At midnight on 31 December the euro ceased being a virtual currency and became the physical representation of the so-called ‘eurozone’. It is interesting to note that in the very same year, 1999, that a virtual euro was born so were the seeds of European energy market liberalisation with the European Commission’s electricity directive. But there the comparison ends. Unlike money, which is now a (largely) single market, the energy market is still fragmented and it will take longer to realise the Commission’s vision of a single liberalised energy market.

Like money the Commission has great expectations for the continent’s energy market, and much of this expectation is being focussed on the Barcelona Summit in March, which is being devoted to economic reform and in particular the reform of the energy sector. But there is very little reason to believe that Barcelona will succeed where previous summits in Stockholm and Lisbon failed. Certainly since the Commission unveiled its proposed liberalisation timetable last year there has been little progress made on the various stumbling blocks, and it has also failed to provide France, the main objector to the timetable proposed, with a review of liberalisation to date as it requested. Given that France will hold both presidential and government elections after the March summit, and with the current political climate shifting centre-right, it is highly unlikely that the current left of centre government will want to alienate its socialist support by agreeing an accelerated liberalisation timetable. It is equally unlikely the Commission will use its powers to pass the timetable without the full support of France.

The EC outlined its vision in 2000 of the European Union being the world’s most dynamic and competitive economy by the end of the decade, and central to this economic dynamism is a robust energy market. But what the commission has skirted clear of is the ‘F word’ – federalism. Interestingly Spain, which assumed the six-month presidency of the European Commission on 1 January, is against the creation of a federal Europe. Indeed it is largely the fear of federalism and central market control that has bolstered the ‘no votes’ of the UK, Denmark and Sweden in remaining outside the eurozone. But can the true realisation of a single European energy market be achieved without a degree of federalism? It can be argued that the Commission is seeking to federalise the energy market through the back door. The Commission has already made clear it sees itself as being the ‘regulator of regulators’ in order to enforce its vision of competition among national markets, and last year it exercised its regulatory power in a series of mergers and acquisitions. But in reality Europe is a patchwork of competition and market efficiency. Reciprocity of trade, as measured by cross-border trading volume, is minimal and only a handful of markets can really be deemed competitive. Market liquidity development has also been fragmented by the proliferation of electricity exchanges and the lack of a standardised trading contract or price index.

Against this background, it seems unrealistic to project a fully competitive single market by 2005, as proposed by the Commission. Unless the Commission successfully addresses the trading reciprocity issues, the acceleration of market competition will see the European energy market controlled by a small group of European utilities, as the strong get stronger and the weak weaker.

As the physical reality of the euro dawned on the Netherlands some started to question whether the clock had started ticking towards the end of the Netherlands as an independent country within the eurozone. And if European energy market liberalisation progresses under the guise of quasi federalism then some might also foresee the end of national energy markets under a fully competitive single European market.

Waiting for the next Enron

Last year will probably be remembered as an “annus horribillis” in the US electricity market, starting with California and ending with Enron. In the immediate aftermath of Enron’s demise the talk started to focus on which company would be the heir apparent and assume a role of global dominance in the gas and electricity markets. A number of companies were suggested, all of them US-based, as pieces of Enron’s failed empire started to be sold to the highest bidders.

But is a new Enron in the best interests of the market? The market has fundamentally changed since Enron began its rise to prominence in the 1980s. Today the electricity church preaches the twin virtues of market liberalisation and competition, and argues in favour of more, not less, energy companies. Although market consolidation has continued at a fast pace, with no signs that it will relent during 2002, there is surely a need now to sit back and take stock. Enron’s demise raised two issues which need to be addressed: is the market best served by a single dominant energy corporation, and are there any other companies that could follow Enron into bankruptcy? The answer to the first question is a qualified no. Although consolidation is an important market dynamic the value of consolidation, and also the health of the market, is weakened if the full value of market competition is not realised before consolidation takes over. A quick assessment of the market last year would suggest that consolidation had developed largely at the expense of market competition.

As to whether there are any more Enron’s waiting to be unveiled, this is harder question to answer. Almost certainly there will not be another company failure on the scale of Enron but it would be foolish to discount further company failures during 2002 and beyond. As such, Enron will serve as a vital warning signal to those companies seeking to expand their business in the liberalising electricity markets, and encourage them to fine tune their analysis of risk and reward.