MCI and European Competition Forecasts

TABLE OF CONTENTS

CHAPTER 1 EXECUTIVE SUMMARY 3

Competitive intensity in the gas and power markets is unsurprisingly lead by the UK with widely varying conditions elsewhere 3

The UK and Sweden lead the field in terms of power market competitive intensity 4

After the UK, the Dutch market is the most competitive gas market both now and in 2008 5

CHAPTER 2 INTRODUCTION TO MCI 24

The MCI Index assesses the competitive environments in 10 key European gas and power markets and forecasts switching behaviour 24

The MCI Index shows how attractive a particular market is to new entrants in terms of the competitive environment 25

The MCI Index is calculated by deriving a weighted average of scores over 9 key metrics 25

Scores were devised by Datamonitor and then tested, validated and revised through an extensive series of expert interviews 26

Two methods of calculation are used in order to ensure accuracy of results and to remove erroneous or misleading scores 26

SIMPLE ADDITIVE MEASURE 26

MULTIPLICATIVE MEASURE 26

Users can adjust scores and weightings using the accompanying Excel model 27

Calibration of the underlying metrics 28

Effectiveness of regulator 28

Ease of Third Party Access 29

Effectiveness of balancing & data transfer 29

Wholesale market fragmentation 30

Retail market fragmentation 30

Traded market maturity 31

Access to market information & assistance 31

Consumer representation 32

Propensity to switch 32

This report is aimed at those needing a greater insight into the current and future competitive environments in Europe's energy markets 33

CHAPTER 3 EUROPEAN MARKET OVERVIEW 34

All of the markets in the MCI Index are subject to the terms of the EU gas and power directives 34

Compliance with the terms of the directives has varied widely across Europe 35

Total and sectoral demand vary widely in the MCI Index markets 35

Demand growth rates also vary significantly between markets 37

CHAPTER 4 MARKET TRENDS 39

Czech Republic - Gas 39

The development of liberalisation will drive all of the Market Framework scores higher by July 2008 39

Retail fragmentation is the highest current and future score of the Supplier Push factors 40

Customer Pull factors all score at the lower end of the scale 41

By July 2008 switching activity in the residential market will lag significantly behind the non-residential market 42

The Czech Republic�s gas metrics all score in the lower half of the scale 43

Czech Republic - Power 43

Market Framework factors are unlikely to develop significantly by 2008 43

Supplier Push factors are curtailed by the lack of a traded market and the dominance of CEZ 44

Customer Pull factors achieve only limited scores both now and in July 2008 45

Switching rates will be limited in the residential sector by July 2008, though greater momentum will be seen in the residential sector 46

Market Framework metrics exert a significant influence over the Czech power scores 46

The Czech Republic�s gas metrics all score in the lower half of the scale 47

France - Gas 48

Regulatory effectiveness is the key driver of the Market Framework scores 48

Supplier Push factors in France are influenced by the reduction in wholesale fragmentation expected by 2008 49

Customer Pull metrics all score low marks both now and in 2008 50

Switching rates in both the non-residential and residential sectors are likely to be lower than in other markets 51

Market Framework metrics are the key driver behind France�s overall gas score 51

France � Power 52

Increased pro-action and momentum from the Regulator are likely to drive the Market Framework metrics higher by July 2008 52

Growth in the Supplier Push metrics will be mainly driven by reduced retail fragmentation between 2005 and 2008 53

None of the Customer Pull metrics score particularly highly both at the current time and in July 2008 54

Residential switching will only be at modest levels by 2008, though non-residential switching will continue to develop 54

Relatively low consumer representation and the ongoing dominance of EDF serve to constrain France�s overall power scores 54

Germany � Gas 55

Germany�s Market Framework score is curtailed by the lack of a regulator and the relatively undeveloped TPA regime 55

The large number of municipal energy retailers drives the Supplier Push metrics 56

Germany has consistently low scores for all of the Customer Pull metrics, with little improvement likely by 2008 57

