The Rise of Third Parties and the Fall of Incumbents Driven by Large-Scale Integration of Renewable Energies: The Case of Germany

Abstract

Changes in the electricity supply industry are dramatic. The liberalization of the electricity sector in 1997 exposed generation and retail to market entry and competition. However, especially in generation, non-incumbent market players were the exception, while a dominant market position of the formerly monopolistic incumbents remained the rule. With the energy transition (the German "Energiewende") starting in 2000 this situation started to change significantly. The large-scale integration of renewable energy supply (RES) has triggered decentralization of generation and market entry of new players ("third parties") and has fundamentally changed the supply structure of the electricity sector. Temporary excess capacity and increasing diversity of ownership has intensified price competition.Why is all this important and what are the policy consequences? Firstly and most prominently, the emergence of third parties changes the business strategies and the competitive environment in the sector. Secondly, the changing competitive environment has consequences for competition policy and monopoly regulation. The notion of traditional market power in power markets is fading quickly. If anything, companies are struggling to survive; abuse of market power is not much of an issue currently. In fact, we would expect a new wave of consolidation. Moreover, the monopoly element of the network seems to erode slowly or at least change, raising two important questions. On the one hand, selectively, the need for regulation phases out. Bypassing of the network by self-sufficiency, facilitated by PV and micro-storage provides an example. On the other hand, as sectors start to converge, regulatory frameworks of these sectors, which largely developed independently, should be aligned more closely. Thirdly, coordination of network and system development gets more complicated with a multitude of different players with widely differing interests. To achieve efficient network development, the governance systems need to align incentives. As the electricity supply changes from a top-down, single-firm game, into a bottom-up, multiple-player system we need novel governance systems to deal with this change.

The impact of heterogeneous market players with bounded-rationality on the electricity sector low-carbon transition

“…Energy systems are, hence, complex adaptive systems which Bale et al (2015) understand as systems characterised by heterogeneous and interrelated elements (such as agents, objects and dimensions), the evolution of which is an emergent property of the behaviours and interactions of the different elements. For example the energy transition in Germany, called "Energiewende", dramatically changed the structure of electricity supply in Germany, leading to a growth in decentralised renewable electricity production and to the rise of "third parties" (Brunekreeft et al, 2016). The emerging property of this increasing competition was the impact on the financial viability of incumbent utilities, and the need of new business models for such actors to be able to continue delivering electricity and the necessary low-carbon investments (Brunekreeft et al, 2016).…”

Economic Issues in Deep Low-Carbon Energy Systems

“…It should be pointed out finally that perhaps the most severe threat to the deployment of REs, similarly to many other economy sectors [67], does not come from the market itself. Rather, it derives from the vested interests of the incumbent fossil energies that have managed to distort competition through oligopolistic behavior; see, e.g., [11,68], in particular [69], for a model of the capture of regulatory bodies by oligopolies, and [70] underlining how democratizing the energy market harms the oligopoly incumbents.…”

Energy Systems Integration: Economics of a New Paradigm

“…The changes in the structure of incumbent utilities and the arrival of new actors in the German electricity market following the Energiewende illustrates the extent to which the utility business models become a dynamic feature of the market (see Brunekreeft et al, 2016). Some German utilities separated their renewable activities from conventional generation and network activities.…”