Energy Retail in Great Britain: Moral Hazard and the Illusion of Competition

16 December 2021 Energy Retail in Great Britain: Moral Hazard and the Illusion of Competition Introduction On 24 November 2021, Bulb, the seventh biggest energy supplier in Great Britain with 1.7 million customers, entered a special administration regime because it could no longer profitably provide energy to its customers.1 Bulb’s failure is not an isolated incident; it is only the most eye-catching of a series of over 50 similar failures in the last five years, following a 10-year period of no suppliers failing at all. On 15 December 2021, after at least two years of consultation, Ofgem published its Action Plan for regulating suppliers for financial stability over the short-to-medium term. Businesses exiting a market is not a problem per se; indeed, the ability to enter and exit a market is arguably a sign that a market is functioning efficiently. In the energy market in Great Britain, however, the slew of recent supplier failures poses tough questions for policymakers. Energy policy over the last five years has not created true competition, but only the illusion of competition, as measured by the sheer number of “competitors”, which peaked at over 70 in 2018. Underlying market and regulatory failures have allowed new suppliers to take bets on risky business practices using customers’ money. As wholesale market conditions have worsened in recent months, the underlying market failures have resulted in an unprecedented bill for British energy customers—a sum as yet unknown, but possibly over £3 billion. British energy markets need reform to promote sustainable business models. Those reforms will need to address the ability or incentive of suppliers to take risks, or reduce the costs to customers when they fail, or a combination of all three. In this paper, we set out the recent history of policy and regulation in energy supply markets. We explain how current arrangements shift costs from shareholders in failed suppliers to customers, in a clear case of market failure. We also estimate the direct costs to customers from those failures and set out potential options for reform. By George Anstey, Soren Christian, and Matthew Newell www.nera.com 2 Recent Policy in Energy Supply Markets Has Been to Promote Entry and Cap Prices In the early years following privatisation of the British gas and electricity industry, policy in British retail energy markets had been to progressively liberalise pricing and promote competition. Competitive retail markets (known interchangeably as “supply” in Great Britain) for energy have been operating in Great Britain since 1996. In 2002, in response to growing competition in energy supply and to foster competition from entrants, Ofgem removed price controls on the supply of electricity and gas to domestic consumers. By 2006, the original 14 regional Public Electricity Suppliers (PES) had merged to form five electricity suppliers. Together with British Gas, they accounted for around 99% of the domestic electricity and gas market.2 In the years that followed the Energy Supply Probe, an investigation into the functioning of wholesale and retail markets in 2008,3 regulatory policy was driven by two principal concerns: 1. Concern over the number of competitors in the market and the costs of entering the market. The sector regulator (Ofgem) and the government department responsible— currently the Department for Business, Energy and Industrial Strategy (BEIS)—responded by promoting the entry of competitors, as distinct from promoting competitive market conditions. They exempted new entrants from environmental and social obligations, and set up mechanisms intended to promote wholesale market liquidity. Their aim was to reduce (i.e., to transfer to others) the costs associated with setting up a supply business and entering the market, so that suppliers need not be fully capitalised businesses owning physical assets. Many suppliers entering retail energy markets could not cope with competition without these privileges and remained below the size thresholds at which environmental and social obligations took effect. 2. Concern over the different prices paid by different customers. Energy suppliers learned to chase new customers with low prices, without offering those same low prices to long-standing, or “sticky”, customers. This form of competition was efficient—and aggressive—but Ofgem intervened to reduce the resulting price differences, for example by limiting out-of-area discounts. These interventions weakened incentives to compete and raised prices for customers overall.4 An inherent contradiction sat at the heart of the policy driven by these two concerns. In retail energy markets, customers face high switching costs (relative to the potential savings from switching). Aggressive competition leads to lower prices for customers engaged in the market, who do switch, and potentially higher prices for disengaged customers—those who do not switch. (The disengaged customers end up paying much of the suppliers’ fixed costs, which is at least economically efficient.) The policy of artificially promoting competitors, whilst intended to address perceived barriers to entry, therefore serves to exacerbate the price differentials between different customer groups. Those price differentials fuelled controversy in the public discourse. www.nera.com 3 The gap between prices paid by engaged customers and disengaged customers persisted stubbornly, despite Ofgem’s interventions, and there followed a further six years of progressive investigation and interventions. Those