24. april 2004
On 24th March the Danish Competition Council approved the merger between Elsam and NESA. The approval is conditonal on the parties making substantial amendments in their original merger aggreement. The commitments to the Council have been necessary in order to restore an effective competition on the electricity market.
In particular, the merger affects the competition on the wholesale market for electricity. The Elsam purchase of NESA means that Elsam obtains a minority shareholding in Energi E2 on 36%. By this transaction Elsam will be the largest shareholders in the only competitor to Elsam, Energi E2.
Elsam has a dominant position on the Danish wholesale market of electricity in Western Denmark already. Similarly, Energi E2 has a dominant position in Eastern Denmark.
The merger implies that there will be a lesser competition pressure on the Danish wholesale market for electricity. Elsam will be likely to take into account its expected revenue stream generated by its financial interests in Energi E2 and will therefore consider how its actions will affect Energi E2’s revenue stream. Therefore, the incentives of Elsam to compete will be changed as a result of the minority shareholding. Also Energi E2 interest in competing against its shareholder Elsam will be reduced.
Even though Denmark is connected to the neighbouring countries, Norway, Sweden and Germany the capacity of the cables are insufficient to impose the full competition pressure on Elsam.
The electricity market is changing rapidly. Therefore, the Counsil has estimated the consequenses of the merger in a medium term perspective. In particular, the size of the cables connecting the nabouring countries to Denmark and inside Denmark is of a substantial importance for the assessment of the effects of the merger.
In a medium term there is formed plans for etablishing of a Great Belt cable corresponding to the size of a combined power plant of 600 MW. There is also formed plans of improving the trading connections to Germany and Norway. Without the merger the expected extension of the cables will improve the competition on the wholesale market for electricity. In particular the Great Belt cable will improve competition between the two electricity producers, Elsam and E2.
However, the merger implies that Elsam will be in the position to influence Energi E2 not to compete with Elsam in Western Denmark, and Elsam will avoid to compete with Energi E2 in Eastern Denmark. The merger will create and strengthening the dominant position of Elsam and Energi E2 and consequently the effective competition will be significantly impeded on the electricity market. Elsam and Energi E2 can enforce their position on the market to get the highest of the prices in the neighbouring countries. Therefore, it is necessary that Elsam enter into a number of commitments.
The commitments can be grouped in three different cathegories:
1. Disposal of decentral capacity and sell by auction of virtual capacity:
It is necessary to create alternative competitors to Elsam and Energi E2. As a minimum this should correspond to the competition pressures from Great Belt cable in the situation without the merger. Therefore, an important condition for the approval of the merger is, that Elsam sells by action a substantial amount of central power capacity (600 MW) in an infinite period. The Competion Authority decides the etablishment of the autions.
The auction starts in 4th quarter of 2005, and there will be 4 autions yearly. The supplied capacity will consist of short term, medium term and long term contracts. There is no minimum capacity price, and the price of the delievered electricity will be equivalent to the marginal cost of Elsams most cost effective power plant. The buyer shall decide how much of the option to be delievered the next day after knowing the Nord Pool surrounding price.
The competition Authority appoint an independent trustee to control the auctions. Elsam pays all the fees to the trustee.
The benefits of this commitment compare to selling off capacity are that the etablishment costs for new entrants are small, there is no maintenance costs and the economic risks are reduced. It means that the number of potential buyers of virtual capacity is much higher than the number of buyers of selling of capacity.
Elsam is also committed to dispose all Elsams and NESAs decentral combined electricity power and heat plants (230 MW capacity).
Finely, Elsam is prevented in buying and managing decentral combined electricity power and heat plants for the next 12,5 year.
2. Improvement of the infrastructure:
In order to prohibite the electricity producers influence on the infrastructure, Elsam is committed to sell NESAs ownership in Elkraft Transmission and System (43,7%). However, this commitment has allready been - as expected - overtaken by the energy compromise entered into an aggreement on 29th marts 2004.
Elsam is also obligated to etablish a cable which combine Funen and Sealand (600 MW) – the Great Bell cable.
3. Improvement of the retail market:
The competition on the retail market is not sufficient effective. There is a need to improve the access to the customers relationship.
Therefore, Elsam is committed to allow new entrants to get a full customers relationship and to relief the admission to consumer profile of NESAs customers.
The advantages gained from the commitments will balance the negative effects of the merger and ensure that the merger does not weaken the competition in the market as such.