Competition in 2012 - Where is the position of the German energy market?

Competition in 2012 Where is the position of the German energy market?

2 | Co mpetiti o n in 20 1 2 – W here is the po sitio n o f t h e G e r m a n e n e rg y m a r ke t ?

Foreword

Berlin, October 2012 Ladies and Gentlemen,

Hildegard Müller, Chair of the General Executive Management Board and Member of the Executive Board

More than ten years have passed since the strategic direction for a fundamental reorganisation of the energy market has been defined in Germany and in Europe: On 29 April 1998 the gas and electricity market was opened up to all customers. This was almost tantamount to a revolution for the energy sector of that time. Today, competition is a matter of course in the German energy market.

Initial difficulties had to be overcome on the way to functioning competition. But today we can take pride in stating that the results of competition in Germany are impressive, also in comparison with other European countries. 2012 is a year for taking stock of what has been accomplished so far. According to the Third Internal Market Package, the EU Commission will submit this autumn a report on the state and progress of the internal market. In this respect, our initiative „Competition 2012“ pointed out already in 2009 that the German energy sector is continuously working on the improvement of competitive conditions in the electricity and gas markets. Especially the German gas market has made remarkable progress since 2009, not least because market areas could be reduced from 41 in 2006 to 2 today.

The aim of this paper is to show the progress competition has made in Germany and to point out the contributions of the sector to the state achieved today.

Focus mainly is on aspects like wholesale markets, market structure, transparency, infrastructure and particularly on the benefit and opportunities offered to customers.

We do not want to sit back and rest on the success achieved, but we will go ahead with all our strength.

We are therefore looking forward to receiving your suggestions, feedback and further ideas.

Sincerely yours, Hildegard Müller

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Introduction........................................................................................................................................ 04 Focus on customers............................................................................................................................ 05 Development of competition............................................................................................................... 06 Extension of trading areas.................................................................................................................... 12 Foreseeable development.................................................................................................................... 12 Germany in comparison with other European countries.................................................................. 13 Focus on liquid wholesale markets................................................................................................... 15 Key role of wholesale markets for competition................................................................................. 15 Venues for trading electricity and gas................................................................................................ 16 Development of liquidity...................................................................................................................... 18 Comparison of churn rates at European level.................................................................................... 22 Development of intraday trading........................................................................................................ 23 Electricity/Gas control energy market................................................................................................ 25 Gas capacity platforms......................................................................................................................... 25 Convergence of national gas markets................................................................................................ 26 The creation of regional electricity wholesale markets in Europe.................................................. 27 Regional futures market through CASC.............................................................................................. 30 Focus on competitive market structures......................................................................................... 31 Market shares in generation................................................................................................................. 32 Market shares of electricity distribution companies......................................................................... 35 Market shares of gas transmission companies.................................................................................. 37 Market shares of gas sales companies................................................................................................ 38 Focus on market transparency.......................................................................................................... 40 Transparency for a level-playing field................................................................................................ 40 Transparency in the generation sector............................................................................................... 40 Transparency in the gas market.......................................................................................................... 42 Transparency on the customer bill...................................................................................................... 42 Focus on access to infrastructures................................................................................................... 43 Platform for competition...................................................................................................................... 43 Market processes and benchmarking agreements............................................................................ 43 Reduction of the number of gas market areas.................................................................................. 46 Efficient use of control energy............................................................................................................ 49 Unbundling............................................................................................................................................. 49 Focus on infrastructure development.............................................................................................. 50 Gas pipelines.......................................................................................................................................... 50 Construction of new natural gas storage facilities........................................................................... 50 Electricity interconnections ................................................................................................................ 53 Network development plans................................................................................................................ 53 Outlook................................................................................................................................................ 54 Additional liberalisation benefits through Europeanisation ........................................................... 54 Stop contrasting development............................................................................................................ 54 Annex: Competition indicators......................................................................................................... 56

4 | Co mpeti ti o n in 20 1 2 – W here is the po sitio n of t h e G e r m a n e n e rg y m a r ke t ?

Introduction

While the focus of public discussions is on climate change and the transformation of the energy system, electricity and gas supply in Germany have developed with giant strides into a competitive market without political and public perception. The position of customers has been improved, switching periods have been abridged and data exchange between suppliers and network operators has been improved in a way so as to provide much better conditions to new suppliers today. This improvement is also shown by the number of suppliers: On an average, household customers can choose among 147 electricity suppliers per network area. 1

During the past few years, the legislator as well as network operators and suppliers/traders paid particular attention to the improvement of the liquidity of the gas market and the simplification of gas network access required to this end. Important milestones have for instance been reached by the gradual significant reduction of the number of market areas and the amendment of the German Gas Network Access Ordinance. Moreover, excess supply of gas and a temporary decline in gas demand put gas supply contracts based on the price of oil under pressure. The result of the boom of gas from unconventional deposits (particularly shale gas) in the USA was that a surplus of available liquefied natural gas (LNG) quantities found their way to Europe. The market has finally set the right signals here, too. The storage potential that developed in Germany in a competitive environment likewise contributes to improving the gas market. Traders have the possibility to optimise their products.

Particularly strong market changes are attributable to the “Energiewende”. Nuclear phase-out but also the immediate shut-down of 8 nuclear power plants in March 2011 have again considerably diminished the concentration of electricity producers. The constant increase in feed-in of renewable energies will further contribute to a decrease in conventional generation.

Switch over to renewable energies requires a substantial development of transmission and distribution networks. It is essential in this context to make sure that the continuous increase in renewable energies in conjunction with the delayed network development does not impede free competition. A separation of the German electricity spot market in two or three price zones or the limitation of interconnector capacities (available to traders) through loop flows would be counterproductive.

1

Federal Network Agency, Monitoring Report 2011, page 9

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Focus on customers

The continuous implementation of the common internal European energy market has a growing positive effect on the intensity of national competi­tion. In Germany, the requirements of the Third European Internal Market Package have been early transposed into national law through the amendment of the Energy Industry Act in August 2011. This contributed to a further strengthening of the customers’ rights.

The BDEW has made numerous contributions to the practical implementation of the Act. For instance, it contributed significantly to the establishment of the energy conciliation body “Schlichtungsstelle Energie e.V.”. The conciliation body was well received by consumers and suppliers. On 31 July 2012, the rate of reconciliation was above 90 percent.

Central competition-relevant issues of the amendment of the German Energy Industry Act to strengthen the rights of customers: • • •

•

•

Increased transparency of customer bills Supplier switching within three weeks Key implementation issues and introduction of smart metering systems Introduction of a maximum period of four weeks for handling customer complaints Establishment of a conciliation body for retail customers

The result of increasing competition intensity in the retail electricity and gas markets was that energy suppliers opened up new markets and offered their customers an increasingly wide range of tailor-made energy services.

Germany has already one of the largest and best developed energy and energy efficiency services markets. The importance of this market will tend to increase in future because energy and energy efficiency services will play an essential role in terms of achieving the national and international climate protection targets.

Subject areas of requests submitted to the conciliation body on energy

2%

1% 1%

2%

Abrechnung

10%

Vertrag

44%

Farbwerte Pantone: Warm Gray 8 CMYK: 0-9-16-54 RGB: 147-138-129

Lieferantenwechsel, An-­‐/ Abmeldung Sperrung Sachschäden/ Baumaßnahmen

40%

Zähler Sons@ges

Subject areas of requests submitted to the conciliation body on energy Source: Schlichtungsstelle Energie, as of 31/07/2012

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Development of competition Essential parameters of functioning competition are the number of electricity and gas suppliers available per network area and the number of supplier and contract changes. The wide variety of suppliers has constantly increased during the past few years in both the electricity and the gas market.

„On 31 December 2010, there was an average of 147 [electricity] suppliers per network area, weighted by the number of inhabitants.“ Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 42

In its Special Report on Energy 20112, the Monopoly Commission speaks of an increasing number of suppliers in the electricity retail market and of large dynamics in this area. However, the Monopoly Commission underlines at the same time that a consolidation has to be reckoned with in the medium term.

From 2008 to 2010, the number of gas suppliers has considerably increased for most household customers. In 2010, the majority of household customers could choose among 11 to 50 suppliers (instead of previously one to five). In 36 network areas, household customers could choose among more than 50 suppliers, and this dynamic development will continue.

In cumulative terms, 27.7 percent (electricity) and 17.6 percent (gas) of all household customers had changed their supplier by March 2012. It becomes evident that the switching propensity remains high. Naturally, it is particularly high during periods of high energy prices.

Special Report of the Monopoly Commission pursuant to Article 62, paragraph 1, of the German Energy Industry

2

Act: “Energie 2011 – Wettbewerbsentwicklung mit Licht und Schatten”

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Percentage share of network areas where the represented number of suppliers is active

Percentage share of network areas where the represented number of suppliers is active according to VNB survey (electricity) Source: Federal Network Agency, Monitoring Benchmark Report 2011

Number of network areas according to the number of suppliers (to household customers) active there

Number of network areas according to the number of suppliers (to household customers) active there according to the survey of VNB Gas from 2008 to 2010 Source: Federal Network Agency, Monitoring Benchmark Report 2011

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Supplier switching in the electricity and gas markets: Change of supplier Change of supplier by households Supplier switching in the electricity andby households* in the gas supply sector in the electricity supply sector gas markets (cumulated switching rate)

(cumulated switching rate)

Change of supplier by households in the electricity supply sector (cumulated switching rate) 27.7 28.2 24.6 20.7

Change of supplier by households*) in the gas supply sector (cumulated switching rate)

Data in %

25.8

21.7

17.6

18.9

14.1 10.9

12.3

11 7

6.8

8

Source: BDEW-Kundenfokus, BDEW-Energietrends

BDEW Bundesverband der Energie- und Wasserwirtschaft e.V.

12/08

10/09

10/10

09/11

03/12

9.8 10.3 11.0 11.2 Billion Households

11/07

03/12

06/12

8.8

10/11

7.4 8.3

04/11

10/10

12/08

11/07

3.1 4.3

10/09

2.7

11/06

11/05

1

0.1

0.7

1.1

1.2

1.4

1.8

*) Households with their own gas meter and direct contract relationship with the gas supplier

Source: BDEW-Kundenfokus, BDEW-Energietrends *Households with their own gas meter and direct contract relationship with the gas supplier

In absolute terms, household customers made use of the wide variety of suppliers in the electricity markets for approximately 2.7 million supplier switches and about 2.2 million contract switches in 2010. Thus, more customers decided to change their supplier in 2010 than to switch to a new contract with their previous supplier.

