OFT closed case: Completed acquisition of Enfield Energy Centre Limited by E.ON UK plc.
Affected market: Electricity generation
The OFT’s decision on reference under section 22 given on 24 August 2005. Full text of decision published on 12 September 2005.
E.ON UK plc (E.ON) is a vertically integrated subsidiary of E.ON AG, a German company. E.ON UK is active in the generation, distribution, trading and supply of electricity and in the shipping, trading and supply of gas. In 2004, E.ON UK's turnover was €8,490 million.
Enfield Energy Centre Limited (EECL) is the owner of a 392MW combined cycle gas turbine (CCGT) power station, commissioned in December 2002. The UK turnover of EECL was £111 million in the year ended December 2004.
On 1 April 2005, E.ON UK acquired a 24.9 per cent share in the holding company which owns the whole share capital of EECL, Infrastructure Alliance Limited (IAL) with the remaining 75.1 per cent acquired by Deutsche Bank. On 5 May 2005, Deutsche Bank exercised a put option selling its 75.1 per cent to E.ON, giving EON 100 percent of IAL shares.
The Administrative deadline expires on 24 August 2005 and the Statutory deadline expires on 5 September 2005.
As a result of this transaction E.ON and EECL have ceased to be distinct. The merger qualifies for investigation under the turnover test in section 23(1) of the Enterprise Act 2002, since the UK turnover of EECL was £111 million in the year ended December 2004. The OFT therefore believes that it is or may be the case that a relevant merger situation has been created.
The parties overlap in electricity generation.
Electricity can be generated using different fossil fuels. The output of power stations is essentially homogeneous. Electricity customers are generally indifferent (and unaware) of location of plant, type of fuel or plant ownership (although some suppliers offer green contracts to end-customers for electricity generated from renewable sources)(see [note 1]).
The narrowest possible frame of reference would be CCGT power stations. However, most energy companies consider it prudent to source their electricity from a balanced portfolio of differently fuelled generators. Nevertheless, there is a substantial degree of demand-side substitutability and constraints from other generators which makes it more likely that the product scope is all electricity generation. There is no need to conclude on this issue as the acquisition raises no competition concerns whichever frame of reference is adopted.
The parties submit that the relevant market is Great Britain (GB) because of the successful implementation of the British Electricity Trading and Transmission Arrangements (BETTA). BETTA is a scheme operating from 1 April 2005 to integrate trading arrangements in Scotland with the New Electricity Trading Arrangements (NETA) which has been in place since 1 April 2001 in England and Wales.
The OFT has no reason to disagree with the parties' view (see [note 2]). Ofgem agrees that the geographic scope is GB.
In GB generation of electricity, the parties will have capacity to supply 10,456 MW of power and will produce [30 -40] TWh annually. This represents a combined share of supply of approximately 13.6 percent (by capacity) and [5-15] percent (by output). After this acquisition, E.ON will remain as the second largest generator of electricity in GB. Two other electricity generators, Scottish and Southern Energy and RWE, are of similar size, whilst British Energy remains the largest electricity generator. Due to the negligible increment in share of supply arising from this transaction (around 0.5 percent in capacity and less than 1 percent in output), the OFT is of the view that this merger does not raise any competition concerns in this regard.
The merger results in a post-merger Herschman Herfindahl Index (HHI) figure of less than 1000 (delta 13) by capacity and output, signifying that the market is not concentrated. National Grid Company's (NGC) 2005 Seven Year Statement reports that there are nearly 140 generators located in GB, many of whom are small Independent Power Plants (IPPs).
Even considering a hypothetical narrower frame of reference limited to CCGT power plant, the merger does not raise competition concerns. Approximately half of GB electricity is sourced from generators powered by CCGT plants. E.ON submits that its CCGT capacity represents some 33 percent of its total generation capacity. In total figures, this represents some 3076MW CCGT of capacity. Other GB generators have similar or even higher CCGT capacity.
E.ON is a vertically integrated company with interests in electricity generation, distribution and supply as well as interests in gas shipping and supply. At the end of 2004, E.ON generated about 50 percent of its own power requirements, purchasing the remainder from other suppliers. E.ON does not consider that the acquisition of EECL will materially affect its portfolio or its ability (and incentives) to trade power.
No vertical concerns arise in this case. No third party raised substantive vertical concerns, although one third party did note that EECL was an independent generator so that its acquisition represented a loss of a wholesale player in the traded market.
THIRD PARTY VIEWS
No third parties responded to the Invitation to Comment issued by the OFT. Third parties contacted directly by OFT had no substantive concerns.
Ofgem received no comments from third parties. Furthermore, Ofgem had no competition concerns arising from this transaction.
The merger results in a minor increment to E.ON's share of supply in generation of electricity in GB and does not materially alter its position or the number of generation companies in GB. Furthermore, third parties and Ofgem had no substantive competition concerns.
Consequently, the OFT does not believe that it is or may be the case that the merger has resulted or may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 22(1) of the Act.
- Electricity suppliers are required (under the Renewable Obligations) to source at least a part of their electricity from renewable generators. They can however, offset this requirement through a buy-out clause where the electricity supplier pays a charge for the shortfall.
- Although under certain circumstances, issues may arise at local level, no such concerns are raised by this case given Enfield's location, its relatively small size and its low generation capacity which would not give it sufficient market power in situations of transmissions constraints.