concentration.This article aims, therefore,to give some qualitative and quantitative results as to the potential effects of increasing international transmission capacity on market power in Belgium.We set the scene by describing several of these studies that focused on the existence of market power in the Belgian electricity market and possible remedies(Section II).This section, therefore,does not necessarily
reflect our own opinion. Consequently we briefly describe the recent relevant changes in the Belgian market,which occurred after these studies have been performed(Section III).Finally we present our own analysis that revisits some of the concerns raised in previous studies and that discusses the effects of one possible market power remedy, i.e.increasing international transmission capacity(Section IV).
II.Previous Studies on Market Power in the Belgian Electricity Market
A.Competition in the Belgian electricity market
In2003,the Belgian federal regulator CREG3commissioned London Economics to undertake a
study on the competitiveness of
the Belgian electricity market in a
European context.Later,London
Economics was also asked by the
European Union’s DG
Competition to study six
European electricity markets,
among them the Belgian market,
in the context of the sectoral
inquiry into the European
electricity and gas markets.The
main conclusion of London
Economics(2004,2007)is that
market dominance does
constitute a serious problem in
the Belgian market,while there is
no evidence that market power
has been exercised.However,
London Economics also argues
that the threat that the abuse of
market power might occur in
itself might already be sufficient
to deter entry of newfirms into
the market,since thesefirms are
uncertain about the behavior of
the dominant company when
entry would occur.4
T he main impediment to
competition,according to
London Economics,is therefore
the dominance of Electrabel,a
company at present owned by
GDF Suez and at the time of the
study highly vertically integrated.
The London Economics studies
focus on the market share of
Electrabel–at roughly80–90
percent in electricity generation–
which remains a dominant player
in the retail market,despite the
entry of new companies(CREG,
2007,at42–46).Accordingly,
standard measures of
concentration,such as the
Herfindahl–Hirshmann Index5and
the concentration ratio CR(1)6,are
high(Table1)compared to most
of other European electricity
markets.An important remark
has to be made concerning the use
of these indicators for Germany.
The German market is divided
into four regions,each dominated
by a vertically integrated
company.Calculating the HHI for
such a single region might even
reach the monopolistic value of
10,000.When considering
Germany as a whole,however,
the rather low values presented in
Table1are obtained.
F urthermore,it is also
considered as problematic
that Electrabel is influential at the
level of both electricity
transmission and distribution.
B.Suggested remedies for
market power
In light of the high
concentration ratio in the Belgian
electricity market,several
remedies have been proposed and
partly implemented.These
remedies tackle four types of
problems,mainly directly or Table1:Concentration Measures for Selected European Electricity Markets(including installed generation capacity,pump storage and seasonal hydro capacity).
Belgium France Germany The Netherlands United Kingdom HHI84318633127521031405
CR(1)91.47%92.80%22.43%28.88%24.88% Source:VGE(2006).indirectly related to the dominance of Electrabel:the vertically integrated structure of Electrabel,its excessive dominance in the generation market,the lack of transparency and information,and the limited geographical size of the Belgian market.Unfortunately,as will become clear in the discussion below,there is generally no agreement on the best way to stimulate competition.
A ccording to London
Economics(2004),the main impediment to workable competition is‘‘Electrabel’s excessive dominance along the value chain.’’One of the suggestions is,therefore,to proceed to an ownership unbundling of the vertically integrated structure(generation, retail,distribution,and transmission),concerning direct as well as indirect participation. According to the Belgian federal regulator(CREG,2006b), however,separating generation and retail activities is not necessarily the best solution,since this might render investment in generation capacity more risky and tends,hence,to increase electricity prices.As a matter of fact,investing in electricity generation requires large sunk investments and vertical integration reduces the risk associated with these investments as it guarantees a minimum customer base.In addition, investing in generation capacity might have a significant effect on prices in small markets like Belgium,and this renders potential entrants even more
reluctant.The CREG(2006b,at43)
therefore comes out in favor of
vertical integration(between
generation and retail)and of
harmonizing the way a company
can integrate vertically.In
particular,the preferential
relation between a generator and
a retailer of the same company
should be broken.In this respect,
CREG suggests studying the
possibility of organizing
obligatory auctions on the
wholesale market.
London Economics also
suggests that the most direct way
to reduce Electrabel’s dominant
position in the generation market
would be to split the company
into several parts.Along with
some other measures,especially
the creation of a market power
mitigation committee for
monitoring and detecting market
power abuse,seven to nine
different companies in total
(including the main competitors
EdF and SPE)would be necessary
to have a sufficiently competitive
level.An alternative way of
implementing this measure,if
quasi impossible legally,7would
be to significantly increase the
amount of virtual power plants
(VPPs,an amount of9,507MW,is
estimated to be equivalent to
splitting Electrabel into four
parts).8Frontier Economics(2006)
also points in the same direction
as it argues that a contract cover
(whether VPPs or other long-term
contracts)of about8,000MW
would be optimal.9The CREG
(2006b,pp.48–50),in contrast,is
not in favor of these measures
because,in a European context,
splitting up a medium-sized
company is not necessarily
welfare-increasing,if the shares
are bought by large European
companies(like E.On,EdF or
RWE).Furthermore,it would be
better to enhance the current VPP
system(with a total capacity of
1,200MW)and,if necessary,to
regulate prices until a sufficient
level of competition is reached.
