The conclusions of the Barcelona economic summit were effectively drafted at the end of February when the European Commission and France agreed a compromise agreement on market liberalisation. It was no surprise that France conceded to opening its wholesale markets in gas and electricity by 2004 and that no date was set for full market competition, ie domestic market liberalisation.
If there are any surprises from Barcelona it is that all parties said they were pleased with the progress made, for in reality there was none. The only winner is France and, in particular, its state-owned monopoly electricity company, EDF. UK Prime Minister Blair made the expected diplomatic comments on 'progress' but it was the UK that probably has lost most. Going into the summit meeting Blair had stressed the vital importance of European economic reform with energy markets being pivotal to the reform process. But the desired reform has not been agreed.
While technically possible, the declared full liberalisation deadline of 2005 proposed by the Commission was never politically realistic. Two years on from the Lisbon summit when the reform process was initiated it is clear that this timetable was over ambitious. But it is worth noting that the timescale outlined in Lisbon for full economic reform was 2010, not five years earlier, and most analysts would concur that 2010 is a more realistic date for full liberalisation in gas and electricity.
To reach a fully liberalised status by the end of the decade will not be that straightforward. Not only will the current 15 member states have to open their markets to full competition but the issue of EU enlargement will have be to considered. It is interesting to note that the agreed date of 2004 for full wholesale market competition is the same date for the first phase of EU enlargement, when up to 10 new members could join the EU. Certainly none of these countries - which include Poland, Czech Republic, Hungary and Romania - are as advanced as the EU 15 on market liberalisation and will be unlikely to open their wholesale markets to competition within the next two years.
Another issue that has to be addressed is the quality of wholesale competition. While it is relatively straightforward to open wholesale markets the benefits will only be apparent if this is supported by lower prices and increased switching by customers of suppliers. Currently, with the exception of Sweden and the UK, there is minimal large user switching, even for those countries which have fully declared market opening. Also the rate of market consolidation is increasing.
Last month Germany's RWE acquired Innogy, which itself had been aggressively building its supply base in gas and electricity through acquisition. In the same month TXU Energi acquired the gas and electricity supply business of Amerada Hess. This month Scottish and Southern Energy will formally enter the first round of bidding for Seeboard, which is being sold by AEP. Joining the bidders will be EDF and PowerGen, itself recently acquired by Germany's E.On. There is also speculation that Scottish Power may become a bid target and if Scottish and Southern Energy is unsuccessful in its bid for Seeboard it too may become prey to acquisition. Outside the UK market, the growth in mergers and acquisition is also evident throughout Europe as utility companies seek increasing scale in their business operations.
If this level of merger and acquisition activity is maintained over the next two years the market infrastructure by the time of full wholesale competition will be markedly different from today. Indeed, with the market moving closer to a model of four or five dominant pan-European energy companies - led by RWE, E.On and EDF - it is questionable whether full wholesale competition will really have any value in the market as these companies will have assets throughout the European market. If this proves to be the scenario then reciprocity of trade between EU countries is largely irrelevant as trading will become more of a portfolio management exercise for these dominant companies.
At this juncture, the relevance of retail competition also becomes questionable. If the market is effectively carved up by four or five companies it would be difficult for other suppliers to compete on price, due to the economies of scale enjoyed by the 'big five'. With no date set for retail competition, which accounts for over 30 per cent of the supply market, it is conceivable that the issue will never see the light of day. France, the main obstacle to full market liberalisation, has no intention to open its retail sector and has no intention to privatise EDF. And as market consolidation increases so will the dominance of EDF and the resolve of the French position.
It is little wonder that President Chirac left Barcelona with a wide smile on his face. With the presidential elections taking place this month, just four weeks after the summit, he has delivered what the French public want most - a protected energy market and a dominant electricity company of which they can be proud.
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