RISK CONCENTRATION IN GENERATION PORTFOLIOS

1. Meaning and Concept

Risk concentration in generation portfolios arises where electricity-generation capacity is excessively concentrated in a limited number of companies, technologies, fuels, geographic areas, or individual generating assets. Instead of risks being diversified across independent sources, a common event—fuel-price shock, plant failure, transmission constraint, extreme weather, cyberattack, or regulatory change—can affect a large proportion of available generation simultaneously.

The issue therefore has two dimensions. Ownership concentration can create market power, while technological or fuel concentration can undermine security of supply. A generator owning a substantial portfolio of flexible plants may have particular influence during periods when alternative generation is unavailable or network constraints restrict competition.

In Great Britain, government data recorded 57 Major Power Producers in 2024, while the nine largest producers generated approximately 75.3% of Major Power Producer output. Concentration must therefore be examined alongside actual competitive conditions rather than simply counting market participants.

2. Competition and Market-Power Risk

The Herfindahl-Hirschman Index (HHI), market shares, barriers to entry and pivotality analysis are commonly used to assess concentration. Pivotality is especially important in electricity because demand and supply must remain balanced continuously. A generator can possess temporary market power even without an exceptionally high annual market share where its plant becomes indispensable at a particular location or time.

Ofgem recognises that transmission constraints can give individual generators significant local market power because the system operator may have few substitutes available. Generation Licence Condition 20A therefore restricts generators from obtaining excessive benefits through Balancing Mechanism bids during constraint periods.

3. Portfolio and Security-of-Supply Risk

Concentration can also exist without corporate dominance. A national portfolio heavily dependent upon gas, nuclear generation, offshore wind, or one geographical region may experience correlated failures. Effective portfolio regulation therefore encourages diversity among renewables, firm generation, storage, demand-side response and interconnection.

The Energy Act 2013 electricity-market reforms introduced the Capacity Market to support adequate capacity and Contracts for Difference to encourage low-carbon investment. Their broader purpose includes maintaining a clean, diverse and competitive generation mix while protecting security of supply. The government's 2025 security-of-supply assessment similarly emphasised the value of a diversified mix of gas, nuclear, renewables and interconnectors.

4. Case Law and Regulatory Authorities

United Brands v Commission, Case 27/76 [1978] ECR 207

Facts: United Brands possessed a substantial position in the European banana market.

Legal Issue: Whether its economic position constituted dominance.

Judgment: The Court held that dominance means economic strength enabling an undertaking to behave to an appreciable extent independently of competitors, customers and consumers.

Legal Principle/Ratio: Concentration must be assessed through market structure, market share and competitive constraints together.

Significance: The principle assists analysis of whether a concentrated generation portfolio produces effective market power.

Hoffmann-La Roche v Commission, Case 85/76 [1979] ECR 461

Facts: Roche maintained very large shares in several vitamin markets.

Legal Issue: Whether large and persistent market shares evidenced dominance.

Judgment: The Court found that very large market shares may, except in exceptional circumstances, establish dominance.

Legal Principle/Ratio: Persistent concentration is powerful evidence of economic strength.

Significance: Electricity regulators can similarly examine sustained generation ownership alongside barriers, flexibility and competitors' available capacity.

AKZO Chemie BV v Commission, Case C-62/86 [1991] ECR I-3359

Facts: AKZO maintained approximately 50% of the relevant market.

Legal Issue: Whether that share supported a finding of dominance.

Judgment: The Court held that a 50% market share could, absent exceptional circumstances, constitute evidence of dominance.

Legal Principle/Ratio: Market share is a major structural indicator, although market definition remains essential.

National Grid plc v GEMA [2009] CAT 14

Facts: Ofgem found National Grid dominant in the GB domestic gas-meter market and imposed a substantial penalty.

Legal Issue: Whether Ofgem correctly defined the market and established dominance and abuse.

Judgment: The Competition Appeal Tribunal upheld the findings on market definition and dominance while reducing the penalty.

Legal Principle/Ratio: Energy-sector dominance requires rigorous economic assessment of actual competitive constraints.

Significance: The case demonstrates the application of competition-law principles by an energy regulator to concentrated infrastructure markets.

5. Conclusion

Generation-portfolio concentration is therefore both a competition-law and system-resilience problem. Effective regulation combines merger scrutiny, dominance rules, licence conditions, capacity mechanisms, market surveillance and generation diversification. The central legal objective is not concentration elimination itself, but preventing concentrated ownership or technological dependency from producing market abuse, excessive prices, systemic vulnerability or unacceptable security-of-supply risk.