Retail price increases a key issue facing European energy markets


Colette Lewiner,
Energy, Utilities and
Chemicals Global Sector
Leader, Capgemini
Paris, France — (METERING.COM) — November 13, 2007 – Retail price increases along with environmental challenges and security of supply are among the issues currently faced by European electricity and gas markets, according to Capgemini’s latest European Energy Markets Observatory (EEMO) report.

The report found that, with a few exceptions, all EU states that have opened their electricity market to competition for more than three years are facing above EU average electricity retail prices. In the residential segment, electricity retail prices were found show a “staggering” range, from €0.06 to almost €0.20/kWh, with the cheapest prices in Poland, France, Finland and Spain. The most expensive electricity is in Norway, Ireland, the Netherlands and Germany, which are also the countries that have experienced three to seven years of fully competitive market. The report also found that residents in Germany, Denmark, Ireland and the Netherlands also experience the highest prices for gas.

The report questions whether another Directive will improve competition in Europe as there are no real tangible results on price decrease from the two previous Directives. The findings suggest that correlation between the degree of market opening and level of prices is not consistent, demonstrating that other factors such as regulated tariffs or subsidies and energy generation mix remain prominent in the formation of energy prices. Rather other measures such as simplifying administrative procedures to decrease investor risk, providing financial incentives (notably through adequate tariffs) to enable investment in interconnection electrical lines and pipelines, and extending new transmission and wholesale exchanges management schemes need to be implemented in order to reap tangible benefits.

The report found that there has been an improvement in the security of electricity supply in Europe but progress seems incompatible with the EU CO2 emissions reduction targets. On the positive side, in 2006, utilities have continued to invest in new power plants to meet the increase in electricity consumption but 81 percent of the intended new plants will use fossil fuels, thus increasing the CO2 emission volumes.

Security of gas supply, however, is being threatened by a clash between EU strategies to address this on the one hand and Russia’s fight for access to the retail market. Europe is highly dependant on imported gas, with imports in 2006 amounting to 54 percent, with Russia providing, through Gazprom, around 25 percent of the total needs.

Gazprom is currently pursuing two main objectives towards the EU – increasing its control on gas transportation pipelines and entering the European retail gas markets. The EU, in its ownership unbundling measures published in September 2007, included a “reciprocity” clause aimed at preventing foreign investors, including Russian companies, from taking over European gas and electricity transportation assets. However, as the unbundling measures are aimed at giving easier market access to the new retailer entrants, it could even help Gazprom in its strategy aimed at dominating the end to end gas value chain. With divergent strategies, one can easily predict that the EU/Russia battle for gas supply and value chain control is only beginning.

Commenting on the report, Colette Lewiner, energy, utilities and chemicals global sector leader at Capgemini, said: “Many of the key players across the sector need to change in line with the present tense oil supply situation and the new regulatory and competitive environment by optimising their asset portfolio, adapting their client relationships and fully implementing new energy and information technologies.”