Europe is currently undergoing a massive upheaval in the energy sector – a complete reorgansation tirggered by a round of mergers and acquisitions. This is all part of the ongoing worries about future energy security and policies, and it’s quite enlightening.
- it all started when Gas Natural, a Spanish gas distributor, launched an hostile takeover on Endesa, another Spanish utility, mostly active in the power generation side. As told in this diary by kcurie, there was an underlying political fight in that Gas Natural is controlled by Catalans (from Barcelona) whereas Endesa was seen as a PP (the rightwing party) entity controlled from Madrid; the socialist government allied with the Catalans, authorised the deal;
- last week, E.On, the German utility, launched a surprise counter-bid for Endesa, valuing it 30% more than the Gas Natural offer. The Spanish government immediately expressed its hostility to the bid, and started to look ways to save the creation of a large Spanish “energy champion”;
- following E.On’s initiative, a number of other cross border merger that had been dreamt of by investment banks and ambitious CEOs came back on the table. In particular, Enel, the semi-public Italian utility, indicated its intention to make a bid for Suez, a Franco-Belgian utility active in power generation and distribution and the water business;
- to preempt that, French authorities suddenly decided that the merger of Suez with Gaz de France, the recently privatised national gas company, would make a lot of sense. The two companies fit together well, but GDF is currently 80% State-owned (after an IPO in early 2005), and the law states that the State should hold more than 70% of its shares – that law was put in place to placate its unions, hostile to the IPO. Thus, the merger, which had been postponed for fear of triggering the hostility of the unions, was suddenly pushed in the face of the “Italian threat”.
- the Italians are terribly pissed about this episode, and ferociously critical of the French (their economics minister compared the situation to August 1914 in Europe…), and are now talking of merging Enel with Eni the (also partly State-owned) oil company in order to create a powerful national energy champion.
- a few weeks ago, Gazprom, the giant Russian gas company, indicated its desire to purchase Centrica, the UK gas distribution company. That intention was met by the UK government declaration that it would “vigorously scrutinize” such a purchase (i.e. that it would prevent it for nationalist reasons, while pretending to act for market purposes…)
Throughout this, the European Commission, which has consistently pushed for “liberalisation” of the European energy markets, has been called by various governments to prevent or authorise these various manoeuvers, and has been mostly powerless to do anything about the various mooted transactions. It has formal powers, but many of these transactions, while contrary to the spirit of liberalisation, are not obviously coming foul of the anti-competitive rules of the EU, and are thus unlikely to be blocked.
The period is seen as one of renewal of protectionism or nationalism in Europe, and a blow to the European single market. On the other hand, since the Russian-Ukrainian war, everybody suddenly seems to care about energy policy, and about energy security, and having strong national energy groups is again seen as a good thing, overriding preoccupations about opening the markets to foreign competition, and generating domestic competition.
Some are obviously better are these games than others, and France will now have the two largest energy groups in Europe, with EDF and Suez-GDF (GDF has a market value of EUR 29 bn and sales of EUR 23 bn). Germany, with E.On and RWE, also has two strong utilities involved in most parts of the energy value chain, from updtream production to transportation networks and retail distribution in various countries.
The UK has no “national champion”, having chosen the route of full liberalisation. Most of its distribution companies have been bought by foreign competitiors (mostly the French and German utilities) and until recently, they were happy to mock the nationalist foreigners who had overpaid for assets while bringing them lower prices. Now that the country is becoming a net importer of oil and gas (shwoing a deficit for the first time in 25 years), it is suddenly worrying about security of supply, and has been complaining about continental comapnies withholding supplies and causing prices to increase (but the fact is that the USA or Spain have been willing to pay even higher prices for gas in the form of LNG, and deliveries have gone there in priority: markets are “efficient”, after all…).
Italy, which went the furthest in the market agenda in voluntarily breaking up its national monopoly, Enel, by forcing it to sell part of its production assets to create viable competitors, is now worried that Enel is too weak to face the European “monsters” being created, and is worried about the lack of reciprocity in the opening up of markets. It was in a bitter fight with France in 2001-2005 when EDF took over Edison, the second largest utility of the country, in a surprise manoeuver; for a while the Italians blocked EDF’s voting rights at 2% of Edison’s shares, but they finally recanted after the EU deemed that rule illegal and after France agreed to give Enel a stake in a couple of EDF’s nuclear plants. Now they are darkly muttering about reinstating that rule, even though EDF has nothing to do in this story (and is actually seeing a real rival emerge on the French market…).
Spain is somewhere in between. It has several utilities which are in real competition at home, but it has not really allowed foreigners into its market (which is physically isolated, for geographical reasons). It was happy to create a “national champion” with the Gas Natural – Endesa merger, but is not threatened by a German take over, which could mean that other utilities become targets of the other giant groups emerging.
But why should the nationality of energy groups matter in Europe? The fact is that security of supply is a real issue, and it is much easier to lead a national policy if you have some degree of control (whether direct via ownership or indirect via regulatory means or via “old boy networks”) over the main investors in the sector. Decisions whether to invest in nuclear, where to buy natural gas from, or what high voltage lines to build will always involves national authorities, and the location of a company headquarters plays a real role there. National companies are also more easily influenced when it comes to setting retail prices, a topic which is likely to become politically sensitive as prices inexorably rise.
Finally, as I have written before, and as France demonstrates, electricity is a sector where contralisation and public control can work effectively to provide reliable and cheap energy supply, simply by taking advantage of the fact that it is a sector that requires massive investments, and being able to invest over 40 years at low, sovereign interest rates brings a massive advantage over those investing over 15 years at commercial market rates. It also influences the kind of technology one chooses (State-owned or State-backed companies can invest in nuclear, hydro or wind much more easily, whereas private sector companies will stick to gas-fired or coal-fired plants).
France has the cheapest electricity prices around (except for hydro-rich Scandinavia) – WITHOUT paying any subsidies to EDF – quite the opposite, the company used to be raided by the government to fill up budget deficits. Now, thanks to smart meddling by the government (and following 60 years of constant attention to the ssector, it will have two world class energy companies to face off the end of our cheap energy world.