Affected market: Electricity generation and procurement of gas
The OFT’s decision on reference under section 22 given on 6 January
2006. Full text published 20 February 2006.
Please note that square brackets indicate figures or text which have
been deleted at the request of the parties for reasons of commercial
RWE Npower plc (RWE) (see [Note 1]) is an energy group
active in electricity generation and supply, and supply of gas, to
customers in the UK. It is also engaged in the provision of engineering
services to third parties.
Great Yarmouth Power Limited (GYPL), a subsidiary of BP plc prior to
the acquisition, owns 100% of a 420 MW combined cycle gas turbine (CCGT)
power station at Great Yarmouth in Norfolk (GYPS). GYPL\s core activity
is the generation of electricity from gas.
On 17 November 2005, RWE completed the purchase of the entire issued
share capital of GYPL from BP for a total consideration of £155
million. GYPL has become a wholly-owned subsidiary of RWE.
The administrative deadline expires on 7 February 2006 and the statutory
deadline expires on 16 March 2006.
As a result of this transaction RWE and GYPL 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 GYPL was some £108 million in 2004. The OFT therefore believes that
it is or may be the case that a relevant merger situation has been
FRAME OF REFERENCE
The parties overlap in electricity generation and procurement of natural
Electricity can be generated using different fossil fuels and other
power sources such as nuclear, hydro or wind. The output of power
stations is essentially homogeneous. Electricity customers are generally
indifferent (and unaware) of location of plant, type of power source or
plant ownership, though most consider it prudent to source their
electricity from a balanced portfolio of differently fuelled generators.
Both parties have flexible generation capability, that is, they are able
to respond relatively quickly to requirements for additional generation
(see [Note 2]). Since competition concerns do not arise on any
reasonable frame of reference, it is not necessary to reach a definitive
conclusion on the product frame of reference.
Procurement of natural gas
RWE procures gas for trading, electricity generation and supply. GYPL
procures gas only to fuel its power station. The acquisition raises no
competition concerns irrespective of how the procurement sector is
As a result of the implementation of the British Electricity Trading and
Transmission Arrangements (BETTA) (see [Note 3]), Ofgem’s view
is that for the purpose of assessing this merger, the geographic scope
of electricity generation (see [Note 4]) and of the procurement
of gas can be considered as Great Britain (GB). The OFT has seen no
evidence that would suggest a different view is appropriate.
In GB, the parties will have capacity to supply 9,658 MW (see [Note 5])
of power and will produce [30-40] TWh annually (see [Note 6]). This
represents a combined share of supply of electricity
generation in GB of approximately [5-15] per cent (by capacity) and
[5-15] per cent (by output) with increments of [less than 1 per
cent][ ]. Two other electricity generators, Scottish and Southern
Energy and E.ON UK, are of similar size to the merged entity, whilst
British Energy remains the largest electricity generator. The merger
results in a post-merger Herschman Herfindahl Index (HHI) figure of less
than 1000 (delta 12) by capacity and output, signifying that the sector
is not concentrated. This is confirmed by the National Grid Company's
(NGC) 2005 Seven Year Statement which reports that there are nearly 140
generators located in GB, many of whom are small Independent Power
Even considering a hypothetical narrower frame of reference limited to
wholesale supply of flexible generation, the merger does not raise
competition concerns. The combined share of supply in GB will be
[10-20] per cent (in capacity) and [10-20] per cent (in output)
with increments of 0.7 per cent and 1 per cent respectively. The HHI
would be 1089 (delta 21) by capacity and 929 (delta 23) by output,
signifying that even on this narrower basis, the segment is not
Procurement of natural gas
In natural gas procurement in GB the combined share will be [5-15] per
cent with a minimal increment of 0.5 per cent. This is a minor increment
to RWE’s share in procurement of gas and does not materially alter
RWE’s position in the procurement of gas in GB, and therefore it does
not give rise to competition concerns in the procurement of natural gas
RWE is a vertically integrated energy company with interests in
electricity generation, distribution (see [Note 7]) and supply
as well as interests in gas shipping and supply. RWE’s overall traded
volumes are many times greater than those it purchases from and sells to
its generation arm. No vertical concerns arise in this case. The
additional GYPL generation volume will not change RWE’s ability to
trade power or its incentives to do so. Although several third parties
expressed concerns about the incremental move toward greater vertical
integration in the electricity generation and supply industry generally,
none considered that the acquisition of GYPL will materially affect
RWE’s portfolio or its ability (and incentives) to trade power.
THIRD PARTY VIEWS
No third parties responded to the Invitation to Comment issued by the
OFT. Third parties contacted by the OFT raised neither horizontal nor
vertical merger-related competition 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 RWE’s share of supply in
generation of electricity and does not materially alter its
position. These conclusions would apply even if a narrower frame of
reference of supply of flexible generation in GB were considered. The
same conclusions apply to gas procurement. 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.
- RWE has stated that RWE Npower is a part of the RWE Group (RWE). It is responsible for RWE’s UK energy business. RWE also includes RWE Trading GmbH which is engaged in commodity trading. For the purpose of this assessment RWE has been considered as a single entity.
- The ability (or ‘flexibility’) of a plant to respond to increased prices by increasing output in the short term varies according to its input: nuclear power is virtually fixed, wind power is unpredictable while gas fired plant is the most flexible of all. For the purpose of this assessment, it can be considered that plants fuelled with coal, gas and oil are flexible.
- 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.
- Although under certain circumstances, issues may arise at local level, no such concerns are raised by this case given GYPS’ location, relatively small size, and its low generation capacity which would not give it sufficient market power in situations of transmission constraints.
- Source: RWE.
- Source: RWE.
- RWE has pointed out that it is not active in electricity distribution in the UK.