Seite 1

The volume of supplier switches in the gas sector still increased moderately by 10 percent in 2009, corresponding to a switching rate of 5.16 percent. In 2010, the volume of supplier switches more than doubled from 47.18 TWh to 110.38 TWh, corresponding to a switching rate of 10.88 percent. This development continues to be dynamic.

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Annual figures of supplier switching in the electricity sector:

Number of supplier switches of final consumers (2006 to 2010) Source: Federal Network Agency, Monitoring Benchmark Report 2011

Annual figures of supplier switching in the gas sector:

Number of supplier switches of final consumers (2006 to 2010) Source: Federal Network Agency, Monitoring Report

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Electricity | Household customer contract structure as of 2010:

Gas | Household customer contract structure as of 31 December 2010 in TWh:

Contract structure of household customers according to the survey carried out among wholesalers and suppliers as of 31 December 2010.

Source: Federal Network Agency, Monitoring Benchmark Report 2011

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Public utilities still hold a special position among energy suppliers due to their public service obligation of electricity supply. (This is mainly attributable to the legally prescribed assignment of every electricity consumer to the public utility unless the consumer itself selects a different supplier.). Nevertheless, it is to be noted that the share of public utilities in overall supply in the electricity and gas sector has continuously decreased since 1998 due to supplier and contract switching.

Many customers that still obtain electricity and gas from their original supplier have nevertheless switched from basic supply to a special contract.

This shows that a structurally ensured competition is in place in the electricity and gas retail markets in conformity with the Federal Network Agency, the Federal Cartel Office and the Monopoly Commission. Increasing switching rates also show that the legal framework contributes to an intensification of competition.

Switching rates are not everything The switching rate only shows a section of the competition intensity. It is imperative for the assessment to take switches to other products of the previous supplier into account. Measures to increase customer loyalty and alternative offers to the supplier’s own customers are elements of competition which generally diminish however the propensity to switch. Such products offer alternatives to a change of supplier and reflect a response to intensive competition. This is also explicitly acknowledged by the Federal Network Agency in its current Monitoring Benchmark Report 2011 (p. 44).

The most important indicators for mapping the development of competition are represented and discussed in the Annex.

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Extension of trading areas

Foreseeable development

But not only the wide variety of suppliers has evidently increased during the past few years. According to the Monopoly Commission, municipal and private players equally use the strategy of (e.g. Germanywide) extension of their trading areas. In 2008, the majority of suppliers operated only within one network area where they took care of basic supply or, if possible, in maximally four additional network areas.

Today, new suppliers operate within 200 network areas, on average, whereas established public utilities are active within 31 network areas, on average.

In the future energy system, retail customers will no longer appear as mere energy consumers but, depending on their size and structure, they will interfere by feedback action in the energy system, e.g. as decentralised producer or by using variable tariffs. In order to be able to actively implement this new role, retail customers must be equipped with smart metering systems where this is reasonable in economic and energy terms. After opening up of markets to meter operation and metering services in 2008, companies of the energy industry sector have tested this technology in pilot projects at interested customers’ premises also in combination with variable tariffs. The rules set up in the amendment of the Energy Industry Act which are to be put more precisely through corresponding Ordinances will set the course for a further large variety of products in the energy retail market, such as provision of additional services, above all energy management services.

This will contribute to further intensifying competition. A basic prerequisite to this end are however market-oriented regulatory framework conditions which enable attractive competitive products to be offered so that the customer may participate in the benefits of the energy market.

3

Source: Federal Network Agency, Monitoring Benchmark Report, page 43

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Germany in comparison with other European countries The decisions on the “Energiewende” will entail a further acceleration of the transformation of the German energy industry, which will also have an effect on competition. This will lead to additional adjustments of the competitive framework conditions on the part of national regulators and legislators. In this context, it is indispensable to bear the cost-benefit ratio in mind in order to make sure that these efforts ultimately do not lead to a burden on the German and European household customers and on Germany or Europe as a location for industry but to an improvement of the market conditions.

The fact that only 35 percent of the household electricity price are currently still made up in the market, that is to say the share of procurement, service and sales, is to be noted with concern. The share of regulated network fees amounts to about 20 percent. State-induced burdens totalling approximately 45 percent account for the largest part on the customer’s bill. Due to this fact, a significant price differentiation to stimulate competition between competing electricity suppliers is increasingly difficult.

In Germany, the provisions of the Third Internal Market Package which are decisive for the European retail market were transposed early on into national law by the amendment of the German Energy Industry Act in 2011. At this time, 18 other European countries had not yet (or only partly) undertaken the necessary implementation steps. It is not unusual in those countries that single state-run energy suppliers hold a predominant position in the market. More than one decade after the beginning of European liberalisation, retail customers still have no real option to choose supplier in those markets. In addition, retail prices in those markets are in many cases determined by the State and are regularly below the prices that would be obtained if the respective Exchange price was used as a basis. This fact considerably reduces the attractiveness of market entry to new competitors. In this way, Member States close off access to their markets. At the same time, utilities located there benefit from the open markets of other Member States such as Germany or Great Britain as additional fields of activity. In this respect, the German energy industry considers that it is primarily the duty of the European Commission to enforce current European law and establish a fair level-playing field for all European energy suppliers.

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Electricity: Price regulation in the supply market

Gas: Price regulation in the supply market

Source: European Commission 2009-2010 Report on Progress in Creating the Internal Gas and Electricity Market – Technical Annex” and BDEW Easy Map © LUTUM + Tappert, Bonn

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Focus on liquid wholesale markets

Key role of wholesale markets for competition The liberalisation of the European energy markets at the end of the 1990ies was at the same time the birth of energy trading as a level of value creation. Since then, energy trading has very positively positioned itself as a link and intermediary between the value creation levels “generation” and “sales”. It thus lays an important basis for an efficient competitive market.

With a churn rate4 of about 10, especially the German electricity exchange market is likely to be the most liquid electricity trading venue in Europe. There are good reasons for this, such as the early establishment of an Energy Exchange, the heterogeneity of market participants, the geographic location as a quasi European hub and the increasingly high transparency.

In terms of liquidity and transparency, gas trading has also undergone a remarkable development during the past few years. Further improvements are likely to be brought about by the growing European integration.

Increasing cross-border cooperation between transmission system operators (TSOs) will also make an essential contribution to this development.

Moreover, due to its great variety (many market participants at all levels of the value creation chain), the German gas market differs widely from other European gas markets which usually have only one established predominant market participant and only one pipeline grid operator that frequently also operates the distribution networks.

Due to the concentration of liquidity in transparent marketplaces accessible to all participants, the market price being formed there reflects the scarcity in the market (i.e. the supply and demand ratio). The energy trading market thus gives rise to fair pricing of the commodities electricity and gas and provides transparency to all participants about the market value of the energy quantities offered and in demand. It thus also provides the necessary incentives to mobilise sup­­­ ply and demand. Especially in situations of shortage (which is not attributable to the network) it contributes to an increase in security of supply.

4

The result of a high price level due to scarcity is that additional generation or storage capacities may possibly be offered in the market. At the same time, wholesale prices have an important long-term signal effect on investments. Particularly in the European context the energy trading market can provide a steering signal; i.e. that it does not only tell whether but also where to invest.

A main task of wholesale in the liberalised energy market is that the traded products permit efficient risk management (in particular secure prices and quantities) to both producers and consumers. For the sake of efficient handling of the risks and chances of the liberalised energy market, it is therefore essential to identify, assess and manage the respective business risks. Energy trading enables the risks to be assessed and to be managed due to the possibility of efficient risk transfer.

Without functioning and liquid energy trade which offers the opportunity to safeguard one’s position, energy supply companies and consumers in a liberalised market would be faced with considerable systematic price and quantity risks. The transfer of these risks, e.g. through hedging programmes also leads to a further intensification of competition because a liquid wholesale market enables sales entities to cover their energy demand in an efficient and market-based manner.

That the market enables efficient position steering due to fundamental events has been shown by the moratorium on nuclear energy: In March 2011, the fundamental change led to a comprehensible price increase with a distinct increase in liquidity, but not to drastic fluctuations or even supply bottlenecks.

Before electricity and gas are supplied in physical terms, they are traded in the futures market. The “churn rate” describes the turnover frequency and is thus an

indicator of liquidity. Liquid futures trading serves the optimisation of procurement but not the recovery of speculative profits.

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Venues for trading electricity and gas

The German wholesale electricity market has a key position within the EU. As the most liquid electricity wholesale market in Europe it serves as a leading reference: The base load contract for the following year (currently Cal-13 Base) has further expanded its role as benchmark contract for electricity in Continental Europe, e.g. analogously with the Brent Front Month Contract for North Sea oil on the British Intercontinental Exchange (ICE) or the Gas Front Month on the British NBP (National Balancing Point) or the Dutch TTF (Title Transfer Facility).

The development of a functioning German wholesale market had to overcome some large obstacles due to the originally great number of gas market areas. As a result of the integration of market areas in the German gas market during the past three years to form two essential virtual trading points, Net Connect Germany (NCG – previously EGT) and Gaspool (previously BEB) have become established. Trading of standardised products has become possible by setting up a spot trading platform for the BEB market area (today

Gaspool) in July 2007 through the European Energy Exchange AG (EEX). The EGT market area (today NCG) was integrated in October 2007. The market areas of EGT and the bayernets market area consolidated for the first time into a common market area; during the following years, further markets (GRTGas, Thyssengas, GVS/Eni) were integrated to form today’s NCG as dualquality market area.

The reduction of the number of market areas from 15 in October 2007 to 2 in 2011 and additional regulatory changes have contributed to a strong intensification of the gas trading business. The constructive participation of the companies concerned enabled this process to be terminated two years earlier than required according to the Ordinance in force. The two market areas, Net Connect Germany (NCG) and Gaspool, have become since then the trading points with the largest growth in Europe. From 2006 to 2010, the trade volume in Germany increased more than hundredfold (2006: 16.1 TWh pa, 2010: 1704.3 TWh pa) (Source: NCG, Gaspool Website).5 As a result of the substantial natural gas production in the Netherlands, TTF has become a very important trading platform for natural gas in the Netherlands. A characteristic feature of the liquid virtual trading platform TTF is its international structure of participants.

Many German market players are also active there.

An essential contribution to the establishment of market platforms for electricity and gas has been made by the wide variety of market participants (regional suppliers, municipal utilities, distributors and trading companies, producers but also global players from the gas and oil sector and financial services providers) which also ensure liquidity during periods of volatile market prices. Moreover, the uniform German price zone supports a high liquidity of the market.

