The German energy market

The market was opened in April 1998 as part of the Single European Market programme. Supply contracts between local and regional monopolies were abolished by the New Energy Law; this introduced competition in supply to all customers. The European Council and Parliament adopted a policy that requires Union member states to ensure that operations in the electricity market are carried out with a view to achieving a competitive market. The Gesetz zur Neuregelung des Energiewirtschaftsrechts law of 1998 is the national law that officially opened the German energy market.

The main three aims of this Energy Act included security of supply, economic efficiency and environmental protection. There was an overall transformation in the electricity market that witnessed the elimination of regional monopolies and the opening of the market and deregulation. The German Electricity market is self-regulated as the Electricity Act did not introduce an independent regulator, which means that decisions are not made prior to the event but the market can regulate itself by a means of voluntary industry agreements.

Decisions are based on individual cases and agreed upon by the main actors in the market. This process is slow and the Commission and other groups have requested for a central regulating body. The German power market has now become one of the most competitive in Europe and liberalisation has resulted in considerable positive effects. Electricity prices for the industry have fallen and costs have reduced. The retail market has experienced reductions of up to 50% in large industries. Employment has decreased in the industry, which has further reduced costs.

Investment has increased from 8. 36 million Euros in 1991 to 9. 38 million in 2000. Liberalisation has lead to the more effective differentiation of products, for example the company EnBW has branded its electricity just like any other consumer good by promoting it as ‘yellow electricity’. This branding lead to that company having a competitive advantage over other companies in the industry, which then led to competitors also branding their electricity. The internationalisation of the industry had lead to companies increasing their overall competitiveness.

Major mergers and acquisitions were taking place and the number of main companies in the industry had declined from eight to six, this may be potentially reduced further to three. Great economies of scale and synergies are the most important benefits of the mergers, as well as increasing their customer base and making the overall market more attractive to foreign companies. Competition has developed greatly, however the reductions in prices and savings of the companies in the industry have unexpectedly not been passed on to the consumers. This suggests that consumers are losing out as the companies are benefiting.

Costs are being reduced drastically and the fact that consumers are not also enjoying the lower prices indicates that the companies are purely satisfying themselves and maximising their profit margins. The price of electricity to households has actually increased as prices to the industry have decreased. Consumers are not the only group disbenefiting; smaller companies and new entrants in the electricity market are finding it harder to compete with the monopolies that still exist and with foreign companies. Consumers are meant to have the freedom to choose their supplier but this is made difficult by complex contracts and ‘welcome fees’.

Although freeing up the electricity market has overall increased competitiveness and enhanced European integration, it can be argued that the German government has not done all it can towards increasing the fairness of the liberalisation of the market. The government has benefited due to German electricity companies merging and enhancing in strength, which has boosted economic growth and encouraged foreign direct investment. However the government seems to be ignoring the fact that companies in a monopoly position can exploit and take advantage of consumers and smaller companies and distort prices.

The system of self-regulation limits transparency and means that there is no official regulatory system monitoring the market, so if another European country had a disagreement regarding the German energy market, it would be difficult to achieve a fair and unbiased decision. The German government has only created a unit of the cartel office committed to settling disputes regarding the electricity sector. To prevent European countries from exploiting their position in the integration process of liberalisation, formal regulatory frameworks such as the Commission or an independent system should regulate each country.

The liberalisation of the financial services sector in Spain has transformed from consisting of centralised and reserved institutions to an energetic and much more international multi-layered sector. Admission to the European Monetary Union in 1999 resulted in the Spanish Central Bank, an institution that supervises and regulates domestic financial sector companies, no longer having any control over monetary policy as this role was taken over by the European Central Bank in Frankfurt. The banking sector consists of three main types of companies. These include commercial banks, savings banks and credit co-operatives.

The effects of the Single Market created a concentration process in the commercial banking sector. There was a desire to strengthen and become a large enough company to survive foreign competition. The concentration process increased competitiveness of companies, this was enhanced by tighter regulatory requirements. In 1988 saving banks began to expand outside their domestic region. Prior to liberalisation, banks were fairly home-focused and centralised. The liberalisation process began in 1969 and as well as resulting in more competition, banks were encouraged to engage in riskier strategies.

This eventually resulted in an extreme banking crisis, mainly due to a harsh economic downturn following a period of growth, overall mismanagement and a fragile regulatory regime. In 1978 foreign companies were allowed to enter Spain. This gave consumers a greater choice of services and gave the sector greater dynamism. To minimise damage to the domestic market there were important rules and regulations; for example a foreign company could only open a limited number of branches in Spain. Since joining the European Union and the European Monetary Union, there has been a drastic increase in the level of foreign integration in this sector.

Outward internationalisation resulted in roughly 20% of Spanish banks having assets abroad. There has been a significant increase in the involvement of Spanish banks in Latin America, where there is a common language and culture. The main reasons for this shift include opportunities for growth and declining domestic profit margins. This made investment abroad seem more profitable. Taking advantage of different business cycles in different countries help Spanish companies pursue risk diversification strategies. Spanish banks also formed alliances with major European Banks.

European Integration was becoming a rapid process regarding the Spanish financial sector; they had opened up their market to foreign companies, successfully invested in other European countries and became effectively involved in the European Union and with the Monetary Union. It is unfair to say that Spain has purely been integrating with Europe due to government interests as although the crisis had a negative impact on the economy, Spain still operated it’s financial sector in an open market, taking the risk of foreign competition once again damaging its domestic market.

Liberalisation was benefiting other member states and primarily not Spain, quite the opposite; it resulted in a crisis. Foreign banks and investments from abroad helped create competition in Spain but also enhanced the process of European integration, which produced benefits and opportunities for many other member states of the European Community. The government helped the Spanish industry regain strength by increasing competition, alliances and rapid outward internationalisation. These were all positive results of liberalisation.

Risk diversification and internationalisation were effective strategies in boosting growth and demand of the Spanish financial sector. Overall, the effects of abolishing the constraints to the free movement of the four freedoms have been greatly beneficial to all member states of Europe and for the European Community as a whole. The release of these barriers have led to significant welfare gains, an increase in competition, a reduction in costs, prices and mark-ups, and a considerable increase in productivity levels.

Production has been significantly increased in a number of European countries. The previous disastrous effects of market rigidities such as rising unemployment and poor economic growth have been transformed into economic growth and the economy being able to fully exploit comparative advantages, specialisation and economies of scale. This higher degree of openness in the market has forced domestic firms to strengthen and become more competitive as they have to compete directly with foreign firms.

Member state governments allow the process of European integration to occur as they realise the huge benefits their country or government can gain from it, and also the synergistic benefits the whole of the European Community will achieve. No state will agree to certain internationalisation policies thinking it will harm their economy, it makes perfect sense that governments will act in the interests of their state and decide on what is best both economically and for other aspects such as politically.

By one country enhancing their integration with Europe, another will also feel the benefits, for example when one country invests or opens operations in another. However for the process of internationalisation member countries are directed to do things which may be harmful to their domestic economy but which will benefit others, for example when Germany liberalised it’s electricity market, some small companies could not survive competing against foreign competition and strong monopolies.