Finally,Electrabel’s dominant
position in electricity generation
might also be strengthened by the
fact that production sites in
Belgium are scarce and that a
large proportion may be owned by
Electrabel.Another remedy
would thus be to oblige Electrabel
to sell unused sites or to tax these
sites.However,the effect of this
measure has not been quantified
yet and there exists no clear
information on potential
production sites(Frontier
Economics,2006).10
Furthermore,according to
London Economics,a lack of
transparency and information
hampers the entry of newfirms.
‘‘A recurrent theme throughout Unfortunately,
there is
generally no
agreement on
the best way to
stimulate
competition.the consultations was the opacity of the Belgian electricity market and lack of access by new entrants to basic information about production,prices,end-user
profiles,etc.By virtue of its dominance in generation,supply and trading,vertical integration, and presence in all electricity markets,and its close relationship in ELIA11and many DSOs,12 Electrabel has access to vastly superior information about all aspects of the Belgian electricity sector.It is also important to note that in many cases,it may not be a lack of information that is at issue, but the fact that Electrabel may have access to better information, or has the information in advance of potential competitors.’’(London Economics,2004,at187). Possible remedies would,for instance,include breaking the link between Elia and Electrabel and the divestiture of Electrabel’s technical activities from the mixed intercommunales(London Economics,2004,at220–221). London Economics(2004) offers as another possible remedy an increase in the relevant geographical market beyond Belgian borders by increasing international transmission capacity.However,it also argues that there is a cost(besides the investment cost)since prices tend to be equalized with increasing transmission capacity.This can imply that prices in the low-price country increase due to exports to the high-price country. Transmission capacity should also be allocated using an auction system.T he aim of this article is
precisely to provide insight
into the effects on market power
of an increased electricity
transmission capacity in Belgium
with its neighboring countries.
III.Recent
Developments in the
Belgian Electricity
Market
Note that since some of the
previously mentioned reports
have been published,several
measures expected to improve
competitiveness have been taken.
We refer to the creation of the
Belgian power exchange Belpex in
2006,the market coupling of the
Belgian,Dutch(APX),and French
(Powernext)wholesale electricity
markets at the same moment
(Trilateral Market Coupling,or
TLC),an increase in
interconnection capacity with
France(the Avelgem-Avelin line),
replacing long-term contracts for
cross-border capacity by explicit
auctioning,the so-called‘‘pax
electrica I’’concluded between
Suez and the Belgian federal
government in2005in light of the
takeover of Electrabel by Suez,13
the reduction of Electrabel’s share
in Elia(fromto24percent;Elia,
2007)14or thefirst auctions of
VPPs in2004and2005with a total
capacity of1,200MW.Not
without consequences for the
Belgian electricity(and gas)
market is the merger between
Suez and Gaz de France,notified
to and accepted by DG
Competition in2006and realized
in2008.15
IV.Assessing the
Competitive Effects of an
Increased Transmission
Capacity
Previous studies have
suggested that transmission
capacity may be an option to
reduce market power in the
Belgian electricity market.One
should also note that the current
transmission capacity of Belgium
(Table2),relative to the demand
of electricity with a peak of about
14GW,is among the highest in
Europe.
T he remainder of this article is
structured as follows:We
first have a look at economic
theory and sketch the competitive
effects of a transmission line
between regional electricity
markets.We present,
subsequently,the methodology
and the results of London
Economics(2007)regarding the
existing transmission capacity
Table2:Transmission Capacity between Belgium and Its Neighboring Countries.
France Germany Netherlands United Kingdom Total Belgium3200MW0MW2400MW0MW5600MW
Based on net transfer capacity of the interconnectors towards Belgium.Values are winter2007–2008values,taken from ETSO(2008).
between
Belgium,France,and the Netherlands.This is done by including the transmission
capacity into three measures of concentration:the Herfindahl–Hirschmann Index (HHI),the Pivotal Supplier Index (PSI)and the Residual Supplier Index (RSI).While the HHI is applied in all markets subject to a potential market power problem 16and only considers the supply structure,the PSI and the RSI are specific to the electricity market and also take the demand for electricity into account.The following
section aims to give a rough idea of the competitive effects of
additional transmission capacity –according to the indexes mentioned before.Finally,we shortly describe the current
working of the Trilateral Market Coupling between Belpex,APX,and Powernext and question whether the relevant market
when challenging the position of Electrabel is national or broader.
