Poland and Hungary have segmented the energy generation and distribution chain and are about to make energy a market commodity, signalling the beginning of a competition-driven market, whereas the Czech Republic may choose to shift from state monopolies to private monopolies – albeit regulated under a Western model, by public bodies. The variant of a free market, where competition establishes the price, appears closer to the model of the European Union (EU) the Eastern states are heading towards. The last months have meant for the EU a liberalisation in this sector, followed by abrupt price drops – which only increased competitiveness in the industry of the old continent at an important moment for the transatlantic race. Additionally, market liberalisation is a global tendency that shows in the European space and beyond, and is seen as a more efficient way to allocate resources.
But the choice of the domestic energy infrastructure is not a trivial one; the general trend in the West of the continent at a super-national level is not directly importable to the East at the national level, at least for a few obvious reasons.
First, countries with single powerful national producers and distributors still exist in the European Union itself, which does not stifle their competition at a continental scale, but in fact strengthens it through the existence of powerful players, able to reap the advantages offered by size. Second, one of the advantages brought by the liberalisation of the Western energy market – falling price – cannot be expected to repeat any time soon in the East of the continent, however harsh competition may be.
Choosing the structure of the industry therefore borders on the regional economic strategy – on available resources, export potential and domestic needs. Whereas the Czech Republic, due to its vicinity to the greatest European economic power, can hope for a virtually unlimited export potential, which justifies the encouragement of powerful players and the increase in production capacity, Hungary prefers the variant of domestic competition. In Romania, the issue stands in the same way, around the realism of an energy market in the south of the continent, and prospects of domestic consumption strictly depending on overall industrial development.
It cannot be disregarded that all Central-European states have finalised, or are about to finalise, an energy strategy only after settling on an economic and regional integration trend – which would mean that the variability of these factors in Romania’s case curtails the gravity of the failure to settle for a long-term energy policy, but it does not excuse the lack of an overall strategy. If Central Europe’s option is in any case made easier by its location between a region rich in resources (the Commonwealth of Independent States) and one with growth potential (France, Germany), which offers a profitable niche, things are less clear for Romania, as the region’s economic geography is still being formed.
Arguments for power concentration
The Czech Minister of Industries and Trade, Miroslav Gregr, has announced plans to impose his own plan in the privatisation of the energy sector. His plan is to merge the majority stake the state holds in the energy producer CEZ with the 16 regional distributors into a package that will later be sold to a powerful foreign investor. This can happen after the Czech government will have prepared, together with foreign consulting firms, seven segmentation plans for energy companies – including the Transgas natural gas importer and CEZ. A final solution has been put off until mid June, but government sources say Gregr’s solution is probable.
CEZ officials, who would enjoy additional power if the plan goes through, are backing the initiative. “We must think about the fact that it would be rational to have a large energy producer with distribution capacities, in the same company,” said Ladislav Kriz, the CEZ spokesman, citing Sweden and Italy, two nations with a single energy producer in each.
But there are also critics to the Gregr plan, who think CEZ would gain excessive power by consolidating the 24 electric plants and 16 regional distributors, virtually eliminating competition. To these objections, Kriz points out that CEZ will not escape close supervision from a regulating authority that will rule out monopolist practices.
The European context
The European electricity market is already liberalised. Up next is the natural gas market, a new opportunity for countries in the centre of continent. Theory has been confirmed by events – competition between companies rid of government supervision has led to plummeting prices and obvious consolidation trend in the industry because of lower profits. The same developments are expected in the natural gas sector.
Free market promoters say this is the way to go for Easter countries on the continent – releasing companies in the sector from the influence of the state, in fact, from that of the politicians. Western experience has shown that a natural monopoly does not exist in the sector, say the advocates of liberalisation; a correct organisation of the market and a passive role of the state are the key to success. Competition, producers say, will boost their efficiency and allow them to curb prices. But this says nothing about the size of companies on the market, as a consequence of choice on the privatisation process. The doctrine of free markets suggests that the market will ultimately determine the best size for companies, through mergers and dissolution. While in the long term, this may be valid, in the short term, things are different. Legislation in the European Union does not limit the size of companies in the sector; the only constraint is equal access to the market.
The East-European variant
The scenario of free markets that will lead to lower energy prices in the east of the continent faces yet another criticism – that prices will not go down any time soon (if ever); their only way is up. Political motivation has led to an exaggerated decline in prices so that, at least in the household sector (natural gas or electricity), prices can only grow, however harsh competition may be.
As for privatisation progress so far, aside from a few profitable refineries, only Hungary can bring arguments to privatisation in the sector, especially in electricity. In all other countries, things are stuck in drafting stage. The general tendency is to accelerate privatisation, after Poland’s example of success stirred up interest in the region – but authorities’ concern for subsequent price developments is stalling progress.
There is no middle way
In a report on the strategy for the sector, Andersen Consulting believes there is no alternative to the two variants of energy architecture – segmentation of the energy chain and liberalisation of the market (maintaining strong players and regulating them with efficient bodies). Maintaining large companies has the advantage of a realistic chance of accession to the European single market. A segmentation of the industry and atomisation of the major players, on the other hand, would bring the advantages of competition. But choosing the latter is less attractive because it could give rise to companies too small to be economically viable. Today, there are 350 energy producers and 33 distributors in Poland, but not all economies in the region have the necessary size to justify atomisation. Consolidation tendencies are already apparent in Central Europe, and once the situation stabilises, they will become visible in the Balkans as well. A study by PriceWaterhouseCoopers found that, in the future, Central Europe would be dominated by four major Western electricity companies – one French, two German and one Swedish.