Germany

Germany

Utility grip starts to weaken in Europe -- E.ON bows to political pressure

The prospect of no longer having to compete with the generation division of energy giant E.ON for access to the company's transmission wires is delighting Germany's wind power industry. In a surprise move last month, E.ON announced its intention to sell its high voltage electricity grid, which spans a huge tract of the country from Denmark in the north to Bavaria in the south, to an independent operator "which would have no interest in the electricity generation and/or supply businesses."

A key plank of Europe's energy policy is to create a fully competitive and integrated electricity market, an aim best achieved by requiring the separation of generation and transmission activities, says the European Commission. While it has long called for large energy firms to be broken up, the German government has argued against the necessity for this "unbundling" of interests to secure fair access to electricity wires for independent power producers.

In view of the government support of its existing business model, E.ON's decision is "a great surprise," says the European Wind Energy Association, which calls it "a key victory for the pro-unbundling side." In arguing the case for unbundling, the EU commissioner for competition policy, Neelie Kroes, says vertically integrated companies like E.ON do not invest in interconnection and network capacity for the greater good. "The vertically integrated company knows that it should develop the networks and facilitate third party access, but it also knows that this would be bad for its supply business," she says.

From Germany's wind energy association, Bundesverband Windenergie (BWE), Ralf Bischof believes a new independent owner of the wires would focus on developing Germany's network for as great an uptake of wind power as possible. Research is ongoing to allow more wind power to connect to existing wires and into the use of cables with a higher transmission capacity. Bischof believes an independently owned network would result in faster application of new technology.

For its part, E.ON says its decision is a commercial one, triggered by the low returns on investment allowed under network regulation laws. Citing a possible profit of just 3.6% for connecting offshore wind stations to shore, E.ON boss Wulf Bernotat says returns are "laughable." His claim is disputed by the Bundesnetzagentur, the energy regulator, which says returns of up to 7.9% are allowed.

The regulator concedes, however, that network operation has become less lucrative, so it is "reconsidering this interest rate, set by the legislator." Even so, Bundesnetzagentur president Matthias Kurth says: "In view of the many speculative losses on the financial markets recently there are happily ever more investors that accept lower returns for a secure low-risk investment."

European Commission pressure from another quarter also lies behind E.ON's surprise decision. The utility is hoping divestment of its transmission business will form part of a deal which sees the Commission drop an anti-trust case against E.ON, allowing it to escape from potential large fines for anti-competitive behaviour.

Potential buyers of E.ON Netz could include Macquarie, Babcock & Brown, Deutsche Bank's infrastructure fund RREEF, the 3i Group, and network operators like National Grid and Tennet. The sale process, adds BWE's Bischof, should not see ongoing network expansion work by E.ON halted or delayed. "If the network company fails to fulfil its obligations, it can expect claims for damages which would impact company valuation before the divestment," he warns.

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