W
e are aware o
f the fact that there exists a wide range
of market power detection methods and the competitive effects of additional transmission capacity could be assessed more in-depth than we do in this article.Twomey et al.(2005)distinguish between four categories:
structural and behavioral indices,simulation models,and
transmission monitoring.We only focus on structural indices (HHI,PSI,and RSI)for different reasons:several methods require detailed data which are not publicly
available,others are not suitable for assessing the effects of
additional transmission capacity,and,finally,we want to apply a similar approach as in London Economics (2007)that focuses only on HHI,PSI,and RSI.A.Competitive effects of transmission capacity in theory
Previous to the liberalization of the electricity market,the role of the transmission network was essentially to ensure stability of the system.Electricity was
transported between regions to compensate disequilibria between regional demand and supply.In a liberalized market with profit-maximizing firms,this is only part of the story since firms use the transmission lines to arbitrage on regional price differences.For this reason,however,generators may also have an incentive to congest transmission lines with limited capacity in order to exercise market power on their regional demand.Therefore,the competitive effects of a transmission line between
otherwise separated markets are not straightforward.Fig.1shows the effect of transmission capacity on regional electricity demand D .
Without any transmission
capacity,producers in each market face a demand D .With a
transmission capacity k ,regional demand depends on regional price differences.If market 1is the high-price market (resp.low-price
market),producers in this market face demand D Àk =D Àk (resp.D +k =D +k )since producers of region 2(resp.region 1)sell part of their output to this high-price region.A monopolist in market 1,for instance,can set a higher price than in market 2,congest in this way the transmission line and exercise his monopoly power on the lower residual demand D Àk .However,he could also set a lower price than in the other market while facing an increased demand D +k .
Borenstein et al.(2000)give some interesting theoretical insights into the competitive effects of a transmission line connecting two regional markets where distinct regional
monopolists are active.17For a sufficiently small transmission capacity,they show that no pure-strategy Nash equilibrium 18exists in a symmetric world with identical demand and supply conditions.19Even a tiny
Fig.1:Two Regional Markets that are Linked by a Transmission Capacity k
flowing on the transmission line (as regional prices are equal). Unfortunately,this symmetric equilibrium is not stable since each monopolist has an incentive to increase prices unilaterally and, hence,to congest the line in order to exercise monopoly power on the residual demand(regional demand minus imports which are equal to the capacity of the transmission line).However,one can show that such an asymmetric equilibrium is not stable either. Therefore,for small transmission capacities,only mixed-strategy equilibria exist in whichfirms choose different strategies (quantities)with a positive probability.20In this context, Borenstein et al.(2000,p.306)also show‘‘...that small increases in line capacities can yield expected output increases much larger than the added line capacity.’’Le´autier (2001)explicitly separates the effect of an increase of transmission capacity into a strategic effect(increase of competition reduces generators’profits and increases output)and a substitution effect(expensive generation can be substituted by cheap generation).He argues that in the past,regulators sometimes failed to recognize the strategic value of a network and the latter was,therefore,not expanded
sufficiently.
F or a sufficiently large
transmission capacity,the only possible pure-strategy
equilibrium is the unconstrained
Cournot duopoly equilibrium
and adding transmission capacity
is futile.
T he main conclusions21we
have to keep in mind are
therefore that unused
transmission capacity is still useful
as it provides a threat to anti-
competitive behavior(‘‘...if a
connecting line is of sufficient
capacity to reduce market power
as much as possible,it may appear
to be overbuilt and underused.’’
Borenstein et al.,2000,at297);
small increases of transmission
capacities can yield large social
payoffs in terms of reduced
expected prices,especially if the
initial capacity is small and the
relevant geographical market can
be regional(the two markets are
separated)or interregional(the
two markets are merged)
depending on the transmission
capacity and,therefore,on the
strategies chosen by the
monopolists.The third conclusion
is relevant especially for
competition and regulation
authorities which have to assess
the competitive structure of the
electricity market.
B.Transmission capacity and
standard concentration
measures
The previous discussion shows
that extending interregional
transmission capacity can lower
market power in electricity
markets.In practice,however,
decision-makers have to choose
the frontier where the capacity
should be increased and by how
much.The lesson that we can draw
for the moment is that
transmission capacity should be
increased between those regions
(1)where transmission capacity is
low or even inexistent,(2)that
have different demand patterns
(large substitution effect)and(3)
where competition between
generators is expected to increase
significantly(strong strategic
effect).Furthermore,one should
not base the investment decision
on historical congestion patterns
(before liberalization)since lines
are expected to be congested more
often in liberalized markets due to
strategic actions(Borenstein et al.,
2000).An additional problem is
that real networks are more
complex than two nodes
connected by a line.22This renders
interactions between the
transmission network and the
generators’strategic decisions
even more opaque(Cardell et al.,
1997).