Forecast switching rates for 2008 are at the lower end of the European scale 58

A highly fragmented retail market is not enough to offset the low scores gained in most of the other metrics in both 2005 and 2008 58

Germany � Power 59

The already low Market Framework scores are further constrained by the current lack of a regulatory body 59

Supplier Push factors all score relatively highly given the well developed nature of the German power market 60

Customer Pull metrics are likely to remain low for the foreseeable future 61

Switching in both sectors will be curtailed by the fact that market opening occurred back in 1998 61

A mature traded market and a relatively fragmented wholesale market are insufficient to offset the low scoring metrics 62

Ireland � Gas 63

All of the Irish Market Framework factors will be at the upper end of the scale by 2008 63

The consolidation of new market entrants will increase the scores of the Supplier Push metrics 64

Continued switching following full market opening in 2005 will drive the Customer Pull metrics higher in 2008 65

The development of competition between 2005 and 2008 will continue to result in increased rates of switching 65

Ireland�s gas scores are largely driven by the Market Framework metrics 66

Ireland - Power 66

Market Framework metrics generally score highly and are likely to further improve by July 2008 66

The Supplier Push metrics will continue to be constrained by only modest gains from new entrants and the lack of wholesale power 67

Customer Pull metrics will remain relatively low by 2008, despite the progress resulting from full market opening in 2005 68

Switching activity in the residential sector will continue to be much lower than the non-residential market 69

Irish power market metrics are constrained by the lack of a traded market 69

Italy � Gas 70

The assertion shown by the Italian regulator has a major impact on the Market Framework metrics 70

Reductions in both wholesale and retail market fragmentation are the key driver of the Supplier Push metrics 71

Customer Pull metrics are mainly driven by propensity to switch 72

Continued switching is likely to occur in both sectors between now and 2008 pushing switching rates higher 73

The Italian gas market achieves higher scores on the more heavily weighted metrics 74

Italy - Power 74

Italy�s Market Framework score is driven by the Regulator's proactive reforms and strong stance on promoting liberalisation 74

Growth in the wholesale power market will increase the Supplier Push metric by July 2008 75

Customer Pull factors are likely to remain relatively low in July 2008 76

Switching rates in the Italian power market are likely to be similar to those seen in the gas market 77

Low scoring Customer Pull metrics constrain Italy�s overall scores 77

Netherlands � Gas 78

The relatively high Market Framework scores reflect the status of the Netherlands as an established and mature gas market 78

Supplier Push factors are driven by the existence of, and growing liquidity in, the TTF wholesale market 78

Customer Pull scores have been constrained, and will continue to be constrained, by a lack of strong consumer representation 79

Switching activity will be higher than in many other markets by 2008 owing to full market opening occurring ahead of EU deadlines 80

Dutch gas scores reflect the Netherlands� role as a significant gas producer and a mature market 81

Netherlands � Power 81

The Market Framework metrics are driven by the competency of the regulator and its focus on social as well as market issues 81

Supplier Push factors will grow by July 2008, though only to a minimal degree 82

Customer Pull factors are mainly driven by a medium propensity to switch 83

Switching rates will continue and are likely to remain higher than in many other markets 83

Strong market framework factors and a mature traded market are the key drivers of the Dutch power market scores 84

Poland � Gas 84

None of the Market Framework metrics increase their scores significantly between 2005 and 2008 84

A lack of access to wholesale gas supplies constrains Poland�s Market Framework scores 85

Customer Pull metrics will remain at the lower end of the scale by 2008 86

Residential switching rates are likely to remain modest, though greater momentum will occur in the non-residential sector 86

Only a modest improvement in Poland�s scores is likely to be discernable between 2005 and 2008 87

Poland � Power 87

Market Framework scores will remain modest in 2008 87

Low levels of retail and wholesale fragmentation drive the Supplier Push metric both currently and in July 2008 88

