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23/09/2015

Ownership unbundling - will the energy market benefit from it?

On June 26th, the Dutch court ruled legislation on ownership unbundling of commercial and network activities of energy companies not to be in violation with European law. The decision puts Delta and Eneco in a difficult position, as the networks are their most profitable assets. Although the unbundling decision has reappeared on the political agenda, chances are slim that the decision will be completely reversed. In this article, we will take a look at the possible scenarios and the associated consequences for the Dutch energy market. 

Short history         

The unbundling law, officially named ‘Wet Onafhankelijk Netbeheer’ in Dutch but better known as the ‘Splitsingswet’, was signed in 2006 and aims to provide a level playing field by fully separating the non-competitive electricity network from the competitive production and supply activities of energy companies. The government at the time found that legal unbundling alone allowed for cross-subsidization between the network company and the supply company and did not sufficiently guarantee non-discriminatory access to the network. The motivation for the legislation was also based on security of supply – a network company should be able to plan its investments fully independently from any commercial holding company to ensure network reliability.

Delta and Eneco have always objected against the Splitsingswet, which is illustrated by a long legal battle fought out with the Dutch state that culminated in the recent judgment. The decision has cleared the way for regulator ACM to force Delta and Eneco to separate their network activities. However, there still is some hope for both companies, as on September 30th the general parliamentary debate will be held, in which unbundling will be addressed. Shortly thereafter the legislative proposal STROOM will be discussed. This proposal aims to reform the current electricity and gas legislations, which contain the principles of ownership unbundling. Although the current proposal leaves these principles untouched, the scheduled discussion provides an opportunity for amendments.

Unbundling to create a level playing field?

During the general debate, the Minister of Economic Affairs Henk Kamp will have to answer a number of questions related to unbundling. One of these questions is whether enforcement will actually result in a level playing field on the Dutch energy market. The competitors of Delta and Eneco, mainly Nuon and Essent, are both owned by international energy companies with significant network activities in their portfolio. Hence, these companies may also benefit from the (financial) advantages that these activities provide, such as a better credit rating. Because of this, Delta and Eneco feel that the current situation does not represent a level playing field. The security-of-supply motive for unbundling is also questioned: are the operations of network companies Stedin and DNWB actually in danger as a result of the commercial interests of its shareholders?

Given the current political arena, we think it is unlikely that the unbundling decision will be undone. The liberal coalition party VVD has always positioned itself as a proponent of unbundling, and there have been no signs of a change in perspective. The standpoint of its coalition partner PvdA is less pronounced, but it is expected that they do not want to create conflict within the coalition. In addition, STROOM serves a bigger purpose and rejecting the bill totally would cause a loss of political credibility and would decrease the chance of emission reduction targets being met.

A conditioned unbundling to prevent job loss and green divestments

An amendment to STROOM, stating that unbundling will only be enforced when surrounding countries do the same, could provide Delta and Eneco with more time (and money) to better prepare themselves for the future. This would prevent both companies from losing their competitive power in the European energy market, and becoming easy targets for the EU’s (vertically integrated) energy giants such as Engie (formerly GDF Suez) and RWE. For Eneco’s major (municipal) shareholders, the unequal international competitive position  resulting from unbundling is the main reason why they are in favour of such an amendment. Without the amendment, unbundling will be enforced, resulting in a reported job loss of over 800 fte each. Moreover, Delta made clear that it will not be able to proceed in its current form, mainly as a result of the expected decrease in credit rating. It will most likely fall apart into four separate companies: Evides (water), EPZ (nuclear reactor), DNWG (network) and the remaining energy production and supply company. In addition to job losses, Eneco has put forward that it will no longer be able to invest in sustainable energy production as funds to do so will no longer be available.

A decision impacting the Dutch energy market as a whole

The prospect of a sale of Delta’s commercial activities – and potentially also of Eneco – to an international energy giant raises the question: will the Dutch economy as a whole benefit from this? The energy market has changed drastically since the first wave of takeovers back in 2009. As positive as the sale of Nuon and Essent was for its public stakeholders, it is likely that Delta and Eneco would be sold for a minimum price. A takeover would also most likely lead to a further concentration in energy generation, whilst the large number of energy suppliers implies that sufficient competition will remain on the retail and wholesale markets. All large-scale centralised production will then be owned by foreign companies, with the exception of the nuclear reactor in Borssele. This would further reduce the power of the Dutch government to steer the energy market in the desired direction, as long as the European energy market isn’t fully integrated. Far from improving the competitiveness of energy retailers, traditional integrated companies would only be replaced by other (international) vertically integrated companies.

In conclusion, it can be questioned whether unbundling would positively affect the Dutch energy market. As long as we don’t have a fully integrated European energy market, imposing stricter rules than neighbouring countries will always put foreign companies at an advantage. There is a chance that all large-scale centralised generation capacity in the Netherlands will be owned by foreign companies in the near future. One could question whether the security of supply is still safeguarded in this situation, which was after all at the heart of the motivation for ownership unbundling. 

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