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Evolution and de-evolution of a European power grid
Evolution and De-evolution of a European Power Grid Are European utilities really moving toward a trans-national electricity market in zohich a German utility can sell to a French industry? Are continent-wide carbon taxes imminent? Don't hold your breath. Andrew Hohnes
Utilities Survive the 'New Europe' s there any such thing as a ."European" electricity industry, as opposed to a collection of power utilities connected only by geography? A first glance suggests not. The European electricity industry contains almost every imaginable type of company. No two countries have exactly equivalentpower systems, and no two governments bring the same agenda to dealing with their electricity industry. (See Figure 1 for a very brief description of the various European unifies' systems.) In some ways, the complexity and diversity of the industry are increasing in the 1990s. Each na-
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Andy Holmes is editor of the Fhlancial Times newsletter Power in Europe. Born in Greenock, Scotland (birthplace of James Watt and Captain Kidd), Mr. Hohnes was educated at Stirling and London Universities. He worked in the UK energy department for three years before joining the Financial Times in 1981. He founded Power in Europe in 1987. He has pubUshed several books on Europe and UK energy developments.
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tional industry has its own preoccupations; nuclear power in France, privatization in the UK, company mergers in Spain. The fusion of Western and Eastern Europe is bringing with it much more complicated and troublesome relationships than seemed likely when the Berlin Wall fell. For countries such as Finland, Austria and, most of all, Germany, the new relationships between east and west are pre-eminent throughout industry and politics; nowhere more so than in the electricity industry. Until the early 1970s, such national preoccupations as these were the dominant concern of European utilities. From that point onward, however, the utilities began to be
The Electricity Journal
addressed - - and to think of themselves - - as a community. It was a community born of adversity. The common adversaries were the green movement, intrusion by politicians and finally, the European Commission, which brought greens and politicians togethen The year 1993 promised to be the year of victory for the common enemy. December 31, 1992, was to have been the final day of "protectionist" electricity markets in western Europe. The 12 members of the European Community were to throw open their national electricity grid systems - - to consumers as well as producers of electricity - - bringing redoubled competition into the power business. At the same time, the EC member countries were supposed to begin the introduction of energy and carbon taxes, designed to limit electricity use and steer electricity production toward more environmentally benign energy sources. ecent events have ensured that neither the single market nor the energy/carbon tax regime are going to arrive in the near term, and probably not in the long term either. Instead, trade in electricity will remain the preserve of utilities. Protection of the environment will depend on the actions of individual countries. The year 1992 proved as bleak a time for advocates of the free market as for Europe's Greens. The power utilities, by contrast, have learned the virtues, not of competition, but of co-operation. European utilities have come together
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in projects to rebuild or take over parts of the antiquated systems of Eastern Europe. They have mobilized to form a single lobbying group, Eurelectric, which takes charge of browbeating both national and EC administrators into abandoning ideas of free markets. Out of this, another pan-European group of power companies came together to push the idea of cutting SO2 emissions by using more gas, rather than fitting desulfurization equipment. More to
Recent events have ensured that neither the single market nor the energy~carbon tax regime are going to arrive in the near term.
the utilities are cooperating on a commercial basis, buying into each other or joining forces to win overseas business. On the political level, the utilities have formed international lobbying organizations, usually to oppose pending legislation from the EC Commission. Most European utilities and not just the biggest ones - now regard themselves as international companies, rather than merely provincial. 'n public relations jargon, they .are "taking on the challenge of international competition." In reality, they are reaching out friendly hands to their European counterparts. Although born in adversity, the utilities' new outlook has matured into a very useful set of arrangements. At the same time, the enemies which brought them together have largely been confounded.
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The Rise and Fall of Nuclear Power the point, perhaps, numerous "working parties" have sprung up over the last two years, with an agenda of discussing matters of "mutual interest" in the preservation of the status quo. This is a genuinely new development. Europe's power utilities have always been ready to gather at international talking shops, and for many years they have cooperated in basic research projects, such as the European fast breeder project. Through the UNIPEDE organization, utility researchers cooperate on technical issues of common interest. Now, however,
The idea of a "European" power industry was born in the travails of the nuclear power "boom" of the 1970s - - a boom gone bust at alarming speed. In 1973-74, all but a handful of power utilities were caught napping by the OPEC oil price hike. In reaction, by 1975 there was barely a country in Europe which did not have plans for a nuclear power program. This i n d u d e d Ireland, Luxembourg, and even Norway which, with its huge reserves of hydropower, hardly seemed in need of new sources of electricity. These three countries quickly changed their minds. 35
Figure 1: Western Eu: Germany: There are over 1,000 electricity companies, from small rural distribution companies to giant utilities. The industry is strongly regionalized; local or municipal govemments play a more important part than the federal government, as they own shares in many of the smaller companies. The industry is dominated, however, by the =BigThree" regional utiIit~es: RWE, based in Essen, which supplies the Ruhr Valley, Germany's indus~ial heartland; Bayemwerk of Munich, which supplies Bavaria; and VEW of Dortmund. Of these, RWE is I~yfar the most important and is part of a huge complex of companies with interests throughout the energy sector. The utilities of the former East Germany have largely been under the control of the "Big Three."
Netherlands: Until the 1990s, the Netherlands had a slightly chaotic system of local govemment producers and distributors. A recent program, overseen by national govemmant, of i'econstruction has left the country with four production companies and 35 distdbu~on companies. The system is overseen by the SEP, which co-.ordinatesthe national system and the trade with neighboring.countries.
Ireland: Ireland's Elecbicity Supply Board is Europe's first state-owned power utility, formed in 1927, and is acknowledged as one of the best of the public u~lities. There is some talk of privatizing the company aJthoughthis would make little difference to the operation of the power system, as the state has an "arm'slength" reIatJonshipwith the ESB, and the ESB has always been a cornmerdally-oriented company. UK: See Inset
Belgium: Over 90% of aJl eIectricity generated by F_lectrabe~,a company formed in 1990 from three private companies, all owned by Belgium's largest industrial concern, Tractebel.
Luxembourg: Apart from a small amount of local hydropower, Luxembourg imports all its power, mainly from Belgium and Germany.
France: Dominated by the state-owned Electricit~ de France (EdF), which accounts for something like 90% of all French power production. The other two main producers are the Rhone Hydro Company and Charbonnages de France, once a major power producer but fo~'cedto the margins by EdF's massive nuclear power program. EdF is the biggest power company in Europe and also, thanks to its nuclear pro.gram, the deepest in debt.
Portugal: Electriddade de Portugal (EdP), the state utility, is responsible for 95% of power production. Distribution is done by municipal companies. EdP is ~nancially weak, not least because distributors are slow in paying bills. The government is in the process of judging intemationaJtenders for the construction of its new Pego coal-fired station.
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European Communit Non-European Com~
Spain: The most volatile of the EC's power industries in recent years. The state generating company Endesa has been buying small distribution utilitie.~,consoTidatingits position in the market, while two of the biggest private u'dlitieshave merged to form Iberdrola, now second in size after Endesa. All this is in line with the government's plan of honing down the industry into three or four integrated utilities, organized on a regional basis. The state also owns the grid system, via a company ~Ied Redesa.
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The Electricity Jounlal
~e's Power Industries Norway: About 30% of Norway's electricity comes from the state producer Statkraft, 50% from municipal companies and the remainder from small independent producers. Statkraft, which also runs the national grid system, is being split up, with the grid remaining in state hands via a company ealled Sta~ett, and the power stations possibly being privatized.
Finland: Probably the most diversified power structure in Europe, with 45% of electricity produced by the state-owned Imatran Voima, the rest from a wide range of munidpal, industrial and independent generators.
Sweden: Electridty comas 50% from the state company Vattentall, which also runs the grid, 20% from municipal power boards and the remainder from industrial and independent producers. With roughly 50% nuclear and 50% hydro, Sweden is, in theory, to phase out its nuclear stations by 2010, in line with a referendum decision. This date is unlikely to be met; there is every possibility that the phase-out will never take place, and that many of the country's nuclear units will see out their normal life. It is equally unlikely, however, that Sweden will build any more nuclear stations.
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Denmark: Two power pools, Elsarn and Elkraft, coordinate activ~es of the country's 12 production companies. Elsam is to the west of the Great Belt which divides Denmark, Elkraft to the east. In 1992 the two assodations linked their systems for the first time.
Aus~ia: A patchwork system, with ownership by local councils and provincial authoritiesl as well as private companies which operate the country's larger hydro stations. Most of the electricity in Austria comes from hydro. The one nuclear power station, Zwentendorf, was completed but never operated due to an anti-nuclear referendum vote. The partially privatized Verbundgesellschaft coordinates and plans the system, as well as administering the grid and controlling power trade.
Switzerland: There are more than 1,200 eIect~dty companies of one description or another, most belong to the country's 26 "cantons" or states, and 3,000 or so "communes" or townships. The only electriciF/production fadlities belonging to the federal government are those of the state railways. It is the government, however, which lays down the general direction of policy, though with increasing difficulty, as the country polarizes over nuclear and hydro issues.