Customer Pull metrics are very much at the lower end of the scale and are likely to remain so in July 2008 89

Residential switching is likely to remain at modest levels, though non-residential rates are likely to grow more rapidly 89

A high degree of fragmentation in the retail and wholesale markets partially offsets the modest scores achieved in other metrics 90

Spain - Gas 90

Spanish Market Framework scores will increase only slightly by 2008 90

Reductions in wholesale and retail fragmentation will drive the Supplier Push metrics higher by July 2008 91

The Customer Pull metric is most heavily influenced by switching rates both currently and in the future 92

Following an upsurge in residential switching, both sectors will continue to see increased switching activity in July 2008 93

Spain�s gas scores are constrained by the lack of a traded market and relatively low levels of consumer representation 94

Spain - Power 94

Market Framework metrics will remain in the middle range both currently and by July 2008 94

Supplier Push metrics are currently modest, though by July 2008 will begin to increase 95

Customer Pull metrics will remain relatively low in July 2008 97

Switching rates in both the residential and non-residential sectors will continue to rise 97

As in the gas market, Spain�s power scores are constrained by the lack of a traded market and low levels of consumer representation 98

Sweden � Gas 98

The undeveloped nature of the Swedish gas market constrains the Market Framework scores 98

High levels of wholesale and retail fragmentation combined with a lack of wholesale gas constrain the Market Framework scores 99

Customer Pull metrics will remain at the lower end of the scale between now and 2008 given the immature nature of the market 100

Switching rates in the Swedish gas market are likely to remain modest 101

The immature and undeveloped nature of the Swedish gas market mean that both current and future scores are modest 102

Sweden � Power 102

The Swedish Market Framework metrics are likely to move up the scale by July 2008 102

Supplier Push metrics are driven by the existence of the Nord Pool market 103

Customer Pull factors score relatively highly, though are unlikely to move significantly between now and 2008 104

Strong rates of switching are likely to continue into 2008 in both the residential and non-residential sectors 104

Most of Sweden�s power market metrics show only limited movement between 2005 and 2008 105

UK � Gas 105

The developed and fully deregulated nature of the UK market allows it to achieve the highest Market Framework score in this study 105

The maturity of the UK�s wholesale market has a strong impact on the Supplier Push metrics 106

High levels of switching, and facilities to assist this switching, result in high Customer Pull scores 107

Switching rates will continue to develop, though at a slower rate than in other markets given the already advanced stage of liberalisation already reached 108

The UK�s role as a major gas producer and its mature market structure mean that most metrics score at the top end of the scale 108

UK � Power 109

The UK�s Market Framework metrics all achieve scores at the top end of the scale 109

Supplier Push metrics are driven by the existence of a fragmented wholesale market and the well developed traded market 110

All of the UK�s Customer Pull metrics score at, or close to, the top end of the scale 110

Switching activity will continue to develop in the UK, though at a slower rate than in the less developed markets 111

The UK�s score is constrained only by the current levels of retail market concentration 112

CHAPTER 5 COMPETITIVE OUTLOOK 113

Current levels of competitive intensity in Europe�s gas markets reflect the widely differing market structures and levels of maturity 113

Other than Sweden and the UK, current levels of competitive intensity in the MCI power markets are relatively uniform 114

By 2008 the UK will remain the most competitive market, though other markets will be increasingly competitive to varying degrees 115

By 2008 all of the markets will have achieved positive multiplicative scores and will see advancements in competitive intensity 116

Given its long history of liberalisation, it is unsurprising that the UK achieves the highest gas and power scores 116

In terms of overall competitive intensity scores, the UK and Dutch markets are currently the most attractive commercial prospects 117

By 2008 relative gas / power competitive intensity will be only marginally changed, though important differences lay in individual metrics and their changes over time 118

Czech Republic 119

The Czech Republic achieves low scores for both gas and power market competitive intensity with little improvement by 2008 119

