E.ON and RWE: damned duopoly 

Love them or hate them, Germany’s two power giants keep the lights on

In an apparent victory for the little man, the burghers of Ensdorf this week successfully blocked plans by RWE, a huge German power company, to build a spanking new coal-fired power station in their back yard. But those Saarland villagers have won an incomplete victory. Germany needs to add about 35,000 megawatts (MW) of new capacity by 2020, plus another 16,000MW if its nuclear plants are to be phased out by then, as planned. So new power stations will have to be built somewhere.

RWE and E.ON, the other German power giant, are treading on eggshells these days. Their duopoly over electricity generation and distribution in Germany is under attack from almost every quarter: the European Commission, the Federal Cartel Office, the Federal Network Agency and, of course, consumers. People are livid that the two giants recently announced price rises of 7-10% for next year, despite record profits in the first three quarters and windfall gains from CO2 emission certificates that they were given free.

On top of that, RWE has been fingered, in a report by PricewaterhouseCoopers, as the biggest carbon emitter in Europe among power producers; E.ON is number three. Part of the reason is that other countries, especially France, rely more on nuclear power and hydro-electricity. Germany has the highest share of wind farms in Europe, but they still provide only 4.8% of production.

The European Commission is on the warpath against E.ON for a suspected secret agreement with Gaz de France not to compete for sales on each other’s territory, and against RWE for allegedly discouraging competitors from using a gas pipeline across southern Germany. A commission report also indicates surprising rises in German electricity prices, compared with the rest of Europe; and it is threatening to order the separation of European power producers from the power networks they operate.

From January 1st the German Cartel Office will have stronger powers to intervene on pricing by the power giants, assuming that a bill passed by parliament is ratified. In any official inquiry, the producers will have to prove that their prices are reasonable—and they will be unable to hinder the investigation using court injunctions. The Cartel Office has been encouraged by a recent court ruling in Dusseldorf, which barred E.ON’s purchase of some municipal power capacity on the grounds that “the electricity market in Germany is dominated by a duopoly”. And the Federal Network Agency, which oversees energy distribution and telecoms networks, has high hopes for a regulation that came into force in July, requiring power companies to operate their networks as separate companies, which could boost competition.

Wulf Bernotat, boss of E.ON, believes the campaign has gone too far, and grumbles that one politician likened the power giants to the Mafia. RWE and E.ON are fighting back, lobbying hard in Brussels and Berlin, and hiring the odd politician to help: Wolfgang Clement, economics minister in the last government, is on RWE Power’s board. And RWE recently installed Jürgen Grossmann as chief executive, replacing Harry Roels, despite buoyant results. Mr Roels was said to care too much about shareholders, whereas Mr Grossmann has more clout with politicians.

As for the high consumer prices, the two giants blame this unconvincingly on taxation, past contracts sold at low prices, and investment in renewable energy, which is supposed to provide 20% of capacity by 2020. But profits of €2.8 billion ($4.2 billion) at RWE and €5.8 billion at E.ON in the past three quarters make those arguments sound a little hollow.

So do protests that the duo’s influence has only a small influence on traded German electricity prices. Together with Vattenfall and EnBW, they account for 90% of German electricity production. Most of this power is bought and sold behind the scenes. EEX, the energy exchange in Leipzig, handles only 9% of German electricity trading, though another 15% is cleared there in the form of over-the-counter trades. For other electricity trades, done either directly or through brokers, no prices or volumes are published. Attempts to get more of these deals traded on (or at least reported to) EEX have largely failed. Another concern is that the giants have an inherent advantage, given the second-by-second sensitivity of the electricity price to the availability of power. They can more easily juggle different sources to increase supply when the spot price shoots up.

RWE and E.ON are investing heavily and noisily in renewable energy. Mr Grossmann recently said he would spend €1 billion a year through a separate renewables division, called RWE Innogy. E.ON, in a consortium with Royal Dutch Shell, plans to build one of the world’s biggest wind farms off the British coast. But these efforts will not change the reality that with nuclear power off the table, most new German power capacity will have to come from dirty old coal. If other communities follow the example of Ensdorf and block new coal-fired stations, the lights will eventually go out.

The Economist

29 November 2007