Greece: Almost all electridty is supplied by the state-owned Public Power Corporation, which has been involved in numerous corruption scandals and is deep in debt. The market is now being opened up to private interests, who are being invited to bid for construction and operation of Greece's new gas and coalfired stations.
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Italy: ENEL, the state utility, is responsible for about 80% of electricity production, although Italy also has a strong and increasingly vecal municipal power industry. ENEL is r~dden with debt and unable to persuade Italian politicians of the need for a tariff rise. It also struggles against Mafia interference at its construction sites, and the ingrained hostility of local governments in the south, which for some reason regard ENEL as an instrument of right-wing repression. In northern Italy, by contrast, ENEL power station sites are regarded as environmental atroc~es which bring with them hordes of Communist labourers. None of the big power companies in Europe has a tougher job than ENEL which performs dally wonders in keep ing the lights burning. PolitJcalchatter about pr~tizing the company can be regarded as fanciful.
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Elsewhere, however, nuclear power moved from being the preserve of a few of the biggest countries, to being the commonly accepted future for the electricity industry in all but the smallest European nations. nly one country, France, has come anywhere near fulfilling the nudear ambitions of those days. Elsewhere, as demand for electricity dipped post1979, and as the cost of sustaining major nuclear programs became dearer, plans were cut back and many orders were cancelled. Three Mile Island accelerated the process; Chernobyl completed it. The dreadful long-term consequences of the Chernobyl accident itself are only n o w becoming dear. Subsequent incidents at nudear plants in the former Soviet Union have made doubly sure that Chernobyl lives on in the communal memory. The nuclear power issue brought the electricity industry into the public spotlight, and made it a subject of deep political controversy for the first time. In the rebuilding of Europe after 1945, the availability of electricity was a sign of returning norreality. The establishment of the big state utilities - - EdF in France, the CEGB in the UK, ENEL in Ital~ and so on - - were a gegture of faith in the future. Electricity meant the good times were coming to everyone. For those whose domestic hearths burned coal, wood or, frequently, nothing at all, electricity was little short of a mirade. To question the organization which provided it was un-
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grateful if not downright unpatriotic. Through the '50s, and on through the boom years of the '60s, electricity utilities were chasing a demand for power which seemed to have no lhnits. Outside the narrow circle of government planners, no one cared to question the electricity industry's plans or motivations; this was just as true in France or Britain as it was in the USSR. The electricity industry was
But by the late 1980s, it was clear that the French had taken a very risky gamble in their move to nuclear power.
wholly unprepared for the antinuclear movement, especially for the speed at which, during the mid-1970s, it moved on to a national and then international basis. The electricity industry, used to dealing with purely local concerns, was slow to catch up. The pro-nudear groupings which formed in the earl.y 1980s, centering on organizations like the IAEA, came too late to do much good. The anti-nuclear lobby had already scored two notable victories by halting nuclear power in its tracks. This was done by referenda, first in Sweden - - a country
highly dependent on n u c l e a r - and then in Austria. In the Swedish case, after a good deal of horse trading, the referendum decision committed the country to ridding itself of nuclear power by the year 2010. In Austria, a referendum on Zwentendorf, the country's first reactor, then still under construction, decided that the reactor should be completed but not operated. This was exactly what happened. Despite plans to turn it into everything from a gas-fired station to a theme park, Zwentendorf stands where it was built, entirely useless. hese two polls showed that nuclear power could be stopped. The Italian Greens learned the lesson and shut down Italy's nuclear program - - which had not amounted to much anyw a y - in 1987. Two years later, Switzerland did the same, in two referenda which vetoed new nudear construction. Elsewhere, notably in West German3~ local courts and a labyrinthine licensing system were used to tie n u d e a t power in knots. In other cases, such as the UK and Spain, the industry crippled itself by its own incompetence. For a while, France appeared to offer a shining example to the rest of Europe. But by the late 1980s, it was dear that the French had taken a very risky gamble in their move to nuclear power. The state utili~, Electricit6 de France (EdF), began to run up debts which would have bankrupted many a small country, as electricity demand failed to catch
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The Electricity Jounzal
up with the stations built to meet it. Nuclear did not fulfil its promise to reduce French electricity prices. The development of a "commercial" fast breeder reactor, which was at the center of French nuclear strategy, failed miserably. The first full-scale FBR, Superphenix, was closed in July 1992, and will remain that w a ~ probably forever. It has never produced electricity for more than a few weeks at a time. Inevitably, even the French came to accept that they had enough nuclear power stations. ~Isewhere, apart from a sinrgle PWR in the UK, the orders dried up and disappeared. By 1990, the European nuclear market was all but moribund. A sign of the desperation of reactor builders was the agreement between Framatome of France and Kraftwerk of Germany, previously deadly rivals, to cooperate on a "Euro-PWR", to meet the reviving nuclear power market (though it looked to be a figment of their imagination).
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Rise of t h e G r e e n s Nuclear power provided an impetus to interference from green activists and from government. The activists, encouraged by their s~access on the nuclear issue, broadened their activities into many other areas of the industry, not simply as objectors, but as proponents of new technologies and methods of operation, from windmills to energy-efficient freezers. From government's point of view, the nuclear debacle had shattered the mystique which had surOctober 1992
rounded the industry's planners and ended forever the idea that the electricity industry knew its own business better than anyone else. As environmentalism caught on with the public, from the late 1970s onwards, activists and government began to find areas of common ground. The arrival of Petra Kell~ the "Green Joan of Arc", in the West German Bundestag, was a point of no return for the most important country in Europe. Given the
A sign of the desperation of reactor builders was the agreement between previously deadly rivals to cooperate on a "Euro-P WR."
since 1974, and national air quality standards were set 10 years before that. In 1983, however, scientific and media investigations showed that, despite all efforts to keep the air dean, German forests were dying. A national panic over "forest-death" set in. The Germans were not the first to discover that sulfur emissions harmed trees, nor the fact that airborne sulfur crosses national boundaries; Sweden had tried to make an international issue of this in the early 1960s. Germany, however, was not just a bigger country than Sweden; it was a member of the EC. Thus it could, through its dominance within the organization, force other members to make more effort to clean up their power stations. In December 1983, the EC's Directive on Large Combustion Plant Emissions was born. rafting a directive was one thing; getting it turned into law quite another. The UK, under Margaret Thatcher, was neither particularly green nor particularly amenable to EC interference in the country's affairs. The other dominant EC member, France, did not care much one w a y or the other, given its dependence on n u d e a r power. The directive went through a stormy passage, in which there were numerous counter-proposals by smaller EC countries, all to no avail. In the end, the final emergence of a Directive, much diluted from the original proposal, did not happen until 1987, and the deciding factor was Cherno-
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see-saw nature of German coalition politics, a handful of seats in the Bundestag meant the difference between power and impotence. Both wings of German politics tried their best to look green. In West Germany's forests, the unholy alliance between Greens and EC Commissioners was formed. Germany has always had an unusually deep love of trees, and specifically forests; German musical culture, from Wagner to Horst Jankowski, is saturated in forest imagery. The German power industry had been required to meet strict pollution control standards
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byl, which made the future of coal look entirely different. The "acid rain" directive, weakened though it was, still provided much encouragement to the environmentalists, and to the EC Commission itself, to press forward with new environmental initiafives. Rather than attempting amelioration of specific problems, the Commission would broker the biggest environmental deal of them all: a new system of taxation which would force down the use of energy and direct both producers and consumers towards the "correct" ways of producing and using energy, and specifically electricity. Drawing this time on the ideas of two smaller countries, Denmark and the Netherlands, the Commission began to work on plans for an energy/carbon tax directive. he Commission overreached itself in a big way. The carbon tax proposals were brought to ministers of the 12 member countries on the eve of the Rio summit and were shot down in flames. The proposals amounted to the equivalent of $3 per barrel of oil, rising to $10 by 2000. The tax was to fall 50% on the energy content of all renewable energy sources and 50% on carbon content. It would be "revenue neutral", because the tax gathered would be redistributed by tax cuts in other areas. If the tax plan ever had much chance, that chance had faded by 199Z The recession had reached even Germany and the environment had, largely as a conse-. quence of this, slid down the
agenda. The 12 ministers killed the proposal stone dead by introducing two preconditions; --first, that the EC should not introduce any such tax scheme until the USA and Japan did likewise; second, that the tax should be subject to the principle of "subsidiarity'; a new piece of ECspeak which meant that each country could apply the measure according to national priorities, or not apply it at all.
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The EC environment commissioner, Carlo Ripa de Meana, refused to represent the EC at Rio and subsequently resigned, an unusually direct and honest response for an EC Commissioner. By May 1992, the EC Commission was in no condition to dictate terms (See Inset 1). Aside from this, the more powerful competition directorate, DG4, had eased environment on to the sidelines, in favor of the new shibboleth, competition.
