Market concentration has reached critical levels in some regions — report

Monday, February 12, 2007

The concentration of market power increased to "critical" levels in a number of European regions between 1996 and 2005, according to a new study published by the German Institute for Applied Ecology.

The study considered typical measures of market concentration and said "two very different development patterns" had emerged over the period. Market concentration in the UK and Scandinavia were now "un-concentrated", but concentration remained "very high" in other regions, notably Germany.

The situation in Spain, Portugal and Italy, where a decrease of market concentration was observed, had not led to a significantly different situation than in France and the Benelux countries where nearly no changes were measured, the study said. Furthermore, especially in the German market, which is historically characterised by a certain diversity of power generation, the mega-mergers pushed the concentration indicators to levels "which must be seen as critical," it continued. "The remaining market concentration in the field of power generation has to be seen as endangering fair, competitive and sustainable energy markets," it concluded.

The report said breaking old monopolies and avoiding new concentration trends in the generation sector "must be a central issue for competition policy in the energy sector," adding the high levels of market concentration in the generation sector "could partly be compensated by extremely transparent and coherent rules for third-party access which favour independent power producers and newcomers in the market." However, it highlighted that "additional measures to decrease market concentration in the power generation sector should attract more attention."

Specifically, the study said strict unbundling of generation, transmission and distribution was a key issue, recommending further activities on an EU level to tackle ownership unbundling for the transmission networks as the main priority. The study also recommended that decentralised power generation receive a premium for long-term avoided network costs, avoided network charges and avoided network losses. Additional market distortions, such as the availability of decommissioning funds for activities in the market, fuel cycle cost obligations, liability issues and so on, between electricity generators should also be removed, the study concluded. "The existing and more or less successful approaches to urge market-dominating companies towards disinvestments (e.g. in the UK and Italy) or equivalent measures (virtual power plant auctions in Belgium, France etc.) should be strengthened and extended," it added.

Against the background of increasing cross-border mergers and acquisitions, the extension of interconnectors for cross-border electricity supplies would also not necessarily lead to more competitive market structures in the EU electricity markets, it said.

In the light of the considerable importance of market-based price signals in attracting investments in power generation, the recent efforts to eliminate market-based pricing for energy-intensive electricity consumers in different member states, such as France and Germany, "must be seen as extremely problematic as regards the development of a competitive Internal Market for electricity," according to the report.

"If the market concentration in power generation can-not be reduced to below the critical levels, even a perfect design and a perfect regulation of the third-party access to the networks will not be sufficient to establish and maintain a competitive market for electricity," the report concluded.

The complete study can be downloaded in English at:

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