interventions were at least partly stimulated by public and political discourse, rather than regulatory requirements, and supported by constant monitoring of a partial view of the profitability of energy supply. The chain of events led inexorably to an investigation by the Competition and Markets Authority (CMA), which concluded that some of Ofgem’s interventions had been harmful.5 The CMA also concluded, not without dispute, that domestic customers had suffered a “detriment” of £1.4 billion on average each year from 2012 through 2015, even though most suppliers were loss-making.6 The CMA’s most intrusive remedy was a price cap for the 17%7 of customers on Prepayment Meter (PPM) tariffs, which addressed a perceived concern about the barriers to competition and excessive prices in that market segment. The CMA’s remedy was a harbinger of future trouble: an intervention to cap prices for a modest proportion of customers did not obviously address the scale of the CMA’s finding of detriment. Even at the time when the CMA published its final report, market data provided less and less support for concerns about market concentration and barriers to entry. The domestic market share of the original PES businesses and British Gas had fallen by 15%. New suppliers were entering the market and capturing substantial market shares. Bulb Energy entered the market in 2015 and earned roughly 5% of the market in five years.8 By May 2018, the total number of new energy suppliers had risen to 70, with a combined market share of 26% of domestic customers.9 Despite the success of new entrants, in 2018 legislators expanded the PPM price cap by mandating Ofgem to put a “Default Tariff Cap” in place across the whole market for domestic customers. This price cap took effect on 1 January 2019. It is no coincidence that suppliers have started to exit the market in larger numbers since that date. For the first 20 years of their operation, there were relatively few supplier failures and most businesses that left the sector did so quietly.10 GB Energy, which left the market under Ofgem’s Supplier of Last Resort (SoLR) process in November 2016, was the first supplier failure in more than 10 years. However, since 2018, supplier failures have become increasingly frequent, with 28 failing in 2021 alone.11 (See Figure 1.) The proximate cause of the recent failures is the stark increase in electricity and gas prices. Historically, suppliers have tended to fail when the wholesale market tightens as wholesale prices rise and some suppliers have found themselves needing to buy additional energy at high prices that are not reflected in their prices to customers (see Figure 2). Certainly, 2021 has seen consistently high prices relative to recent years. Between 1 January and 1 October 2021, wholesale gas and electricity prices both rose by more than 230%.12 However, that suppliers fail during times of high wholesale prices is not the full story; one might also ask why suppliers do not better hedge their risk exposures or are not better capitalised to weather financial storms. And for the answer to that question, one needs to look to the regulatory arrangements. www.nera.com 4 Current Arrangements for Addressing Supplier Failures Impose Costs on Consumers Given the high costs of disruption to customers’ energy supply, special arrangements govern the bankruptcy or exit of suppliers. The current arrangements for addressing supplier failure date largely from 2003, a period of relative stability in the retail market— though Ofgem updated the arrangements in 2008 and 2016. Under current circumstances, it is increasingly clear that these arrangements are not fit for purpose. Ofgem’s primary duty in retail electricity and gas markets is to protect the interests of existing and future customers, which includes ensuring that they receive a continuous Source: NERA analysis. Figure 2. Suppliers Tend to Fail When Wholesale Prices Are Rising Baseload Electricity (£/MWh) Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 0 50 100 150 200 250 Bankruptcy 30 Day Mov. Avg. GB 1 Month Ahead www.nera.com 5 supply of electricity and gas.13 When an active electricity and/or gas supplier goes out of business or has its supply licence revoked, Ofgem usually appoints a SoLR to take on the customers of the failed supplier at short notice. Ofgem appoints SoLRs using a beauty parade: other suppliers still in the market submit a bid for the customers of the failed supplier. Ofgem does not publish clear, replicable criteria for the award process, but Ofgem takes into account both the tariff that bidders propose to charge the transferring customers, and their process and expected costs for effecting the transition. Ofgem expects bidders to honour customers’ credit balances (i.e., payments for energy made in advance and owed to customers). Ofgem allows SoLRs to claim a Last Resort Supply Payment (LRSP) after the event for costs incurred, unless the SoLR committed not to make a claim in its SoLR bid.14 Historically, the largest component of LRSPs has been the cost (part or total) of guaranteeing consumer credit balances. Other charges include transitional IT, operational and communication costs, and additional working capital to fund the SoLR event, but in the claims made in 2018 and 2019, these costs were typically less substantive. The costs of acquiring new customers also include any difference between the actual cost of purchasing wholesale energy to supply those customers and the allowance for these costs within the price cap (i.e., the maximum price that a SoLR can charge its new customers).15 Ofgem recovers