The Single Market Throughout the 1980s, Europe swung to the political right. The
leaders of Britain and German}~ Thatcher and Kohl, dominated the scene, while in France the erstwhile socialist Mitterrand moved more and more towards the center ground with every year of his interminable presidency. Elsewhere, in countries such as Spain and Greece, governments of the left went with the prevailing tide, drifting slowly but surely rightward. The European Commission was bound to follow the drift, given that its commissioners are appointed by member governments. It was, for example, a Thatcher appointee, Leon Britain, who took over the Competition directorate, DG4, in 1986 and used his position to further Thatcherite ideas on free markets and the commercial ethos. This centered around the "completion of the single market." A draft directive was issued in 1985, calling for unlimited free trade in gas and electricity by the end of 1992. Third party access (TPA) was the key; in this case TPA meant free trade between utilities and foreign customers, rather than access to grids by independent producers, although this would follow in due course. Like the UK privatization, with which it enjoyed a symbiotic relationship, the EC's single market project was born in arrogance and bred in ignorance. The Commission, which at that time was becoming steadily more influential, felt itself able to enforce the new regime regardless of protests from some member countries as well as
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numerous utilities. The Commission first decided to create a single market, and only then decided to find out w h y - - not if ~ it was a good idea. The bureaucrats put two and two together, and confidently announced that the answer was five.
France has a surplus of nuclear electricity; Italy had a shortage; German industrial customers wanted cheap electricity; France and Belgium could sell it to them. What could be simpler? At first, France proved a powerful ally. By 1985, as the nuclear
surplus began to reach epic proportions, the French government saw an increase in exports as a justification for the surplus. France had originally intended, via the fast breeder reactor, to export its nuclear wizardry to the world. If it could not conquer foreign markets with the breeder, then selling electricity made from French nuclear stations was the next best thing. There were problems, however. rance had locked itself into the most inflexible power source known to man. When the system was under strain, in times of drought or industrial disruption, EdF needed all the help it could get from foreign utilities. It simply could not afford to alienate them by stealing their customers. The income from exports, though attractive, was not a solution to EdF's chronic financial problems. Only a sizeable tariff increase would do this. But having promised cheap power from nuclear energy; the government could hardly allow EdF tariffs to glide into the upper range of European prices. Post-Chernobyl, both French industry and the public at large became less willing to bear the risks and costs of nuclear power in order to give the Germans cheap electricity. These were the problems of just one country. Unifying tariff systems, signing connection agreements and grid contracts, regulating the n e w market; these and a thousand other problems were revealed to the EC Commission in a slow and painful program of ed-
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ucation in the basics of selling electricity. The irony of it all was that European countries had never been, except in wartime, closed protectionist markets. Two international organizations, UCPTE on the European mainland and NORDEL in Scandinavia, existed for the sole purpose of administering the huge volume of electricity which passes across national borders every day, as it has been doing for many years (see Inset 2). These, however, were power pools, not markets. While massive increases in traded electricity became apparent in the 1980s, these were largely the result of a single transaction ~ French sales to Italy. The rest of the arrangements were cooperative as much as commercial - - swap deals which generally came out roughly even at the end of every year. Turning these systems into commercial markets would not change them; it would ruin them.
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None of this deterred the Commission from spending six weary years "refining" the electricity trade directive and employing a horde of lawyers and consultants to help them do it. inally, in June 1992, a draft irective was put before the Council of energy ministers. It was a much diluted version of the 1985 draft. Among other things, the target date had moved forward to 1997, and the directive was subject to the same principle of subsidiarity which had fatally compromised the energy taxation scheme. The key proposal, on TPA for large consumers, was opposed by all but three ministers. Britain and Portugal were in favor, and Ireland gave qualified support. Portugal was, in effect, simply carrying on its long-standing feud with Spain over hydro rights. Given that Britain and Ireland are separated by water from the rest of the EC, and from each other, their participation in the new market would have been
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rather limited. The single market was all but dead. T h e Great British E x p e r i m e n t It was hardly surprising that Britain lent its support. Since 1987, that country had been pushing the idea of a free electric!ty market up to, and probably well beyond, its natural limit. By mid1992, that program was also in deep trouble. In 1987, Margaret Thatcher won her third general election victory: In the eight years since she first won power, her Conservative Party had made it a central part of its economic policy to return nationalized industries to the private sector. Shortly before the election, two of the country's industrial giants, British Telecom and British Gas, had been "privatized," to use the word which Thatcher put in the mouths of politicians the world over. Even In early 1987, however, it seemed improbable that electricity would be privatized. It was, some argued, simply too big, too complex and too important an industry to be let out of state control. This proved not to be the case. Not only would electricity be privatized; it would also be restructured, and placed in an entirely new kind of system. The decision to privatize was inescapable. The electricity business was too lucrative a target for the British Treasury to miss. The industry had over-ordered power stations in the 1970s, had long since paid for them, and had ordered little or nothing in the 1980s. As a result the industry 1lie Electricity Joun~al
was loaded with money. The main compan3~ the Central Electricity Generating Board, and the 12 distribution companies in England and Wales, were turning enormous yearly profits and had paid back most of their state loans. It was a temptation no finance minister could turn down. elling the industry w o u l d not be enough, however. The industry had to be changed. This had nothing whatever to do with the industry itself. There was no suggestion that it was notably inefficient, compared with foreign power utilities, nor any particularly convincing reason w h y a given set of changes would make it more efficient. The reason w h y the electricity industry was so radically shaken up lay in the sale of British Gas. There was a widespread feeling, in parliament and amongst the political commentators in the press, that British Gas had been allowed to escape into the private sector with its monopoly powers unchanged. There was no incentive, therefore, for the company to become more efficient than it had been in the public sector. Only competition could force the state companies to become real businesses. Complaints about the privatized British Telecom - - mainly concerning its failure to provide public services like phone booths which worked - - was further evidence that privatization was not enough. Electricity - - the biggest sale of them all - - had to be done better. It did not occur to anyone in the upper reaches of the Conservative
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43
Party to ask whether this was an industry in which competition would be possible, let alone useful. The Party, its third general election victory still fresh in the memory, was not in the mood to question its own dogma. Like the EC Single Market, it was a case of an answer looking for questions. The shape of the industry was conditioned by a two simple ideas: (1) Competition improves performance, under any circumstances, in any industry. (2) The private sector is always more efficient than the public sector. The privatization of the electricity industry showed, in very short order, how wrong these ideas were. fter a period of wrangling with the companies involved, and among the numerous financial analysts and consultants who had been employed for the purpose, a new system was hammered out (See Inset 3). It fell neatly between the devil and the deep blue sea. It involved the trauma of a major upheaval in the country's biggest industry; but not quite enough of an upheaval. If the generating industry was to prove competitive in the way the government intended, then the CEGB had to be split into a number of competing generating units; a number much bigger than two. The limitation on the extent of the split was n u d e a r power. The London financial institutions took one look at the British nuclear power sector and turned
A
44
away in horror. The message was conveyed to energy secretary Cecil Parkinson, in words of one syllable, that the City of London would not buy nuclear power stations. It would not even take them as a free gift. This, Parkinson could not accept. He attempted to compensate for the burden of nuclear power by giving the company which took it over a sufficiently enormous tranche of non-nuclear stations to make it sellable. Having done this, it would not be very useful to create a number of tiny companies around it; one shark and twelve catfish does not constitute competition. Therefore there came into being National Power - - the nuclear company - - with 70% of the CEGB's power stations, and PowerGen with the rest. This did not seem a particularly hopeful framework for competition. New entrants to the system were being asked to compete with two "sitting tenants" who also happened to be among the big-
gest power companies in Europe (see Table 1). Initially, the prospects for independent generation looked miserable. Yet within 18 months of the two generators being sold, there was talk of "gas mania" as numerous projects for gas-firing, combined cycle generators got off the drawing board and into construction. The cause was neither an economic miracle in the price of gas nor a change in the regulatory framework, It was, instead, a marriage of convenience. n the original plan for a new system, there were to be three distinct kinds of "non-CEGB" generation: independent generators, selling power into the pool and on contract to industrial consumers generation by the 12 regional electricity companies (RECs) for their own use industrial autoproduction (self-generation). The problems besetting independents have already been mentioned. The 12 RECs were dis-
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-
-
-
Table 1: Europe's Biggest Utilities Status Electricite de France ENEL (Italy) National Power (UK)1 RWE (Germany) Vattenfall (Sweden) PowerGen1 Electrabel (Belgium)2 Preussenelektra (Germany) Endesa (Spain) Iberdrola (Spain)3
Public Public Private Private Public Private Private Private Public Private
Sales (TWh) 304.0 220.5 123.8 120.6 77.3 76.5 64.7 51.1 47.2 46.4
Employees 122,300 111,000 16,000 23,521 10,930 9,430 17,149 6,676 15,678 14,139
Source:AndersenConsulting(1991)with ~tera~onsby Powerin Europe(1992).F'~uresreferto 1990. I. These two companiesare generatorsonly. 2_ Formedin 1990from three ~lities; l~gurosare those of the componentcompaniesro~edtogether. 3. Formedin 1991from two ~lilies; fgures are those of the componentcompaniestotedtogether.
