Ownership Unbundling

1

• Ownership Unbundling

The appropriate route to increased
competition?
Results of an A.T. Kearney study
Brussels, February 13 2008
2
Agenda
Page

• Effects of Ownership Unbundling 3
• Drivers of competition in the electricity
  market 15

3
Effects of Ownership Unbundling
4
In EU-15 the majority of countries have
implemented Ownership Unbundling on transmission
level
Effects of Ownership Unbundling
Unbundling among EU-15 Transmission Operators
Overview1)

• Ownership Unbundling postulated by the EU
  Commission has already been implemented on
  transmission level in many countries
• Germany, France, Austria and Greece are the only
  countries in the EU-15, that have implemented
  Legal Unbundling
• Ownership Unbundling on distribution level has
  been realized in Great Britain only, while Legal
  Unbundling is a European-wide standard
• According to the EU Commission "ownership
  unbundling has a number of positive impacts on
  the market by stimulating investment in
  particular in interconnectors, reducing market
  concentration and bringing down prices."

Is this a fact?
Legal Unbundling
Ownership Unbundling
Independent System Operator
1) Status 1. January 2007 incl. Norway, excl.
Luxemburg Source Regulatory authorities, EU
Commission, A.T. Kearney
5
Networks in countries with Legal Unbundling have
been more reliable in recent years
Effects of Ownership Unbundling
Unplanned Interruption (minutes lost per
customer, average 2004-2006)
(1)
(2)
(2)
(3)
(2)
(2)
(4)
(2)
(3)
Legal Unbundling
Ownership Unbundling
Independent System Operator
1) Norway started detailed interruption recording
in 2005 2) 2004-2005 3) only 2004 4)
only 2005 Source E-Control, Fingrid, VDN,
TenneT, CEER, EU Commission
6
Electricity prices for household customers
increased across all countries in Europe
Effects of Ownership Unbundling
Development of Prices for Households
1998-2007(1)(in ct./kWh)
Average CAGR 1998-2007 Ownership Unbundling
3.0 Legal Unbundling 0.7
Legal Unbundling
Ownership Unbundling
1) Consumption of 3.500 KWh p.a without
tax Source EUROSTAT, A.T. Kearney
7
for industrial customers the trend is the same
Effects of Ownership Unbundling
Development of Prices for Industry
1998-2007(1)(in ct./kWh)
Average CAGR 1998-2007 Ownership Unbundling
4.0 Legal Unbundling 0.9
IRL
IT
UR
DE
BE
PT
ES
NOR
GR
DK
SWE
FIN
F
Legal Unbundling
Ownership Unbundling
1) Consumption of 2.000 MWh p.a without
tax Source EUROSTAT, A.T. Kearney
8
Wholesale prices in legal unbundled countries did
not rise faster than in ownership unbundled
countries
Effects of Ownership Unbundling
Development of Wholesale Prices
-31
CAGR 15.2
Germany
In 1998, liberalization started for all customer
groups in one step
1)
EEX Spot prices (Base in Cent/kWh)
CAGR 21.2
-54
Sweden
Gradual liberalization between 1996 and 1999
Nordpool Spot prices in (SEK/kWh)
-28
CAGR 25.2
Great Britain
Gradual liberalization between 1991 and 1998
IEA Wholesale index in (1996 100)
Liberalization Period
1) until 1999 IEA Wholesale price index, as of
2000 EEX Spot Base Source EEX, Nordpool, IEA
Wholesale price index, A.T. Kearney analysis
9
Except for Great Britain, there is no clear
correlation between type of unbundling and
investment activities
Effects of Ownership Unbundling
Selection
Investments into the grid/transmission
volume1) (in /GWh)
Legal Unbundling
Ownership Unbundling
1) 2004 to 2006 Source A.T. Kearney Analysis
10
Even the development of cross-border transmission
capacity lacks consistency
Effects of Ownership Unbundling
Development of cross-border transmission capacity
2000-2006(in )
Ø
BE
PT
AT
ES
IT
NL
FIN
DE
F
NO
SE
DK
Legal Unbundling
Ownership Unbundling
Source UCTE, Nordel, A.T. Kearney Analysis
11
No clear correlation in the ratio import
capacity/generation capacity can be identified
Effects of Ownership Unbundling
Average import capacity/generation capacity1)(in
)
Legal Unbundling
Ownership Unbundling
1) 2006 Source ETSO, A.T. Kearney
12
In absolute terms, grid access tariffs in Europe
differ widely and are not linked to ownership
unbundling
Effects of Ownership Unbundling
Transmission tariffs 20061)(in /MWh)
Legal Unbundling
Ownership Unbundling
Independent System Operator
1) Except for other regulatory changes that are
not directly linked to TSO activities such as
standard costs, public interest, renewable
energies etc. Source ETSO, A.T. Kearney
13
No correlation between grid tariffs development
and type of unbundling can be observed
Effects of Ownership Unbundling
Development of Transmission Tariffs
2003-2006(Index 2003100)
CAGR 2003-2006
Average CAGR 2003-2006 Ownership Unbundling
0.1 Legal Unbundling -0.1
Legal Unbundling
Ownership Unbundling
Source ETSO, A.T. Kearney
14
Networks in countries with Legal Unbundling are
more reliable grid tariffs below average
Effects of Ownership Unbundling
Backup
Summary Unplanned Interruptions vs. Grid Tariffs
Grid Access Tariff TSO (in /Mwh)
Ø 91
DK East
DK West
IT
UK
IRL
DE
Ø 7.0
FR
AT
NOR
ES
FIN
NL
SW
Ownership Unbundling
ISO
Interruption Time in minutes lost per customer
(Ø 2004-2006)
Legal Unbundling
Source E-Control, Fingrid, VDN, TenneT, CEER, EU
Commission, ETSO, A.T. Kearney analysis
15
Drivers of competition in the electricity market
16
In competitive development certain stages with
certain characteristics can be observed
Drivers of competition in the electricity market
Stages of competitive development
Market development
Competitive market
Market opening
1
Grid Accesstariffs
2
Retailmargins
3
Churn rates
Source A.T. Kearney
17
First the regulator reduces grid tariffs through
cost and incentive regulation
Drivers of competition in the electricity market
Grid Access Tariffs Low Voltage1)(in ct./kWh)
2005
1989-1998
1999-2001
Tenure of Regulatory Authorities
Household Customers Market Opening 2007
Household Customers Market Opening 2007
2)
BE
DK
FRA
AT
FIN
SWE
DE
IT
UK
LUX
ES
POR
IRL
NL
Ø
1) Status 2005 2) Estimated mean value Source
Eurelectric, CEER, A.T. Kearney
18
A decrease in grid tariffs increases retail
margins and makes alternative suppliers more
competitive
Drivers of competition in the electricity market
Retail Margins Electricity Households1)(in
ct/kWh)
High Competitive Retail Markets
Retail Margin Households 2006 (in ct/kWh)
Low Competitive Retail Markets
Cumulated churn rates (in )
2004
2005
2006
1) GWh 2) Annual Consumption 3.500 kWh Retail
margin is calculated by taking the energy
component (retail prices less taxes and grid
tariffs) and deducting wholesale future prices.
For UK spot prices where taken. Source EUROSTAT,
UKPX, Nordpool, EEX, EEXA, EU Kommission,
regulatory authorities, A.T. Kearney Analysis
19
In particular lengths and type of regulation
drive competition in the European electricity
markets
Drivers of competition in the electricity market
Competition drivers
Regulatory experience

