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
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
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
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