German Utilities Market Review 2005

SUMMARY

Introduction

The report investigates the complex ownership structure of the German energymarket and demonstrates the extent to which the larger market players are vertically integrated intoretail operations. The study gives full market information concerning prices and volumes of gas andpower sources.

Scope

• Interrogates each key segment of the value chain - Networks, Wholesale & Procurement andDistribution & Retail
• Uses Datamonitors German Utilities Equity Database to uncover the indirect influence of theVerbund companies at the retail level
• Demonstrates how the variability of access charges are suppressing competition from pure retailoperations by squeezing margins at the retail end
• Discusses the likely approach of Germanys new energy regulator to competition issues

Report Highlights

Using Datamonitors German Utility Equity Database, which permits the clearidentification of ownership structures in a complex market, we discover that Verbund own 57% of theequity in power customers and 43% in gas. This was mapped against their interests across the 917regional utilities and Stadtwerke.

The Verbunds remain structurally long in Germany, while smaller players andtheir municipal and private owners are structurally short.

Datamonitor analysis of costs facing retailers demonstrates that they facemargins of less than 5%, leaving them little margin to discount in order to gain market share. Thiscan be partly explained by the high and variable access charges, an issue that the new regulator iscurrently reviewing.

Reasons to Purchase

• Understand the optimal strategies for smaller players given the position of the Verbund
• Discover where opportunities might arise in light of the RegTPs position on access charges
• Understand the structural hedge for the Verbund & smaller suppliers

TABLE OF CONTENTS

CHAPTER 1 EXECUTIVE SUMMARY

• Key conclusions

CHAPTER 2 INTRODUCTION

• The report examines complex ownership issues surrounding the German energy market
• The report will interest a wide audience of decision makers

CHAPTER 3 OWNERSHIP STRUCTURE OF THE GERMAN ENERGY MARKET

• Four Verbund utilities still dominate electricity production in Germany
• Around four fifths of total gas used in Germany is imported
• Stadtwerke and regional utility entities still dominate the end-customer relationship in Germany
• Verbund companies directly or indirectly own 48% of the combined retail volumes on an equitybasis
• The different categories of ownership under German company law have influenced the developmentof cross ownership patterns in the utilities sector
• Municipals are still more likely to have overall control of their Stadtwerke than other types ofentity

CHAPTER 4 NETWORKS & REGULATIONS

• The four Verbund companies own interconnected electricity transmission networks
• RegTP will assume regulatory responsibility for electricity and gas markets in 2005
• Electricity transmission access charges have historically been set by agreement not by aregulator
• There are still different approaches to charging for third party access in German gastransportation
• Due to the fragmented and intransparent nature of the TPA process, wide variations of chargerates are found

CHAPTER 5 WHOLESALE & PROCUREMENT

• Utilities & major users can generate their own power, buy it on the wholesale market, orthrough bilateral negotiations
• Thermal sources dominate electricity generation though current industry forecasts are typicallybased on the phasing out of nuclear and a dramatic further expansion in renewables
• German wholesale power prices rose at double-digit levels in 2004
• European coal prices havent fed through to baseload power price yet, so further rises in 2005& 2006 are likely
• Trade activity in the power market has now grown back through pre-collapse levels
• Limited liquidity in the forward electricity market means a relatively large bid-offer spread onthe German forward curve
• Historically, the German electricity forward market has exhibited a non-structural contango -forward prices have proved expensive
• Germany has many gas delivery points and therefore a number of wholesale gas benchmark prices
• Continental European gas contract prices are typically indexed to a basket of traded oilproducts, typically including gas oil
• There is a lack of forward price discovery for TTF forward gas compared to Zeebrugge

CHAPTER 6 DISTRIBUTION & RETAIL

• There are around 900 different distribution networks in Germany
• Ex-post regulation will take time to unravel distribution and retail costs
• There is a large variation in German residential energy prices between classes of customer
• Tax makes up a considerable proportion of the cost of gas to end users
• Electricity retail margins are low across Germany, Datamonitor believes distribution charges arestill artificially high
• Gas retail margins are also artificially low due to incomplete unbundling between retail &distribution

CHAPTER 7 APPENDIX

• The German Utilities Equity Database
• Ownership and owned equity stakes segmented under 5 owner type classifications
• Individual company generation data
• Individual company supply data
• Research methodology
• Future readings
• SPP writing team
• How to contact experts in your industry
• List of Tables
• Table 1: Implicatations of levels of Stadtwerke stakeholding
• Table 2: Verbund Transmission Network ownership
• Table 3: Third Party Access charging arrangements
• Table 4: Major players gas sendout and networks

List of Figures

• Figure 1: Shares of Companies in Power Generation in Germany, 2004
• Figure 2: Origins of Gas Used in German Market, 2000-2003
• Figure 3: German Retail Energy Market Volume share by entity holding customer relationship, 2004
• Figure 4: German Retail Energy Market - Volume share by equity owner, 2004
• Figure 5: Ownership of Stadtwerke by Share of Equity
• Figure 6: Power Transmission Networks in Germany
• Figure 7: TPA charges in Germany for 20,000kWh gas customer, 2004
• Figure 8: Power generation by source in Germany, 2002-2020
• Figure 9: Wholesale Power Prices, May 03 to Dec 04
• Figure 10: Prices of Coal, Gas and Power, May 03 to Dec 04
• Figure 11: Volumes of Power Trading in Germany, 2001-2004
• Figure 12: Bid - Offer Spreads in Power Market, Q1 05 - end 08
• Figure 13: Forward curves for Power, 2001-2008
• Figure 14: Historic Trends in Gas Price, 2001-2004
• Figure 15: Historic Trends in Gas and Gas Oil prices
• Figure 16: Forward Curves for Gas, Q1 2005-2007
• Figure 17: Localised Power Distribution Networks
• Figure 18: Distribution Costs for Power, 2004
• Figure 19: Residential Power Prices for Different Consumer Types, July 2004
• Figure 20: Residential Gas Prices for Different Consumer Types, July 2004
• Figure 21: Breakdown of Retail Power Prices, 2004
• Figure 22: Breakdown of Retail Gas Prices, 2004