Dutch Consumer and Competition Authority issues negative opinion on coal plant closure agreement

08 October 2013

Michelle de Rijke, Pierrette Gaasbeek

On 26 September 2013, the Consumer and Competition Authority (ACM) published its provisional and informal view that an agreement between generators to close 5 coal-fired power plants infringes the Dutch competition rules. The plant closure agreement forms one component of the "Energy Agreement for Sustainable Growth" signed by a wide range of private and public sector organisations, and the opinion of the ACM has therefore thrown a significant national initiative into confusion.

The Energy Agreement is a wide-ranging agreement between more than forty organizations in the Netherlands – including central, regional and local government, employers and unions, nature conservation and environmental organizations, and other civil-society organizations and financial institutions.. The core feature of the Agreement is a set of broadly-supported provisions regarding energy saving, clean technology and climate policy. Implementing these provisions is intended to result in an affordable and clean energy supply, jobs and opportunities for the Netherlands in the market for clean technologies and reduction of CO2. (http://www.ser.nl/en/publications/news/20130906-energy-agreement.aspx).

The Energy Agreement comprises ten basic components. Combined, they are mutually reinforcing and therefore constitute a comprehensive package of agreements. One component is the agreement between four energy companies (GDF Suez Netherlands, E.ON, RWE/Essent and EPZ) to close 5 old coal-fired power plants in the Netherlands before the end of their economic life cycle. The Agreement was conditional on the ACM issuing a positive opinion on the compatibility of this element of the Energy Agreement with the competition rules. However, it declined to do so. The ACM suggested that there may be scope for an alternative arrangement if it is less harmful to effective competition, while allowing for more benefits in the area of environmental policy, preferably for consumers.

This was surprising, bearing in mind that the whole reason for the Energy Agreement was environmental. However, one of the reasons why the ACM could come to this conclusion was the fact that it looked in isolation at the competition law aspects of the closure of the coal-fired power stations. The ACM acknowledged that for the parties concerned the Energy Agreement could not be separated into its component parts. However the four energy companies decided independently to offer closure of the power stations as part of the negotiation, according to ACM. By choosing this solution, the companies opted for an arrangement that fell within the scope of competition law. The consequence was that the ACM looked only at the negative and positive effects which were directly attributable to the shut-down.

Restriction of competition

ACM saw the plant closures as an agreement between the four energy companies, concerning the a coordinated shut-down of the 5 coal-fired power stations. The result of that agreement would be a reduction of production capacity in the Netherlands of approximately 10%. The ACM restricted its analysis to the Dutch market, because it considers that the relevant markets are not (yet) broader than national. It concluded that the significant reduction of production would result in upward pricing pressure for electricity sold on the Dutch wholesale electricity market. The ACM estimated that the average price rise as a result of the reduced capacity would be around 0.9%. In real terms, that would amount to around EUR 75 million per annum, which is EUR 450 million in total over the entire period.

Positive effects

The ACM then examined whether the negative effects on competition were sufficiently counterbalanced by the environmental benefits achieved by this measure. The Dutch Competition Act provides for exemption, in the equivalent of Article 101(3) TFEU. The ACM follows the Guidelines on the application of Article 81(3) of the Treaty (Official Journal C 101, 27.04.2004, p. 97-118). The aim of the analysis is to ascertain the objective benefits created by the agreement and the economic importance of such efficiencies. To do this the ACM embarked on a quantification project to allow the comparison of the positive and negative effects.

The ACM found that the closure of the power plants would result in reduced emissions of carbon dioxide (CO2), sulphur dioxide (SO2), nitrogen dioxide (NOx) and particulates (PM). The ACM concluded that the improvement of the air quality as a consequence of reduced emissions of SO2, NOx and PM would qualify as benefits of the agreement. In the opinion of ACM the reduced emission of CO2 did not qualify as a benefit, as it would only lead to a reduced need for CO2 emission rights, and those rights can be traded with and used by third parties everywhere in the EU. If there had been no Emission Trading System, the CO2 reduction would have qualified as a benefit, like SO2, NOx and PM.

The quantification of the benefits of the reduced emission of SO2, NOx and PM was based on "shadow prices". The ACM established the shadow prices on the basis of avoided costs for alternative reduction measures (for SO2 and NOx) and the value of the improvements in air quality for society. The ACM concluded that the total benefit of the agreement could be valued at around EUR 30 million per annum for the period 2016-2021, or EUR 180 million in total.

Balancing the negative and positive effects

Clearly, the environmental benefits (EUR 180 million) of the shut-down therefore did not outweigh the negative effects on competition caused by price increases (EUR 450 million). The ACM considered that various other potential benefits flowing from the agreement either were not the direct result of the isolated agreement or were too uncertain to be considered as benefits resulting from the agreement.

The relationship between competition and sustainability

The relationship between competition and sustainability can be tense, because most sustainability initiatives need to include a whole sector in order to have effect. The ACM has received numerous questions on the possibilities of working together in reaching environmental goals. To offer more clarity about the possibilities for collaboration with regard to sustainability, the ACM published a position paper on 30 July 2013 (https://www.acm.nl/en/publications/publication/11733/Opportunities-for-collaborations-with-regard-to-sustainable-development/). The Energy Agreement was the first test after this publication. Two things stand out. One is the fact that the ACM analysed the negative and positive effects and then concluded that the negative effects were EUR 450 million and the positive effects EUR 180 million. The ACM failed to provide the range of values that would normally be expected in a forward-looking exercise such as this. Energy prices are volatile and the market is changing rapidly, as a consequence of the increase in electricity production from wind and solar. The ACM also considered only the Dutch market, which is questionable. Secondly the ACM took into account only the direct effects of the anticompetitive agreement. This approach works well with simple arrangements that address only one issue, such as waste management systems, the use of quality labels or agreements to cease production of certain types of energy-inefficient washing machines. However, in complex multi-party agreements like the Energy Agreement, which has no precedent in the EU, it is difficult to indicate positive effects with a direct causal link between the agreement and the claimed efficiencies.

Consequences

Finally, the ACM emphasized that it did not express a view on the consequences of its opinion. It is up to the parties to the Energy Agreement to determine whether the closure of the power stations is a crucial element in the broader arrangements, or if it can be separated from the broader set of arrangements. The organizations which signed the Energy Agreement declared they are still committed to the goals of the Energy Agreement and are currently looking for a solution. However, the Dutch Minister of Economic Affairs, one of the signatories of the Energy Agreement, stated that he still wants the power plants to shut down.

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