A new directive has introduced competition to the previously closed and tightly regulated European electricity markets. This creates major opportunities, as well as challenges, for both incumbents and new entrants.
Fereidoon P. Sioshansi
I. Too Cozy for Comfort
he title of an editorial in a recent issue of The Economist 1 sums up the situation in Europe: too cozy for comfort. The editorial, while pointing out a few encouraging signs of market liberalization, focused on the still formidable remaining barriers to free trade and competition. It mentioned the proposed asset swaps , which giant monopolies such as Electricite de France (EdF), ENEL, and Endesa are proposing to use instead of outright sale of assets. These half-measures clearly won't do-keeping a handful of powerful state-owned and private companies in a position to do a lot of mischief. The Economist identified three critical Ts for electricity market reform in Europe:
β’ Transmission, β’ Trading, and β’ Transparency.
To appreciate the rapid changes now talking place on the European continent, one must first examine how things were until recently. The European electricity market, with annual revenues exceeding $250 billion, has long been a collection of individual markets, closed, tightly regulated, and dominated by a handful of giant state-owned players such as EdF and ENEL. Cross-border trade used to be heavily controlled through artificial tariffs, arbitrary transmission pricing, and a host of other restrictions. Prices were determined primarily through regulatory fiat, as opposed to market conditions. State-owned, privately held, and municipal utili-