Source: EGT, Prospex

5

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EPEX SPOT market areas

Strommärkte der EPEX SPOT 3 market areas: • Germany/Austria • France • Switzerland + Hungarian day-ahead market operated by HUPX

6 market segments: • • • • • •

auction Germany/Austria auction France auction Switzerland intra-day trade Germany intra-day trade France Intra-day trade Austria © EPEX SPOT SE – Any use of information contained in this document is expressly prohibited without prior written consent of EPEX SPOT SE

Source: EPEX SPOT, 2012

In addition to a liquid futures market, a functioning liquid spot market is also an important indicator. In the electricity sector, the French Exchange Powernext and the European Energy Exchange in Leipzig have integrated their electricity spot market activities for Germany and France and incorporated into a cross-frontier joint venture called European Power Exchange (EPEX SPOT) located in Paris. Besides, EPEX SPOT is active in Austria and Switzerland and thus forms the nucleus of the spot market in Central Western Europe (CWE) (IDE-FR-BeNe-Lux).

1

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Development of liquidity Since the beginning of liberalisation, the trade volumes have continuously increased both in the electricity and gas sector.

The importance of electricity and gas trading in Europe increased yet again in 2010. The volume of electricity trading in Germany is estimated to account for more than 10,600 TWh. Wholesale gas trading amounted to approximately 1,686 TWh. Energy trading has become an important tool for energy producers and large users for limiting losses from fluctuations in energy prices (hedging). The importance of electricity and gas trading is also growing because small and municipal companies, in particular, can derive competitive advantage from more flexible trading strategies in supplying their customers. And another reason is the growing role of trading on the exchange for the integration of renewables.

Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 79

As confirmed by the Federal Network Agency, wholesale OTC gas trading has very well developed.

“Compared to other key European trading points on the continent, the highest volumes were found at the six German trading points, with 1,686,670 GWh. This development is also confirmed by the latest analyses for the year 2011.”6

Overall, gas trading at the European hubs shows a distinct growth. The two German gas hubs NCG and Gaspool have meanwhile reached the Dutch TTF in terms of the traded gas volume. Growth rates of trade at the European hubs of about 50 percent annually show the traders’ confidence in the liquidity and reliability of these hubs, and above all of the two German trading points.

Source: Federal Network Agency, Monitoring Benchmark Report 2011

Approximately 200 bcm of natural gas were traded on NCG and Gaspool in 2011; this was more than twice the German gas consumption.

Gas quantities traded in the Energy Exchange, on the other hand, are rather modest in percentage terms.

Due to the high rate of increase and on the basis of a cross-comparison at European level, the German Federal Network Agency arrives at a different conclusion.

“Compared to other European Exchanges, the EEX has assumed a key role. The expansion of trading points to include the Dutch TTF at the end of May 2011, the introduction of 24/7 trade and the reduction of minimum contract sizes from ten MW to one MW suggest that further growth in liquidity can be expected.”7

Source: Federal Network Agency, Monitoring Benchmark Report 2011,

6

7

p. 63

p. 63

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Trade volumes in the spot gas market 2009 - Feb 2012

Trade volumes in the gas market, Source: EEX, 2012

OTC trade volumes (1999-2011) at the most important European Hubs 700 bcm

CEGH

600 bcm

TTF

GRTgaz

TIGF

PSV

huberator

GasPool

NCG

500 bcm

400 bcm

300 bcm

200 bcm

100 bcm

OTC trade volumes (1999-2011) at the most important European Hubs Source: Heather, Oxford Institut for Energy Studies, „Continental European Gas Hubs: Are they fit for purpose?“, 2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

0 bcm

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Trade volumes in the natural gas spot and futures markets (TWh)

Development of the trade volume in the natural gas spot and futures market on the EEX Source: EEX “Company and Products” Brochure

Since its beginning, spot trading in the EEX electricity market and later on EPEX SPOT has been characterised by continuous annual rates of growth. The same applies to the electricity futures market in terms of the pluri-annual average.

Trade volumes in the electricity spot and futures markets (TWh)

Trade volumes in the electricity spot and futures markets (TWh), Source: EEX, 2011

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This increase in liquidity was not a matter of course. Other European wholesale markets experienced a downward trend during the same period.

After a continuous increase, the trading volume has however slightly decreased again since 2011 both in the electricity and gas sector as a result of the financial and economic crisis.

In the gas storage market, the capacity development with an increase in freely available capacity products begins to show and makes a contribution to liquidity in the storage capacity offer. This becomes also apparent by the volume bids recorded at the store-x auction platform which showed a strong increase in 2011.

Trade volumes in the electricity spot and futures markets (TWh)

Trade volumes in the electricity spot and futures markets (TWh)8, Source: EPEX SPOT, 2012

Overall volume in Central Europe in 2010

Development of the German gas trading market consisting of the six German market areas in comparison with other trading platforms in Continental Europe.

Source: Federal Network Agency, Monitoring Report 2011, Data base: Huberator, GTS, CRE

8

The electricity spot market has been operated since 2009 by the joint venture called EOEX SPOT SE in which EEX AG and Powernext SA are holding

each a share of 50 %.

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Comparison of churn rates at European level Apart from trading on the different European Energy Exchanges, trading activities in the electricity market are carried out mainly through “over-the-counter” (OTC) platforms.

Since the liberalisation of the market, trading volumes have increased in the different EU countries. However, differences in the development of trends become apparent which are attributable, among other things, to the definition of the necessary regulatory framework.

The German wholesale electricity market currently shows the highest churn rate, i.e. the ratio between the trading volume and physical consumption.

Compared to other European countries, traded volumes and churn rates of the German gas trading points NCG and Gaspool still have catch-up potential; a distinct upward trend is however becoming noticeable. Moreover, it has to be noted that part of the liquidity of the Dutch trading point TTF results from the fact that German market participants are active here, too.

Electricity wholesale trade: Churn rates 2008/2009

Electricity wholesale trade: Churn rates 2008/2009 Source: BDEW, Office of the Gas and Electricity Markets (OFGEM)9

9

OFGEM does not publish churn rates on a regular basis. The values collected in 2010 for the years 2008/2009 are likely to be lower due to the world

economic crisis, but they provide nevertheless a good comparison of the turnover frequencies at the different trading points or in different markets.

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Trading volumes at European continental hubs

Trading volumes at European continental hubs, Source: ICIS Heren, European Gas Hub Report Q4 2011

OTC churn rates

OTC churn rates, Source: ICIS Heren, European Gas Hub Report Q4 2011

Development of intraday trading In addition to the day-ahead market (trading today for tomorrow), the intraday market (trading today for today) is also an important market segment which is gaining in importance especially due to the fast development of renewable energies. It is necessary in order to manage short-term deviations from forecasts. The development of short-term trading “today for today” makes an essential contribution to the integration of renewables.

Since 2009, intraday trading has been organised by EPEX SPOT which is currently the most important intraday market platform (almost 18 TWh) in Europe.

Germany has the largest share totalling approximately 16 TWh. An essential reason for this is the renewable energies’ trading in the market.

24 | Co mpetiti o n in 20 1 2 – W here is the po sitio n of t h e G e r m a n e n e rg y m a r ke t ?

Intraday-Volumina EPEX SPOT Germany and France

Intraday-Volumina EPEX SPOT Germany and France, Source: EPEX SPOT, 2012

Cross-border intraday trading on EPEX SPOT

Cross-border intraday trading on EPEX SPOT, Source: EPEX SPOT, 2012

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Electricity/Gas control energy market According to the German Electricity Network Access Ordinance, the four German transmission system operators have been required since 2007 to procure the three control energy qualities (primary, secondary, minute reserve) through a common anonymised invitation10 to tender across control areas. Small generation plants may also participate in the control energy market through pooling.

Due to the introduction of a uniform calculation method for secondary control and minute reserve by the Federal Network Agency, the demand for control energy put to tender has meanwhile diminished. In view of the rules and regulations in force, neither the Federal Cartel Office (Sector Inquiry 2011) nor the Monopoly Commission considers that there is a need for changes in terms of control energy procurement.

The utilisation of control energy in the gas network is based on the provisions of the German Gas Network Access Ordinance and on the “Basic model of balancing services and balancing rules in the gas sector” (German abbreviation: GABi Gas)” defined by the Federal Network Agency. Mainly the “external control energy” is relevant to the market; it is however utilised only if the internal control energy is not sufficient to solve network-related problems. External control energy is procured by the parties responsible for the market area through a transparent, market-oriented and non-discriminatory procedure. After a corresponding extension of trading hours to 24/7 for gas trading, almost the complete control energy quantity is procured by the parties responsible for the market area on the EEX and the Dutch TTF.

10 https://www.regelleistung.net 11 TRAC-X primary, Evaluation Report 2011/2012, p.20 12 https://secondary.trac-x.de/tracx/index.do

Gas capacity platforms The primary capacity platform of the gas pipeline grid operators was put into service in August 2011. The associated standardisation of products and processes means a considerable facilitation to shippers. Due to the standardisation of essential texts of contracts, the expenditure required for monitoring has decreased.

Uniform capacity products and above all equal mechanisms of contract awarding enable easier access to the transport capacity market. The demand for capacities is currently still very low (about 12.7 percent of the quantities offered find a purchaser11).

It is to be hoped that day-ahead trading will lead to a further increase. After all, scheduled auctions known well in advance facilitate the planning process.

Consequently, a great deal remains to be done. At the present time, the primary capacity platform does not yet meet the legal requirements in terms of suitability for bulk implementation: Especially regarding the ease of operation (general user friendliness, where required) still needs considerable improvement, as underlined by the provider TRAC-X in a published evaluation report.

Apart from the primary market in capacities, there is the secondary trading platform TRAC-X secondary12 that enables traders to resell transport capacities to other traders, i.e. trading them in a secondary manner. Both day-ahead and long-term capacities can be traded. In the day-ahead segment of the platform it is possible to trade fixed cross-border transport capacity rights for the following day on a short-term basis, whereas long-term transport capacities may be traded in the long-term segment. Here too, continuous efforts are undertaken in close cooperation with the corresponding stakeholders to achieve further improvement and bulk business suitability.

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Convergence of national gas markets Similarly to the electricity market, national gas markets in Continental Europe are continuously growing together. This is clearly reflected by the high correlation of prices at the essential European gas hubs. The high price correlation shows that gas markets in Europe (except for Italy and Austria) are very closely linked today and that price differences between the markets have strongly decreased.

The further coalescence of markets through cross-border cooperation between transmission system operators and regulatory authorities (keyword: Gas Target Model) and Europe-wide operation of trade companies will continue to promote the realisation of a European gas market.

Quotations at the European gas hubs in 2012

Quotations at the European gas hubs in 2012 Source: Heather, Oxford Institute for Energy Studies, „Continental European Gas Hubs: Are they fit for purpose?“, 2012

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The creation of regional electricity wholesale markets in Europe National networks have been connected to one another for decades by means of interconnectors which served primarily the network security.