The Electricity Jounzal
couraged by their new masters, the financial institutions, from becoming involved in anything so risky as building power stations. The shareholders saw the RECs as widows and orphans bonds, and wanted them to stay that way. As for industry, most companies believed at first that the ability to contract direct with generators would bring d o w n prices. This proved not to be the case; quite the opposite. The really big companies had, pre-privatization, enjoyed various indirect subsidies. When they began to pay real market prices, the effect was trau-
matic. By that time, however, the recession was getting into its swing, and capital expenditure on power stations dropped off the agenda. hile none of the three parties could become serious players individually, they came to realize that, in combination, they could make something happen. Specifically; the 12 RECs could contract for electricity over 15 years or more, allowing the operators to offer sufficient guarantee of return to raise finances and to buy long-term gas supplies. Both the gas and the electricity
W
Table 2: The UK's New Gas Stations Station
Capacity (MW) EquityHolders
Roosecote
200
Killingholme Sellafield Teeside
900 160 1875
Brigg Corby
240 350
Peterborough Killingholme Rye House Medway
360 650 680 660
Barking Derwent
1000 200
Keadby Deeside Staythorpe Didcot Connah'sQuay
670 500 1500 1500 1350
TOTAL
ASEABrown Boveri(80%)NorthWest REC (20%) PowerGen2 British NuclearFuels(100%) Enron(50%); Northern,SouthWales,South Western and MidlandsRECs(50%) YorkshireREC (75%) IVO (Finland)(25%) Hawker Siddeley(40%) ESB Ireland(20%) East MidlandsREC (40%) Hawker Siddeley(50%) EasternREC (50%) NationalPower PowerGen AES Electric(%), Southern,South-Eastern RECs ( % each) BICC (45%)CU Power(45%)Schroeders(10%) Courtaulds,MissionEnergy,SouthernREC (percentagesundecided) ScottishHydro(50%) Manweb(50%) NationalPower National Power NationalPower PowerGen
On line~
1991 1992 1993 1993 1993 1993 1993 1993 1993 n/a n/a n/a n/a n/a n/a n/a n/a
12,975
1. Most of the st,atJonsmarked not availabIe (n/a) will be on line in 1994-96,but have yet to announce an off~ia] target date. 2. The Killingholmesite, which belonged to the CEGB, was ~vided between the two successor ~ m ~ , ai~ ~ planning permission for new power stations, which had been obtained several years previously. The total capacity of these plants should be measured against the total 61,300 MW available on the national grid in England and Waios in 1990J91. Rants in the planning or proposal stage, which have yet to achieve contracts, would add a further 6,000 MW to the total. In terms of new plants on t ~ system, the total due to be commissioned in 1993, nearly 4,000 MW, is nearly doutYethe arno~t ever inb'oducedon to the CEGB system in a single year. The 1993 I~guredoes not indude the 1,200 MW SizeweUB nuclear power stations, also due on in late 1993 or eady 1994.
October 1992
were sold on a take-or-pay basis. From a state of hopelessness, the new generating industry became rock solid. The price of the electricity, which was almost certain to stay above the coal-based pool price, was really neither here nor there. The point was, for the RECs, that these contracts provided some leverage against the duopoly power of National Power and PowerGen. A power station market, which was once sealed up for British interests, now cracked open (see Table 2). Meanwhile, the government had finally acknowledged that British nuclear power was not a sellable commodity and had removed the nuclear element from National Power and the Scottish nuclear generator, ScottishPower. The withdrawal of nuclear power from the sale took a long time; so long that it precluded the possibility of changing the structure of the industry to reflect the new circumstances. Thus the industry kept the structure of a privatized industry including nuclear power out of state hands, while leaving nuclear in state hands. In order to ease the burden on the Treasury, a nuclear quota was introduced, making purchase of nuclear electricity mandatory on the 12 RECs, while a n u d e a r lev~ running at 10% or above, was put on electricity tariffs in the franchise market to keep n u d e a r solvent. The government pleaded environmental reasons for the quota and levy, though no one believed them except, surprisingly enough, the EC Commission, which was pre-
45
pared to countenance this blatant protectionism to serve the greater good of a free market. The market's freedom, however, looked more shaky by the day. By 1992, there were two protected sectors, gas and nuclear. Then there was coal. It was always assumed that the privatization of electricity and the opening up of fuel markets spelt death to the UK's state-owned coal company British Coal. The original consultative document of electricity privatization, published in 1987, spoke of coal entirely in the past tense. Barely a year later, however, energy secretary Parkinson made a pledge to the annual Conservative conference which, at the time, was taken as the merest persiflage: he would privatize British Coal. Analysts assumed - quite plausibly -that Parkinson's pledge
on coal was a device to avoid talking about the plans for selling electricity which were, in late 1988, in a complete mess. Yet in 1992, the Conservatives returned for their fourth consecutive term :in office, still intent on selling off British Coal. he fact is that the o n c o m ~ g gas stations will cut coal s market to the bone, even if the government can contrive to keep out imported coal, and persuade the generators not to utilize the 30 million tons or so which they have in stock as a result of previous fixes. The take-or-pay contract which the new gas stations will hold ensures that the coal stations will be driven down the merit order, to levels of operation at.which the best of them will be barely economic, unless the coal is cheaper than any British product. Somehow, the government hopes
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to persuade the stock market, or some particularly feckless coal company, to buy a set of mines which face rapid and inevitable decline. All this is to be done without an energy department. The incoming government d u m p e d the department into the gigantic department of trade and industry. This was the visible signal of the Conservatives" abandonment of energy policy-making. The real significance of the "no-policy policy" is to be seen in an electricity system being turned upside down.
Retrenchment: An End to Experimentation? Not so long ago European state utility companies trembled at the idea that the British experiment might be repeated on them. Now, when they address EC Commis-
What l~@dof dance for Europe's utilities? 46
~lle Electricity Journal
sioners or members of their own governments, utility chieftains point to Britain as a dreadful example of what privatization and competition can do. The long fiasco of British privatization, and the demise of the EC single market, have served to bring the electricity utilities of Europe closer together and taught them to speak with a single voice. This was the precise opposite of what was intended. hird party access, outside the UK, is a dead letter. There is, undoubtedl~ an opening of certain national markets. Yet it has to be asked whether this opening extends much beyond the newly-formed and rather exclusive club of big power companies. For example, the Portuguese government has been seeking tenders for construction and operation of its Pego power station since late 1991. Various US and Japanese companies were involved in the early stages, but the final shortlist, made public in July 1992, contains but four names: National Power; Electrabel; and a consortium of PowerGen and Iberdrola. And when and if the nuclear power market in Europe revives, a consortium of France's Framatome and Germany's f4,raftwerke, once deadly rivals, is ready to swallow up the orders. The EC's agenda for the power industry - - competition, TPA, carbon taxes and all the rest of it - was drawn up during the fat years of the late 1980s. Now, as the 1990s become hungrier in west as well as east Europe, the time for experiments is, for the
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October 1992
time being at least, over. Where privatizations are carried out on the electricity industry they will be for the simple, old-fashioned motive of raising cash. It is not the most lofty of motives, but it causes the least trouble. "In the light of the British experience, that looks like no bad thing. It may be time for a reassessment of the integrated utilit~ which seemed to have fallen into such disrepute. Whatever else may happen in the European power market of the future, one
thing is certain; it will never be easy or cheap to build power stations, given the environmental objections which meet every new project - - wind farms and hydro stations, as well as coal or nuclear plants. The way of the future has to include greater emphasis on the way electricity is used and the means by which more value can be gained from each station. This will include refurbishment and
conversion. It will also have to include demand-side management (DSM), which is beginning to appear on the agendas of European utilities as well as green parties. Bizarre as it may seem, the European leader in this field is none other than Electricit6 de France. The overload of baseload supply which EdF created for itself has to be accommodated by flattening the demand curve. EdF tried load-following with its PWRs, with little result. It is n o w engaged in a long-term attempt to change the behavior of its consumers, in every sector of the economy; through a tariff system whose complexity is becoming legendary. EdF is also introducing metering and fuel-switching systems in households throughout France. ' n the UK, meanwhile, the .new system has introduced a race for the cheap kilowatt, introducing wasteful power station construction and sectioning the market into pieces whose only rationale is to sustain and protect the fuel producers and "independent" generators. Introducing DSM into this jungle will be an impossibility. If they can muster sufficient rationality, it may be that Europe's various governors will begin to see the integrated utility as something more than a relic of postwar socialist centralism. At the very least, they may begin, belatedly, to recognize that competition, energy efficiency and environmental protection do not sit easily with each other. ..
