Electricity generation powers ahead, but transportation lags

Date: 29/10/1998

By Chris Johnstone

EUROPE'S electricity companies are already putting their costs under the spotlight as they prepare for the staged opening of their markets to competition from February next year.

EU countries will have to open up at least 25&percent; of their markets in this first move. However, this target should easily be exceeded, with European Commission officials confidently expecting that industry will be able to shop around for the cheapest supplies in more than 60&percent; of the Union market.

Expensive power stations are already being earmarked for closure or part-time operations, reflecting a recognition by energy companies that some of their domestic reserve capacity can be mothballed as a competitive European electricity market takes shape.

The theory is that more lower-priced electricity will be bought in from outside. But to what extent that will happen and how far industry will benefit from the promised fall in inflated European electricity prices is still unclear.

While most of Europe's electricity companies are seriously considering a long-term switch to cheaper gas for their future generation capacity, some of the existing big players warn that it is in no one's interest to spark all-out competition and a price war for electricity.

However, they may not have much choice. A study by Europe's largest electricity companies points to a rapid rise both in the number of firms producing power for themselves and in independent power producers before the year 2000, with the biggest increases expected in Italy, the Netherlands, Spain and Luxembourg.

There will be far less change in the market for transporting electricity, and that in itself is raising questions about how the whole liberalisation process will evolve. Even in ideal circumstances, electricity, unlike gas, does not travel well across long distances, with transmission costs rising sharply the further it has to go.

On the eve of liberalisation, companies were still discussing the system to be used in future to set charges for transporting electricity, with two options being floated: a fee related to the distance travelled or a flat 'postage stamp' levy. The result of that debate will have an enormous impact on how the market opens.

Europe's electricity grid is far from perfect, with gaps in the system acting as a brake on the potential for competition between producers.

Although the Commission promises that market opening will solve some of these problems, national electricity companies are not so sure.