Case Study: Regulation of Electric Power in Germany

Term Paper, 2011

19 Pages, Grade: 1,7


Table of Content

1. Introduction

2. Historical background
2.1 History of Energy supply

3. European Perspective

4. Current Situation

5. Why Regulation is needed

6. Liberalisation
6.1 Legal background of liberalization
6.1.1 European Single Market policy 96/92/EG
6.1.2 European Single Market policy 200/54/EG

7. Regulation
7.1 Cost-based Regulation
7.2 Why changing it to incentive regulation

8. Incentive Regulation

9. Conclusion

10. References

1. Introduction

The electricity market in Germany was faced with loads of changes since the 19th century, when it all began due to Werner von Siemens (and among others) and his first electric generator. But soon electricity became a public good and the governments realized, that it needed to be provided to every citizen. Therefore many different systems, regulations and deregulations were implemented over time. After a historical overview and a European perspective on the electricity market, we present you the Liberalization process and its cost-based regulation and, as a last point, the change to incentive regulation.1,2

2. Historical background

2.1 The History of Energy Supply in Germany (see: )

With the first street light in Berlin in 1884 the history of public energy supply in Germany begun. Following the example of Berlin and other cities in the world, in the next decades other German cities developed an urbanized network of several power stations. Already at the beginning of the 20th century there was laid out the first long- distance cable and there were several German power stations which offered a cheaper price for power at night for consistent capacity utilization. In 1938 the German Energy Industry Act mandated the electricity supply under the supervision of the German Reich, therefore the National Commissioner was then responsible for the price and introduced the first basic fee. Quick after World War II the biggest electricity suppliers reached again the pre-war level, but in 1954 the separation of the electricity grid network of the German Democratic Republic (GDR) and the Federal Republic of Germany (FRG) was conducted and still inflicts some problems today. After that, the first German nuclear power plant “Grunremmingen A” (1966) started supplying electricity to the grid. In 1974 the regulation for Federal Tariffs of Electricity was implemented which replaced the provisions of 1938 and imposed greater cost orientation and lower energy prices. In order to supply the five new federal states after the German reunification (1989) the “Vereinte Energiewerke AG” was founded (The VEAG nowadays belongs to 50Hz Transmission (formerly Vattenfall Europe) after it was sold in 2002). Many of the electricity providers (who produce about 90 % of the electricity sales in Germany) are located of the “Vereinigung Deutscher Elektrizitätswerke (VDEW)” which includes local companies, public utilities and interconnected suppliers (since 2007 member of the Bundesverband der Energie- und Wasserwirtschaft). In 2008 the four major grid operators consolidated in the Netzregelverbund (NRV), which guarantees grid security and an optimal usage of the transmission network.

Very important for the electricity market process in Germany was the “Energiewirtschaftsgesetz“from 1998. Mainly this law was installed to implement the single energy market in Europe. The national energy market should be more competitive to have, as a new supplier, an easier market entrance. This so-called “Liberalization of the electricity market” was an unbundling of different business areas (such as producing, conduction and distribution) to split the natural monopoly of the grid operation.

Repetition: An industry is a natural monopoly if the production of a particular good or service by a single firm minimizes cost and production of a commodity where long- run average cost declines for all outputs. The long-run marginal cost lies necessarily below. This creates a welfare loss due to the fact that the monopolist offers an artificially higher price because he produces less quantity than the perfect competition3.

The internal electricity market directive was provided to implement the liberalization of the energy market and offered two alternatives: The “verhandelter Netzzugang” and the “regulierter Netzzugang”. In the “regulierter Netzzugang” a regulatory authority sets prices and conditions for grid usage. The “verhandelter Netzzugang” will only be implemented if the grid area of the vertically integrated company will allocate further companies. This requires the above mentioned separation of the different accounting business areas: grid operation and electricity supply4.

3. European Perspective

Not only is the European Union trying to control and dissolve antitrust and monopolies on the energy market, it has its own energy politics. The main objectives of the European Union are to ensure the security of supply as well as sufficient energy supply. But the Union has two problems: it needs to widely expand the grid infrastructure and secondly there is an increasing dependency on imports (compared to a low quantity delivered). But there are a lot of negotiations between the countries and the suppliers to solve the questions concerning energy politics (such as renewable energy, disconnecting nuclear power stations, creating a European Single Market for energy, etc.).