Cross-border electricity trading was additionally introduced after the liberalisation. However, system-inherent restrictions impeded this way of trading. Market coupling now constitutes a novelty in terms of quality.

In the past, electricity trading on the Exchange and the utilisation of cross-border transmission capacities were two completely separate activities. The national wholesale electricity markets were operated independently of each other and did not take cross-border trading possibilities into consideration. Market coupling links these two areas by taking cross-border transmission capacities into consideration already when the results on the Exchanges are being determined.

Prior to that, electricity traders who wished to sell electricity that was produced in Germany to France, for example, were required not only to complete an electricity transaction, but also to purchase the corresponding transmission capacities. This separation introduced significant disadvantages, one of these being that in the case of congestion on cross-border power lines, it was possible that not enough transmission capacity could be purchased. Another disadvantage was that if capacities were purchased, they could ultimately become worthless because of the low electricity price in the target country. Market coupling prevents such inefficiencies. Cross-border electricity trade only comes about when the required transmission capacities are available and when the transaction makes sense economically.

Ultimately, market coupling leads to a harmonisation of prices on the Electricity Exchanges. One of the reasons for the price differences is that until now, cross-border transmission capacities have hardly played a role in determining prices. Trading potentials went untapped, and the significant price differences reflected an inefficient utilisation of transmission capacities.

Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 32

All relevant players in Germany have intensively and constructively participated in market coupling.

After the successfully launched market coupling between Germany and the Nordic market in November 2009, the implementation of market coupling in the CWE region was put on the agenda for 2010.

A particular challenge was to achieve a good coordination of the two market couplings. In order to ensure a smooth launching of the two projects they had to be closely coordinated because the two systems were still organised in different ways in terms of operation. This coordination was particularly important to Germany that forms the intersection of the two projects.

Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 102 (Part II, German only)

28 | Co mpetiti o n in 20 1 2 – W here is the po sitio n of t h e G e r m a n e n e rg y m a r ke t ?

Coupling of the electricity markets of North Western Europe (Germany, France, Benelux and Scandinavia) on 9 November 2010 was an important milestone towards the integration of electricity markets within the European Union. Since then, the national electricity spot markets of nine countries have been coupled with one another at the wholesale level. The BDEW has supported this development through the “Market Parties Platform” (MPP).

The expected positive effects resulting from the optimum utilisation of cross-border capacities on the market results have come true which is e.g. shown by equal prices obtained in Germany, France and Benelux

during about 70 percent of the hours. Before, this was the case in less than one percent of the hours over the year.13 Since market coupling has been launched in Central Western Europe a strong convergence of wholesale market prices could be observed. Even though the accelerated nuclear phase-out in Germany has had a dampening effect on the price convergence, the time intervals during which there was complete conformity of prices in the wholesale market between Belgium, the Netherlands, Luxemburg, France and Germany amounted to about 63 percent, on average.

CWE Market Coupling: Price convergence

FR=DE= Month DE=FR DE=NL DE=BE FR=BE FR=NL NL=BE FR=DE=BE FR=BE=NL FR=DE=NL DE=BE=NL BE=NL Divergence 11 70% 99% 72% 97% 70% 72% 70% 70% 69% 71% 69% 0,0% 2010 12 45% 70% 46% 98% 67% 68% 45% 67% 45% 46% 45% 0,0% 1 77% 83% 77% 100% 89% 89% 77% 89% 76% 76% 76% 0,0% 2 76% 82% 76% 97% 86% 87% 76% 86% 76% 76% 76% 1,8% 3 73% 89% 72% 96% 76% 76% 72% 76% 72% 72% 72% 3,2% 4 73% 85% 73% 100% 70% 70% 73% 70% 67% 67% 67% 0,0% 5 65% 94% 65% 100% 65% 65% 65% 65% 64% 64% 64% 0,0% 6 44% 91% 44% 99% 42% 43% 44% 42% 41% 41% 41% 0,0% 2011 7 48% 93% 49% 99% 49% 49% 48% 49% 48% 48% 48% 0,0% 8 53% 91% 53% 98% 55% 53% 53% 53% 53% 52% 52% 0,0% 9 73% 94% 73% 100% 76% 76% 73% 76% 72% 72% 72% 0,0% 10 82% 93% 82% 100% 86% 86% 82% 86% 82% 82% 82% 0,0% 11 82% 92% 82% 99% 88% 88% 82% 88% 82% 82% 82% 0,0% 12 63% 72% 63% 100% 75% 75% 63% 75% 60% 60% 60% 0,0% 1 63% 66% 64% 99% 68% 69% 63% 68% 54% 54% 54% 0,0% 2 21% 66% 33% 67% 26% 47% 19% 26% 18% 32% 18% 3,0% 2012 3 52% 55% 51% 93% 73% 80% 50% 73% 47% 49% 47% 0,1% 4 73% 72% 73% 100% 77% 77% 73% 77% 64% 64% 64% 0,0% 5 72% 49% 72% 100% 48% 48% 72% 48% 42% 42% 42% 0,0% Total 63% 80% 64% 97% 68% 69% 63% 67% 59% 60% 59% 0,4%

Year

CWE Market Coupling: Price convergence, Source: EPEX SPOT, 2012

13 Source: Federal Network Agency, p. 31 and 102

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Price convergence in the German and in the Dutch market

Price convergence in the German and in the Dutch market; Source: ECOFYS 2012, Platts data

When taking a look on the development of price differences between the Netherlands and Germany it becomes apparent that the implementation of market coupling constitutes a quantum leap. While wholesale prices were identical before during a few percent of all hours during the year, the situation has reversed by the introduction of market coupling.

The EU Commission and the European Agency for the Cooperation of Energy Regulators (ACER) aim at coupling of spot markets as a target model for the entire EU by 2014. This aim has also been adopted by the Council.

However, numerous impediments still have to be overcome till then for it is a big challenge to harmonise and integrate the different levels of development of market coupling in Europe.

Current market coupling with neighbouring countries

Current market coupling with neighbouring countries, Source: Europex, 2012

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The improved use of interconnectors for intraday cross-border electricity trading was a further major focus of attention especially in the CWE region. On 14 December 2010, a system was installed on the D/FR border which also enables an implicit continuous capacity allocation and thus couples the German and the French intraday markets. In parallel, explicit (direct) access to utilisation for bilateral trade transactions is maintained. First results show a clear success of the scheme. Both trade volumes and the number of market participants have substantially increased. Implicit and explicit capacity utilisations complement each other and offer the necessary flexibility to satisfy the different market needs.

Cooperatively with expert committees at European level, TSOs, Energy Exchanges and Regulators are currently working, apart from bilateral projects, on a concept for the establishment of a common implicit continuous allocation model for the regions CWE, NE and Great Britain. This project will actually also lead to coupling of the aforementioned markets in intra-day trading. Current plans aim at an implementation by the end of 2012. If the planned scheme will also form the nucleus of a pan-European model as scheduled, the CWE region will again have served as a role model and spur for the integration of the European electricity market.

Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 102 (Part II, German only)

Current level of development of long-term allocation of congestion capacities - electricity

Regional futures market through CASC The cross-border futures market is very important, too.

Firm interconnector capacities are especially required for hedging transactions which are to be effected across borders.

With active participation of all German transmission system operators, the Capacity Allocation Service Company (CASC) located in Luxemburg was founded for that purpose. Interconnector capacities are auctioned forward (year/month) there by transmission system operators. This has been done since 2009 for France/ Benelux/Germany and has been continuously extended since then to the borders of Italy, Switzerland and parts of Scandinavia.

Current level of development on long term – Electricity, Source: Everis und Mercados EMI, 2010

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Focus on competitive market structures

The fact that there exists a large number of market participants at the different levels of the valueadded chain in the energy industry is, among other things, a sign of functioning competition, the absence of market barriers, and a reinforcement of the development of competition at downstream levels of value creation. Moreover, due to a large number of market participants it is impossible for individual companies to build up market power and cause a distortion of competition. Compared to other European countries, the number of suppliers in Germany is

very high at all levels of the value-added chain. The continuously increasing number of foreign market participants underlines the attractiveness of the German energy sector and the non-discriminatory access to the different sub-markets.

The German Federal Network Agency also arrives at this conclusion in its Monitoring Report 2011; it states that the large number of competitors shows that the necessary framework conditions are in place to enable efficient and undistorted competition to be realised.

Wide variety in the energy market

Number of companies in the different market segments; adding-up is not possible because many of these companies are active in several segments and at several levels of value added, and were thus recorded several times; figures partly rounded Source: BDEW 2011

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Market shares in generation Market shares of the “big four” in the German electricity generation have considerably decreased during the past three years. This decrease was mainly attributable to the following developments:

• sale of generation capacity by E.ON to the amount of 4,800 MW; • considerable increase in generation from renewable energy sources (currently about 20 percent of the German electricity consumption); • shutdown of 8,400 MW of nuclear power station capacity due to the amendment of the German Nuclear Power Act; • increase in electricity exchanges, inter alia as a result of the establishment of the Central Western European Market Coupling since November 2010 between Fr, D, BeNeLux for day-ahead products and optimisation of the Net Transfer Capacity.

In addition, the accelerated nuclear phase-out had a strong impact on the share of the big four in the installed electricity generation capacity: After the moratorium, Germany’s four big electricity producers RWE, E.ON, EnBW and Vattenfall have only a share of 46.9 percent in the electricity generation capacity. Taking power stations of more than 10 MW into account, there presently exist 126 power plant operators that are independent of one another.14 A similarly wide variety of producers within the EU exists only in Denmark and in the Netherlands.

Market shares in the German electricity generation market

Federal Network Agency, power station list updated to 02/07/ 2012 Only fossil-fired power stations (including cogeneration plants) and run-of-river power stations are taken into consideration.

Electricity generation market: Market shares in the available installed capacity (2011) in Germany * actually also ranking among public supply plants; ** including long-term purchase contracts Sources: Company information, Annual Reports, BDEW, 2011

Federal Network Agency, power station list updated to 02/07/ 2012

14

Only fossil-fired power stations (including cogeneration plants) and run-of-river power stations are taken into consideration.