47
Utilities Survive the 'New Europe' s there any such thing as a ."European" electricity industry, as opposed to a collection of power utilities connected only by geography? A first glance suggests not. The European electricity industry contains almost every imaginable type of company. No two countries have exactly equivalentpower systems, and no two governments bring the same agenda to dealing with their electricity industry. (See Figure 1 for a very brief description of the various European unifies' systems.) In some ways, the complexity and diversity of the industry are increasing in the 1990s. Each na-
I
Andy Holmes is editor of the Fhlancial Times newsletter Power in Europe. Born in Greenock, Scotland (birthplace of James Watt and Captain Kidd), Mr. Hohnes was educated at Stirling and London Universities. He worked in the UK energy department for three years before joining the Financial Times in 1981. He founded Power in Europe in 1987. He has pubUshed several books on Europe and UK energy developments.
34
tional industry has its own preoccupations; nuclear power in France, privatization in the UK, company mergers in Spain. The fusion of Western and Eastern Europe is bringing with it much more complicated and troublesome relationships than seemed likely when the Berlin Wall fell. For countries such as Finland, Austria and, most of all, Germany, the new relationships between east and west are pre-eminent throughout industry and politics; nowhere more so than in the electricity industry. Until the early 1970s, such national preoccupations as these were the dominant concern of European utilities. From that point onward, however, the utilities began to be
The Electricity Journal
addressed - - and to think of themselves - - as a community. It was a community born of adversity. The common adversaries were the green movement, intrusion by politicians and finally, the European Commission, which brought greens and politicians togethen The year 1993 promised to be the year of victory for the common enemy. December 31, 1992, was to have been the final day of "protectionist" electricity markets in western Europe. The 12 members of the European Community were to throw open their national electricity grid systems - - to consumers as well as producers of electricity - - bringing redoubled competition into the power business. At the same time, the EC member countries were supposed to begin the introduction of energy and carbon taxes, designed to limit electricity use and steer electricity production toward more environmentally benign energy sources. ecent events have ensured that neither the single market nor the energy/carbon tax regime are going to arrive in the near term, and probably not in the long term either. Instead, trade in electricity will remain the preserve of utilities. Protection of the environment will depend on the actions of individual countries. The year 1992 proved as bleak a time for advocates of the free market as for Europe's Greens. The power utilities, by contrast, have learned the virtues, not of competition, but of co-operation. European utilities have come together
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October 1992
in projects to rebuild or take over parts of the antiquated systems of Eastern Europe. They have mobilized to form a single lobbying group, Eurelectric, which takes charge of browbeating both national and EC administrators into abandoning ideas of free markets. Out of this, another pan-European group of power companies came together to push the idea of cutting SO2 emissions by using more gas, rather than fitting desulfurization equipment. More to
Recent events have ensured that neither the single market nor the energy~carbon tax regime are going to arrive in the near term.
the utilities are cooperating on a commercial basis, buying into each other or joining forces to win overseas business. On the political level, the utilities have formed international lobbying organizations, usually to oppose pending legislation from the EC Commission. Most European utilities and not just the biggest ones - now regard themselves as international companies, rather than merely provincial. 'n public relations jargon, they .are "taking on the challenge of international competition." In reality, they are reaching out friendly hands to their European counterparts. Although born in adversity, the utilities' new outlook has matured into a very useful set of arrangements. At the same time, the enemies which brought them together have largely been confounded.
l
The Rise and Fall of Nuclear Power the point, perhaps, numerous "working parties" have sprung up over the last two years, with an agenda of discussing matters of "mutual interest" in the preservation of the status quo. This is a genuinely new development. Europe's power utilities have always been ready to gather at international talking shops, and for many years they have cooperated in basic research projects, such as the European fast breeder project. Through the UNIPEDE organization, utility researchers cooperate on technical issues of common interest. Now, however,
The idea of a "European" power industry was born in the travails of the nuclear power "boom" of the 1970s - - a boom gone bust at alarming speed. In 1973-74, all but a handful of power utilities were caught napping by the OPEC oil price hike. In reaction, by 1975 there was barely a country in Europe which did not have plans for a nuclear power program. This i n d u d e d Ireland, Luxembourg, and even Norway which, with its huge reserves of hydropower, hardly seemed in need of new sources of electricity. These three countries quickly changed their minds. 35
Figure 1: Western Eu: Germany: There are over 1,000 electricity companies, from small rural distribution companies to giant utilities. The industry is strongly regionalized; local or municipal govemments play a more important part than the federal government, as they own shares in many of the smaller companies. The industry is dominated, however, by the =BigThree" regional utiIit~es: RWE, based in Essen, which supplies the Ruhr Valley, Germany's indus~ial heartland; Bayemwerk of Munich, which supplies Bavaria; and VEW of Dortmund. Of these, RWE is I~yfar the most important and is part of a huge complex of companies with interests throughout the energy sector. The utilities of the former East Germany have largely been under the control of the "Big Three."
Netherlands: Until the 1990s, the Netherlands had a slightly chaotic system of local govemment producers and distributors. A recent program, overseen by national govemmant, of i'econstruction has left the country with four production companies and 35 distdbu~on companies. The system is overseen by the SEP, which co-.ordinatesthe national system and the trade with neighboring.countries.
Ireland: Ireland's Elecbicity Supply Board is Europe's first state-owned power utility, formed in 1927, and is acknowledged as one of the best of the public u~lities. There is some talk of privatizing the company aJthoughthis would make little difference to the operation of the power system, as the state has an "arm'slength" reIatJonshipwith the ESB, and the ESB has always been a cornmerdally-oriented company. UK: See Inset
Belgium: Over 90% of aJl eIectricity generated by F_lectrabe~,a company formed in 1990 from three private companies, all owned by Belgium's largest industrial concern, Tractebel.
Luxembourg: Apart from a small amount of local hydropower, Luxembourg imports all its power, mainly from Belgium and Germany.
France: Dominated by the state-owned Electricit~ de France (EdF), which accounts for something like 90% of all French power production. The other two main producers are the Rhone Hydro Company and Charbonnages de France, once a major power producer but fo~'cedto the margins by EdF's massive nuclear power program. EdF is the biggest power company in Europe and also, thanks to its nuclear pro.gram, the deepest in debt.
Portugal: Electriddade de Portugal (EdP), the state utility, is responsible for 95% of power production. Distribution is done by municipal companies. EdP is ~nancially weak, not least because distributors are slow in paying bills. The government is in the process of judging intemationaJtenders for the construction of its new Pego coal-fired station.
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European Communit Non-European Com~
Spain: The most volatile of the EC's power industries in recent years. The state generating company Endesa has been buying small distribution utilitie.~,consoTidatingits position in the market, while two of the biggest private u'dlitieshave merged to form Iberdrola, now second in size after Endesa. All this is in line with the government's plan of honing down the industry into three or four integrated utilities, organized on a regional basis. The state also owns the grid system, via a company ~Ied Redesa.
36
The Electricity Jounlal
~e's Power Industries Norway: About 30% of Norway's electricity comes from the state producer Statkraft, 50% from municipal companies and the remainder from small independent producers. Statkraft, which also runs the national grid system, is being split up, with the grid remaining in state hands via a company ealled Sta~ett, and the power stations possibly being privatized.
Finland: Probably the most diversified power structure in Europe, with 45% of electricity produced by the state-owned Imatran Voima, the rest from a wide range of munidpal, industrial and independent generators.
Sweden: Electridty comas 50% from the state company Vattentall, which also runs the grid, 20% from municipal power boards and the remainder from industrial and independent producers. With roughly 50% nuclear and 50% hydro, Sweden is, in theory, to phase out its nuclear stations by 2010, in line with a referendum decision. This date is unlikely to be met; there is every possibility that the phase-out will never take place, and that many of the country's nuclear units will see out their normal life. It is equally unlikely, however, that Sweden will build any more nuclear stations.
J
Denmark: Two power pools, Elsarn and Elkraft, coordinate activ~es of the country's 12 production companies. Elsam is to the west of the Great Belt which divides Denmark, Elkraft to the east. In 1992 the two assodations linked their systems for the first time.
Aus~ia: A patchwork system, with ownership by local councils and provincial authoritiesl as well as private companies which operate the country's larger hydro stations. Most of the electricity in Austria comes from hydro. The one nuclear power station, Zwentendorf, was completed but never operated due to an anti-nuclear referendum vote. The partially privatized Verbundgesellschaft coordinates and plans the system, as well as administering the grid and controlling power trade.
Switzerland: There are more than 1,200 eIect~dty companies of one description or another, most belong to the country's 26 "cantons" or states, and 3,000 or so "communes" or townships. The only electriciF/production fadlities belonging to the federal government are those of the state railways. It is the government, however, which lays down the general direction of policy, though with increasing difficulty, as the country polarizes over nuclear and hydro issues.