Unfortunately,we are not able,
within the scope of this article,to
perform a complete analysis of
the competitive effects on
the
entirely to the largest company the market as measured by available installed capacity.This scenario thus represents the lar-gest increase in measured con-centration possible due to the allocation of the interconnector.’’The concentration ratios become
CRð1Þ¼
AIC1þIC P N
1
AIC iþIC
and
HHI¼
X N
1AIC iþzÂIC P N
1
AIC iþIC
!2
where z is a dummy taking
the value1for i=1and0 otherwise.
These two scenarios give thus the lower and the upper bound HHI values when transmission
T
he figures clearly indicate that including existent transmission capacity lowers concentration measures,although does not change the overall picture of a highly concentrated Belgian electricity market.In the
most competitive scenario
(‘‘Atomistic Competition’’in Table 3),the largest company in the market (Electrabel)keeps a share of 77percent and the HHI remains largely above values that AC 1þIC c C 31
P N 1C 3i
!!À
X
B),we assume that the increase of transmission capacity
attracts new firms.In this case,we assume that the additional transmission is used by a single new firm.While it matters in scenario A on which border the capacity is increased,it has no importance for computing the HHI in scenario B.
Furthermore,the HHI is the same (in scenario B)whether the new entrant is located in the Belgian or in a foreign market.Finally,the way we include the transmission capacity into the HHI assumes that electricity flows from the neighboring countries into the Belgian
market.This is an extreme case since flows depend on regional price differences and electricity
would only flow to Belgium if the spot market price was higher in Belgium than in all other countries.In this sense,we evaluate the maximum effect that transmission capacity might have on concentration and the two scenarios differ in the user of this capacity.Results are
presented in Table 5.For the current situation (0additional MW),we allocated the existing transmission capacity in both scenarios A and B to the
foreign companies according to their market shares in their market.
F
or capacity increases
between 500and 4,000MW,the results show that
concentration remains fairly high.Except for France,the
concentration level of the Belgian electricity (generation)market stays higher than the current level in all other neighboring countries,even in the most competitive ‘‘Atomistic Competition’’
scenario (see Table 1).Although there are no significant
Table 4:RSI and PSI with Interconnector Capacity (years 2003–2005,for largest company).
No IC
IC Domestic IC Foreign Scenario
RSI PSI RSI PSI RSI PSI Average and %hours PSI =10.55100%
0.53100%
0.7997.20%
Max 0.810.82 1.16Min
0.35
0.33
0.53
Source:London Economics (2007,p.126–140).
Table 3:CR(1)and HHI with Interconnector Capacity (years 2003–2005).
No IC
Atomistic Competition Largest Company Apportionment Scenario CR (1)HHI CR (1)HHI CR (1)HHI Average 90.70%830772.60%533292.50%8617Max 97.50%950877.50%603096%9236Mm
87.20%
7761
67.90%
4678
90.50%
8266
Source:London Economics (2007,p.118).
Table 5:HHI and Additional Transmission Capacity (based on installed capacity and Net Transfer Capacity).
Additional Transmission Capacity
0MW
500MW 1000MW 1500MW 2000MW 2500MW 3000MW 3500MW 4000MW Atomistic competition 4531333781347332012959274425522379Largest company apportionment 8823
8451
8118
7820
7550
7305
7081
6877
6690
Scenario A B-F 476346094472435242454152407039983936B-G 476345454343415539813819366735263394B-NL 47634557436140253874373336023480B-UK 476345454343415639823820366935293397Scenario B
4763
4550
4361
4194
4047
3917
3804
3704
3617
differences
between scenario A and B and the border on which capacity is increased,it seems that it would be most beneficial to build transmission capacity connecting Belgium with Germany and the United Kingdom.These are also the least concentrated markets according to the HHI and CR(1)indexes (Table 1).Note that there is currently no transmission capacity connected to these countries.26However,the German market is dominated by four vertically integrated companies (EnBW,E.ON,RWE,and Vattenfall)27and it is unlikely that a new
transmission line would be used by these companies according to their national market shares.The strategic effect is thus likely to be lower,as shown earlier.Additionally,Germany’s
electricity production is mainly coal-based and production in the United Kingdom is coal-and gas-based.These technologies have a higher production cost than
nuclear power,which next to gas is the main technology used in Belgium (see Table 6).
Furthermore,electricity demand patterns (Fig.2)are similar such that the substitution effect is
expected to be low.Therefore,our
results should be interpreted with care.