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In its sector inquiry of January 2011, the German Federal Cartel Office did not take renewables-based electricity quantities into consideration on the ground that these are not organised under competitive conditions but that they are traded on the basis of legal provisions independently of quantity and price signals.15 This is true; but renewables-based quantities through their bulk quotation have a direct impact on pricing in the spot market and influence the market price and the use, the operating regime and the supply behaviour of conventional power stations. It would therefore be advisable to take account at least in qualitative terms of renewables-based capacities for a consideration of the generation market. Recent public statements of the President of the Federal Cartel Office show that an extension of the relevant market is taken into consideration and that competitive developments have not gone unnoticed. In is Special Report 59,16 the Monopoly Commission queries the practice of the Cartel Office to consider the rising share of renewablesbased electricity generation as an independent market.

Furthermore, the Monopoly Commission recommends observing over a period of two years the correlation of net wholesale prices and congestions on interconnectors. Should relatively homogeneous conditions show over this period, the geographically relevant market should be correspondingly extended. Current investigations17 show a correlation of day-ahead spot market prices in Germany with neighbouring countries of 60 percent (e.g. with Nordpool) to 80 percent and more (France, BeNeLux, Switzerland, Austria).

Germany holds a good position among the European countries in terms of market concentration. Both with regard to the Herfindahl-Hirschman Index (HHI)18 and the share of the largest electricity producer, Germany belongs to countries like Great Britain where market liberalisation was launched early on, i.e. that Germany ranks among the countries with the lowest market concentration in Europe.

Herfindahl-Hirschman-Index 2009 











Herfindahl-Hirschman-Index 2009, Source: European Commission /GNC World Energy Council, 2012

15

Federal Cartel Office, sector inquiry, final report, p. 17

16

Monopoly Commission, Special Report 59 (item 156)

17

E.g. ESMT; „Electricity Wholesale Sector: Market Integration and Market Power“, Study of 13/01/2010, p. 30

18

The Herfindahl-Hirschman Index (abbreviation: HHI, digit) is the most frequently used indicator to measure concentration in a market. The index shows the concentration of a company in a given market. A value of 10,000 indicates that there is only one monopolist.

34 | Co mpeti ti o n in 20 1 2 – W here is the po sitio n of t h e G e r m a n e n e rg y m a r ke t ?

Deutschland mit geringer Marktkonzentration in der Stromerzeugung Electricity

100% 90%

87%

85%

81%

80%

79%

73%

70% 60% 50% 40%

17%

Polen

21%

Great Britain

24%

Spain

Czech Republic

Belgium

Slovakia

Greece

0%

27%

Finland

10%

… …

28%

Italy

20%

28%

Germany

30%

France

Market share in electricity generation in %

Market share of the largest producer in the electricity market, 2010 Market share of the largest producer in the electricity market, 2010

Source: Eurostat, 2012 SP-V/Ba Strom- und Gasmärkte in Europa

BDEWshare Bundesverband der producer in the electricity market, 2010, Source: Eurostat, 2012 Market of the largest Energie- und Wasserwirtschaft e.V.

29.03.2012 Seite 1

A comparison with other European countries clearly shows that Germany has a relatively low market concentration regarding electricity generation.

Some disinvestments and the accelerated nuclear phase-out suggest that the HHI value for Germany is likely to have again decreased.

Germany is closely integrated into the European market. On the one hand, this is attributable to the high share of interconnecting capacity with neighbouring countries, particularly in a westerly and southerly direction. On the other hand, market coupling in Central Western Europe (Belgium, Netherlands, Luxemburg,

France and Germany/Austria) and market coupling with Northern Europe makes itself felt by a high, frequently even very high, price convergence.

During periods of equal prices which frequently occur in Central Western Europe, it does not make any difference whether a generation plant is located within or outside the country. With good reason the question is therefore discussed time and again whether the market delimitation of the generation market to Germany is still adequate.

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Physical electricity exchanges between Germany and its neighbour countries in 2011 (billion kWh)

Source: BDEW, 2012

Market shares of electricity distribution companies Unlike other European countries, Germany has completely opened up the retail electricity market to competition already in 1998.

A continuous development has taken place since that time. More than 1000 electricity distribution companies are currently active in the market. Both the Federal Network Agency and the Monopoly Commission have expressed a positive opinion about competition in the German retail market.

The market share of the four largest electricity suppliers in the overall segment of household customers is continuously decreasing. In view of the market concentration, the Federal Network Agency refers in its recent Monitoring Benchmark Report to a “drop of 6.3 percent” within two years”: “While in 2008 the share of the four largest electricity suppliers in the overall household customer segment was still at 50.1 percent, in 2010, the year under review, this share is at 43.8 percent.”19

19

Federal Network Agency, Monitoring Benchmark Report. p. 46

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The Federal Network Agency states that “Among other things, this high number of competitors shows that the necessary conditions exist for effective and undistorted competition in the segment of electricity end consumers.”

Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 42

Market shares of electricity sales companies Market shares of electricity sales companies Market shares in 2009 1) in electricity sales to final consumers2) According to a survey of Eurostat, Germany is in the RWE lead in comparison with other European countries as 16.8% far as the lowest market concentration in electricity sales is concerned. In 2012, the cumulated market share of electricity sales companies with a share of more Other 43.1% than 5 percent in electricity sales to retail customers EnBW Total: amounted to somewhat more than 40 percent. Only 14.3% 509,8 TWh three companies have a Germany-wide share of more than five percent in the electricity retail market.

E.ON 12.9% Stw. München 0.9% Vattenfall Europe Stw. Hannover RheinEnergie EWE 4.5% 0.9% 2.1% 1.6% N-ERGIE MVV Energie 1.2% 1.7% 1) 2)

including consolidated subsidiaries electricity sales to final consumers inside Germany – total electricity supply

Market shares BDEW Bundesverband der Energie- und Wasserwirtschaft e.V.

Source: Company information, BDEW, 2

in 2009 (including consolidated SP-V/Ba subsidiaries) in electricity sales

to final consumers (electricity sales to final consumers inside Germany – total electricity supply) Source: Company information, BDEW, 2009

Germany has lowest market concentration in the electricity sales sector

2009 cumulated market shares of electricity sales companies with a share of more than 5 % in electricity sales to final consumers /number of companies with a share of more than 5 % Source: Eurostat and BDEW 2012, no data available for Denmark and Finland

12.07 S

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Market shares of gas transmission companies According to the distinction made by the Federal Cartel Office, the companies of the German gas sector can be distinguished into gas transmission companies with import purchases and natural gas production companies (interregional gas transmission companies), gas transmission companies without their own sources of production and import purchases (regional gas transmission companies) as well as regional and local gas companies (frequently municipal utilities).

The market share of the five largest importing gas transmission companies has decreased from 81.6 percent to 72.9 percent between 2008 and 2010.

Market share of the largest upstream supplier (gas imports/domestic production) in 2010*

Market share of the largest upstream supplier (gas imports/domestic production) Source: Eurostat. *No data available for the Netherlands, Luxemburg, Austria, Denmark and Turkey ** 2009 data

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Market shares of gas sales companies The sales business of the German gas market is characterised by a high compe­ titive market structure. With 850 gas sales companies, Germany has the most hetero­geneous market in Europe. In Italy, for instance, there are 303 gas distributors, followed by Romania with 52 gas distributors.

The market share of the five largest German gas sales companies decreased from 44.3 percent to 36.9 percent between 2008 and 2009.

In 2010, the largest German gas distribution company had a market share of 8.9 percent.

In comparison with other European countries, the market share of the largest gas distributor in France amounts to approximately 65 percent and in Great Britain to 54 percent.

The figures show the Europe-wide great intensity of competition at the sales level of the German gas market, though it becomes apparent that the market share of large distributors tends to considerably increase when there is a rise in consumption intensity of final consumers.

Market share of the largest gas distributor in 2010*

Market share of the largest gas distribution in 2010; Source: Eurostat * No data available for the Netherlands, Luxemburg, Austria, Denmark and Turkey

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Shares of the largest three and largest five companies in the different sectors of the gas market, 2008 to 2010

Area

Shares of the largest three (in percent)

Share of the largest five (in percent)

Shares of municipal suppliers (in percent)

Year

2008

2009

2010

2008

2009

2010

2008 2009

2010

Imports

66.0

60.6

56.4

81.6

74.7

72.9

0.2

Exports

73.5

53.5

66.0

89.6

76.0

82.7

0.3

Storage Working volume

62.8

69.5

56.0

82.4

84.3

72.2

0.9

Gas delivered to final customers Total

35.2

30.1

29.3

44.3

39.6

36.9

37.8

Gas delivered to final customers  300 MWh/year

28.2

25.9

26.3

36.0

31.7

31.1

53.7

Gas delivered to final customers > 300 MWh/year  100,000 MWh/year

26.7

22.8

25.2

35.5

30.4

33.1

48.1

Gas delivered to final customers > 100,000 MWh/year

57.6

51.6

46.7

68.3

66.1

57.7

12.5

Gas delivered to gas-fired power stations

45.3

41.5

39.2

63.1

59.0

50.0

27.6

Not specified

Shares of the largest three and largest five companies in the different sectors of the gas market, 2008 to 2010 Source: Federal Network Agency, Monitoring Benchmark Report 2011

40 | Co mpetiti o n in 20 1 2 – W here is the po sitio n o f t h e G e r m a n e n e rg y m a r ke t ?

Focus on market transparency

Transparency for a level-playing field

Transparency in generation sector

Transparency on market activities is an important prerequisite for competition. Market transparency makes pricing processes more comprehensible and creates equal conditions for competition (level-playing field). It thus is an important criterion of market entry for new market participants. However, it is not of decisive importance how much information is accessible but that the “right” information is available with sufficient transparency to the market participants at the “right” time.

Since 2009, fundamental data from the generation sector have been published on the EEX transparency platform according to legal obligations to publish and on the basis of voluntary commitments entered by transmission system operators and electricity producers .22 The transparency platform that was established and designed with significant participation of the BDEW enables market-relevant generation and consumption data (such as scheduled and actual generation, unavailability) to be published in a central and neutral place close to the market. It represents the cross-border market area of Germany/Austria and probably henceforth also the Czech Republic. Approximately 96 percent of the installed generating capacity is currently included.23 The completeness of the published data is continuously verified by the Federal Network Agency. The regulatory authority considers the EEX transparency platform to make a positive contribution to the market conditions and acknowledges that it “has become a model for European solutions”.24

Fundamental data are of particular importance. These are inter alia data about the availability, use and degree of capacity utilisation of generating or production facilities and of electricity and gas networks. Marketoriented publication of fundamental data enables market participants to make a substantiated assessment of the actual supply and demand situation in the respective markets.

During the past few years, it has been possible to clearly increase transparency in the German electricity and gas markets at all value added levels. The following examples are worth mentioning: launching of electricity and gas Exchange trading and the establishment of the related “Transparency platform for generation”, the Internet platform for control energy trading, the European transparency platform of transmission system operators, the emerging EU-wide coordinated monitoring of the energy wholesale market (REMIT) and the detailed disclosure of consumption and cost data on the customer bills.