Greece: Almost all electridty is supplied by the state-owned Public Power Corporation, which has been involved in numerous corruption scandals and is deep in debt. The market is now being opened up to private interests, who are being invited to bid for construction and operation of Greece's new gas and coalfired stations.
4
t
Italy: ENEL, the state utility, is responsible for about 80% of electricity production, although Italy also has a strong and increasingly vecal municipal power industry. ENEL is r~dden with debt and unable to persuade Italian politicians of the need for a tariff rise. It also struggles against Mafia interference at its construction sites, and the ingrained hostility of local governments in the south, which for some reason regard ENEL as an instrument of right-wing repression. In northern Italy, by contrast, ENEL power station sites are regarded as environmental atroc~es which bring with them hordes of Communist labourers. None of the big power companies in Europe has a tougher job than ENEL which performs dally wonders in keep ing the lights burning. PolitJcalchatter about pr~tizing the company can be regarded as fanciful.
October 1992
37
Elsewhere, however, nuclear power moved from being the preserve of a few of the biggest countries, to being the commonly accepted future for the electricity industry in all but the smallest European nations. nly one country, France, has come anywhere near fulfilling the nudear ambitions of those days. Elsewhere, as demand for electricity dipped post1979, and as the cost of sustaining major nuclear programs became dearer, plans were cut back and many orders were cancelled. Three Mile Island accelerated the process; Chernobyl completed it. The dreadful long-term consequences of the Chernobyl accident itself are only n o w becoming dear. Subsequent incidents at nudear plants in the former Soviet Union have made doubly sure that Chernobyl lives on in the communal memory. The nuclear power issue brought the electricity industry into the public spotlight, and made it a subject of deep political controversy for the first time. In the rebuilding of Europe after 1945, the availability of electricity was a sign of returning norreality. The establishment of the big state utilities - - EdF in France, the CEGB in the UK, ENEL in Ital~ and so on - - were a gegture of faith in the future. Electricity meant the good times were coming to everyone. For those whose domestic hearths burned coal, wood or, frequently, nothing at all, electricity was little short of a mirade. To question the organization which provided it was un-
O
38
grateful if not downright unpatriotic. Through the '50s, and on through the boom years of the '60s, electricity utilities were chasing a demand for power which seemed to have no lhnits. Outside the narrow circle of government planners, no one cared to question the electricity industry's plans or motivations; this was just as true in France or Britain as it was in the USSR. The electricity industry was
But by the late 1980s, it was clear that the French had taken a very risky gamble in their move to nuclear power.
wholly unprepared for the antinuclear movement, especially for the speed at which, during the mid-1970s, it moved on to a national and then international basis. The electricity industry, used to dealing with purely local concerns, was slow to catch up. The pro-nudear groupings which formed in the earl.y 1980s, centering on organizations like the IAEA, came too late to do much good. The anti-nuclear lobby had already scored two notable victories by halting nuclear power in its tracks. This was done by referenda, first in Sweden - - a country
highly dependent on n u c l e a r - and then in Austria. In the Swedish case, after a good deal of horse trading, the referendum decision committed the country to ridding itself of nuclear power by the year 2010. In Austria, a referendum on Zwentendorf, the country's first reactor, then still under construction, decided that the reactor should be completed but not operated. This was exactly what happened. Despite plans to turn it into everything from a gas-fired station to a theme park, Zwentendorf stands where it was built, entirely useless. hese two polls showed that nuclear power could be stopped. The Italian Greens learned the lesson and shut down Italy's nuclear program - - which had not amounted to much anyw a y - in 1987. Two years later, Switzerland did the same, in two referenda which vetoed new nudear construction. Elsewhere, notably in West German3~ local courts and a labyrinthine licensing system were used to tie n u d e a t power in knots. In other cases, such as the UK and Spain, the industry crippled itself by its own incompetence. For a while, France appeared to offer a shining example to the rest of Europe. But by the late 1980s, it was dear that the French had taken a very risky gamble in their move to nuclear power. The state utili~, Electricit6 de France (EdF), began to run up debts which would have bankrupted many a small country, as electricity demand failed to catch
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The Electricity Jounzal
up with the stations built to meet it. Nuclear did not fulfil its promise to reduce French electricity prices. The development of a "commercial" fast breeder reactor, which was at the center of French nuclear strategy, failed miserably. The first full-scale FBR, Superphenix, was closed in July 1992, and will remain that w a ~ probably forever. It has never produced electricity for more than a few weeks at a time. Inevitably, even the French came to accept that they had enough nuclear power stations. ~Isewhere, apart from a sinrgle PWR in the UK, the orders dried up and disappeared. By 1990, the European nuclear market was all but moribund. A sign of the desperation of reactor builders was the agreement between Framatome of France and Kraftwerk of Germany, previously deadly rivals, to cooperate on a "Euro-PWR", to meet the reviving nuclear power market (though it looked to be a figment of their imagination).
E
Rise of t h e G r e e n s Nuclear power provided an impetus to interference from green activists and from government. The activists, encouraged by their s~access on the nuclear issue, broadened their activities into many other areas of the industry, not simply as objectors, but as proponents of new technologies and methods of operation, from windmills to energy-efficient freezers. From government's point of view, the nuclear debacle had shattered the mystique which had surOctober 1992
rounded the industry's planners and ended forever the idea that the electricity industry knew its own business better than anyone else. As environmentalism caught on with the public, from the late 1970s onwards, activists and government began to find areas of common ground. The arrival of Petra Kell~ the "Green Joan of Arc", in the West German Bundestag, was a point of no return for the most important country in Europe. Given the
A sign of the desperation of reactor builders was the agreement between previously deadly rivals to cooperate on a "Euro-P WR."
since 1974, and national air quality standards were set 10 years before that. In 1983, however, scientific and media investigations showed that, despite all efforts to keep the air dean, German forests were dying. A national panic over "forest-death" set in. The Germans were not the first to discover that sulfur emissions harmed trees, nor the fact that airborne sulfur crosses national boundaries; Sweden had tried to make an international issue of this in the early 1960s. Germany, however, was not just a bigger country than Sweden; it was a member of the EC. Thus it could, through its dominance within the organization, force other members to make more effort to clean up their power stations. In December 1983, the EC's Directive on Large Combustion Plant Emissions was born. rafting a directive was one thing; getting it turned into law quite another. The UK, under Margaret Thatcher, was neither particularly green nor particularly amenable to EC interference in the country's affairs. The other dominant EC member, France, did not care much one w a y or the other, given its dependence on n u d e a r power. The directive went through a stormy passage, in which there were numerous counter-proposals by smaller EC countries, all to no avail. In the end, the final emergence of a Directive, much diluted from the original proposal, did not happen until 1987, and the deciding factor was Cherno-
D
see-saw nature of German coalition politics, a handful of seats in the Bundestag meant the difference between power and impotence. Both wings of German politics tried their best to look green. In West Germany's forests, the unholy alliance between Greens and EC Commissioners was formed. Germany has always had an unusually deep love of trees, and specifically forests; German musical culture, from Wagner to Horst Jankowski, is saturated in forest imagery. The German power industry had been required to meet strict pollution control standards
39
byl, which made the future of coal look entirely different. The "acid rain" directive, weakened though it was, still provided much encouragement to the environmentalists, and to the EC Commission itself, to press forward with new environmental initiafives. Rather than attempting amelioration of specific problems, the Commission would broker the biggest environmental deal of them all: a new system of taxation which would force down the use of energy and direct both producers and consumers towards the "correct" ways of producing and using energy, and specifically electricity. Drawing this time on the ideas of two smaller countries, Denmark and the Netherlands, the Commission began to work on plans for an energy/carbon tax directive. he Commission overreached itself in a big way. The carbon tax proposals were brought to ministers of the 12 member countries on the eve of the Rio summit and were shot down in flames. The proposals amounted to the equivalent of $3 per barrel of oil, rising to $10 by 2000. The tax was to fall 50% on the energy content of all renewable energy sources and 50% on carbon content. It would be "revenue neutral", because the tax gathered would be redistributed by tax cuts in other areas. If the tax plan ever had much chance, that chance had faded by 199Z The recession had reached even Germany and the environment had, largely as a conse-. quence of this, slid down the
agenda. The 12 ministers killed the proposal stone dead by introducing two preconditions; --first, that the EC should not introduce any such tax scheme until the USA and Japan did likewise; second, that the tax should be subject to the principle of "subsidiarity'; a new piece of ECspeak which meant that each country could apply the measure according to national priorities, or not apply it at all.
T
40
The EC environment commissioner, Carlo Ripa de Meana, refused to represent the EC at Rio and subsequently resigned, an unusually direct and honest response for an EC Commissioner. By May 1992, the EC Commission was in no condition to dictate terms (See Inset 1). Aside from this, the more powerful competition directorate, DG4, had eased environment on to the sidelines, in favor of the new shibboleth, competition.