F
inally,our approach shows that it matters to include transmission capacity into
concentration measures like the HHI.For the current situation (0MW additional capacity),the HHI is likely to drop far below the current level of 8,431(Table 1).Concerning the PSI and the RSI,we evaluate the competitive effect
of increased transmission
capacity by adding it to the total regional supply capacity.As with the HHI,this approach assumes that electricity flows only into Belgium.Therefore,the
competitive effect of transmission capacity we measure is the largest possible according to the PSI and RSI.Note that for the calculations,it has no importance to know on which border the capacity is increased.The indices are
computed for the largest Belgian company (Electrabel)whose
absolute size does not change by adding additional capacity.The results are presented in the figures below.
Fig.3indicates that the largest Belgian electricity company (Electrabel)is always pivotal at current levels of transmission
Table 6:Installed Capacity by Technology (note that the presence of pump storag e in this table has to be interpreted with care).
%B FR G NL UK Coal 158462733Gas 372175830Nuclear 306624314Pump storage 1057–1Other 81961222Total
100
100
100
100
100
Source:London Economics (2007).
Fig.3:Effect of Additional Transmission Capacity on the Pivotal Supplier Index (PSI)
Fig.2:Electricity Demand Profiles in Belgium and Its Neighboring Countries
capacity (see
also Table 4).For small capacity increases,the
marginal competitive effect of the transmission capacity on the dominant position of Electrabel seems to be increasing (up to 2,000MW additional capacity).Figs.4and 5also show that the dominant position of Electrabel is sensibly weakened for further investments in transmission capacity.Fig.4indicates that Electrabel has less potential market power during summer and in the end of a year (the demand for electricity is lower).
T
aking the current
transmission capacity into account,Electrabel is,on average,responsible for 30percent of the total demand for electricity in Belgium.On average,Electrabel would not be pivotal anymore for
an additional capacity of around 3,100MW (Fig.5).
In summary:According to the structural concentration
indicators,it seems that the most efficient way to increase
competition through an increase of transmission capacity would be to increase capacity with
neighboring countries with which transmission capacity is low or non-existent,i.e.Great Britain and Germany.This result should,however,be interpreted with care since the German electricity market is fragmented into four regions dominated each by one player and production costs are expected to be higher in these countries.Substantial capacity increases of about 3,100MW would be necessary to render Electrabel,on average,not pivotal
anymore.For small increases up to 2,000MW,the marginal competitive effect seems to be increasing.These findings confirm the theoretical
conclusions of Section IV-A .C.An application:the trilateral market coupling 1.Expectations.The term ‘‘market coupling’’suggests that it is about coupling
markets that were previously not coupled.From the start of market reforms in Europe,cross-border trade was however possible,but it
required traders to buy border transmission rights from the involved TSOs.A Belgian market party that acquired such a transmission right could for instance introduce an order on the Dutch power exchange.Instead of auctioning these rights in a separate market,as done on many borders,they can also be used by the power exchanges to optimize the
clearing of their auctions,which is referred to as ‘‘market coupling.’’Market coupling therefore means that orders from different
locations are handled jointly and settled at a single price to the extent that the exchanges have enough transmission rights available.
I
n other words,market coupling increases the
liquidity of the involved power exchanges because an order introduced in France can,for instance,be matched with an order introduced in the
Fig.5:The Average Effect of Additional Transmission Capacity on the Residual Supplier Index (RSI)
Fig.4:The Effect of Additional Transmission Capacity on the Residual Supplier Index (RSI),Presented as Daily Averaged Values
Netherlands.This is important for exchanges that are voluntary fine-tuning markets,which means that their liquidity is by definition limited,especially if they operate in concentrated markets with vertical integration between generation and retail/supply,which is the case in most
European countries.The so-called Trilateral Market Coupling (TLC)between the Belgian (Belpex),the Dutch (APX),and the French (Powernext)electricity spot markets is one example.28
P
rior to the realization of the TLC in 2006,Hobbs et al.(2005)analyzed the potential effects of such a market coupling for the Dutch and the Belgian electricity markets (note that at that time,Belpex did not exist yet).Their main conclusions were that the proposed market coupling should lead to lower overall generation costs since the two markets are complementary (asymmetric load profiles and different generation mixes)and it was expected to increase competition especially in the Belgian market.29
However,Hobbs et al.(2005)also identified two caveats related to the strategic behavior of Electrabel (before and after the realization of the market coupling)and to distributional effects.As we have seen above,the Belgian market is largely dominated by Electrabel.Hobbs et al.(2005)argued that due to public pressure,Electrabel could be pushed to set prices closer to competitive levels.With market coupling,it would set prices (or
quantities)according to the Cournot assumption since it
would feel less public pressure,as the market would be less
concentrated.30In this worst case,market coupling would actually lead to an overall welfare loss since prices would increase in both countries.Additionally,even if overall welfare increases (if
Electrabel is playing Cournot also before coupling),Dutch
consumers would actually lose from the market coupling since it would be in Dutch producers’interest to sell in Belgium (which leads to a decrease of the electricity price in Belgium and to an increase of prices in the Netherlands).2.Results.The TLC is operating since November 2006.This allows us to take a look at the historic data of the TLC for the year 2007(hourly day-ahead electricity prices of 2007of Belpex,Powernext,and APX)and to investigate
whether prices moved closer to each other.Fig.6presents the difference in price between Belgium and both France and the Netherlands,for each hour of the year.
