August 29, 2008

European Energy Retail: EDF Price Increases Will Not Spur Competition

The French government has recently agreed for state-owned energy supplier EDF to increase its prices for both business and residential customers. This has led some analysts to point to the relatively large increase by French standards as a sign that the French government is trying to move energy prices towards a market-based price, and eventually remove regulated tariffs.

While the price changes are significant for commercial users, reaching 8% for large businesses, the agreed increase is a mere 2% for residential customers. In an era of high energy inflation, marked by the recent spike in oil prices, a 2% rise in price will not affect the pressures that EDF and competing suppliers are under. However, EDF and the French government are bound to the public service agreement of 2005 which states that prices cannot increase above inflation for domestic customers until at least 2010. With increases in energy costs for generators well above the general inflation rate on the whole, highlighted by the increasing wholesale cost of gas, the incentives for suppliers to compete in the French market are becoming smaller, not greater.

The main competitor to EDF's stranglehold on the French power market is the state-owned gas company Gaz de France (GDF) and independent supplier Poweo. GDF has the advantage as it can lever its regulated gas tariffs into a semi-regulated dual fuel package, while Poweo does not have this option, being an independent supplier without government backing. Despite its obvious disadvantages, Poweo is attracting a small amount of custom, and as of July 2008 had over 100,000 residential customers. However, those who have been eagerly awaiting the chance to move away from EDF have probably already switched, and Poweo will find it increasingly difficult to attract customers following such a small change in regulated prices.

The expected fractional increases of regulated prices in France are likely to bring the country further away, not closer to, market prices and de-regulated pricing. A widening disparity between what customers pay and what they should be paying will increase the burden on the taxpayer, in terms of the subsidy that they are providing to energy users.