utilities – possible in future M&A activity and restructuring to continue Electricity changes to be mirrored by gas - more slowly Cannot be separated from other energy policy concerns - environment and security concerns Power cuts?

28. Environment

29. Sustainability Helps security of supply Energy central to many environmental issues and the subject of key initiatives –Emissions trading schemes –Promotion of energy efficiency –Carbon capture and storage –Energy technology innovation –Increased use of renewables

30. Renewable energy as % gross inland energy consumption – EU-15 2010 target

31. Security of supply

32. Energy insecurity growing Declining indigenous production – all fuels Increased demand from China, India, etc Energy prices upwards EU dependence on energy imports from c. 50% now to two thirds by 2020

33. 19902000201020202030 Solid fuels – e.g. coal17.430.137.450.865.7 Liquid fuels – oil and oil products 80.976.581.486.188.5 Natural gas47.649.561.475.381.4 Total44.847.153.362.167.5 Source: European Commission Energy and transport outlook to 2030 Energy import dependency in the EU-25

34. Policy responses Diversify supplies wherever possible Partnerships with third country producers Energy diplomacy Crisis measures