Giants battle to control the EU’s energy sectors

By Stewart Fleming

Date: 08/09/05

The competitive pressures that the EU laws on energy market liberalisation were supposed to unleash look like being weaker than policymakers hoped for and the benefits to consumers from increased competition will come through more slowly.

On Monday (5 September) Spanish energy group Gas Natural made its bid to join the list of European energy giants with a hostile EUR 22.5 billion bid for Endesa, the country's biggest electricity generator. If successful, and Endesa looks like fighting the bid, the move would create a group with assets of EUR 60bn in Spain, Portugal and parts of Latin America, and create a vertically integrated organisation.

So the creation of national energy champions continues apace. In Germany and France this policy is most advanced. In Germany, the electricity market is effectively in the hands of a duopoly, RWE and E.ON, which have vigorous pan-European expansion strategies.

RWE, with annual sales internationally of close to EUR 49bn, mines lignite and generates electricity. According to Neil Beddall, an analyst with Barclays Capital in London, RWE is refocusing on its core energy business, particularly beefing up its gas operations, perhaps to try to catch up with its biggest rival E.ON.

E.ON has sales revenues of around EUR 50bn. It is a multi-utility which, in addition to its electricity generation and distribution business, is also a leading player in natural gas markets.

This week E.ON said that it would launch a bid for the UK energy company Centrica, which owns the assets of the former British Gas's distribution business and still controls some 60% of that market.

In 2002 the German government approved E.ON's EUR 10bn takeover of Ruhrgas, Germany's leading gas supplier, with close links to Gazprom, the Russian giant which sits on the world's largest reserves of natural gas. Government support for the E.ON initiative was widely seen as a strategic decision, designed both to ensure access to vital energy supplies and to create a national champion in the utility sector capable of operating on a pan-European level.

In France, state-owned Electricité de France (EdF), with sales revenues last year of EUR 47bn, and Gaz de France (GdF) with EUR 18bn of sales, have dominated their domestic markets and continue to do so.

This year GdF has taken a cautious step towards privatisation with an Initial Public Offering (IPO) on the Paris bourse. EdF is expected to follow suit in October.

Deferring to political sensitivities - the word 'privatisation' is anathema in polite French society - the government has promised to retain a minimum 70% shareholding in both companies. But, says Beddall, while the state share sell-offs will provide some funds for the government, both companies will use their increased financial and managerial flexibility to become more aggressive in their international national champion expansion strategies. GdF is currently rumoured to be another potential bidder for Centrica.

EdF has long been expanding internationally. In the UK it acquired London Electricity in 1998 and Eastern Electricity in 2001. In 2000 it acquired a 25% stake in Energie Baden-Württemberg (EnBW). A convoluted and protracted battle for a position in the Italian market is likely this year to end up with it holding a 50% stake in Edison, Italy's second largest electricity supplier, says Beddall.

Germany's E.ON, with its acquisition of Britain's Powergen in 2002 and RWE, which bought the UK's other leading power generator, npower, in the same year, have also been active consolidators, he says, Beddall expects Enel, the leading state-owned Italian electricity generator to follow a similar strategy of pan-European expansion. It has already bought a 60% stake in Slovakia Electricity for $1bn (e800 million), a move which apes RWE's purchase of Transgas in the Czech Republic. Swedish state-owned Vattenfall, now the leading Scandinavian electricity supplier, is another company which has been expanding vigorously from its domestic base. Its strategy has included the purchase of brown coal assets in the former East Germany.

"Central and Eastern Europe, and Russia represent a fertile hunting ground for acquisitive utilities from Western Europe like E.ON, Enel, RWE, Vattenfall and EnBW," says Deutsche Bank utilities analyst Richard Smith. EdF, GdF, and Vattenfall have also made a number of acquisitions in these regions. He estimates that EUR 14bn has already been spent there on acquisitions and another EUR 24bn could follow. The attractions, he suggests, include high growth rates, efficiency savings, improving regulatory regimes, reduced political risks (particularly following enlargement) and the potential benefits from interconnecting to Western European markets.

Some analysts note that gas companies in particular are moving nearer to potential markets in the Middle East and Iran and see advantages in seeking closer links with pipeline operators in, for example, Ukraine, through whose territory flows more than 80% of Russian gas exports to Europe. In June, Ivan Platchkov, the Ukrainian minister for energy and fuel, and Jean-Francois Cirelli, chairman and chief executive of GdF, signed a partnership memorandum.

• Stewart Fleming is a freelance journalist based in Brussels.

Article looks at recent tendencies of consolidation in the European Union's energy markets, with a number of rising national energy champions dominating the scene.