Competition Review of Energy Sector Mergers

1. Introduction

Energy-sector mergers occur when companies involved in electricity, gas, petroleum, renewable energy, energy storage or related infrastructure combine their businesses. Such mergers can produce economic benefits, including greater investment, improved technology, economies of scale and better energy infrastructure.

However, mergers can also reduce competition by increasing market concentration or giving one company control over important energy resources or infrastructure. Competition review is therefore necessary to determine whether a proposed merger may substantially prevent or lessen competition.

In South Africa, energy mergers are primarily reviewed under the Competition Act 89 of 1998, together with relevant sector-specific legislation and regulation.

2. Meaning of Merger Review

Merger review is the process through which competition authorities examine whether a proposed transaction could harm competition.

The authorities may examine:

the relevant product market;

geographic market;

market shares;

concentration;

barriers to entry;

customer bargaining power;

alternative suppliers;

vertical relationships;

technological change; and

possible efficiencies.

Large mergers may require notification before implementation.

3. Horizontal Energy Mergers

A horizontal merger occurs between competitors operating at the same level of the energy supply chain.

Examples include:

two electricity generators merging;

two electricity retailers merging;

two renewable-energy developers combining; or

two battery-storage operators merging.

The main concern is that the merged company may have increased market power.

For example, a merger between major electricity generators could reduce the number of independent generators available to the wholesale market.

4. Vertical Energy Mergers

A vertical merger occurs between companies operating at different levels of the supply chain.

Examples include:

a generator acquiring an electricity retailer;

a battery operator acquiring a trading company;

a gas producer acquiring a pipeline;

a renewable-energy generator acquiring a retail business.

Vertical integration can create efficiencies, but it can also create foreclosure risks.

A vertically integrated company could potentially give its own downstream business preferential access to essential inputs while making access more difficult for competitors.

5. Natural Monopoly Infrastructure

Energy mergers require special attention where they involve infrastructure such as:

transmission networks;

distribution networks;

pipelines;

ports;

storage terminals; and

electricity interconnection facilities.

These facilities may have natural-monopoly characteristics.

A merger involving such infrastructure may affect competition even where the infrastructure itself is not a competitive market.

Competition authorities may therefore examine whether the merged company could restrict competitors' access or increase their costs.

6. Okavango/Sonnedix Case

A particularly relevant South African renewable-energy merger case is Okavango Biology Luxembourg SARL v Sonnedix Solar South Africa Holdings (Pty) Ltd.

The Competition Tribunal considered a transaction involving solar photovoltaic electricity-generation businesses.

The Tribunal concluded that the transaction was unlikely to substantially prevent or lessen competition and approved it. The case demonstrates that renewable-energy mergers are subject to ordinary competition analysis rather than being automatically approved simply because they support renewable energy.

This is important as South Africa expands renewable generation.

7. Competition Commission v Hosken Consolidated Investments

In Competition Commission v Hosken Consolidated Investments Ltd, the Constitutional Court considered important issues concerning merger notification and the statutory merger-control framework.

The case confirms the significance of the Competition Act's merger-control system and the legal consequences of transactions falling within that framework.

For energy businesses, proper identification of whether a transaction constitutes a merger and whether notification is required is therefore essential.

8. Market Definition

A central part of merger review is defining the relevant market.

An energy transaction might involve separate markets for:

electricity generation;

wholesale electricity;

electricity retail;

balancing services;

energy storage;

gas supply;

transmission services; or

renewable-energy development.

Market definition is important because the competitive effects of a merger can look very different depending on the market being examined.

9. Market Concentration and Market Power

Authorities may examine whether a merger significantly increases concentration.

However, market share alone does not determine whether a merger is harmful.

Other factors include:

barriers to entry;

availability of alternative suppliers;

transmission constraints;

customer bargaining power;

imports;

technological developments; and

potential new competitors.

This is particularly important in electricity because network congestion can create localised market power.

10. Public Interest

South African merger law also requires consideration of public-interest factors.

Relevant issues may include:

employment;

ownership;

participation of small and historically disadvantaged businesses;

industrial development;

geographic considerations; and

other statutory public-interest factors.

Therefore, energy merger review is not limited to market concentration. Competition and public-interest considerations are both part of the statutory framework.

11. Senwes Case

The Competition Commission of South Africa v Senwes Ltd case provides useful principles concerning market power and vertical relationships.

Although it was not an energy merger, the case involved an important storage facility and related markets. It illustrates why control over an important infrastructure facility can affect competition in neighbouring markets.

The same reasoning can be relevant when assessing mergers involving electricity storage, transmission facilities or other essential energy infrastructure.

12. Merger Remedies

If a merger raises competition concerns, authorities may impose conditions rather than prohibit the transaction completely.

Possible remedies include:

divestiture of assets;

non-discriminatory access commitments;

restrictions on exclusive agreements;

information-sharing safeguards;

supply obligations; and

behavioural commitments.

For example, where a merger combines a generation business with an important network facility, access commitments may be considered to protect competing generators.

13. Energy Transition and New Technologies

The energy transition is creating new merger issues.

Competition authorities increasingly need to examine transactions involving:

solar and wind farms;

batteries;

electric-vehicle charging;

green hydrogen;

smart grids;

distributed generation;

energy-management platforms; and

critical energy technologies.

Some emerging markets may initially have few competitors. Authorities therefore need to consider whether a merger could remove an important potential competitor even where current market shares appear modest.

14. Interaction With Sector Regulation

Competition authorities do not operate alone.

Energy mergers may also require consideration of:

electricity licences;

grid rules;

NERSA regulation;

environmental approvals;

transmission access;

municipal electricity arrangements; and

security-of-supply concerns.

Sector regulation and competition law therefore need to operate together.

15. Conclusion

Competition review of energy-sector mergers is essential because mergers can influence electricity prices, investment, infrastructure access, innovation and energy security.

The review should consider horizontal concentration, vertical foreclosure, infrastructure control, market definition, barriers to entry, potential competition, efficiencies and public-interest factors.

The Okavango/Sonnedix decision demonstrates the application of merger review to renewable electricity, while Hosken Consolidated Investments illustrates the importance of South Africa's statutory merger-control framework. Senwes provides useful principles concerning infrastructure-related market power.

The central principle is that energy-sector mergers should be assessed according to their actual competitive effects. Renewable-energy or investment benefits may be relevant, but they do not remove the need for careful competition analysis.