EEX transparency platform

Furthermore, the Monitoring Reports of the regulatory and cartel authorities are worth mentioning. They ensure reporting at regular intervals about different subjects, such as development of the electricity, gas and biogas market, on the basis of company data.

22

www.transparency.eex.com

23

EEX, http://www.transparency.eex.com/de/, as of May 2012

24

Federal Network Agency, Monitoring Benchmark Report 2011, p. 80

EEX transparency platform; Source: EEX, 2012

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In order to enhance the competitive environment in wholesale trading in European markets, it is also particularly important to ensure that the publication requirements are similar in all Member States. This prompted the energy regulators to draw up a joint proposal in 2010 (for the electricity sector in cooperation with the European Network of Transmission System Operators – ENTSO-E) to adopt binding, pan-European regulations on the transparency of fundamental data. The proposal is based on the transparency requirements that have already been successfully implemented in Germany.

Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 79

Particularly the forecasts on conventional and renewable generation can serve as a basis for applications concerning demand side management. Management of electricity demand contributes to improving the cost efficiency of electricity supply by shifting demand to periods of high electricity output. The specific provision of generation data can make a contribution to this end: Corresponding applications offer consumers the opportunity to focus their electricity consumption on periods with high renewables-based electricity feed-in.

Apart from the wholesale electricity market, particular importance is attached to a market-conforming and transparent organisation of the control energy market.

Control energy is needed in order to compensate the permanent power fluctuations on transmission and distribution networks and thus ensure the stability of the system. The market-oriented allocation takes place through auctions on the transmission system operators’ internet platform “regelleistung.net”. The timely publication of market-relevant information, relating for instance to market participants, power prices, anonymised lists of bidders, allocated bids, also increases market transparency.

The markets of the different EU States are closely interconnected; the decisions of participants in the wholesale market have cross-border effects. It is therefore with good reason that data for a Europewide register will be made available in future pursuant to the EU regulation REMIT (Regulation on wholesale energy market integrity and transparency).

The EU regulation will provide transparency throughout Europe and boost confidence in fair competition in European energy trading. In the light of the necessary administrative efforts, it is incomprehensible that a market transparency office at national level is required to collect additional information about trading transactions and fundamental data such as on the availability of power stations or lines from companies in Germany.

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Transparency in the gas market The amendment of the Gas Network Access Ordinance in 2010 was a first step towards increased market transparency, as the Federal Network Agency explained. The increase in transparency in the gas market basically plays a very important role for any adjustment made to the network access regime. The Federal Network Agency has made proposals for an improvement of transparency in the report on the evaluation of the economic impact of the balancing and control energy scheme according to Article 30 of the Gas Network Access Ordinance of 1st April 2011. These proposals were taken into consideration during an amending process which was however not completed because the Federal Network Agency considered that transparency in the balan-

cing and control energy system has meanwhile considerably improved without the definition of specific requirements.

The requirement of the Federal Network Agency to introduce a conversion system in dual-quality market areas can be mentioned as a further example where a special focus was laid on sufficient transparency.

In conclusion, it can be said that publication requirements of the regulatory authorities and active participation of all market participants made a contribution to an increase in transparency.

Transparency on the customer bill Comprehensible electricity and gas bills of the energy supplier provide an added value to the final consumer. In addition to the mere consumption and cost items, energy bills comprise today a wide variety of useful additional information such as the mix of energy sources, the meter number and the next possible termination date and the period of notice.

This raises the customer’s awareness as regards its energy consumption and the ecological origin of its electrical energy.

t

Moreover, a change of supplier is facilitated which leads to increased competition in the energy market.

Transparency requires comparability. On the other hand, the customer bill is not only an essential instrument of customer loyalty but also of differentiation from competitors. The BDEW has set up relevant guidelines for the electricity and gas sector and main points for the design of customer bills.

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Focus on access to infrastructures

Platform for competition

Market processes and benchmarking agreements

The network infrastructure forms the platform for competition. This applies to both electricity and gas networks. The network operator is required to make its network available in a non-discriminatory manner to all users. Competition in the electricity and gas markets, particularly at the retail level, necessitates bulk business suitability. In this respect, enormous progress has been made in Germany during the past five years. As this process mainly related to standardisations and technical and organisational agreements, it hardly attracted public attention. Nevertheless, these achievements are the backbone of competition, particularly in the retail market, and contribute to its economic efficiency. As a result, the neutrality of network operators is even better guaranteed than by unbundling measures.

In a competitive environment, market players optimise themselves individually on the basis of their respective market role. The market framework must therefore set right and sufficient incentives for a behaviour which serves the overall system and benefits the customer.

There exist clear-cut, transparent and practicable rules in Germany governing the use of electricity and gas networks. These rules mainly relate to supplier switching processes, procedures for balancing group accounting and the use of standardised data formats.

Supplier switching: Supplier switching processes concern customers, previous and new suppliers and, where necessary, substitute suppliers and network operators. Standardised supplier switching processes suitable for bulk businesses were introduced in 2006 (GPKE for electricity) and 2007 (GeLi for gas). Since then, these processes have been periodically updated on the basis of findings from practical application. They were last updated in October 2011 to implement customer switching within three weeks according to the third EU internal market package.

Procedures for balancing group accounting: Balancing group management and settlement of accounting are essential elements to enable competition for retail customers in the electricity and gas sector. Procedures for balancing group accounting relate to accounting of electricity delivered by the suppliers to final consumers between the market roles of supplier, distribution system operator, balance responsible party and balance coordinator. These procedures were adjusted to new requirements in June 2011.

With a view to further standardising business transactions, the different agreements and guidelines are made available in addition to the main text. In the “Gas balancing group management business processes guideline”, for instance, balance-relevant processes between the market roles involved are recorded as accurately as possible and graphically represented by means of a standard role model.

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Data formats: Defined processes need to be converted into electronic data formats in order to enable automatic communication between the market roles and thus allow automated handling of mass processes.

The complexity of processes, the mass of operations and the interaction of the different processes and formats is enormously high.

The BDEW plays a leading role in the elaboration of implementation guides to the market. On behalf of the Federal Network Agency, the BDEW develops, maintains and refines data formats which are published in a six-month interval.

Result: The strongly increasing operations are automatically processed which is a basic requirement for a functioning German energy market. The BDEW is also playing a leading role with regard to the remaining processes.

Steps towards the development of market processes

Development of market processes, the different phases of development Source: BDEW, 2012

There is a permanent feed back and periodical adjustment of these processes to the experience of market participants. To this end, the BDEW deals with any question addressed to it from the market relating to process gaps or ambiguities in terms of provisions of the Federal Network Agency, and coordinates sectorwide solutions cooperatively with all market roles. This enables considerable cost reductions to be achieved for market participants because manual bilateral clarification efforts can be diminished.

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In the gas sector, the cooperation agreement plays a particular role. The Associations BDEW, VKU and GEODE have cooperatively developed since 2006 the Cooperation Agreement of network operators on access to the gas network. This agreement comprises the rules of their cooperation for a transparent, nondiscriminatory and efficient network access suitable for bulk transactions, and thus satisfies the legal requirements of the Energy Industry Act and the Gas Network Access Ordinance.

The Cooperation Agreement specifies the details of gas network access on a contractual basis. On one hand, this concerns contractual agreements between the network operators or between the market responsible parties and on the other hand contractual agreements with transport customers or balance responsible parties.

As a result, the greatest possible standardisation of non-discriminatory conditions for access to the gas network is achieved.

Entry and exit agreements: The agreement comprises the necessary rules for entry and exit of gas both to/from the network of pipeline grid operators and distribution network operators with an entryexit system. It describes the rights and duties of network operators concerning network access, and the fee to be paid.

The entry agreement entitles the shipper to use the network from the point of entry to the virtual trading point. The exit agreement entitles the shipper customer to use the network from the virtual trading point to the exit point at the final consumer’s premises, a border crossing or market-area transition point or to a storage facility within the meaning of Article 3, No 31 of the German Energy Industry Act. Supplier framework agreement: Operators of local gas distribution networks must offer shippers access to the network on the conditions of the standardised supplier framework agreement. This agreement concluded between the network operator and the shipper entitles shippers within a market area to use the networks from the virtual trading point and for gas delivery at exit points of the local gas distribution networks.

Balancing group agreement: The balancing group agreement sets out the rules for the establishment of a balancing group, the registration of quantities consumed and balancing and accounting of deviations between allocated gas quantities and actual consumption. Balancing group agreements are offered to the shipper (if it is at the same time the balance responsible party) by the market area coordinator.

Should a shipper intend to trade gas exclusively at the virtual trading point of a market area, it must likewise conclude a balancing group agreement with the market area coordinator.

The Cooperation Agreement is continuously reviewed and cyclically adjusted. In addition, network user forums (gas) are held at regular intervals, where network users can make proposals for adjustment. The Cooperation Agreement is currently available in its 5th

26

http://www.bdew.de/

version.26 It takes account of practical experience, on one hand, and of specifications and decisions of the Federal Network Agency. The revised Cooperation Agreement will become effective as per 1st October 2012.

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Reduction of the number of gas market areas is no longer of any relevance to shippers and traders because all the entry and exit points and hence all customers are incorporated in one large balancing area. In this way it is possible for shippers and traders to supply their customers with gas regardless of the gas quality. Previously, this had not been possible. Specifications of the Federal Network Agency have created the necessary instruments for network operators enabling them to cope with the technical challenges which continue to exist.

The considerable reduction of gas market areas was an essential aim of all market participants because they expected to achieve a higher liquidity.

As a matter of fact, the integration of the former market areas Thyssengas H-Gas and Thyssengas L-Gas along with the market area OGE L-Gas into the dual-quality market area NetConnect Germany could take place as per 1st April 2011. In technical terms, the L-gas and H-gas networks must continue to be operated separately. This

All the entry and exit points and hence customers are incorporated in one big balancing area. […] The remaining firm capacity has much greater free usability and reach as a result of the widened market area that it had in the formerly separate areas.

Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 52

The new Gas Network Access Ordinance from the year 2010 simplifies, among other things, the access to non-utilised gas transport and storage capacities. This contributes to facilitating competitive gas transports, making Germany-wide supply offers economically more attractive to new suppliers and thus giving final customers more choice.