Table 7gives an overview of the electricity price differentials in the TLC area.P i is the electricity price in country i =Belgium (B),France (FR)or Netherlands (NL).We notice that the case of three different prices (first column)occurs only rarely,namely 2.8percent of the time.Furthermore,during hours of congestion on
Fig.6:The Wholesale Electricity Price Difference of Belgium with its Neighboring Countries (hourly prices,year 2007;a positive difference indicates a higher price in Belgium)
Table 7:Price Differences within the TLC Region (hourly data,year 2007).
B
B +FR or B +NL B +FR +NL P B >P FR >P NL 0.02%P NL >P B =P FR 19.75%P B =P FR =P NL
59.94%
P B >P NL >P FR 0.00%P NL
P NL >P B 0.33%P FR >P B =P NL 5.29%P FR >P B >P NL 0.61%P FR
6.78%
P NL >P B >P FR 0.76%P NL >P FR >P B 1.10%Total
2.82%
Total
37.24%
Total
59.94%
both borders,prices do not seem to be excessive in Belgium(Fig.5). In37.2percent of the time,either France or the Netherlands has the same price as in Belgium.In the majority of time(about60 percent),prices are equal in all countries.
H aving equal prices among
at least two electricity wholesale markets means that the concerned transmission lines are not congested and that generation companies are,therefore, competing over the combined market(two or even three countries).Recall from Section IV-A that unconstrained lines may still be useful,as they constitute a competitive threat.Thefindings above suggest thus that in most of the hours in2007,Electrabel was competing over a market that encompassed at least two markets.This leads us to conclude that the competitive position of Electrabel should probably be assessed by relying on a broader relevant market than just the Belgian market.Likewise,we doubt whether an increase of the transmission capacity with France or the Netherlands would change the competitive situation a lot. Other alternatives(increasing capacity with Germany or Great Britain,as mentioned in the discussion on the HHI)could be more effective in promoting competition.
V.Conclusions
This article investigated whether increasing electricity transmission capacity would be
an option to decrease the
dominant position of Belgium’s
largest electricity generation
company Electrabel.According to
standard measures of
concentration,the Belgian
electricity market is indeed
highly concentrated and
there is,accordingly,a problem of
potential market power abuse–
although an abuse has never been
proven.
T heoretically,a transmission
line connecting regional
electricity markets can be a
powerful instrument to foster
competition.We concluded
that increasing transmission
capacity is expected to be
most efficient where transmission
capacity is small or inexistent,
when regions have heterogeneous
demand profiles and generation
mixes,and when the other
region has a higher level of
competition.
London Economics(2007)
concluded that existing
transmission capacity does not
change the overall conclusion that
the Belgian market is highly
concentrated.According to a
similar methodology as used by
London Economics and based on
concentration indices,we can
confirm that this also holds for
additional transmission capacity,
if Belgium is considered to be the
relevant market.
Finally,we looked at the
Trilateral Market Coupling
between the Belgian,Dutch,and
French electricity markets.It
shows that,besides a physical
increase of capacity,improving
the use of existing capacity by
allocating it in a more efficient
way also enhances the
competitive effects of a
transmission line.In a majority of
the hours in2007,prices in
Belgium were equal to Dutch
and/or French prices.This led us
to conclude that a broader market
than the national one should be
considered when assessing the
competitive position of Electrabel.
Furthermore,one should question
whether increasing capacity
towards France or the
Netherlands will lead to
significantly more competition in
Belgium,and whether other
options might be more effective
(Germany,Great Britain).
This article is not intended to
give a precise idea of whether and
where transmission capacity
should be increased.Instead,our
aim was to give some critical
insights,both theoretically and
practically,into the problem.One
should not forget that there are
other alternatives that may be
more effective in spurring
competition,e.g.,favoring entry
into a given
market.References Mark
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Judith B.Cardell,Carrie Cullen Hitt and William W.Hogan,Market Power and Strategic Interaction in Electricity Networks,Resource Energy Econ., 1997,19at109–137.
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COMP/M.4180–Gaz de France/Suez.
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the Adverse Effects of Market Power,Final
report prepared for CREG,March.
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Etabli a`l’Occasion de l’Emission et de
l’Admission des Actions GDF Suez
Re´sultant de la Fusion par Absorption
de Suez par Gaz de France,Presented
at general assembly,July.
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David Newbery,Allocating Transmission
to Mitigate Market Power in Electricity
Networks,RAND J.Econ.,2004,35(4)
at691–709.
Benjamin F.Hobbs,Fieke A.M.Rijkers
and Maroeska G.Boots,The More
Cooperation,the More Competition?A
Cournot Analysis of the Benefits of
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2005,26(4).
