Industry is the winner as utilities slash prices

by Michael Webb

There’s a power struggle going on in the German utilities sector. Liberalisation of the electricity market has triggered a battle among the major power generators, which can now chase business across the country – and much of Europe – instead of having to stick with their traditional regional customer base.

Rival firms are setting up offices in competitors’ back yards to pinch business that until now has been protected by the rigid regional system set up in the 1950s, essentially to ensure security of supply.

Industrial electricity consumers, for years burdened by some of the heaviest costs in Europe, are already benefiting. Prices are tumbling, in some cases by nearly a third, and generators are prepared to meet the customer’s every need.

For example, automotive groups such as Volkswagen are keen to buy energy for all their European plants from just one supplier.

Utilities such as VEW in Dortmund are even offering to form alliances with rivals outside Germany if it meets customer needs.

Essen-based utility RWE said last week it is embarking on a new customer-orientated strategy to win more business. At a recent conference in Berlin, an RWE director’s presentation was sprinkled with references to `consumer profiles’. For the first time, utilities are having to fight for business rather than rely on the monopoly positions in their local markets.

In recognition of these changes, industrial electricity consumers such as aluminium smelter VAW and the utilities this month agreed to set up financial futures trading in Frankfurt. Consumers and producers will be able to hedge against volatile prices, and even speculate.

The utilities are setting up trading teams to optimise operations through buying and selling short-, medium- and long-term supply contracts across Germany.

This a step change for an industry run by engineers with little feel for the cut and thrust of commodities trading. `We’re entering a new world,’ said a director at one of the big five utilities.

But there is some way to go before all barriers are removed. Regional supply grids are still controlled by regional electricity companies, which can refuse or charge high prices for access. A voluntary code of practice under discussion is not expected to change this significantly.

Nevertheless, the new competition will spark major consolidation, analysts say. Hundreds of smaller electricity suppliers will disappear as the big players seek critical mass in the market.