"OPEN" MARKETS IN EUROPE?

How do competitors see the European Gas Market?

It’s approaching five years since the EU gas directive came into force in August 2000, promising market liberalisation, choice and lower prices for Europe ’s gas customers. In many ways the liberalisation agenda has moved swiftly since then, with much greater legal market opening than was anticipated at the time, but in other ways the practical effects of liberalisation in terms of choice and lower prices, have been slow to develop in many European markets. The first of an occasional series on European gas markets, this article looks at the context of European liberalisation as a whole and reviews the progress so far in the key market of Germany .

Gas market liberalisation in Europe has been a long journey. Traditionally the gas downstream gas industry has been characterised by monopoly, often in the form of major national, sometimes state-owned, gas companies. One of the first steps was the passing of the Oil and Gas (Utilities) Act in the UK in 1982, which in theory allowed 30,000 large gas customers to contract directly with producers rather than buying gas from British Gas, with British Gas required to offer third party access to its transportation system. However, the first actual competitive supply in the UK didn’t emerge until 1990, with British Gas’ stranglehold finally broken by some heavy-handed regulation by Ofgas. Eight years later, Great Britain became the first gas market in the world to be fully deregulated with competition extended to nearly 21 million customers.

Meanwhile the liberalisation process in Europe had hit a few roadblocks on the way. The European Commission first seriously proposed energy market liberalisation in its 1988 white paper, and in 1992 it launched a far-reaching Gas and Electricity Market Directive, which proposed, among other things, supply market opening, regulated third party access to transportation infrastructure, and legal unbundling of energy transportation and supply businesses. The Commission’s draft directive was fiercely opposed by some member states and spent two years bouncing back and forth via committees in the European Parliament, before it was abandoned with the retirement of the Commission in 1994. The new Commission had learnt the strength of opposition to change and instead presented separate directives on electricity and gas. This gas directive still took a further four years to be agreed, and that in a watered-down state, allowing member states to opt for the minimum of internal accounts unbundling and negotiated third party access. The directive came into force in August 2000. The ink was hardly dry on the national laws implementing the directive (or in the case of France, not yet out of the inkwell) when the EU Heads of State agreed to further market liberalisation at the Lisbon European Council in 2000. This materialised in a directive revising the gas and electricity directives in 2003. Many of the provisions were oddly familiar from 1992, including mandatory regulated third party access and legal unbundling, but there was one crucial difference – the new (or accelerated) directive required full market opening for non-domestic customers right across the EU from July 2004 and for all customers from July 2007.

In 2005 where are we? In theory all non-domestic customers are eligible for competitive supply, but the level of competition in practice is very varied, from Britain , where competition is well-established, to Germany , Austria , Sweden or Denmark , where there is very little competition in evidence.

As can be seen from the graph, a reasonable proportion of large users have switched in a number of countries, but the level of small user competition is woeful across almost the whole EU, with only the UK and Italy able to boast of levels above 5%.

Sources: DG TREN and MJMENERGY estimate

The German gas market and pipe-to-pipe competition

Germany is the second largest gas market in Europe (and the fourth largest in the World) with consumption in 2003 of 96 bcm. The German gas market is unusual in Europe in that it has never had strong state involvement, but rather has developed a complex structure based on a number of major private producers, transporters and suppliers, and local distributors often related to local municipalities (Stadtwerke). There are over 700 gas transporters, although the market is dominated by a number of supraregional players, notably Ruhrgas, Wingas, RWE Gas, BEB, VNG and GVS. These players often have strong links with their major customers – regional transporters, local distributors and Stadtwerke – through complex chains of cross-ownership. Until 1998 the major players controlled supply through a range of demarcation agreements, which in effect split up the country into a string of de facto monopolies, with the players agreeing not to compete in each others’ demarcated areas. This harmonious arrangement was disrupted by the entrance of Wingas in the early 1990s. BASF, owner of the then largest gas consumer in Europe, the chemicals plant at Ludwigshafen , had approached Ruhrgas for terms to transport Norwegian gas on its behalf. Unimpressed by the terms offered it by the German gas giant, BASF, through its oil and gas exploration business Wintershall, set up the joint venture Wingas with Gazprom, the Russian gas producer, which was keen to enter the lucrative German market in its own right. Denied the chance for third party access on existing pipelines, Wingas swiftly built its own pipeline network, in places shadowing the Ruhrgas national network, and started to compete in everyone’s backyard for gas supply.