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Arbitrage in Energy Markets:Competing
in the Incumbent’s Shadow,K.U.Leuven,
CES Discussion Paper Series07.30,
Leuven,Belgium.
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Constraints and Imperfect Markets for
Power,J.Reg.Econ.,2001,19(1)at
27–54.
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Functioning of the Electricity Market in
Belgium in a European Perspective,Final
report to CREG,Oct.
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Performance of Six European Wholesale
Electricity Markets in2003,2004and
2005,Presented to DG Comp,Feb.
Leonardo Meeus and Ronnie Belmans,
2008,Electricity Market Integration in
Europe,Revue E tijdschrift–nr.1,
March.
Karsten Neuhoff and David Newbery,
Evolution of Electricity Markets:Does
Sequence Matter?Util.Policy,2005,
13at163–173.
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Network Industries,CESifo Working
Paper No.1132.
Steven Stoft,Power System Economics:
Designing Markets for Electricity,2002.
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Neuhoff and David Newbery,2005,A
Review of the Monitoring of Market
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Congested Transmission Systems,
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This is important for exchanges that are voluntary fine-tuning markets.ciency,University of California,CSEM Working Paper150.
Endnotes:
1.‘‘Liberalization’’is not to be confused with‘‘privatization.’’
‘‘Privatization is the transfer of ownership and control by the state to private owners’’(Newbery,2004,at2).
A market or industry is liberalized when itsfirms are exposed to competition.The objective of competition is to achieve allocative
efficiency(the market price equals the marginal production cost)through market forces.Hence,one can say that privatization of companies is possible without liberalizing the market in which these companies operate,while liberalization normally requires privatization.However,allocative
efficiency in a market can also be achieved by regulation,i.e.the conduct of thefirms is limited by a certain number of rules.Network industries(like the grid for transporting and distributing electricity or the railway system),for instance,cannot be exposed to competition due to economies of scale. Therefore,these networks should either be regulated private companies or remain state-owned.For a more detailed discussion on the relative benefits of regulation and liberalization,see Armstrong and Sappington(2006).
2.Directive96/92/EC of the European Parliament and of the Council of19of December1996concerning common rules for the internal market in electricity,OJ 30.01.1997L027.
3.Commission de Re´gulation de
l’Electricite´et du Gaz/Commissie voor de Regulering van de Elektriciteit en het Gas. Note that the CREG is the federal regulator.Besides the federal regulator,each of the three Regions also has its own regulator,namely the VREG(Flanders),the CWaPE (Wallonia),and the BRUGEL (Brussels).
4.According to London Economics (2004,at113–117),there is some indication that a‘‘margin squeeze’’may have occurred in the Belgian electricity market.A margin squeeze
occurs if a vertically integrated
company(Electrabel)supplies an
essential input(electricity)to a
downstream market(the retail
market)and if this company increases
the wholesale price of the input to
reduce margins in the retail market.
This strategy shifts profit from the
retail market to the wholesale market
and may deter new entry in the retail
market.
5.The Herfindahl–Hirshmann index
(HHI)is defined as follows:
HHI¼
P N
i¼1
s2i,where s i is the market
share offirm i and N is the number of
firms in this market.It measures the
degree of concentration in a given
market and indicates,therefore,
whether market power is likely
to occur.The maximum value of the
HHI is thus equal to10,000
(monopoly).
6.The concentration ratio CR(m)gives
the sum of the market shares of the m
largest companies in a market.
7.See also the discussion in CREG
(2006b),at57–59.
8.VPPs are contracts in which the
owner of a generation plant sells the
right,and not the obligation,to use
part of his generation capacity to other
market participants,who have to pay
the virtual production cost.Willems
(2006,at5–6)distinguishes between
two types of VPPs:financial and
physical VPPs.Afinancial VPP hedges
against price increases and the buyer
does not intervene actively in the spot
market by selling electricity.In a
physical VPP,however,the buyer has
the option for physical delivery of
electricity and can resell it on the spot
market.He therefore plays an active
role in this market.For this reason,
Willems(2006)argues that physical
VPPs imply more competitive
outcomes thanfinancial VPPs,for a
given contract level.However,he also
shows thatfirms are less inclined to
offer this type of contracts such that it
is not clear cut to know which type
yields higher welfare.
9.Electricity customers,like retail
companies or largefirms,either have
to rely on the spot market(or the day-
ahead market)or on long-term
contracts to purchase electricity.The
contract cover of a generation
company indicates the share of
electricity demand which is satisfied
by contracts.Since prices arefixed by
contracts,the generation company has
fewer incentives to raise prices in the
wholesale market.
