Economic Characteristics of the EU Electricity Sector

Essay, 2009

4 Pages, Grade: 2


1. Business structure of European Union Electricity Sector.

In early 90´s all transition countries started with economic reforms in infrastructure services, changed the centralized organization of monopolistic infrastructure utilities and introduced market- oriented structures and public regulation. Electricity sector is specific because of its high macroeconomic significance that arises from its substantial contribution to GDP, which directly employs important amounts of capital, labor and other resources, and indirectly impacts the efficiency and competitiveness of most firms and economy as a whole through the quality and price of the electricity. Before whole reform process started, economies in EU were dealing with monopolies and natural monopolies. Natural monopoly exists when there is great scope for economies of scale to be exploited over large range of output and when only one seller emerges in an industry. As a result, a single firm can supply the entire market demand at a lower cost than two or more smaller firms. (Tucker, 1997,250) From the viewpoint of society, monopoly leads to effects that are less desirable than those resulting from economic competition. Generally, monopoly results in a smaller output of goods or services and higher prices than those in competitive industries. Standard market theory considers that the competition should imply a number of producers and suppliers in the different levels of the value chain, under the hypothesis that the structure determines the players’ conducts and the efficiency of the markets (Newberry, 2001).

EU electricity sector is currently undergoing a frantic process of business concentration, characterized by a veritable flood of Public Tender Offers (take-over bids), some friendly, others hostile or unsolicited1. Four big electricity players in Europe are exist i.e. in Germany E.ON, French EDF and Italian ENEL. As an analyst shows only those three (Energy Champions), maybe four are able to survive developing and liberalization process to take over European Energy sector. Other medium- sized companies are in corporate operations in countries like United Kingdom, Spain and Eastern European countries. Those Energy European Champions are part-owned by their respective country state, which protect them from unsolicited acquisition operations. They are more profitable than other mid-sized companies, and therefore have different tariffs in different countries. Those Champions with high profitability do not occur other most efficient companies, but make them less open for competition. E.ON for example is less efficient in EU and protected by German state. European Union electricity sector recognized Pan-European companies as a less efficient and innovative. ” As long as there is no convergence in either regulatory or pricing issues, these differences will cause great asymmetries between companies that may end up having negative effects on the business structure of the EU’s entire energy sector, and so on the development of its liberalized model.”

European Union electricity sector is at the moment in liberalization process. Rises in electricity wholesale prices in recent months (which many feel is not just a reflection of increased fuel prices), the increase in business concentrations across Europe, and the differences in pace of liberalization in the electricity and gas sectors are cited to explain the low activity currently being recorded in retail energy markets.

1 Richard J Gilbert and Edward P Kahn (eds) International Comparisons of Electricity Regulation, New York:

Cambridge University Press, 1996 ISBN: 0-521-49590-3 Electricity sector in the EU is characterized:

- Lack of transparency

Wholesale electricity market sector is recognized by the lack of transparency in harmonization of regulations on markets and their supervision.

- Excessive concentration of the market

Most wholesale markets are known to be national and have a high degree of concentration in generation, strengthening the market power of incumbent operator. Those practices generating companies influenced on electricity prices.

- Vertical integration of operators

There is still substantial vertical integration between generation and supply activities and infrastructures. This integration reduces incentives for incumbents to ensure network access and for newcomers to negotiate in the wholesale market. The implementation obligations for separation attract heavy criticism and newcomers think there is still discrimination by incumbents in favor of their own subsidiaries.

- Problems with price setting

Price setting is not very reliable and complex. Consumers of electricity see those practices as nonregulated markets. As we know many sets of elements has influence on final price, like the price of coal, gas etc. This co-existence of regulated and liberalized markets affect the final price.

- Slowing down process of liberalization

Liberalization process takes time to implement in every country in Europe. Some of the countries have dynamic problems, that´s why European Commission introduce Agenda 2000 to speed up liberalization processes.

- Lack of right regulation

The regulators do not have enough power, they are not in-dependent of government and their actions are both harmonized across the EU.

- Independence of system operators

Unbundling is not being implemented in a sufficiently robust manner across all EU Member States. It lists six criteria for independence of system operators and in only 13 out of 27 Member States all criteria have been met, which means that there is a sufficient level of unbundling called as the ownership unbundling.


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Economic Characteristics of the EU Electricity Sector
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ISBN (eBook)
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economic, characteristics, electricity, sector
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Katarzyna Skrobot (Author), 2009, Economic Characteristics of the EU Electricity Sector, Munich, GRIN Verlag,


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