New Standard of Measuring Diversification and Security in Energy Markets (Part 2)

By Iliyan Petrov, June 26, 2013

In the first section of the article we made a presentation of new Balanced Diversification Index (BDI) and Transitive Optimal Market Equilibrium Model (TOMEM) in comparative analysis with traditional Shannon-Wiener Index (SWI) and Hirshman-Herfindahl Index (HHI). As SWI and HHI are called usually “diversification index” we also defined our BDI as diversification index. Actually, all three indexes measure directly concentration as it increases with a decrease in number of players and an increase of their market shares (relative weights of events). Accordingly, it would be better to call further our index Balanced Concentration Index (BCI), as an increase of its value from “zero” to “one” reflects directly an increase оf concentration (indirectly decrease of diversification). A major advantage of BCI is its scale – to brought to a percentage level it is simply multiplied by 100 and not by 10,000 as for SWI and HHI.

The main advantages of BCI are displayed in Fig. 3, comparing normal and logarithmic plots (BCI, SWI,HHI) and histograms of statistical distributions (BCI and HHI).

To measure evolution and structure of markets it is also necessary to review assessment scale mentioned in part 1 of this article for HHI adding corresponding values for new BCI, proving the advantages of the logistical non-linearity of basic sigmoidal logarithmic function:

Limited market power of three major players ( summed weights of three major events) CR3<45 percent in a non-concentrated market with more than 10 players and overall market BCI<21,5 percent (HHI<1,000);

Moderate market power of three major players (summed  weights  of three major events) 45 percent<CR3<70 percent in a moderately concentrated/diversified market with more than five players and overall market 21,5 percent<BCI<35,9 percent (1,000<HHI<2,000);

Important market power of three major players (summed weights of three major events) CR3>70 percent with mediocre competition in a concentrated market with one to five players and overall market BCI>35,9  percent (HHI>2,000);

In all intervals BCI better reflects non-linear trends of synergy relations when increasing the number players or events.

BСI and TOMEM Application: Macro- and Micro-levels of Analysis

The area of potential application of the new approach with BСI and TOMEM is very wide, and was successfully realized on the basis of large data sets for evaluating diversification of energy mixes at world, regional and national levels, supply diversification from the viewpoint of importers (EU) and exporters (Russia), diversification of the routes of gas supply of particular countries and companies, diversification of reserves, etc..

This article displays the results of measuring diversification of energy mixes on the basis of a new author’s approach BСI-TOMEM at the world level and in EU, the largest developed countries, countries producing and exporting oil and gas, and transit countries.

Diversification of energy mixes of the EU countries was measured with two methods (BСI/TOMEM and HHI). Comparison of the results shown in Fig. 3 and Fig. 4 proves advantages of BСI method. The HHI results have very dense distribution and are rather far from the adequate market concentrations levels. They do not reflect the real situation and