10.‘‘The CREG has indicated that the
availability of suitable sites for the
construction of new generation is a
potential concern in Belgium.In
particular,the CREG has indicated
that Electrabel may own a large
proportion of such sites,including the
most attractive sites for new
build...we have been unable to
gather data either to support or refute
this assertion’’(Frontier Economics,
2006,at53).Furthermore,we read:
‘‘...there is reason to suppose
that Electrabel might have both a
number of relevant sites and also
facesfinancial incentives to retain
those sites even if it does not intend to
build on them in the foreseeable
future’’(Frontier Economics,2006,
at54).
11.ELIA is the Belgian transmission
system operator.
12.Distribution system operators.
13.Suez committed to reduce the
share of Electrabel in Elia to24
percent,to sell unused production
sites(1,500MW)and to offer500MW
on Belpex(CREG,2006a,at28).
14.Note that Electrabel also has a
share of30to49percent in most of the
regional network operators(CREG,
2007,at
19).15.The merger has been declared compatible with the common market subject to the compliance with commitments taken by the parties.A commitment with importance for the Belgian electricity market is the divestiture of Gaz de France’s holding in SPE,which is the main competitor of Electrabel(European Commission,2006,at243).The French State holds a share of35.7 percent of GDF Suez,which gives it the right to block certain decisions which are against French interests. Additionally,the new group took commitments towards the Belgian State that should not jeopardize the competitiveness of the Belgian electricity market.These commitments are also known under the term‘‘pax electrica II’’(Gez de France Suez,2008, at2and65).
16.See,for instance,the merger cases of EU DG Competition:http://
ec.europa.eu/comm/competition/ mergers/cases/.
17.Note that in this setting,it does not matter who is using the line: producers,large consumers,or trading companies.
18.This is an equilibrium in which each player chooses a given strategy(a quantity to produce,for instance)with certainty,given the other players’strategies.
19.Firms are assumed to compete a`la Cournot and the transmission cost is determined by nodal pricing,i.e. shipping one unit of electricity
from one region to the other is costless in case of no congestion
and equal to the regional electricity price difference if the transmission line is congested.Note that the allocation of scarce transmission capacity among generators can be designed in different ways which are not neutral with respect to the ability to exercise market power in electricity production(Gilbert et al., 2004).
20.This implies that the transmission line is congested with some probability.
21.These are broad conclusions and extend beyond the simplifying assumption of identical demand and
supply conditions.
22.If we consider a model of at
least three nodes,we need to take
‘‘loopflows’’into account.Electricity
flows are determined by physical
laws and take more than one
path toflow from the generation
to the consumption point(Stoft,2002,
at397).
23.Classical concentration indicators
have the drawback that they
only consider the supply side in a
static approach and they may be
sensitive to the definition of the
relevant product and geographical
market.Furthermore,it is not
obvious to define the critical
concentration level above which
market power raises a problem.
In electricity markets,even a
small generator can have
significant market power in some
circumstances.Moreover,the market
power of largefirms also depends on
other supply-side characteristics than
just the relative sizes,like,for
example,the shape of the cost
curves and the generation capacity of
the competitive fringe(Borenstein
et al.,1995),or the contract position
of afirm(Allaz and Vila,1993).
Finally,network constraints often
affect the competitive outcome too,
while this is not necessarily reflected
in concentration measures(for a
simple illustration of some of these
aspects,see Crespo and Herrera,
2002).
24.If we set IC=0,we get the usual
definition of the indicators.
25.A HHI of1,800or higher is
generally accepted as a benchmark
in competition policy for cases to
raise a market power issue.To be
indicative of a HHI equal to1,800,
this means the presence offive
to six companies with an identical
market share.Note that in electricity
markets,this critical value is probably
lower.Given the characteristics of
demand and supply of electricity,even
small companies can exercise market
power in some moments(when
demand is high and generation
capacities close to full utilization).
26.There are currently discussions
between the Belgian and the British
network operators(Elia and National
Grid)to build a transmission line of a
capacity between700and1,300MW
(Elia,Communique´de presse,Feb.8,
2008).
27.Note that E.ON recently proposed
to divest its electricity transmission
network(European Commission,
MEMO/08/132,Feb.28,2008).
28.For a discussion of other
examples,see for instance Meeus and
Belmans(2008).
29.Note that in times of congested
transmission lines,market coupling
can reduce overall welfare,although
competition is increased.This might
especially be the case for the Belgian-
Dutch border(Kupper and Willems,
2007).
30.This assumption,however,can be
challenged.One could also argue,for
instance,that with increased
integration and harmonization,more
market information is available which
renders anticompetitive behavior more
difficult.Neuhoff and Newbery(2005)
refer to a similar effect as Hobbs et al.
(2005).If the markets in two
neighboring countries are integrated,
both regulators reduce their
monitoring efforts since the impact on
the neighboring consumers is not
internalized by the regional regulatory
authority.This externality is large
compared to the competitive effect of a
market coupling when the number of
firms is
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