TCS Daily

Power to the People

By Benedikt Koehler - November 4, 2004 12:00 AM

On a Richter scale registering the impact of economic news on public attention, hikes in electricity prices are usually barely perceptible. Utility bills are not the stuff tabloid headlines are made of. Yet in September for days on end utility bill increases were lead news in German media. Commentators were torn over whether they were observing a freak event or witnessing tectonic plates crashing.

When prices change, there is a reaason. In this case, price increases originate in changes which are upsetting the established consensus on how energy markets work. Power companies and consumers are akin to seismic indicators registering the fact that the market equilibrium has been upset.

Several factors combine to shake up the status quo. Technological innovation accounts for some of them, for example wind farms and CO2 emissions trading. But that is only part of the story. What's more, utilities are coping with these changes just when the playing field for competing in energy markets has turned into shifting sands. Throughout the EU a single market in energy is emerging and will not stop at Germany's borders. September's spat has upped the ante for the Bundestag, where a new Energy Bill is on the agenda.

In 2003 an EU Directive appeared setting out best practice for how member states' energy regulators should go about their business. For example, regulators should make sure monopolies do not exploit their pricing power or block competition from newcomers. For many countries there was not much in the Directive to cause commotion. Britain's networks and generation have been split for years and regulators routinely intervene to create level playing fields for competition. But elsewhere, the Directive has kick-started a process which ultimately could lead to a complete overhaul of energy markets. Germany is a case in point.

Four big companies dominate energy generation in Germany and the public sector has substantial stakes in the networks. Once prices are subject to regulatory scrutiny, pricing in energy markets will result from competition rather than consensus. The winds of change are blowing. Local authorities, for example, traditionally apply profits from network charges to cover the costs for anything from public libraries to sports clubs. If network charges drop, local authorities up and down the country will be looking at a hole in their expenditure accounts. The money for pet projects will have to come from somewhere else.

The industry's giants, too, are caught between a rock and a hard place. One option for them is to keep network charges high and raise barriers to new entrants. In that case, competitors will cry foul. Alternatively, they can resign themselves to lower profits on networks, and in a pre-emptive move raise prices to consumers before the new regulator takes office. Tilburg University's Gert Brunekreeft and Hanover University's Sven Twelemann in a contribution to Energy Journal surmise September's price increases were not a fluke, but a perfectly rational response to a new market scenario.

Time was when countries in the EU could decide for themselves what kind of energy market suited them best. The writing is on the wall, and this era is ending. When 25 countries are required to implement level playing fields for competition, it will not take long to separate leaders from laggards. Once prices and profits are contestable, monopolies and government planners will no longer set the course for consumer welfare. The invisible hand of the market will take the reins.


TCS Daily Archives