Overview of the European Energy  Market
(November/December 1999)

As the world moves into the next century, global economics, global politics and global industries also are moving into a new era. Restructuring of the energy industry is expanding across the world. The United States has seen the restructuring of both the natural gas and electric industry sweep across the country.

In the developing world, opportunities are expanding at an ever-increasing speed for the energy industry. Those opportunities are exceptionally clear and active in Europe.

In February 1997, the European Union (EU) voted for the directive allowing restructuring for the electric industry and, in 1998, it adopted a unanimous position for the natural gas market.¹ 

Although each of the 15 member states is at a different level of restructuring, almost all have had some form of change to their energy industry. The reasons behind the European Union's directive are threefold:

1. To open the energy sector to competition and thereby improve efficiency, create a more competitive energy-producing industry, to ensure security of supply, to attract new, outside investors and to divest the state of over-regulated, heavily indebted public undertakings. Since Europe has been involved in the integration of global trade through the deregulation of their industries (i.e., telecommunications and the airline industry) restructuring the energy industry is the next logical step.

2. On an economic level, European companies will be competing against other manufactures or service providers that operate on the basis of different economic factors. Due to revolutionary changes in information and process technology, many industries are forced to compete in a vastly changing marketplace.

3. Under the European Commission's Treaty, the internal energy market is defined as "an area without internal frontiers in which the free movement of goods, people, services and capital is ensured in accordance with the provisions of the Treaty." Therefore, electricity is considered as goods and the selling of electricity as services.²

Already, the results of that directive are being felt throughout Europe. In the United Kingdom, the entire residential gas market opened up to competition last year. Natural gas deregulation prompted alliances between gas companies and other companies with strong customer-service initiatives.

Out of the 15 state European Union, only Germany, Finland, Sweden and the United Kingdom are fully deregulated. Denmark has opened 80 percent of its market, Spain is approximately 50 percent open and Belgium has opened approximately 35 percent of its market. These deregulated markets now comprise 60 to 65 percent of the total European energy markets.

The liberalization of the European energy market is creating a rash of merger activity throughout the region. As recently as September of the this year, German utility giants Viag and Veba announced their merger. This created Germany's largest electric utility and the third largest electricity company in Europe after France's EdF and Italy's ENEL.

Recently, it was announced Germany also is heading to the United Kingdom, hoping to acquire British water and electric utilities.

The United Kingdom itself has seen many mergers since its market opened to competition. Many of those mergers and acquisitions have taken place within the borders of the United States such as British Energy merging with Philadelphia Electric to form Amergen that led to the purchase of several U.S. nuclear plants.

Take-overs, mergers and acquisitions are being felt in Belgium as seen in the case of Tractabel, once a solid institution dominating Belgium's electricity market. Previously half owned by French water and waste management company, Suez Lyonnais de Faux, it is now fully owned by the French conglomerate.

Although France has not opened its market to competition, the French actively are pursuing energy opportunities in neighboring countries.

The market for natural gas also is opening up opportunities for major growth. European gas companies are spending billions to connect their pipeline networks to allow gas to flow freely from the Atlantic to the Urals. Natural gas is expected to be the favored combustible fuel of Europe with an expected growth rate of one-third over the next decade.³

Italy's ENEL, currently concentrating on becoming a multi-utility company by providing telecommunications, waste management, television and water services, also is projecting a move toward the gas distribution business.

Austria also has been hit with the merger epidemic as energy companies within its borders have combined to control 55 percent of the Austrian electricity market, and now rank among Europe's top energy companies.

This wave of mergers and acquisitions continues to sweep across the European borders -- British companies such as National Power, Scottish Power and the Eastern Group have made several foreign acquisitions. EdF and Germany's RWE own 10 percent of Spain's Endesa, all while EdF is acquiring Great Britain's electricity distributor, London Electricity.

1. Energy and Economic Development Technology and Policy Program; The Deregulation of the Power Industry in the European Union. (http://cogen.mit.edu/tpp126EUROPE2html)
2. Electricity Deregulation in the European Union (http://europa.eu.int/en/comm/dg17/27klom.htm)
3. Wall Street Journal Interactive "The Great Gas Chase" by Matthew Kaminski and Martin Du Bois