New entrants to the Czech power markets will need to mitigate the threat posed by dominant players and low switching 121

Commercial opportunities in the Czech gas market appear to be very limited both now and in 2008 122

France 122

France�s current levels of competitive intensity are low, though a strong improvement in gas competitiveness can be expected 122

The dominance and formidable challenge represented by EDF means that new entrants need to aggressively build market share at the lowest possible cost 125

New gas market entrants will need to overcome a series of threats in the short term, though by 2008 significant commercial opportunities will exist, particularly in the south of the country 126

Germany 127

The lack of a regulatory body constrains the current gas and power scores 127

Mitigating regulatory uncertainty and ensuring cost effective TPA are the key challenges facing entrants to the German power market 129

Germany�s gas market competitiveness improves by 55% between 2005 and 2008, the highest increase in all the markets analysed 130

Ireland 130

In spite of being in its relative infancy, the Irish gas market is at a similar stage of competitiveness to the power market 130

Despite a favourable TPA regime, new entrants will need to ensure they gain access to power and overcome switching lethargy 132

The issues facing new entrants to the Irish gas market are similar to those facing entrants to the power market 133

Italy 134

Competitiveness in both the Italian gas and power markets is in the mid range of the other markets analysed 134

The opportunities in the Italian power market are stronger than in many other markets, though grid issues need careful attention 137

Gas market switching rates are currently twice those in seen the power market 138

Netherlands 139

Relatively liquid traded wholesale markets are key elements leading to high levels of competitive intensity in the Dutch markets 139

With a stable regulatory environment and a mature traded market, the Dutch power sector has its attractions to new entrants, though balancing efficiently remains an issue 140

Despite being the most competitive market after the UK in both 2005 and 2008, opportunities in the Dutch gas market may be limited by the wave of new entrants with first mover advantage 141

Poland 142

There is a wide degree of diversity between the levels of competitive intensity in the Polish gas and power markets 142

Growing environmental pressures are creating strong commercial opportunities for generators 144

The difficulties associated with obtaining gas are just one of the many reasons why the Polish gas market is an unattractive option for new entrants 145

Spain 145

Although the gas and power markets are currently at different stages of development, their competitive intensity scores converge in 2008 145

Developments in the Spanish power market will create improved competitive intensity, though challenges remain to be overcome 147

Strong demand growth and continued gasification enhance the attractiveness of the Spanish market to new players 148

Sweden 149

Sweden�s position as the second most competitive power market is in direct contrast to its zero rated gas market 149

Concerns over regulatory stability and the existing dominant players will somewhat temper the otherwise attractive nature of the market 151

The current opportunities in the Swedish gas market appear to be extremely limited with little improvement likely before at least 2010 152

UK 153

The UK unsurprisingly achieves the highest competitive intensity scores in both the gas and power markets 153

Commercial opportunities do exist in the UK power market, though the high level of competitive intensity means that they are more difficult to capitalise on than in other less advanced markets 155

The strong level of competitive intensity in the UK means that the market place is in many ways crowded 156

Although Spain sees the biggest increase in its overall power market score, the attractiveness of entering its residential power market is curtailed by a relatively low forecast switching rate 157

Despite seeing only small increases in their power market scores, the UK and Sweden remain the most attractive non-residential power markets to enter due to high switching rates 158

Germany is an attractive residential gas market to enter given the strong increase in overall score and relatively high forecast switching rate 159

Germany and Ireland appear to be the most attractive non residential gas markets to enter owing to higher end score improvements and likely switching rates 160

Despite the liberalisation process and movement towards a single European market, the idiosyncrasies of each market need to be carefully assessed by new market entrants 160

CHAPTER 6 APPENDIX 162

The UK will continue to lead power market switching activity, though switching activity in all markets will continue to develop 162

Gas market switching will continue to develop in both sectors of all the markets, though the UK will continue to lead the field 163

Declining UK gas production will lead to greater price spike potential between 2005 and 2007 164

