Cap Gemini Ernst & Young launches European deregulation Index

Cap Gemini Ernst & Young and Enerpresse have today published the latest results of its European Energy Markets Deregulation Observatory (EEMDO). A key part of the Observatory was the issue, "Does deregulation mean cheaper?" and the answer appears to be a resounding "Sometimes".

The winter of 2001/2002 could be viewed by the electricity industry as one of the more economically turbulent six-month periods of all time.

Cap Gemini Ernst & Young wanted to know what effect this period had on the European electricity market and, with Enerpresse, has today published the results of that study within the second issue (Winter 2001/2002) of the EEMDO, a research publication assessing the levels of deregulation across 17 European countries.

Over this six-month period, the extent and pace of deregulation has had a noticeable effect on prices. As expected, in Sweden and in the UK, two of the most deregulated countries, prices have fallen by up to 18% and 12% respectively. In those countries where deregulation is somewhat slower, like Ireland, prices have increased considerably (18%).

However, the electricity pricing of some countries has not behaved in the way expected and in highly deregulated countries like Finland, Norway and Denmark, prices have shot up by up to 13%.

Therefore, Cap Gemini Ernst & Young sought to find some explanation and developed an European deregulation index, a mid to long-term index of the pattern of European deregulation and price evolution included into the EEMDO and examining data from 1996 up to the present day. The Small & Medium Enterprise consuming around 2GWh was used as the reference as, following the European Union Summit in Barcelona earlier this year, all such businesses will be free to choose their supplier by 2004.

Key observations from this European deregulation index include:

    * Finland and Sweden - Over the long-term prices have decreased considerably (15% in Finland; 25% in Sweden). Full optimisation of generation capacity and the emergence of Noordpool are seen as the key reasons for this change.
    * Denmark - In spite of successful deregulation, prices have increased by over 30% over the 6-year period. A reliance on wind power with its associated high costs is said to be to blame.
    * UK - Prices have increased over this period by over 10% but, as the last 6 months show, prices appear to be on the way down with the introduction of NETA (New Electricity Trading Arrangements) claiming primary responsibility.
    * France - Deregulation has not taken place to a significant extent, yet its electricity prices have slowly dropped by over 10%. The influence of Government and its desire for a deregulated French market is seen as the catalyst for this change.
    * Germany - Prices have decreased (25%) yet remain among the highest in Europe due to issues of overcapacity.

In conclusion, this study has shown that in many countries deregulation is having the expected effect of increased competition leading to price reduction. However, it is evident that pricing in markets depends not just on the status of deregulation, but also on the broader aspects of competition. Key factors here include the balance of supply and demand, generation fuel costs, the learning process that new markets go through, competition within different market segments and the costs of access to transmission and distribution networks. Deregulation is a long-term process that requires sustained attention.

According to Philippe David, Cap Gemini Ernst & Young's research program Director, "These factors are the key to explaining how the likes of France and Germany managed to significantly reduce prices whilst keeping deregulation at their chosen pace. Indeed, without the necessary investment and physical infrastructure in place, deregulation alone may not have the desired effect and some countries will struggle to keep up."

The next issue of Cap Gemini Ernst & Young's European Energy Markets Deregulation Observatory will appear in Spring 2003