Over the last few years the consequences of opening of the electricity market in various countries of the European Union developed differently despite that all EU members had to open their markets because of the so-called “EU- Binnenmarktrichtlinie” (2003). All EU Member States had the obligation to implement this internal market directive into national law within two years and they did it5. But each country preferred a different interpretation of this directive. For example, some countries decided to open their electricity market immediately and completely. In March 2000, just four Member States of the European Commission (Sweden, Finland, Germany and Great Britain) conducted a full opening of the electricity market. Denmark had already been liberalized about 90% at that time and thus a pioneer of the liberalization of the electricity market. This is followed by Spain (42%), Netherlands (35%), Portugal (33%) and Belgium (33%). The major electricity markets in Italy and France were just opened about 30% until May 2000 and Austria about 27%6.

The grid operators were bound to provide their networks (by gaining a fee) for electricity transmission through Europe unless spare capacities are available. The conditions are negotiated bilaterally between the two participants. The possibility of cross-border trade leads to enormous changes in corporate organizations. The new electricity market creates new business segments which blurry the boundaries of former separated energy markets, thus leading to cross-border business links7.

The pressure of competition on a liberalized electricity market is not only due to cross-border electricity supply but also through direct investments by foreign competitors on the domestic market. Simultaneously, domestic companies are also represented with equity investment and partnerships on foreign markets. Both developments support the assumption that the European electricity market is merging to a joint network. Experiences of already existing competitive markets such as Scandinavia or England/Wales are showing that the pressure to adjust leads to new forms of business relationships8.

The increasing number of mergers and acquisitions might be an indication that the electricity industry follows the development of other heavy industries (e.g. steel, chemicals industry, aerospace, oil industry) to a concentrated market with just a few dominant companies or alliances. However the electricity market is strongly influenced by politics so that the market and corporate structures are not only affected by supply and demand. The international activities of the electric utilities are following different strategies. Some companies focus their activities on bordering electricity markets, others are engaged in various investment properties in more distant regions or with a greater value added consequence on geographically distant markets. Among European utilities, the Electricité de France (EdF) has established itself as such a global player. Their activities extend cooperation within and outside of Europe. EdF holds investments in the U.S., the Netherlands, Germany, Belgium, Poland, Mexico, Argentina, China, Great Britain, Hungary, Sweden, Brazil, Switzerland and the Ivory Coast9. But the focus of these foreign relations is shifting primarily to South America and Africa. Obviously, global opening of electricity markets results in a global market. Enterprises which only expand in the interior of their country have to cope with declining revenues and margins will. That means, a pure national enterprise policy has only short-term prospects to gain revenue. To avoid this, they require new strategies. And one is geographic expansion. While the consumption of energy in Europe will not change significantly, the competition will arise and therefore further company mergers will be unavoidable. Only Partnerships and mergers can reduce costs on a medium to long term base. In Scandinavia and Britain, where the liberalization process already begun in the early 90s, customers are already benefiting from lower electricity prices. Between 1990 and 1996 the prices for domestic customers were decreasing by 15% and 21% of medium and large enterprises in Britain. An observed side effect of domestic and international mergers is the reduction of employees since there are many crossovers in various business divisions10.

Although the entire European electricity market is not fully liberalized yet there are already significant changes in this sector: The supply of electrical energy is no longer based on a single region. But it is likely that this industry will not change in the private-sector on a long-term base. A prospective price comparison will show that the increasing liberalization and increasing competition of different suppliers are used for verification. Probably in the long term mainly large enterprises with corresponding consumption of energy will benefit financially from an open market. With the opening of a previous monopolistic sector there are always associated opportunities for the market with more or less assessable risk factors.

Level of market opening in the European Union in 2000 and 200711


1 17.06.2011.

2 17.06.2011.

3 20.06.2011.

4 16.06.2011.

5 Vgl. Analysis of the Electricity Sector Liberalisation in European Union Member States pursuant to Directive 96/92/EC on the Internal Market in Electricity.

6 15.06.2011.

7 Vgl. Wild, Jörg: Wie schafft man Wettbewerb am Strommarkt?, Neue Zürcher Zeitung vom 09.01.1998.

8 15.06.2011.

9 15.06.2011.

10, 22.06.2011.


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Case Study: Regulation of Electric Power in Germany
University of Erfurt
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Carsten Dümichen (Author), 2011, Case Study: Regulation of Electric Power in Germany, Munich, GRIN Verlag,


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