Discussion Papers

Nicole Angenendt, Gernot Müller, Marcus Stronzik, Matthias Wissner

Stromerzeugung und Stromvertrieb – eine wettbewerbsökonomische Analyse

Nr. 297 / August 2007

Summary

After the liberalisation of energy markets a number of market entries into the German power market from the year 1997 on took place. By now, the majority of these newcomers has left the market again. Reasons for this are planning failures of new suppliers as well as lacking willingness of customers to switch suppliers and pre-emptive price reductions of incumbents. At the same time, the number of big utilities has decreased strongly due to mergers and acquisitions. Moreover, the supply side of the market is characterised by a continuing trend of forward integration by the big electricity producers and by concentration efforts of regional utilities. The competitive situation on the German power market is generally unsatisfying, power prices in Germany have increased continuously for years now.

With the installation of the German regulatory authority (the “Bundesnetzagentur”) for transmission and distribution grids for power and gas markets and the introduction of incentive regulation from 2009 onwards, one might expect a positive development of grid charges for newcomers and consumers. But what about the stages of the value chain preceding and following the grid, namely power generation and supply?

This article analyses the sectors of power generation and supply by means of competition economics and focuses on barriers to competition due to the institutional framework and the specific sector structure, namely the high degree of vertical integration of the four big network companies.

Objective of this article is to show what forces could operate in the fields of generation and supply after the market opening and are characteristic for the present competitive situation. Therefore, the article is split into two independent studies, illuminating the respective competitive situation and elucidating the essential tendencies of development. For power generation, it becomes obvious that the sub-segments for base and peak load are characterized by a high degree of market concentration, a fact that can be classified as extraordinary problematic when taking the relatively inelastic power demand into account. In the narrow market at peak load times the marginal seller therefore has the chance of increased exertion of influence on prices. Within the supply sector, barriers to entry mainly exist in the form of excessive grid charges of those grid companies that are electricity producers at the same time or have a share in generation to a high degree. Results of the subtraction test, by which the implicit power price can be identified, indicate that many vertically integrated companies cross-subsidise the power price, partly so much that negative margins have been found. These has made it nearly impossible for newcomers to enter the market. [only a german version available]

Discussion Paper is available for download.

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