Third party access – VV style  

Wingas brought a measure of competition to the German gas market, but at huge cost, spending over €5bn to build a pipeline network and capturing up to 15% of the German gas market over ten years. However, competition was limited to areas where there were Wingas pipelines and there was no chance of competition for smaller customers. In 1998 the German Federal Government passed the Energy Industry Act, which introduced 100% legal market opening and required negotiated third party access to infrastructure. Implementation of the negotiated third party access  (tpa) regime was left to German industry in the form of the Verbandevereinbarung (Associations Agreement) – a framework for tpa put together by the associations of large gas companies, local gas companies, industrial customers and industrial cogenerators. The energy traders and new entrants were not represented. VV went through a number of incarnations, but remained a loose document, not providing sufficient definition on a number of key issues such as flexibility and load profiles, and the actual ease of third party access in Germany remained very low. Enron managed to achieve it after lengthy legal wrangling with Ruhrgas and with the help of the Bundeskartellamt (Federal Cartel Office), but few other players had the legal resources, or nerve, to follow where Enron had gone.

Now in 2005 a degree of competition has emerged, but tortuous third party access arrangements and the dominant positions of regional incumbents, has led to many competitive gas offers resulting in contract renegotiations with the existing supplier, rather than actual switching. Although this may give the appearance of competition, in terms of reduced prices and changing contract terms, it may not be in the interest of consumers (or economic efficiency) in the longer term, as, once potential competitors have spent their marketing budgets and gone off to find more lucrative opportunities, the incumbent may exploit its undiminished market power to maintain or increase price levels. On the topic of undiminished market power, the approval of the German Government to E.On’s merger with Ruhrgas, has also not been a positive step. Although some conditions were imposed, such as the requirement to release certain volumes of gas to the market, and the divestment of certain shareholdings in other gas players, E.On-Ruhrgas’ market power was in the main increased by the takeover, creating a hugely powerful gas and power player not only in Germany, but in a number of other European markets.

Regulation, regulation, that’s what it takes…

What is being done to bring change in this key European market? There have been many developments over the last year or two that give the promise of more effective liberalisation, although the fruit is yet to be seen.

The accelerated EU gas directive that came into force in July 2004, required all member states to impose mandatory regulated third party access, and to appoint independent, sector-specific regulators. The German Federal Government had already made the decision to introduce regulated third party access, and in the summer decided to grant the role to RegTP, the existing telecoms and post regulator. This was a disappointment to some, who had hoped that the Bundeskartellamt would be appointed, perhaps leading to a more pro-active approach to regulation. Whatever pro-activity the new regulator might have shown, however, has been prevented by his lack of legal powers. The energy law amendment installing the regulator and implementing the other conditions of the accelerated directive, has still not been passed, following wrangling between the Government coalition partners, and the Parliament. Current forecasts could see the law passed this summer, but even if this happens, the regulator will be unlikely to have a major impact on transportation access for the 2005-06 gas year starting in October.

Meanwhile the high level of German gas prices over the last year has begun to bring pressure for change from other directions. Many of the German suppliers argue that price rises are the direct result of rising oil prices, to which most German gas contracts are indexed. Others see the ability of suppliers to pass on these costs to their customers as evidence of inadequate competition and dominant players. Around December thousands of domestic gas consumers sent letters of complaint to local suppliers based on drafts issued by consumer watchdogs angry at the price rises. Both the Bundeskartellamt and a number of its regional colleagues have also begun investigations into anti-competitive behaviour in the German gas market in recent months. Meanwhile third party access regimes are changing with BEB’s introduction of an entry-exit system, complete with a virtual trading point, during 2004. Ruhrgas’ own recently-adopted entry-exit system, has met with fewer plaudits, particularly due to its division of the system into six zones, and limited flexibility or trading opportunities. However, as year follows year and the positive signs fail to lead to significant change, one begins to question whether widespread competition will ever really occur in this market. As noted above it took eight years from the passing of liberalisation legislation for any competition to emerge in the UK gas market. It has now been seven years since the passing of the Energy Industry Act in Germany , and there has in fact been some competition. However, without a strong advocate to push through change, as the UK had in the form of the Conservative Government of the day and the regulator, Ofgas, it may take much longer for effective competition to emerge in Germany .

top