– The appropriate route to increased competition? – Ownership Unbundling Brussels, February Results of an A.T. Kearney study

2 A.T. Kearney 77/ /4729w Agenda Effects of Ownership Unbundling 3 Drivers of competition in the electricity market15 Page

3 A.T. Kearney 77/ /4729w Effects of Ownership Unbundling

4 A.T. Kearney 77/ /4729w In EU-15 the majority of countries have implemented Ownership Unbundling on transmission level Ownership Unbundling postulated by the EU Commission has already been implemented on transmission level in many countries Germany, France, Austria and Greece are the only countries in the EU-15, that have implemented Legal Unbundling Ownership Unbundling on distribution level has been realized in Great Britain only, while Legal Unbundling is a European-wide standard According to the EU Commission "ownership unbundling has a number of positive impacts on the market by stimulating investment in particular in interconnectors, reducing market concentration and bringing down prices." Unbundling among EU-15 Transmission Operators – Overview 1) Legal UnbundlingOwnership UnbundlingIndependent System Operator 1) Status 1. January 2007 incl. Norway, excl. Luxemburg Source: Regulatory authorities, EU Commission, A.T. Kearney Effects of Ownership Unbundling Is this a fact?

5 A.T. Kearney 77/ /4729w Networks in countries with Legal Unbundling have been more reliable in recent years Unplanned Interruption (minutes lost per customer, average ) Legal UnbundlingOwnership UnbundlingIndependent System Operator (1)(2) (3)(2) (4)(2)(3) Effects of Ownership Unbundling 1) Norway started detailed interruption recording in 2005; 2) ; 3) only 2004; 4) only 2005 Source:E-Control, Fingrid, VDN, TenneT, CEER, EU Commission

6 A.T. Kearney 77/ /4729w Development of Prices for Households (1) (in ct./kWh) Average CAGR Ownership Unbundling: +3.0% Legal Unbundling: +0.7% Electricity prices for household customers increased across all countries in Europe… IT IRL DE PT NL NOR UK BE DK SWE AT ES F FIN GR 1) Consumption of KWh p.a without tax Source:EUROSTAT, A.T. Kearney Effects of Ownership Unbundling Legal UnbundlingOwnership Unbundling

7 A.T. Kearney 77/ /4729w Development of Prices for Industry (1) (in ct./kWh) IT IRL UR DE BE PT ES NOR GR DK SWE FIN F 1) Consumption of MWh p.a without tax Source:EUROSTAT, A.T. Kearney Effects of Ownership Unbundling Average CAGR Ownership Unbundling: +4.0% Legal Unbundling: +0.9% …for industrial customers the trend is the same Legal UnbundlingOwnership Unbundling

8 A.T. Kearney 77/ /4729w In 1998, liberalization started for all customer groups in one step Gradual liberalization between 1996 and 1999 Gradual liberalization between 1991 and 1998 Germany Sweden Great Britain EEX Spot prices (Base in Cent/kWh) Nordpool Spot prices in (SEK/kWh) IEA Wholesale index in %; (1996 = 100) 1) Liberalization Period Wholesale prices in legal unbundled countries did not rise faster than in ownership unbundled countries -54% -28% -31% CAGR +15.2% CAGR +21.2% CAGR +25.2% 1) until 1999 IEA Wholesale price index, as of 2000 EEX Spot Base Source: EEX, Nordpool, IEA Wholesale price index, A.T. Kearney analysis Effects of Ownership Unbundling Development of Wholesale Prices

9 A.T. Kearney 77/ /4729w Except for Great Britain, there is no clear correlation between type of unbundling and investment activities Legal UnbundlingOwnership Unbundling Effects of Ownership Unbundling Investments into the grid/transmission volume 1) (in /GWh) 1) 2004 to 2006 Source: A.T. Kearney Analysis Selection

10 A.T. Kearney 77/ /4729w Even the development of cross-border transmission capacity lacks consistency Development of cross-border transmission capacity (in %) Source: UCTE, Nordel, A.T. Kearney Analysis ØBEPTATESITNLFINDEFNOSEDK Legal UnbundlingOwnership Unbundling Effects of Ownership Unbundling

11 A.T. Kearney 77/ /4729w No clear correlation in the ratio import capacity/generation capacity can be identified Average import capacity/generation capacity 1) (in %) 1) 2006 Source: ETSO, A.T. Kearney Effects of Ownership Unbundling Legal UnbundlingOwnership Unbundling