The Single Market Throughout the 1980s, Europe swung to the political right. The
leaders of Britain and German}~ Thatcher and Kohl, dominated the scene, while in France the erstwhile socialist Mitterrand moved more and more towards the center ground with every year of his interminable presidency. Elsewhere, in countries such as Spain and Greece, governments of the left went with the prevailing tide, drifting slowly but surely rightward. The European Commission was bound to follow the drift, given that its commissioners are appointed by member governments. It was, for example, a Thatcher appointee, Leon Britain, who took over the Competition directorate, DG4, in 1986 and used his position to further Thatcherite ideas on free markets and the commercial ethos. This centered around the "completion of the single market." A draft directive was issued in 1985, calling for unlimited free trade in gas and electricity by the end of 1992. Third party access (TPA) was the key; in this case TPA meant free trade between utilities and foreign customers, rather than access to grids by independent producers, although this would follow in due course. Like the UK privatization, with which it enjoyed a symbiotic relationship, the EC's single market project was born in arrogance and bred in ignorance. The Commission, which at that time was becoming steadily more influential, felt itself able to enforce the new regime regardless of protests from some member countries as well as
The Electricity Jounlal
numerous utilities. The Commission first decided to create a single market, and only then decided to find out w h y - - not if ~ it was a good idea. The bureaucrats put two and two together, and confidently announced that the answer was five.
France has a surplus of nuclear electricity; Italy had a shortage; German industrial customers wanted cheap electricity; France and Belgium could sell it to them. What could be simpler? At first, France proved a powerful ally. By 1985, as the nuclear
surplus began to reach epic proportions, the French government saw an increase in exports as a justification for the surplus. France had originally intended, via the fast breeder reactor, to export its nuclear wizardry to the world. If it could not conquer foreign markets with the breeder, then selling electricity made from French nuclear stations was the next best thing. There were problems, however. rance had locked itself into the most inflexible power source known to man. When the system was under strain, in times of drought or industrial disruption, EdF needed all the help it could get from foreign utilities. It simply could not afford to alienate them by stealing their customers. The income from exports, though attractive, was not a solution to EdF's chronic financial problems. Only a sizeable tariff increase would do this. But having promised cheap power from nuclear energy; the government could hardly allow EdF tariffs to glide into the upper range of European prices. Post-Chernobyl, both French industry and the public at large became less willing to bear the risks and costs of nuclear power in order to give the Germans cheap electricity. These were the problems of just one country. Unifying tariff systems, signing connection agreements and grid contracts, regulating the n e w market; these and a thousand other problems were revealed to the EC Commission in a slow and painful program of ed-
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41
ucation in the basics of selling electricity. The irony of it all was that European countries had never been, except in wartime, closed protectionist markets. Two international organizations, UCPTE on the European mainland and NORDEL in Scandinavia, existed for the sole purpose of administering the huge volume of electricity which passes across national borders every day, as it has been doing for many years (see Inset 2). These, however, were power pools, not markets. While massive increases in traded electricity became apparent in the 1980s, these were largely the result of a single transaction ~ French sales to Italy. The rest of the arrangements were cooperative as much as commercial - - swap deals which generally came out roughly even at the end of every year. Turning these systems into commercial markets would not change them; it would ruin them.
. . . . .ii. .......... . i
42
None of this deterred the Commission from spending six weary years "refining" the electricity trade directive and employing a horde of lawyers and consultants to help them do it. inally, in June 1992, a draft irective was put before the Council of energy ministers. It was a much diluted version of the 1985 draft. Among other things, the target date had moved forward to 1997, and the directive was subject to the same principle of subsidiarity which had fatally compromised the energy taxation scheme. The key proposal, on TPA for large consumers, was opposed by all but three ministers. Britain and Portugal were in favor, and Ireland gave qualified support. Portugal was, in effect, simply carrying on its long-standing feud with Spain over hydro rights. Given that Britain and Ireland are separated by water from the rest of the EC, and from each other, their participation in the new market would have been
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rather limited. The single market was all but dead. T h e Great British E x p e r i m e n t It was hardly surprising that Britain lent its support. Since 1987, that country had been pushing the idea of a free electric!ty market up to, and probably well beyond, its natural limit. By mid1992, that program was also in deep trouble. In 1987, Margaret Thatcher won her third general election victory: In the eight years since she first won power, her Conservative Party had made it a central part of its economic policy to return nationalized industries to the private sector. Shortly before the election, two of the country's industrial giants, British Telecom and British Gas, had been "privatized," to use the word which Thatcher put in the mouths of politicians the world over. Even In early 1987, however, it seemed improbable that electricity would be privatized. It was, some argued, simply too big, too complex and too important an industry to be let out of state control. This proved not to be the case. Not only would electricity be privatized; it would also be restructured, and placed in an entirely new kind of system. The decision to privatize was inescapable. The electricity business was too lucrative a target for the British Treasury to miss. The industry had over-ordered power stations in the 1970s, had long since paid for them, and had ordered little or nothing in the 1980s. As a result the industry 1lie Electricity Joun~al
was loaded with money. The main compan3~ the Central Electricity Generating Board, and the 12 distribution companies in England and Wales, were turning enormous yearly profits and had paid back most of their state loans. It was a temptation no finance minister could turn down. elling the industry w o u l d not be enough, however. The industry had to be changed. This had nothing whatever to do with the industry itself. There was no suggestion that it was notably inefficient, compared with foreign power utilities, nor any particularly convincing reason w h y a given set of changes would make it more efficient. The reason w h y the electricity industry was so radically shaken up lay in the sale of British Gas. There was a widespread feeling, in parliament and amongst the political commentators in the press, that British Gas had been allowed to escape into the private sector with its monopoly powers unchanged. There was no incentive, therefore, for the company to become more efficient than it had been in the public sector. Only competition could force the state companies to become real businesses. Complaints about the privatized British Telecom - - mainly concerning its failure to provide public services like phone booths which worked - - was further evidence that privatization was not enough. Electricity - - the biggest sale of them all - - had to be done better. It did not occur to anyone in the upper reaches of the Conservative
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43
Party to ask whether this was an industry in which competition would be possible, let alone useful. The Party, its third general election victory still fresh in the memory, was not in the mood to question its own dogma. Like the EC Single Market, it was a case of an answer looking for questions. The shape of the industry was conditioned by a two simple ideas: (1) Competition improves performance, under any circumstances, in any industry. (2) The private sector is always more efficient than the public sector. The privatization of the electricity industry showed, in very short order, how wrong these ideas were. fter a period of wrangling with the companies involved, and among the numerous financial analysts and consultants who had been employed for the purpose, a new system was hammered out (See Inset 3). It fell neatly between the devil and the deep blue sea. It involved the trauma of a major upheaval in the country's biggest industry; but not quite enough of an upheaval. If the generating industry was to prove competitive in the way the government intended, then the CEGB had to be split into a number of competing generating units; a number much bigger than two. The limitation on the extent of the split was n u d e a r power. The London financial institutions took one look at the British nuclear power sector and turned
A
44
away in horror. The message was conveyed to energy secretary Cecil Parkinson, in words of one syllable, that the City of London would not buy nuclear power stations. It would not even take them as a free gift. This, Parkinson could not accept. He attempted to compensate for the burden of nuclear power by giving the company which took it over a sufficiently enormous tranche of non-nuclear stations to make it sellable. Having done this, it would not be very useful to create a number of tiny companies around it; one shark and twelve catfish does not constitute competition. Therefore there came into being National Power - - the nuclear company - - with 70% of the CEGB's power stations, and PowerGen with the rest. This did not seem a particularly hopeful framework for competition. New entrants to the system were being asked to compete with two "sitting tenants" who also happened to be among the big-
gest power companies in Europe (see Table 1). Initially, the prospects for independent generation looked miserable. Yet within 18 months of the two generators being sold, there was talk of "gas mania" as numerous projects for gas-firing, combined cycle generators got off the drawing board and into construction. The cause was neither an economic miracle in the price of gas nor a change in the regulatory framework, It was, instead, a marriage of convenience. n the original plan for a new system, there were to be three distinct kinds of "non-CEGB" generation: independent generators, selling power into the pool and on contract to industrial consumers generation by the 12 regional electricity companies (RECs) for their own use industrial autoproduction (self-generation). The problems besetting independents have already been mentioned. The 12 RECs were dis-
I
-
-
-
-
Table 1: Europe's Biggest Utilities Status Electricite de France ENEL (Italy) National Power (UK)1 RWE (Germany) Vattenfall (Sweden) PowerGen1 Electrabel (Belgium)2 Preussenelektra (Germany) Endesa (Spain) Iberdrola (Spain)3
Public Public Private Private Public Private Private Private Public Private
Sales (TWh) 304.0 220.5 123.8 120.6 77.3 76.5 64.7 51.1 47.2 46.4
Employees 122,300 111,000 16,000 23,521 10,930 9,430 17,149 6,676 15,678 14,139
Source:AndersenConsulting(1991)with ~tera~onsby Powerin Europe(1992).F'~uresreferto 1990. I. These two companiesare generatorsonly. 2_ Formedin 1990from three ~lities; l~gurosare those of the componentcompaniesro~edtogether. 3. Formedin 1991from two ~lilies; fgures are those of the componentcompaniestotedtogether.
