The Case for a Pan-European Energy Regulator

In a keynote speech at the Financial Times Global Energy Leaders Summit 2012 held in London the chairman of Iberdrola, Ignacio Galan, called for the creation of a single regulator for the European energy sector. 

The speech rightly highlighted the barriers to a single European energy market. He noted a range of diverging energy policies, and underlined the damage to investment and inter-European competition from unstable regulatory frameworks and barriers to entry respectively.  Datamonitor sees two sets of issues in creating a single EU energy market, the structural or physical infrastructure, and the virtual or policy/regulatory infrastructure needed to integrate the national markets and allow energy companies to compete outside their home market. Both require the regulatory powers of a single regulator that transcends national borders. 

Recent analysis by Datamonitor largely supports Mr Galan’s comments. Many European utilities have identified the problem of insufficient investment in grids and interconnectors and barriers to entry to other markets, all of which prevent the creation of a single EU energy market. The barriers are such that Datamonitor considers a single regulator to be the most expedient way to accelerate progress in harmonising the markets. 

Where cross border projects are concerned a super regulator is clearly required. A common strategy, network codes, and oversight of those codes are needed, which is best implemented at an EU level. In particular, a regulator could ensure that utilities can access cross border capacity and ensure transparency in interconnection trading. In the absence of transparent and fair cross border regulation, it is likely that investment in interconnection capacity will remain insufficient. 

For an efficient EU energy market, the physical infrastructure – interconnection capacity and effective grids - is integral. Yet such infrastructure is highly capital intensive, complex, and in particular, long term, and which therefore calls for planning to ensure the infrastructure is fit for purpose in the future.  At present there are bottlenecks in interconnection capacity in Continental markets making it difficult for companies to sell power to end users in neighbouring countries, as many national wholesale markets remain illiquid.  

Once the structural barriers are tackled, the second step for a central regulator is then to create the conditions to harmonise the virtual structure, including a myriad of tax laws, subsidies, renewable energy support mechanisms and market reform packages.  The regulatory and policy landscape in Europe is sufficiently complex and diverse that it requires a central regulator to gain sufficient strategic perspective and enforce compliance. A central regulator could hope to create the conditions for efficient inter European trade, ensure stability to encourage investment, and allow prices that reflect supply and demand.  It would therefore be a decisive step towards a common European energy market.

Written by Yasmin Valji
Analyst within Datamonitor's Energy & Utilities team.
Follow Yasmin on Twitter: @YasminV_DMEN

New Leader in Gas for Datamonitor's Energy Survey

Gazprom Energy’s Market Entry Continues to Sweep Away the Competition as it Tops Customer Satisfaction Rankings for Large Gas Users

Gazprom Energy entered the UK B2B gas market with the acquisition of Pennine Gas in 2006 and has gone on to become the second largest supplier in terms of volume, based on tailored service to some of the largest gas consumers in the UK. This has culminated with the supplier topping Datamonitor’s Energy Buyer Customer Satisfaction Survey for the first time, dislodging Dong Energy (formerly Shell Gas Direct).

While there may be questions about the success of competition in the UK residential energy market, as highlighted by the current focus of the Energy Select Committee, competition is heating up in the B2B energy market, with independent suppliers beyond the Big Six gaining market share on the back of competitive deals and high levels of customer service.

Significantly, Gazprom Energy top the table for major gas customers. Gazprom Energy’s market share has grown rapidly, now accounting for more than 14% of gas volume sold to B2B customers. Shell Gas Direct, acquired by Dong Energy in May 2012, held the top ranking since 2008, making it the most consistent providers of customer service in the market but the transition period has had an effect on what customers are experiencing from the supplier.

The independent suppliers in the energy market are performing extremely well in terms of growing market share and maintaining high levels of customer satisfaction. The agility of the independent suppliers in providing tailored service and efficiently handling customer queries is reaping tangible benefits which many of the Big Six simply cannot match.

This is further confirmed in the power market with Smartest Energy topping the rankings for large power users for the second survey running. With a relatively smaller number of large energy users, the supplier can harness its flexibility to provide innovative products and customer service initiatives to obtain a market leading customer satisfaction score.  However, not all the Big Six are suffering at the rise of independent suppliers in the market.

E.ON Energy’s ‘Reset Review’ - which is intended to refocus the company’s efforts into improving the customer experience - is having clear benefits, with the supplier steadily increasing its customer satisfaction score to sit 2nd in the rankings for SME customers.

It is another smaller supplier, Haven Power, which tops the SME category ahead of E.ON Energy making it clear that business customers value premium levels of customer service from smaller suppliers.  Although it may still be price that dictates a lot of a customer’s decision making, customer service is and will continue to be an incredibly important factor in a highly competitive and increasingly informed market place.

Written by Rhys Kealley
Lead Analyst in Datamonitor’s Energy Team
Follow Rhys on Twitter: @RhysKealley

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Datamonitor Energy group has now launched a dedicated website, replacing this blog account.

