By Claire West
After two decades of post-communist transition, countries in Central and Eastern Europe (CEE) are moving slowly but steadily towards de facto opening of their gas and electric utility markets. The market opening is being driven by a combination of widespread inward investment by West European utilities, the entry of new players, and compliance with European Union (EU) requirements to separate transmission networks from energy production assets.
In an Economist Intelligence Unit qualitative ranking of energy utility sectors in six major CEE countries, the Czech Republic's emerges as the most competitive, followed in order by those of Hungary, Slovakia, Romania, Poland and Russia. In the Czech Republic, three major players compete for business in the electricity sector and large new entrants in the gas sector are making inroads into the incumbent’s dominant position. In Hungary, where the dominant electric utility has had to make room for newcomers, as many as eight significant players compete for the industrial gas market.
This is among the major findings of Changing direction: Reform of energy utility sectors in Central and Eastern Europe, a study published today by the Economist Intelligence Unit and sponsored by Oracle. To assess the degree of progress that the region’s utility sectors have made in transforming the legacy of state control, the Economist Intelligence Unit conducted extensive desk research and interviewed utility executives, regulators and industrial energy users in the aforementioned countries.
“The region’s energy utility sectors are gradually emerging from the shadow of state control and catching up with their West European counterparts,” said Aviva Freudmann, Research Director for Continental Europe, the Middle East and Africa for the Economist Intelligence Unit and director of the study. “As in the European Union as a whole, opening utilities to competition in the five EU countries under study, as well as in Russia, has been a long term project, and an uneven one. To move the process forward, governments in the region need to create conditions for truly competitive markets, which in turn would attract the necessary investment and know-how from other regions.”
Other key findings of the study include the following:
•A major driver of liberalisation is the need to upgrade plant, and attract capital to do so. This has opened the way for strategic investors to enter the market, bringing advanced management practices and technological know-how along with capital.
•Competition is more advanced in electricity than in gas markets. This is mainly because the power sector has more varied sources of fuel and greater access to required feedstocks. In the case of gas, there are only two options for obtaining the fuel–access to domestic production or to imports–and both tend to be dominated by governments or by monopoly, government-backed incumbents.
•The concentration of gas supply sources (mainly in Russia) hinders competition in that sector by giving suppliers pricing power. When importers of gas all must pay the same prices for fuel, because they are buying from the same source, this leaves comparatively little room for price-based competition at the retail level.
•Competition is more advanced in industrial market sectors than among households–as is also the case in other regions. In most of the six states, household prices are still regulated as governments try to protect citizens against rate increases. Governments are more likely to leave large industrial users to their own devices, allowing them to choose their own suppliers and negotiate their own prices.
•EU policies on competition, customer protection and environmental protection are drivers of increased competition in five of the six countries reviewed. This is one reason that the sole non-EU nation in the group, Russia, lags far behind the others in liberalising its energy markets.
•Unlike most Western countries, the six CEE countries do not have interest groups dedicated to protecting consumers’ interests. This weakens consumers’ voices, making it more difficult to establish a customer focus in both utility regulation and in utilities’ management practices.
Changing direction: Reform of energy utility sectors in Central and Eastern Europe is available free of charge at: www.eiu.com/sponsor/CEE utilities 2010