Will German Energy Giant E.ON’s Massive Proposed Investment in Power Generation Pose a Threat to Competition in the UK Energy Market

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E.ON, which already has a grip on the UK electricity distribution market under the Powergen brand is keen to secure a larger share of the generation business. It is anxious to lobby the UK government to give a clear guidance on energy policy so that the company can make further huge investment in UK generation. But is this fair given that the German market is virtually closed to foreign entrants?

The Times recently devoted a full page to an article about E.ON’s chief executive, Paul Golby, highlighting his refusal to blame the UK Government for the lack of investment in its energy infrastructure despite his previous record of strongly criticising the new forward trading market for electricity in 2002.

However, in examining the position of E.ON, the German energy giant whom he represents, one can’t help but wonder where the authority comes from that allows him to criticise our government policy.

After all, is it not the European energy giants who refuse to open their markets to competition from the UK? They all have cosy monopolistic markets of their own but they see the UK as easy prey since they have been allowed to re-monopolise our supposedly competitive market.

Another recent article in the Sunday Business exposes the level of criticism of these energy giants by the European Commission inquiry. The Business claims that ‘the commission’s report will warn that it is considering serious action against Europe’s energy companies and governments for restrictive practices and abuse of dominant market positions’.

The Business also claims that the report is likely to criticise the energy giants’ control of gas imports, a criticism that can certainly be made of E.ON who derives great benefits from its exclusive deals with the Russian state controlled Gazprom.

This makes the UK particularly vulnerable given that we have become a net importer of gas and will increasingly depend on European gas imports via the Zeebrugge – Bacton pipeline. We saw only recently the effect of the Russian-Ukrainian dispute on gas movements to Germany and other countries in continental Europe. The fear is that any further shortages will filter through to shortages in the UK as Europeans are forced to supplement their own shortages with gas earmarked for the UK.

It is claimed that back in the 1980’s Margaret Thatcher was appalled to discover that Germany was increasing its dependency on Russia to 14% of its gas supplies.

Well this level has now risen to over 40% and in some other European countries is as high as 90%.

In future this dependency will also be transferred to the UK as North Sea reserves dwindle. This is an uncomfortable fact with which the government will have to deal when the forthcoming energy review examines security of supply.

E.ON’s Mr. Golby also expects the government to develop a long-term framework which encourages industry to invest in energy infrastructure. In other words, if industry is to commit to massive long-term investments it needs to clarify the direction of the government’s energy policy. This would appear to make reasonable sense except that it plays further into the hands of E.ON’s expansionist aims.

The European commission’s report adds that many companies have failed to adequately separate their supply and generation businesses from their gas and power networks, as required by European Law. This is a charge that holds true for Germany’s E.ON.

If it treats its own country in such a way how can E.ON be expected to help the competitive nature of the UK market if its massive investments give it further control over electricity generation?

The Times feature also cites E.ON’s continued interest in Scottish Power despite its failure to secure the company in its previous bid. It is expected that the company will make a further move after six months when it will be allowed under Takeover Panel rules to bid once again.

Scottish Power has extensive interests in both generation and networks and a successful approach by E.ON will only serve to exacerbate the creeping concentration in our market.

Electricity4business’ view

We have always felt that the UK government made a huge mistake by allowing companies to operate as both electricity generators and distributors. It gives a clear competitive advantage to those companies involved in both areas.

E.ON has already made its mark in the distribution arena and allowing it further access to UK electricity generation can only add to the future security of supply problem. It also means that retailers who source their supplies from E.ON will in future be assisting their direct competitors.

The impact on business electricity

The UK has traditionally been a net exporter of energy. However, the dwindling North Sea supplies and increasing dependency on Europe has had and will increasingly have an impact on the prices that businesses pay for electricity.

We are already seeing huge hikes in the price to businesses who have been less protected against market fluctuations than domestic consumers. However, all predictions are that prices will continue to rise and the impact will be hardest on those industries where electricity is a greater proportion of their overall cost.

Editors Notes

electricity4business is Britain's independent electricity retail company specialising in the supply of electricity to small and medium sized businesses. E4B’s aim is to cut the cost for British business by offering lower prices.

Business Electricity Retail Supply Market

96% of UK business is supplied by 6 players:

E.ON Energy – Powergen, owner

RWE – Npower, owner

EDF Energy – EDF Energy, owner

British Gas Business, Centrica Plc

Scottish Power –

Scottish & Southern Energy –

The UK government is in the throws of an energy review which is likely to support an expansion of nuclear power stations. E.ON has already expressed an interest in this as have American and Japanese companies.

Given that BNFL is being broken up and Westinghouse, the nuclear power plant experts, sold off, there must be a feeling of déjà vu in giving away control of our energy assets and thus our security of supply.

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Bernard Scally