The Electricity Jounzal
couraged by their new masters, the financial institutions, from becoming involved in anything so risky as building power stations. The shareholders saw the RECs as widows and orphans bonds, and wanted them to stay that way. As for industry, most companies believed at first that the ability to contract direct with generators would bring d o w n prices. This proved not to be the case; quite the opposite. The really big companies had, pre-privatization, enjoyed various indirect subsidies. When they began to pay real market prices, the effect was trau-
matic. By that time, however, the recession was getting into its swing, and capital expenditure on power stations dropped off the agenda. hile none of the three parties could become serious players individually, they came to realize that, in combination, they could make something happen. Specifically; the 12 RECs could contract for electricity over 15 years or more, allowing the operators to offer sufficient guarantee of return to raise finances and to buy long-term gas supplies. Both the gas and the electricity
W
Table 2: The UK's New Gas Stations Station
Capacity (MW) EquityHolders
Roosecote
200
Killingholme Sellafield Teeside
900 160 1875
Brigg Corby
240 350
Peterborough Killingholme Rye House Medway
360 650 680 660
Barking Derwent
1000 200
Keadby Deeside Staythorpe Didcot Connah'sQuay
670 500 1500 1500 1350
TOTAL
ASEABrown Boveri(80%)NorthWest REC (20%) PowerGen2 British NuclearFuels(100%) Enron(50%); Northern,SouthWales,South Western and MidlandsRECs(50%) YorkshireREC (75%) IVO (Finland)(25%) Hawker Siddeley(40%) ESB Ireland(20%) East MidlandsREC (40%) Hawker Siddeley(50%) EasternREC (50%) NationalPower PowerGen AES Electric(%), Southern,South-Eastern RECs ( % each) BICC (45%)CU Power(45%)Schroeders(10%) Courtaulds,MissionEnergy,SouthernREC (percentagesundecided) ScottishHydro(50%) Manweb(50%) NationalPower National Power NationalPower PowerGen
On line~
1991 1992 1993 1993 1993 1993 1993 1993 1993 n/a n/a n/a n/a n/a n/a n/a n/a
12,975
1. Most of the st,atJonsmarked not availabIe (n/a) will be on line in 1994-96,but have yet to announce an off~ia] target date. 2. The Killingholmesite, which belonged to the CEGB, was ~vided between the two successor ~ m ~ , ai~ ~ planning permission for new power stations, which had been obtained several years previously. The total capacity of these plants should be measured against the total 61,300 MW available on the national grid in England and Waios in 1990J91. Rants in the planning or proposal stage, which have yet to achieve contracts, would add a further 6,000 MW to the total. In terms of new plants on t ~ system, the total due to be commissioned in 1993, nearly 4,000 MW, is nearly doutYethe arno~t ever inb'oducedon to the CEGB system in a single year. The 1993 I~guredoes not indude the 1,200 MW SizeweUB nuclear power stations, also due on in late 1993 or eady 1994.
October 1992
were sold on a take-or-pay basis. From a state of hopelessness, the new generating industry became rock solid. The price of the electricity, which was almost certain to stay above the coal-based pool price, was really neither here nor there. The point was, for the RECs, that these contracts provided some leverage against the duopoly power of National Power and PowerGen. A power station market, which was once sealed up for British interests, now cracked open (see Table 2). Meanwhile, the government had finally acknowledged that British nuclear power was not a sellable commodity and had removed the nuclear element from National Power and the Scottish nuclear generator, ScottishPower. The withdrawal of nuclear power from the sale took a long time; so long that it precluded the possibility of changing the structure of the industry to reflect the new circumstances. Thus the industry kept the structure of a privatized industry including nuclear power out of state hands, while leaving nuclear in state hands. In order to ease the burden on the Treasury, a nuclear quota was introduced, making purchase of nuclear electricity mandatory on the 12 RECs, while a n u d e a r lev~ running at 10% or above, was put on electricity tariffs in the franchise market to keep n u d e a r solvent. The government pleaded environmental reasons for the quota and levy, though no one believed them except, surprisingly enough, the EC Commission, which was pre-
45
pared to countenance this blatant protectionism to serve the greater good of a free market. The market's freedom, however, looked more shaky by the day. By 1992, there were two protected sectors, gas and nuclear. Then there was coal. It was always assumed that the privatization of electricity and the opening up of fuel markets spelt death to the UK's state-owned coal company British Coal. The original consultative document of electricity privatization, published in 1987, spoke of coal entirely in the past tense. Barely a year later, however, energy secretary Parkinson made a pledge to the annual Conservative conference which, at the time, was taken as the merest persiflage: he would privatize British Coal. Analysts assumed - quite plausibly -that Parkinson's pledge
on coal was a device to avoid talking about the plans for selling electricity which were, in late 1988, in a complete mess. Yet in 1992, the Conservatives returned for their fourth consecutive term :in office, still intent on selling off British Coal. he fact is that the o n c o m ~ g gas stations will cut coal s market to the bone, even if the government can contrive to keep out imported coal, and persuade the generators not to utilize the 30 million tons or so which they have in stock as a result of previous fixes. The take-or-pay contract which the new gas stations will hold ensures that the coal stations will be driven down the merit order, to levels of operation at.which the best of them will be barely economic, unless the coal is cheaper than any British product. Somehow, the government hopes
T
to persuade the stock market, or some particularly feckless coal company, to buy a set of mines which face rapid and inevitable decline. All this is to be done without an energy department. The incoming government d u m p e d the department into the gigantic department of trade and industry. This was the visible signal of the Conservatives" abandonment of energy policy-making. The real significance of the "no-policy policy" is to be seen in an electricity system being turned upside down.
Retrenchment: An End to Experimentation? Not so long ago European state utility companies trembled at the idea that the British experiment might be repeated on them. Now, when they address EC Commis-
What l~@dof dance for Europe's utilities? 46
~lle Electricity Journal
sioners or members of their own governments, utility chieftains point to Britain as a dreadful example of what privatization and competition can do. The long fiasco of British privatization, and the demise of the EC single market, have served to bring the electricity utilities of Europe closer together and taught them to speak with a single voice. This was the precise opposite of what was intended. hird party access, outside the UK, is a dead letter. There is, undoubtedl~ an opening of certain national markets. Yet it has to be asked whether this opening extends much beyond the newly-formed and rather exclusive club of big power companies. For example, the Portuguese government has been seeking tenders for construction and operation of its Pego power station since late 1991. Various US and Japanese companies were involved in the early stages, but the final shortlist, made public in July 1992, contains but four names: National Power; Electrabel; and a consortium of PowerGen and Iberdrola. And when and if the nuclear power market in Europe revives, a consortium of France's Framatome and Germany's f4,raftwerke, once deadly rivals, is ready to swallow up the orders. The EC's agenda for the power industry - - competition, TPA, carbon taxes and all the rest of it - was drawn up during the fat years of the late 1980s. Now, as the 1990s become hungrier in west as well as east Europe, the time for experiments is, for the
T
October 1992
time being at least, over. Where privatizations are carried out on the electricity industry they will be for the simple, old-fashioned motive of raising cash. It is not the most lofty of motives, but it causes the least trouble. "In the light of the British experience, that looks like no bad thing. It may be time for a reassessment of the integrated utilit~ which seemed to have fallen into such disrepute. Whatever else may happen in the European power market of the future, one
thing is certain; it will never be easy or cheap to build power stations, given the environmental objections which meet every new project - - wind farms and hydro stations, as well as coal or nuclear plants. The way of the future has to include greater emphasis on the way electricity is used and the means by which more value can be gained from each station. This will include refurbishment and
conversion. It will also have to include demand-side management (DSM), which is beginning to appear on the agendas of European utilities as well as green parties. Bizarre as it may seem, the European leader in this field is none other than Electricit6 de France. The overload of baseload supply which EdF created for itself has to be accommodated by flattening the demand curve. EdF tried load-following with its PWRs, with little result. It is n o w engaged in a long-term attempt to change the behavior of its consumers, in every sector of the economy; through a tariff system whose complexity is becoming legendary. EdF is also introducing metering and fuel-switching systems in households throughout France. ' n the UK, meanwhile, the .new system has introduced a race for the cheap kilowatt, introducing wasteful power station construction and sectioning the market into pieces whose only rationale is to sustain and protect the fuel producers and "independent" generators. Introducing DSM into this jungle will be an impossibility. If they can muster sufficient rationality, it may be that Europe's various governors will begin to see the integrated utility as something more than a relic of postwar socialist centralism. At the very least, they may begin, belatedly, to recognize that competition, energy efficiency and environmental protection do not sit easily with each other. ..
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