Glossary of terms 164

CHAPTER 7 METHODOLOGY 165

An extensive series of expert interviews were undertaken to validate the scoring metrics 165

Related reports and contact details 165

LIST OF FIGURES

Figure 1: Summary MCI Additive Power Scores 4

Figure 2: Summary MCI Additive Power Scores 5

Figure 3: Markets covered by the MCI Index 24

Figure 4: MCI Index Scoring Scale 25

Figure 5: MCI Index Scoring Metrics 25

Figure 6: Adjusting scores and metrics using the accompanying model 27

Figure 7: MCI Metrics 28

Figure 8: Effectiveness of regulator scoring scale 28

Figure 9: Ease of Third Party Access scoring scale 29

Figure 10: Effectiveness of balancing & data transfer scoring scale 29

Figure 11: Wholesale market fragmentation scoring scale 30

Figure 12: Retail market fragmentation scoring scale 30

Figure 13: Traded market maturity scoring scale 31

Figure 14: Access to market information & assistance scoring scale 31

Figure 15: Consumer representation scoring scale 32

Figure 16: Propensity to switch scoring scale 32

Figure 17: Who is this report aimed at? 33

Figure 18: Electricity demand growth 1994 to 2003 35

Figure 19: Gas demand growth 1994 to 2003 36

Figure 20: Sectoral Electricity Demand 2003 36

Figure 21: Sectoral Gas Demand 2003 37

Figure 22: 5 Year Gas and Power Demand CAGR (to 2003) 37

Figure 23: 10 Year Gas and Power Demand CAGR (to 2003) 38

Figure 24: Czech Republic summary gas scores 43

Figure 25: Czech Republic summary power scores 46

Figure 26: Czech Republic gas scores summary 47

Figure 27: French summary gas scores 51

Figure 28: French summary power scores 54

Figure 29: Germany Summary Gas Scores 58

Figure 30: German summary power scores 62

Figure 31: Irish summary gas scores 66

Figure 32: Irish summary power scores 69

Figure 33: Italian summary gas scores 74

Figure 34: Italian summary power scores 77

Figure 35: Dutch summary gas scores 81

Figure 36: Dutch summary power scores 84

Figure 37: Polish summary gas scores 87

Figure 38: Polish summary power scores 90

Figure 39: Spanish summary gas scores 94

Figure 40: Spanish summary power scores 98

Figure 41: Swedish summary gas scores 102

Figure 42: Swedish summary power scores 105

Figure 43: UK summary power scores 108

Figure 44: UK � summary power scores 112

Figure 45: 2005 summary gas scores 113

Figure 46: 2005 summary power scores 114

Figure 47: 2008 summary gas scores 115

Figure 48: 2008 summary power scores 116

Figure 49: 2005 additive gas score vs power score 117

Figure 50: 2008 additive gas score vs power score 118

Figure 51: Czech Republic scores by metric 120

Figure 52: France scores by metric 124

Figure 53: Germany scores by metric 128

Figure 54: Ireland scores by metric 132

Figure 55: Italy scores by metric 136

Figure 56: Netherlands scores by metric 140

Figure 57: Poland scores by metric 143

Figure 58: Spain scores by metric 146

Figure 59: Sweden scores by metric 150

Figure 60: UK scores by metric 154

Figure 61: Increases in Additive Power scores vs 2008 Residential Power Switching Rate 157

Figure 62: Increases in Additive Power scores vs 2008 Non Residential Power Switching Rate 158

Figure 63: Increases in Additive Gas scores vs 2008 Residential Gas Switching Rate 159

Figure 64: Increases in Additive Gas scores vs 2008 Non Residential Gas Switching Rate 160

Figure 65: Electricity switching forecasts by market 162

Figure 66: Gas switching forecasts by market 163

Figure 67: UK supply / demand balance 164

LIST OF TABLES

Table 1: Forecast switching rates 1st July 2008 5