12 A.T. Kearney 77/ /4729w In absolute terms, grid access tariffs in Europe differ widely and are not linked to ownership unbundling Transmission tariffs ) (in /MWh) Legal UnbundlingOwnership UnbundlingIndependent System Operator 1) Except for other regulatory changes that are not directly linked to TSO activities such as standard costs, public interest, renewable energies etc. Source: ETSO, A.T. Kearney Effects of Ownership Unbundling

13 A.T. Kearney 77/ /4729w No correlation between grid tariffs development and type of unbundling can be observed Development of Transmission Tariffs (Index 2003=100) CAGR IT ES DE DK EAST UK FRA PT SWE FIN AT NL DK WEST BE NOR Effects of Ownership Unbundling Source: ETSO, A.T. Kearney Average CAGR Ownership Unbundling: +0.1% Legal Unbundling: -0.1% Legal UnbundlingOwnership Unbundling

14 A.T. Kearney 77/ /4729w Networks in countries with Legal Unbundling are more reliable – grid tariffs below average Grid Access Tariff TSO (in /Mwh) Interruption Time in minutes lost per customer (Ø ) Ownership UnbundlingISO Legal Unbundling Effects of Ownership Unbundling Summary Unplanned Interruptions vs. Grid Tariffs Source: E-Control, Fingrid, VDN, TenneT, CEER, EU Commission, ETSO, A.T. Kearney analysis Backup DK East DK West DE NL AT FR UK SW ES IT IRL Ø 91 Ø 7.0 FIN NOR

15 A.T. Kearney 77/ /4729w Drivers of competition in the electricity market

16 A.T. Kearney 77/ /4729w In competitive development certain stages with certain characteristics can be observed Source: A.T. Kearney Grid Access tariffs Retail margins Churn rates Stages of competitive development Drivers of competition in the electricity market Market opening Market development Competitive market

17 A.T. Kearney 77/ /4729w First the regulator reduces grid tariffs through cost and incentive regulation DKFRAATFI N SWEDEITUKLUXESPORIRLNL Ø 2) BE Tenure of Regulatory Authorities Household Customers Market Opening 2007 Grid Access Tariffs Low Voltage 1) (in ct./kWh) 1) Status ) Estimated mean value Source: Eurelectric, CEER, A.T. Kearney Drivers of competition in the electricity market

18 A.T. Kearney 77/ /4729w A decrease in grid tariffs increases retail margins and makes alternative suppliers more competitive Cumulated churn rates (in %) Retail Margin Households 2006 (in ct/kWh) High Competitive Retail Markets Retail Margins Electricity – Households 1) (in ct/kWh) 1) GWh 2) Annual Consumption: kWh; Retail margin is calculated by taking the energy component (retail prices less taxes and grid tariffs) and deducting wholesale future prices. For UK spot prices where taken. Source: EUROSTAT, UKPX, Nordpool, EEX, EEXA, EU Kommission, regulatory authorities, A.T. Kearney Analysis Drivers of competition in the electricity market Low Competitive Retail Markets

19 A.T. Kearney 77/ /4729w Countries with a longer regulatory experience have lower grid tariffs and higher retail margins New suppliers require comfortable retail margins for a sustainable interest in the electricity market The longer a regulator is installed in a market, the better the competition Experience shows (e.g. in Great Britain and Scandinavia), that establishing a working regulatory system as prerequisite for competition requires a few years Only an integrated European electricity market ensures variety and increase in number of suppliers on the generator side large market shares in regional markets reduce in a European market In particular lengths and type of regulation drive competition in the European electricity markets Competition drivers Drivers of competition in the electricity market Low grid tariffs/attractive retail margins Regulatory experience Market integration

20 A.T. Kearney 77/ /4729w Effectively harmonized regulation in all markets Across Europe the current legal framework is not leveraged in the sense of the objective Intensification of Legal Unbundling, e.g. asset transfer, increased independence through incorporated company with independent representatives in advisory board and allocation of grid activities to grid company Raise transparence standards on a common level across Europe, e.g., in terms of invoice information on utilities, price changes etc. Simplify and accelerate churn process Ensure grid access for new players, e.g., improve data provision through grid operators Investment guidelines to all EU- countries for cross- border transmission capacities Tougher implementation of Legal Unbundling on all grid levels A domestic electricity market in Europe can in the long term only be achieved by high performing transportation grid connections Legally binding provisions for the realization of grid connections are imposed for all EU-member states Actions to stimulate competition should orientate towards identifiable drivers of competition Drivers of competition in the electricity market Actions to stimulate competition