Case Study Analysis European Energy Market Economics Essay

European Union, which was established in 1993 by Treaty of Maashrist, for the determination of accomplishing political and economic amalgamation. Joining the Union community are 27 countries. EU, which is the largest regional trading bloc in the world, has been taking initiatives to liberalize the energy market since July 2007. The main reason to liberalize trade policies was to increase competition, as there was a monopoly of countries in this sector. Example: Electricitie de France, for example, has an 87 percent share of that country.

Regional Integration

There are many reasons for this regional integration of the EU, one of the main objectives has been to strengthen the trade integration in this area, aiding in private sector development which would impact the economic growth as they have created a single market through enforcement of standard laws which allows free movement of goods, people, capital and services. Regional integration has also helped in development of infrastructure and institutions, adroit governance, socio-cultural development, environmental development, fostering peace and strengthening security and strengthening regional interaction on a global platform.

Energy Market Scenario pre -liberalization

The national markets in the EU were dominated by a single enterprise in most cases a former state owned utility. To further complicate the matters these companies were vertically integrated hence establishing a monopolistic market condition. These national monopolies within the EU energy market, are causing high set up costs, vertical integration, high sunk costs, higher pricing systems, productivity is less causing low employment. They have been inefficient in achieving high economies of scale.

Need and Benefits of liberalization

As globalization is increasing the competiveness of companies is also on high. The EU is also trying to increase competition in the energy market, which would lead to lower costs and prices, directing towards establishment of an efficient market.

These are the similar factors the EU energy market and one of the reason the union trying to liberalize their trade policies as to use the resources in the best possible way through elimination of national monopolies and establishment of a single market in order to protect the interest of weaker member countries and protecting the member states foreign imports by erecting high tariff barriers. In order to liberalize the market they have insisted on de-integration of utilities and split it into generation, transmission and selling of energy.

Their basic aim has been to open the market to competition within the eu which would benefit in various ways increase competitiveness would decrease the prices and directly benefit the customers, as they are various alternatives to choose from and they would have to pay less because of the competitive pricing strategies. These completive strategies help in steadying the energy market and also protecting the environment. There would be lower government intervention. This regional integration would link various members states increase their dependency on each other and facilitate employment and investment opportunities.

Implications of liberalization and revolution in environment post -liberalization

Disintegration played a crucial role in the process of liberalization hence Separation of the three verticals (disintegration) in the power companies has changed the market structure and impacted the producers as well as the environment. It would eventually break national monopolies and replace the markets of 27 member states by a single -market for electricity

There are many implications post liberalization. Eu energy producers would face increased competition, hence Cost pressures would increase due to loss of monopoly and they would be forced to adopt competitive pricing. As a result of backward integration the monopolist companies would lose their shine and would have to produce cost efficient products hence each producer would focus on its core activity the quality and pricing of services provided to the end users. More jobs would be created, as the 3 verticals of an existing company would be disintegrated into 3 different companies.

At the same time big energy groups would acquire the permit to overtake smaller firms. (E.g. Enel and Endessa). There would be numerous acquisitions and mergers that will take place, every government will take various measures by imposing stringent regulations in order to protect the national firms from being taken over by the competitors. Larger and powerful firms would acquire small local country firms.

The entire market dynamics would change post liberalization. As the markets would open the companies would have to gear up for the competition receivable from other players from other countries. Such companies would have to reengineer their business process to make it more robust so as to accommodate low cost revenue generation activities. Competition would change the tradition of running business in EU post liberalization in the region. Adaption to new methods would be the key to survival.

Role of De-integration in liberalization of the EU energy market

De-integration of large international company is essential as integrated supply chain makes it impossible for new companies to enter at the middle stage and reduces incentives to trade on an whole sale market thus reducing liquidity in the market and is seen as a barrier, another important fact it unavailable and inefficient cross border transmission capacity is a barrier to national integration together with lack of transparency, weak network and reliability of information therefore it is essential for all these three departments to split their functions into generation, transmission and selling and separate the business of selling and producing energy this would enable independent power marketing companies to buy energy from the cheapest sources and offer to the end users hence induce competition in the market as this would permit new entrants into the market , it is clear as to why large German companies were resilient to disintegration as their structure was highly integrated and loss of monopoly was feared , but it has been essential to change the market into an oligopolistic market through emergence of innovative small firms , development in RnD , complexity in competition , low cost of operations , global accessibility developing intra -organizational structures .

Prevailing market scenario and reasons for slow progress

The EU energy market liberalization has been a story looking for a happy ending since 1990’s. To reap the benefits of the energy market, many directives have been introduced and all of them left some space for more improvisations every time. These unstable policy development is a time contributing factor and the acceptance of such directives/polices has also been a considerable factor, E.g.: The national energy ministers retaliated the European commission, which is the highest competition body of the EU and raised their doubts about the benefits thereby delaying the de-integration of the national power companies. The disturbed political scenario of few countries helped, E.g.: When France and Germany opposed the idea of de-integration of the national energy companies. Technology to create a system /utilities that can serve cross borders within the EU, pushed time away. Realizing that acquiring cross border utilities will help achieve economies of scale also created a lot of excitement in the market, but things were not falling in place for these acquisitions and the agenda was further delayed.

 

 

Timeline:

 

1990’s:

The first directive was introduce to improve the conditions of the energy sector by gradually opening up the market for competition hence resulting in cut-throat prices.

2000’s:

2001:further measures were initiative to reap the energy market benefits

2003:The concept of unbundling was introduced, which meant that the same company couldn’t perform power generation – or supply – and transmission..

2007:The Commission put forward its ‘third energy package’. The package provided companies in the member states with two options for separating gas and electricity production from supply provision. A third option was later added at the insistence of France and Germany

Corrective action was promised by the EU executive, which tabled a further package of proposals in September 2007.

2008:Energy Council reached broad political agreement on the Commission’s third liberalization package

2009:After long negotiations, the Parliament and the Czech Presidency struck a compromise deal on the legislative package on 23 March 2009.

Commission delivers impact assessment on the Internal Energy Market package. EU Council of Ministers adopts common position on third energy liberalization package.

Conclusion:

 

Dis integration of European energy markets is a win- win situation for the vendors as well as for the consumers.

EU policies for liberalization will call for increased GDP for economy, better quality services of energy supply at cheaper prices and therefore an improved standard of living for consumers.

Moreover, the suppliers will enter into a battlefield where they will face a healthy competition and there will be survival of the fittest, as the most efficient player will take home maximum profits.

The economy as a whole will benefit in terms of more GDP and more employment, which is one of the major concerns today in the whole Europe.

 

However, there emerge some challenges, which need to be tackled carefully while implementing this policy. They are Security of supply and Sustainability of Environment. There may be a possibility that this competition may create a rift between the states and may ruin the initiative. The EU states need to make sure that there are prescribed a guidelines and a proper governance system to ensure a healthy competition and not a negative one. At the same time the principles of sustainable environment have to be kept in mind so that our future generations also reap the benefits of current policies.