Development of the number of market areas 45 40 35 15

30 25

7

H+L-Gas L-Gas

20

H-Gas 5

15 5

26

5

21

10

5

3

14 11

5

9

7

7

3 3

0 2006

1 1 1

2

01/05/06 19/07/06 25/04/07 01/10/07 01/10/08 01/04/09 01/10/09 01/04/11 01/10/11

Development of the number of market areas; Source: BDEW and Monopoly Commission 2011, Special Report 59

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Gas market areas in Germany

Seven named H gas market areas (2009)

> 2 combined H and L gas areas (2012)

Three named L gas market areas (2009)

As of 01/04/2009

Simplified representation of H gas market areas in Germany (As of: 01/10/2007 and 01/10/2008) L gas market areas in Germany (As of: 01/10/2008 and 01/04/2009) Source: Federal Network Agency, Monitoring Report 2009; ENET GmbH survey of German market areas from October 2011

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Consequently, the competitive use of the gas infrastructure is positively assessed by the Federal Network Agency: “In connection with the report evaluating the portfolio balancing and the system balancing energy arrangements presented by the Bundesnetzagentur, this has proved a boost for competition, as had been hoped.

Besides, the markedly improved competition for household customers, liquidity in the trading markets has also increased.

The dynamic generated by the portfolio and system balancing energy regime makes further progress likely”.27

All operators of storage facilities have meanwhile individually published the required data on their Websites. In addition, there still exists the aggregated Germany-wide data collection and representation of the level of gas in storage and injection and withdrawal quantities on a daily basis on the Website of Gas Infrastructure Europe.28 This representation is very useful for assessing the broad supply situation; it has been completed by graphic representations. Hourly data are only exchanged with transport network operators and published there.

The storage market has continued to experience competitive development and shows a very high dynamic. The provisions of the Third Internal Market Package have been implemented and are showing great success in terms of the transparency of necessary market and utilisation data and of the range of products.

Moreover, there is a tendency towards variable storage products and pricing oriented on the liquidity market; this trend increasingly characterises the market-based competitive storage market.

27 Federal Network Agency, Monitoring Benchmark Report 2011, p. 50 28 http://www.gie.eu.com/index.php/maps-data/gse-storage-map

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Efficient use of control energy Since May 2010, the four German transmission system operators have jointly procured control energy within the framework of German Grid Control Cooperation (Netzregelverbund NRV).

Due to these benefits, the transmission system operators Energienet.dk (Denmark), Tennet BV (Netherlands), Swissgrid (Switzerland) and CEPS (Czech Republic) have joined the NRV. The substantial gains in efficiency thus obtained ultimately benefit the system users.

Grid Control Cooperation (Netzregelverbund – NRV)

The NRV based on a modular structure prevents the activation of opposite secondary control and minutes reserve power, dimensions the need for control power for all control areas, creates a Germany-wide uniform market in secondary control power and leads to control power use at optimum cost throughout Germany.

Source: Federal Network Agency, Monitoring Benchmark Report 2011 (p. 109; Part II, German only)

Grid Control Coorperation (Netzregelverbund - NRV) Source: ECOFYS, 2012

Unbundling The question of how far unbundling between the network and distribution/generation should go mainly had a symbolic meaning in the discussions about the Second and Third Internal Liberalisation Package. Above all, the additional competitive benefit of ownership unbundling was seriously questioned at that time. Meanwhile, these discussions have been overtaken by the development in terms of energy policy. RWE had early on made the electricity transmission system operator Amprion (belonging to the group) an Independent Transmission Operator (ITO); but meanwhile it sold almost 75 percent to a consortium from the financial and insurance sector.

The gas transmission system operator Thyssengas had already been sold before due to a requirement from an antitrust proceeding.

A similar picture emerged with E.ON and Vattenfall.

Transmission system operators have been sold. TransnetBW has replaced EnBW Transportnetze AG as an independent transmission system operator.

The German distribution system operators are currently facing an even stronger separation between trading and network operating companies. From a competitive point of view, the necessary unbundling measures are likely to have thus been completed.

Furthermore, the amendment of the German Energy Industry Act accelerated the hive-off of storage companies from the parent groups through the implementation of unbundling provisions for operators of storage facilities. This provision has meanwhile been implemented by the majority of storage facility operators.

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Focus on infrastructure development

Apart from the positive effects on security of supply, the development of infrastructures may also support competition. For instance, the development of natural gas storage facilities makes it easier for suppliers to benefit from market price fluctuations, to hedge in physical terms and to be able to supply their customers in a reliable manner.

Gas pipelines

Construction of new natural gas storage facilities

At the end of 2011, the Baltic Sea Pipeline Nord Stream was commissioned along with the connection line to the Baltic Sea Pipeline. In 2012, the North European Natural Gas Pipeline (NEL) will transport gas from the Nord Stream (total length approx. 1,220 km) towards the West. To this end, expansion investments will be made by GASCADE in order to enable the further transport of gas quantities which reach Germany inter alia via Nord Stream and which are to be transported further via the NEL.29

A change in the natural gas storage facilities market towards a distinct buyer’s market has been observed since 2010. Due to the increasing liquidity of the German natural gas trading points, too (Gaspool and Net Connect Germany) many market participants obviously consider that there is no longer a need for keeping storage capacity available to the usual extent for the supply to customers. This led to a decrease in demand for storage capacity and thus exacerbates competition among operators of storage facilities.

The two Nord Stream connection lines (total length approx. 920 km) and the expansion investments of the pipeline grid operator GASCADE are an integral part of an overall energy concept with the aim to realise the transport of Russian natural gas from Siberia on a new delivery channel across the Baltic Sea to Germany and further to Western and Southern Europe. This overall energy concept is one of the largest gas infrastructure projects in Europe with a planned investment volume of about 10 billion Euros and capacities of 55 billion cubic metres annually.

Besides, due to the increasing orientation towards gas trading markets, storage facility operators do not only compete among one another but also with all supply flexibilities available to the market. Due to the generally good natural gas supply situation at the present time, the market position of storage facility operators is additionally coming under pressure. This becomes for instance apparent by the increasing frequency of storage auctions held by storage facility operators on the trading platform store-x before the storage year 2012/13. The operators concerned or also their customers found themselves obviously constrained to allocate free or unused capacities in this way. The bookable tariffs in the event of re-trading published on the operators’ Websites do no longer appear to get accepted. Storage facility operators therefore had obviously to accept reduced storage tariffs in this non-discriminatory bidding process in order to avoid capacities running idle. But there also is a trend towards connecting storage tariffs with variable shares to tariffs with shares correlating with market prices, and integrating additional service components and flexibility shares.

Due to the fundamental importance for Europe’s natural gas supply and the internal natural gas market’s functioning, this project has been identified as “priority project of European interest” in the Guidelines for Trans-European Energy Networks.

29

GASCADE plans to extend the compressor stations in Bunde, Lippe and Weisweiler, to construct a new compressor station near Rehden and erect new lines in

order to ensure the demand-based transport of additional gas quantities from the NEL to Western Europe (under construction).

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The importance of the already existing storage volume is assessed by the Federal Network Agency as follows: “With a working gas volume of approx. 20bn m3 22 , Germany has the largest gas storage capacities of all European States.”30

In addition, current congestions in the gas transport network whose removal cannot be predicted make trading of storage capacities and their use by storage customers more difficult.

The utilisation of storage capacity products becomes increasingly unattractive to market participants due to the hardly calculable risk of interruption of the transport capacities of neighbouring network operators.

In addition to the 48 pore and cavern storage facilities operated in Germany (working gas volume: approx.

20bn cubic metres), 23 storage projects are currently in the planning stage or under construction (working gas volume: approx. 12bn cubic metres). The data of some of these projects have not been taken into consideration in this figure because they are not available yet. If there will be a market demand for storage capacity extension, the storage volume can be further developed, but the complete realisation of planned construction projects appears questionable under the given circumstances.

According to the State Authority for Mining, Energy and Geology of Lower Saxony, Germany will play an essential role in future as natural gas hub in Western Europe in the light of its important storage volume. Due to the existing and scheduled storage volume, diversification of natural gas imports, domestic gas production and favourable geological framework conditions for planning of new storage facilities, the commercial coverage of gas demand in Germany is ensured.

Source: State Authority for Mining, Energy and Geology of Lower Saxony; Paper: Fuel oil and natural gas in the Federal Republic of Germany in 2011, Hanover, May 2012, p. 56 (German only).

30

Source: Federal Network Agency, Monitoring Benchmark Report 2011, p. 61

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Natural gas storage facilities in Germany

In the plannnig stage or under construction In operation (as In the planning stage or under construction per 31/12/2011)

23

In operation (as per 31/12/2011)

11.9 48

20.4

Working gas volume

Natural gas storage facilities in German: in operation and future facilities Source: State Authority for Mining, Energy and Geology and BDEW, as of 31/12/2011

Number

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Electricity interconnections As described above, the implementation of market coupling has shown that close coupling of spot markets enables the available interconnectors to be optimally utilised. This contributes to optimally tap economic efficiency potentials which ideally lead to equal prices between the markets. By introducing a load-flow based optimisation approach, it is expected to tap further potentials through an integrated approach. However, these optimisation measures also meet with real physical limits, namely a necessary extension or retrofitting of interconnectors.

As expected, there have not been any changes with regard to the physical development of cross-border interconnections during the past three years. But progress has been made in the authorisation procedure of the planned 380 kV EHV line from Wesel to Doetinchen in the Netherlands. This line will increase the transmission capacity between the transmission systems of Amprion and Tennet by 25 to 50 percent and make an essential contribution to the coalescence of regional markets. Tennet and Amprion will invest about 70 million Euros in the interconnection covering a distance of 60 km. Construction is likely to start in 2014.

Network development plans Among other things, network development plans are to make investments in network infrastructure more transparent and more predictable for third parties.

On 30 May 2012, the four German transmission system operators have published and submitted to consultation the draft of the first national electricity network development plan 2012. In the leading scenario for 2022, direct current lines are scheduled for the first time for electricity transports from the North to the South of Germany. These direct current lines account for a major part of the new line routes under construction which will extend over 3,800 km. According to the draft network plan, approx. 400 km of lines are to be constructed and optimised on existing routes. Investments in the electricity network total approx. 20 billion Euros. The need for network development is determined here for the first time in a transparent procedure and backed up in scientific, social and political terms. Some specifications are important in competitive terms: Network development shall for instance always take precedence over capacity restrictions, and demand that is not covered by renewable energies shall be freely supplied from the market without any regional restrictions in accordance with the European merit order.

The scenarios and the draft of the gas network development plan have been set up and submitted to consultation by the gas pipeline grid operators. The consultation process is currently on the agenda of the Federal Network Agency.

The 14 German gas pipeline grid operators have submitted early in April 2012 their first common draft of the gas network development plan 2012 with a ten-year duration to the Federal Network Agency according to their legal obligation under Article 15a of the Energy Industry Act and Article 17 of the Gas Network Access Ordinance.

