On 24 April 2012, the European Commission adopted a formal decision generally exempting from the EU procurement rules all public companies active in the production and wholesale of conventional electricity in Germany. The exemption covers all contracts for the purchase, construction, operation and maintenance of conventional power plants—e.g., gas and coal-fired ones—as well as related support activities such as combined heat and power plants (CHP).

This decision is based on a formal request that was filed by Robert Klotz with the European Commission on behalf of BDEW (German Association of Energy and Water Industries), representing approximately 1,800 companies active in the natural gas, electricity and district heat, water and wastewater sectors in Germany.

Following the liberalization of the energy sector, many private companies are now active in the production and wholesale of electricity in Germany, and are not subject to the public procurement rules. By exempting

their public competitors from these rules, the decision now establishes more homogenous conditions for competition in this key market. This is the first time that the Commission has granted such an exemption for a German market, after similar decisions had previously been adopted for Austria, England, Wales, Finland and Sweden, among others.

Public Procurement in Regulated Sectors

Directive 2004/17/EC aims to coordinate the public procurement procedures of entities operating in the water, energy, transport and postal services sectors; it contains specific rules for the procurement of products or services by public undertakings. Contracts falling within the scope of the directive must therefore be concluded subject to special conditions regarding transparent and non-discriminatory award criteria, in order to ensure open competition.

It is possible, however, for affected EU Member States and companies, or their associations, to request an exemption from the provisions of the directive. Pursuant to Article 30 of the directive, such exemptions will be granted with respect to a given market, subject to two conditions: (i) there must be unrestricted access to this market and (ii) the market must be directly exposed to competition. Access is deemed to be unrestricted if the Member State has implemented and applies the relevant EU legislation liberalizing the market in question. Key factors for the assessment of direct exposure to competition include market shares of the main players (concentration ratio) as well as market liquidity, size of imports and exports, price competition and the extent of customer switches.

These criteria are not strictly identical to those commonly used for the competitive assessment of markets under the EU antitrust and merger control rules. This is due to the specific objectives of the directive. Exemptions from the public procurement rules will be granted if the level of competition on the relevant market ensures that even in the absence of the public procurement rules contracts will be awarded in a transparent and non-discriminatory manner, in the interest of reaching the most economically advantageous solution.

The Exemption Decision

In October 2011, BDEW formally requested an exemption on behalf of its member companies for the purchase, construction, operation and maintenance of all their electricity generation plants, and relevant support activities, as well as for the wholesale of electricity. This request included both conventional and renewable power plants.

Following a mandatory opinion provided by the German Federal Cartel Office, the Commission defined a narrower relevant product market for the generation and wholesale of electricity produced only from conventional sources, thus excluding generation and wholesale of electricity from renewable sources. In Germany, the latter are subject to the specific regime of the Act on Renewable Energy (EEG), based on guaranteed minimum feed-in tariffs. While such EEG electricity exercises some competitive pressure on energy generated from conventional sources, this was not considered to be reciprocal, due to the feed-in priority for electricity from renewable sources. This is seen by the authorities as a form of subsidy rendering such electricity independent from the actual demand.

The Commission then decided that the above-mentioned exemption criteria of Article 30 Directive 2004/17/EC were fulfilled with respect to the German market for generation and wholesale of electricity produced from conventional sources. Access to such markets is deemed unrestricted, because Germany has implemented Directive 2009/72/EC as well as the previous Directives 96/92/EC and 2003/54/EC, which provide for the liberalization of, and open third-party access to, the German electricity markets.

Although characterized by the presence of four big companies, and with the the cumulative market share of the first three producers still being as high as 70 percent in 2010, the Commission found sufficient indications that the German market for the production and wholesale of electricity from conventional sources was directly exposed to competition. This is particular due to the fact that the first two producers (E.ON and RWE) are private undertakings, and therefore not subject to the procurement rules. Thus, these companies were able to exercise significant competitive pressure on the (mostly smaller) public market players. These findings were backed up by a study the Commission had published in June 2011 on the progress in creating an internal energy market, where it was found that the concentration of the German electricity market had decreased in recent years, so that the market could be classified as only moderately concentrated.

The Commission further found that competitive pressure on the German conventional electricity market is exercised by importers of electricity. This is due to the fact that Germany switched from being a net exporter to a net importer of electricity after several nuclear plants were closed in 2011. Other factors for the finding of competitive exposure of the relevant market were the increasing number of customer switches, the high degree of liquidity on the electricity wholesale market and the characteristics of the German balancing market with market-based pricing and price differences between positive and negative balancing power. These are interesting conclusions also for the big private operators E.ON and RWE, which do not otherwise directly benefit from the exemption decision.

Consequences and Outlook

As a result of the decision, which was already published in the Official Journal of the EU (L 114 of 26 April 2012, page 21 et seq.) and entered into force immediately, the provisions of Directive 2004/17/EC no longer apply to any contracts awarded by public companies for the production and wholesale of electricity produced from conventional sources in Germany. For those companies, all of which are members of BDEW, this leads to significant benefits through reduced cost, shorter procedures and more legal certainty for their power generation projects.

The exemption decision, however, does not cover any contracts related to the production and wholesale of renewable electricity subject to the special EEG regime which is currently not deemed to be directly exposed to competition. This includes electricity-based on sources such as hydro (wave, tidal, salt gradient and flow energy), wind, solar, geothermal, biomass, landfill gas and sewage gas, as well as biodegradable parts of waste incineration in Germany.

There is, however a strong trend toward more direct marketing of such electricity volumes with an increasing number of generators not opting for the guaranteed feed-in tariffs under the EEG. As soon as this trends leads to a sufficient degree of substitution between conventional and renewable sources, it may justify a separate request to the Commission also seeking the exemption of such activities from the EU public procurement rules. In the meantime, the same mechanism may of course also be used for other markets in network industries of other EU Member States.