The new site contains more commentary, insight, and analysis from all of the Datamonitor Energy team, as well as overviews of all published and soon to publish data and research.

For more information, you can find the site here: www.datamonitorenergy.com 

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Gazprom is coming under pressure on both the competitive and the regulatory front.

Antitrust proceedings from the EC could lead to the company paying significant financial compensation, while lower demand and competition from other suppliers could affect its business. Nevertheless, Gazprom's dominant position in Europe's gas market does not look under threat for now.

On the regulatory front, the European Commission has formally opened proceedings to investigate alleged anti-competitive behavior by Gazprom in Central and Eastern European upstream gas supply markets, including Bulgaria, the Czech Republic, Slovakia, Poland, Estonia, Lithuania, Latvia, and Hungary.

The commission is concerned that Gazprom may be causing harm to EU consumers by abusing its dominant market position. In particular, Gazprom is suspected of having restricted the free flow of gas across EU member states, of having prevented the diversification of supply, and of having charged relatively unfair prices by linking gas to oil prices.

Gazprom certainly has significant power, as it supplies over 25% of all gas consumed in Europe; however, the EU has tried to counter this power imbalance by investing in the Nabucco pipeline (an alternative supply route that would allow gas to be supplied to Europe from the Caspian region) and by creating a more integrated European gas market.

No deadline exists for this antitrust investigation, but if Gazprom is found guilty, the company could be liable for significant levels of financial compensation or could face a turbulent change in its business methods in Europe.

On the competitive front, Gazprom is under pressure from lower sales, both domestically due to falling demand, and in its export markets due to competition from independent suppliers and from LNG suppliers.

Of note is the competing firm Novatek, which has signed two new deals, thereby taking market share away from Gazprom. The first is a deal to supply E.ON Russia with a reported 180 billion cubic meters (bcm) over 15 years for use in the German-owned company's power plants. The second is a deal with Finnish utility Fortum, also for 15 years.

Gazprom's response has been to reaffirm its role as the main Russian gas exporter. It has announced its intention to cease buying from independent gas producers in Russia due to unstable domestic demand. This decision could include between one quarter and over half of the gas sales of independent producers like Novatek and Lukoil. While this posturing underscores Gazprom's increasing vulnerability, the company holds the Russian domestic market in its grip for now, and even contracts like that between E.ON and Novatek are relatively small compared to Gazprom's gas production level of 513bcm in 2011.

Further underpinning Gazprom's influence - and inflexibility regarding antitrust allegations - was a Kremlin-issued decree on September 11, 2012 stating that state-controlled firms must have permission to give information to overseas authorities or to change the prices of overseas contracts. While this was reportedly issued in order to protect the economic interests of the country, Gazprom will certainly benefit from such a directive.

Written by Yasmin Valji

Analyst, Datamonitor Energy & Utilities

Follow Yasmin on twitter: @YasminV_DMEN

France plans to move to progressive prices for electricity, gas, and water

The French government has presented a draft law to introduce progressive utility pricing.

The law, presented on September 5, covers water, electricity, and gas, and will be debated through to November. The government hopes that it will be cost-neutral, but this will depend upon the fine detail, and will be affected by how consumers react to the new rules.

Although more specific information has not been released, the aim is to have three distinct thresholds of tariffs, calculated by the kilowatt-hour, that progressively increase with volume. The tariffs will be adjusted for the number of people in the dwelling, the type of heating, the geographical location, and the quality of insulation. In practice, a household will therefore have an explicit amount of electricity that it can consume at a lower tariff than it currently faces. Above the limit, a higher tariff will apply in the successive two thresholds.

The aim of the price adjustment is twofold. Firstly, to reduce energy consumption by giving consumers a clear price signal regarding higher levels of use; and secondly, to provide assistance to the 4 million households in France that are described as "energy-precarious," defined as those who spend more than 10% of their income on energy costs.

Indeed, the Commission for Energy Regulation (CRE) has forecast that energy expenses will rise by 30% between now and 2016, making the topic one of intense political interest. The move to restrict energy prices follows a 2% cap in the rise of regulated electricity prices by the government this summer.

At face value, the law appears to be positive with regards to demand-side management, but the cost impact - and therefore the reception the law will receive from the major power and gas utilities EDF and GDF Suez -  is unclear. The government expects the measure to be cost-neutral; however, this will clearly depend on the details of the law and on households' response to the changes.

France's electricity and gas prices are already regulated, but suppliers still need to be able to cover production and distribution costs. For gas, in particular, the progressive pricing may pose a problem in light of the recent decision by the CRE to revoke the government's price freeze on gas in the fourth quarter of 2011, leaving the way clear for GDF Suez to retroactively charge its customers the difference for the period. 

Written by Yasmin Valji

Analyst, Datamonitor Energy & Utilities

Follow Yasmin on twitter: @YasminV_DMEN