This plan shall comprise all measures required to optimise, reinforce and develop the network and to ensure security of supply.

On the basis of a medium gas demand scenario which is considered to be the most likely one by gas pipeline grid operators, measures to be carried out by 2015 have been determined for the construction of lines with a total length of somewhat less than 200 km, an additional compressor capacity of 90 MW and capital investment needs of approximately 600 million Euros. Until 2022, measures will have to be carried out with regard to the construction of lines covering a distance of almost 730 km, installation of additional compressor capacity of little less than 360 MW and an investment volume of approx. 2.2 billion Euros.

After receipt of the draft paper, the Federal Network Agency has given network users the opportunity to submit their comments in a further consultation procedure. The BDEW, involving its member companies, participated in the consultation procedure and submitted numerous comments on network modelling, concrete network development measures and security of supply issues.

Upon completion of the procedure in June 2012, the different subjects were again discussed with the gas pipeline grid operators and other market participants in various workshops organised by the Federal Network Agency. Focus was on the approach for the connection of power stations and storage facilities (including the corresponding capacity development need for new connections or extensions) and considerations regarding capacity products and modelling requirements for the future gas network development plan.

According to the further procedure, binding force shall be provided to the 2012 gas network development plan in December 2012, at the latest. The preparatory work for the 2013 gas network development plan shall be launched already in July 2012.

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Outlook

Additional liberalisation benefits through Europeanisation

Stop contrasting development

According to the decision of the EU Council of Ministers of 4 February 2011, the internal market in electricity and gas shall be completed by 2014. To this end, the Agency for the Cooperation of European Regulators (ACER) has set up framework guidelines which will subsequently be put in concrete terms by ENTSO-E for the electricity market and ENTSO-G for the gas market trough binding Network Codes. In this context, the framework and the rules will be defined covering the entire market spectrum from the futures to the control energy market. These are ambitious objectives in the light of a very short time-frame. At the same time, market structures are adjusted which requires a careful approach involving all stakeholders concerned. Examples that are worth mentioning here are the requirements for the determination of price zones in the electricity wholesale market and the considerable effects on the gas market, from distribution to renewables.

Regardless of the European Union’s objective to complete the Internal Energy Market by 2014, an opposite trend is observed in Germany in connection with the decisions on the transformation of the energy system.

There is a growing state interference and nationalisation of energy policy which were decided with virtually no coordination with European neighbour countries.

In order not to jeopardise the success of liberalisation and the Internal Market and to continue to benefit from the positive effects, it is necessary to urge for better coordination with the European partners with a view to avoiding decoupling of markets.

Overall, essential importance will also be attached to energy trading in a rapidly market environment in the future because it provides the breeding ground for the creation of innovative products which will be needed in the future to an even larger extent. The transition to a “smart energy world” will further increase the demand for tailor-made products for customers. The need for flexibilities will rise with the development of renewable energies. The market can and will generate efficient approaches and increase competition. This is precisely why it is important to always focus on the overall picture: intermittent feed-in from renewable energies will lead to more volatile spot markets. Functioning futures market products are needed in order to be able to hedge against these fluctuations.

In order to enable this market to continue to develop, a market-oriented policy that focuses on the principle of competition is to be pursued at all levels. This is particularly important as the “Energiewende” will present major challenges to the German society and above all to the energy sector. The call for state or regulatory interference is frequently growing louder. But such interference would not be expedient because a decisive criterion for the success of the “Energiewende” is a reasonably priced energy supply and thus the cost issue in addition to climate protection and security of supply aspects. Instead of state intervention, it is necessary to establish reliable framework conditions which enable open competition for innovative ideas and efficient solutions to be realised and promoted. Moreover, scarcity signals which can only arise from the market are important in order to provide the corresponding price signals for currently necessary investments. This is why a competitive market design is needed which equally contributes to the success of the “Energiewende” and to an increase in competition.

It is recognised that competition in Germany developed well after the Second and Third EU Internal Energy Market Package had been adopted. It not only bears comparison with all other EU countries but Germany is one of the markets undergoing the fastest change within the Community.

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Annex: Competition indicators Indicator

Definition

Data sources

Data Base

Time frame

Part A: Customer/Distribution sector A.1 Supplier per network area

Number of suppliers serving household customers in a network area

Monitoring Report 2011 of the Federal Network Agency

Survey among distribution network operators

2007 to 2010 (electricity); 2008 to 2010 (gas)

A.2 Supplier per postcode area

Number of suppliers offering electricity and/or gas within a postcode area

GET/AG Leipzig, e’net Hückelhoven, Verivox, Heidelberg, and others

Research, inquiries

Current

A.3 Providers to suppliers

Total number of suppliers in Germany

BDEW

Research

Current

A.4 New suppliers

Number of new entrants to the energy market within a given period

BDEW

Research

Current

A.5 Supplier switching

Share of customers having changed their supplier within one year

Monitoring Report of the Federal Network Agency

Survey among distribution network operators

2006-2010

A.6 Change of tariff and product

Share of customers by type of contract (basic supply, products)

Federal Network Agency, Monitoring Report

Survey among suppliers

Gas: 2005-2011 Electricity: 2005-2011

A.7 Advertising expenses

Advertising expenditure of energy suppliers

Axel Springer Mediapilot

Survey

1998-2011

A.8 Customer satisfaction

Share of customers satisfied with their energy supplier

BDEW Customer Focus

Opinion research

2007-2011

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Data quality

Target rele­ vance

Comments

high

high

It is of decisive importance to competition for retail customers whether electricity and gas customers wanting to switch supplier can choose among a sufficient number of different suppliers.

high

high

Apart from data of the Federal Network Agency which determines the number of suppliers per network area (see indicator A-1.1), the number of suppliers per postcode area can also be obtained from data service providers, e.g.

GET AG.

high

medium

The attractiveness of the German energy market to energy suppliers and the basic opportunity of supplier switching become apparent by the increase in the number of suppliers. On the one hand, companies disappear from the market as a result of merger or termination of business; on the other hand, there are new entrants to the market (see indicator A.1-4).

not complete

high

In a competitive market, a number of new suppliers have entered the market in addition to the interregional and Germany-wide products offered by established suppliers. New market entrants are for instance • spin offs or subsidiaries of already active suppliers (also from other countries), • subsidiaries of companies from outside the sector or • new companies.

All new suppliers make a contribution to competition and to the wide variety of suppliers in the German energy market. Since 2009, the BDEW has registered 148 new companies as electricity suppliers and 129 new companies as gas suppliers.

high

medium

The data of the Federal Network Agency on supplier switching show the number of switches recorded by network operators during the year under review. These changes of supplier take also households into consideration which have chosen a supplier different from the basic supplier after having moved to another network area. Thus, this indicator is a quantitative measured variable for the switching activities of final consumers. However, it does not reflect the overall competitive situation in the energy market which is influenced by many other factors. An additional drawback is that data are outdated when the Federal Network Agency’s Monitoring Report is published.

high

medium to high

Competition and options available to customers become also apparent by customers that remain with their supplier but switch from basic supply to a product. This leads to a shift of the shares of customers by type of contract.

As a result, the share of basic supply tends to decrease. With regard to natural gas, the share of customers with a basic supply contract is lower than in the electricity sector because households using natural gas for heating were previously classified for the most part as customers with special contracts.

high

medium

In order to be successful in a competitive environment, particularly new suppliers need to make use of advertising measures. This becomes apparent by the expenses of energy suppliers for advertisement in media (radio, newspapers and magazines, posters)

high

medium

Customer satisfaction and thus customer loyalty are important goals to be pursued by suppliers in a competitive market. Customers that are satisfied with their energy supplier are less prone to supplier switching than unsatisfied customers. An essential strategy of energy suppliers therefore is to increase the satisfaction of their customers.

58 | Co mpetiti o n in 20 1 2 – W here is the po sitio n of t h e G e r m a n e n e rg y m a r ke t ?

Indicator

Definition

Data source

Data base

Time frame

Part B: Sector Development B.1 Energy prices

Development of end user prices corrected for levies

BDEW electricity price analysis

Database GET AG; Analyse

1998-2012

B.2 Market concentration in electricity sales

Shares of energy suppliers in total electricity sales to final consumers

BDEW; Eurostat

Analysis

2003-2010

B.3 Market concentration of generation

Shares of energy suppliers in total electricity generation

BDEW; Eurostat

Analysis

2005 - 2011

B.4 Concentration measurement

Herfindahl-Hirschman Index

European Commission: Progress Report, Sector Inquiry

Analysis

2004 - 2009

C.1 Liquidity of trading markets

Development of energy quantities traded in the wholesale markets EEX/EPEX Spot

EEX, EPEX-Spot

Surveys

1999-2011

C.2 Participants in trading markets

Development regarding traders listed on the wholesale markets EEX/EPEX Spot

EEX, EPEX-Spot

Surveys

2002

Part C: Trading

Further indicators Standardisation of switching processes Tendering for delivery contracts (where applicable, VEA data)

Data quality

Target relevance

Comments

high

medium

The development of retail prices is increasingly determined by state levies, taxes and charges. The higher this share, the little opportunities are given to suppliers for differentiating from competitors in terms of prices.

high

medium

A balanced supplier structure generally ensures a good competition situation. On the sales side, a low market concentration reflects the wide variety in the German energy market and is an indicator of good conditions for competition. A comparison with other European countries shows the specific competitive position in Germany.

high

low

Due to the high capital intensity in electricity generation, fewer companies have been active to date in the generation market than in other market areas. This situation has changed in Germany, among other things due to increasing shares of renewable energies and co-operations of small and medium-sized companies in the electricity generation sector. The generation market concentration is a good indicator of this development. A Europe-wide comparison of the market concentration shows the situation of competition in Germany.

high

medium

The HHI is a recognised method for assessing the market concentration. The index takes account of both the relative size and the total number and distribution of the different companies in a market. The HHI is calculated from the sum of squared market shares.

high

high

High liquidity in trading markets is an important prerequisite for efficient pricing. The energy quantities traded on Energy Exchanges for electricity and gas are the most important indicator of the liquidity of Exchanges.

high

high

The number of participants in exchanges shows the importance of the different Energy Exchanges.

A high number of participants generally indicates more trading activities.

Published by BDEW Bundesverband der Energie- und Wasserwirtschaft e. V.

Contact persons: Dr. Stephan Krieger Strategy and Politics Management Division Phone: +49. 30. 30 01 99 -1061 stephan.krieger@bdew.de Michael Nickel Head of the Economics Department Phone: +49. 30. 30 01 99 -1600 michael.nickel@bdew.de

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