* Utilities caught between regulation and price caps
* Decade-old EU energy liberalisation model undermined
* Utilities suffer creeping renationalisation
By Geert De Clercq
PARIS, Jan 19 Vattenfall unplugged! With flyers,
posters and an animated film of a bear disconnecting the Swedish
utility that operates the Berlin electricity grid, campaigners
tried to convince voters to put power distribution back in
The November referendum in Berlin failed, but in September,
citizens of Hamburg, Germany's second-biggest city, voted to
return their power grid, also run by Vattenfall, to public
The votes were organised by citizens' groups who want
municipalities to buy back electricity distribution networks
from private utilities, because they say local authorities can
provide a cheaper and better service.
The German movement is part of a Europe-wide reversal of the
trends towards liberalisation and privatisation that have driven
energy policy in the past decade.
While ostensibly backing free energy markets, many European
governments squeeze utilities by intervening in power generation
while also capping energy prices. This creeping
renationalisation cuts utilities' profits by billions of euros.
The idea behind the EU-driven energy liberalisation was to
force the old monopolies to compete so that prices could fall
and services improve.
Countries privatised utilities and split them into private
power producers and independent, but government-regulated
network operators. Energy retailing was also freed up for
vendors to compete for household accounts.
But as Europe created a free market for power generation, it
also brought back regulation by encouraging wind and solar power
generation with generous state subsidies.
As renewable energies boomed, their priority access to the
grid and cost-free operation crowded out the utilities'
traditional plants, to the point that gas-fired generation has
become virtually uneconomical in Europe.
With their investment choices for producing power limited by
government policies, utilities also saw their retail prices
regulated. Spain and France limit energy prices for consumers,
while Germany provides big discounts for industry.
But keeping prices low for consumers and industry, while
also favouring green power generation and maintaining security
of supply is just not possible.
"RENATIONALISING OUR REVENUES"
Critics say that these mutually exclusive targets have made
much of Europe's energy regulation so inconsistent that private
firms can no longer operate profitably. Investment in
non-subsidised generation has virtually dried up.
"At some point the regulatory risk gets so bad that it might
be better to give the political risk back to the policy makers
by renationalising the sector," said Georg Zachmann of Brussels
think tank Bruegel.
A country close to this point is Spain, where generous
subsidies to the renewables sector and caps on energy prices
have led to the build-up of a 30 billion euro power tariff
deficit - the difference between the cost of energy and what
utilities are allowed to charge for it.
Last month, the Spanish government scrapped plans to reduce
the deficit by sharing it between utilities, consumers and the
state, and pushed the debt back onto the balance sheets of
utilities such as Iberdrola, Endesa and Gas
Natural, which will have to hold it for 15 years.
For the Spanish utilities, this boils down to a creeping
nationalisation of their profits.
"They are renationalising our revenues, but not our assets.
That is worse," Iberdrola CEO Ignacio Galan said.
Spanish Industry Minister Jose Manuel Soria told Reuters in
November he does not think utilities should be renationalised
and more competition is better for consumers.
But Spain might serve as an example of where other countries
are heading, as more and more EU governments dictate investment
choices through subsidies and regulate tariffs.
Britain - the cradle of European energy liberalisation -
seems like an unlikely candidate to lead the way: its
Electricity Market Reform, to come into force this year, will
introduce the "Contracts for Difference" scheme, which offers
price guarantees for low-carbon energies.
The British package will also dictate which power plants
receive public money to provide backup power generation.
In October, Britain agreed to give unprecedented loan
guarantees and a 35-year power price guarantee in a deal with
France's EDF to build a nuclear plant at Hinkley Point.
This will reverse more than a decade of non-intervention in
power generation and turn Britain's low-carbon energy production
- essentially offshore wind and nuclear - into a
Britain's opposition leader Ed Miliband promised more
regulation in September by saying he would freeze retail energy
prices for 20 months if he were elected in 2015.
"The UK led the way in liberalisation and I think it is
leading the way - for better or worse - in changing its market
framework towards having a much greater role for the state,"
said Compass Lexecon energy consultant Fabien Roques.
The most radical renationalisation drive in Europe is in
Hungary, where the government wants to turn utilities into
Prime Minister Viktor Orban wants to nationalise six or
seven utilities and if he is re-elected this spring he plans to
make them "community-owned" within a year or two.
Most of Hungary's energy sector is foreign-owned, mainly by
German, French and Italian firms including E.ON, RWE
, EDF, GDF Suez and Eni.
Late last year, state-owned energy group MVM bought E.ON's
gas trade and storage businesses and it is also in talks with
RWE about buying its stake in Budapest gas utility Fogaz Zrt.
Hungary does not confiscate the foreign-owned firms, but
pays for the assets, albeit at prices depressed by a tough
regulatory regime and state-imposed energy price caps.
RWE East chairman Martin Herrmann says Hungary's moves are
unacceptable and has spoken of "expropriation".
Germany's movement to put local power networks in municipal
ownership is relatively benign, as it allows utilities to sell
their assets at market prices and redeploy capital elsewhere.
"It is not renationalisation but remunicipalisation that we
are after. Energy issues should be dealt with on a local level,"
said Stefan Taschner, head of BurgerBegehren Klimaschutz which
drove the Berlin campaign.
Taschner thinks all power distribution networks should be in
municipal hands, although he does not object to "a good mix" of
public and private ownership for power generation assets.
After losing the Berlin referendum, the group is now helping
citizens' groups in cities such as Essen and Karlsruhe wrest
distribution networks from private ownership.
"I have been in the industry 25 years and I have seen cities
go three times private and three times public so I would not
overinterpret the moment," E.ON CEO Johannes Teyssen told
Reuters, adding that public owners would face the same cost
pressures as private utilities.
Teyssen is part of the dozen-strong Magritte group of
utilities CEOs, which represent half of Europe's electricity
generating capacity. They say European energy policy is a
failure, as retail power prices are higher than ever, security
of supply has weakened and investment has stalled.
The group wants an end to subsidies for "mature" renewable
energies such as onshore wind and solar.
Two of its proposals - strengthening the European carbon
market and the establishment of EU guidelines for capacity
remuneration mechanisms - actually offer more regulation and
would increase the role of the state in energy policy.
Capacity mechanisms - under which utilities are paid, and
sometimes forced, to keep idle plants on standby - are the most
recent development in EU utilities regulation.
In Germany, where utilities are already told by government
in which assets to invest (renewables) and which not (nuclear),
they are now also told where not to divest.
Utilities must get approval from the regulator to close
plants and can be forced to maintain unprofitable operations to
minimise blackout risk.
Dirk Uwer, partner at German law firm Hengeler Mueller, said
utilities can no longer take plants off grid for economic
reasons, since grid operators and regulators can order them to
stay online in exchange for compensation payments.
"We have arrived at a planned economy," he said.