• The longer a regulator is installed in a market,
  the better the competition
• Experience shows (e.g. in Great Britain and
  Scandinavia), that establishing a working
  regulatory system as prerequisite for competition
  requires a few years

Low grid tariffs/attractive retail margins

• Countries with a longer regulatory experience
  have lower grid tariffs and higher retail margins
  
• New suppliers require comfortable retail margins
  for a sustainable interest in the electricity
  market

Market integration

• Only an integrated European electricity market
  ensures variety and increase in number of
  suppliers on the generator side ? large market
  shares in regional markets reduce in a European
  market

20
Actions to stimulate competition should orientate
towards identifiable drivers of competition
Drivers of competition in the electricity market
Actions to stimulate competition
1

• Raise transparence standards on a common level
  across Europe, e.g., in terms of invoice
  information on utilities, price changes etc.
• Simplify and accelerate churn process
• Ensure grid access for new players, e.g., improve
  data provision through grid operators

Effectively harmonized regulation in all markets
2

• Across Europe the current legal framework is not
  leveraged in the sense of the objective
• Intensification of Legal Unbundling, e.g. asset
  transfer, increased independence through
  incorporated company with independent
  representatives in advisory board and allocation
  of grid activities to grid company

Tougher implementation of Legal Unbundling on all
grid levels
3
Investment guidelines to all EU-countries for
cross-border transmission capacities

• A domestic electricity market in Europe can in
  the long term only be achieved by high performing
  transportation grid connections
• Legally binding provisions for the realization of
  grid connections are imposed for all EU-member
  states