the costs of LRSPs through an industry levy on charges for using distribution networks (Distribution Use of System or “DUoS” charges), which are ultimately paid by all customers connected to them.16 The LRSPs that suppliers seek to recover may or may not cover all costs they face. Some suppliers may have been willing to incur costs to acquire customers, in the hope of supplying them profitably in the future, and so may not have sought to pass those costs on to other customers via the LRSP. Nonetheless, in 2018 and 2019, LRSPs cost energy customers in general over £45 million to fund the credit balances and transition costs for around 800,000 customers of defaulting suppliers. (See Table A.1 in Appendix A for more detail.) The costs of a supplier failure are not limited to the LRSP. Under the Renewables Obligation (RO) mechanism, administered by BEIS, energy suppliers in Britain must present a certain number of Renewables Obligation Certificates (ROCs) to Ofgem for every MWh of electricity supplied (e.g., 0.471 ROCs for each MWh supplied between April 2020 and March 2021).17 For the 2020/21 financial year, suppliers had until 31 August 2021 to present the ROCs, or until 31 October 2021 to make a buy-out payment of £50.05 per missing ROC.18 In the first instance, when a supplier exits the market, it defaults on that obligation and the remaining suppliers have to submit additional certificates to make up the difference. In extreme cases, the obligation rate is cut, and renewable generators receive less revenue as a result of supplier bankruptcies. In the event of a large supplier failing, such as Bulb, Ofgem does not appoint a supplier under the SoLR process. Ofgem argues that doing so would risk the failure spreading across the energy market because the cost of supplying energy and honouring the credit balances for a large number of customers would affect the ability of the SoLR to serve its existing customer base.19 Instead, Ofgem appoints a special administrator under the Special Administration Regime (SAR) to run the company and ensure customers continue to be supplied with gas and electricity until either the company is rescued, or it is sold, or its customers have been transferred to other suppliers.20 www.nera.com 6 The Energy Supply Act 2011 enables the government to provide grants and/or loans to the energy administrator to finance the company’s activities. If the firm is ultimately unable to repay these grants/loans, then the government can reclaim the costs from the industry, and hence its customers, via a cost recovery mechanism.21 The SAR differs from the SoLR regime in at least one important respect. Under the SoLR regime, the customers are separated from the assets of the business and the costs of acquiring customers and honouring credit balances must be borne by the new supplier, or else are “socialised” over the whole customer base. Under the SAR, the customers and assets remain with the firm, and its customers continue to have a claim on the assets of the business (e.g., credit balances and any in-the-money hedge contracts for wholesale costs). As a result, the SAR has the potential to reduce the costs socialised over the generality of customers. Market Failures and Regulatory Failures in the Existing Regime Like many markets, energy supply suffers from “information asymmetry”. Energy suppliers know what risks they are running, but customers often do not. This information asymmetry provides some grounds for offering a form of customer protection. However, the current arrangements, including the existence of the SoLR regime, tend to exacerbate at least three market and regulatory failures that result in excessive risk-taking by suppliers and excessive financial distress, all of which imposes additional costs on customers. First, moral hazard occurs when equity holders and management take excessive risk in conditions in which they benefit from the upside but do not suffer the full downside.22 There are several reasons current arrangements exacerbate moral hazard in energy supply: • The current SoLR and SAR arrangements effectively insure customers against the risk of their supplier experiencing financial distress. As a result, customers do not have an incentive to monitor the performance of their supplier. On the contrary, current arrangements provide a strong incentive for customers to switch to the lowest-price supplier most at risk of going bankrupt, safe in the knowledge that their credit balances will be protected. Customers would find it challenging to assess suppliers’ hedging strategies or likely wholesale prices. However, they might be able to appraise the overall reliability of established brands (developed in or outside energy supply) versus unknown entrants and they would have an incentive to do so, were it clear that they had capital at risk in the case of supplier failure. • Current licensing arrangements allow suppliers to stockpile customers’ money in the form of credit balances through payment in advance by direct debit. Suppliers face no enforceable obligation to reserve capital for government obligations, despite Ofgem having consulted on methods for protecting credit balances over the last two years (see the section titled “Options for Reform”). As a result, current arrangements allow suppliers to finance their operations with the least informed line of credit and do not subject their business plans to the strictures of capital markets. Second, current arrangements exacerbate adverse selection in energy retail.23 Adverse selection describes markets in which both high-value types (i.e., suppliers unlikely to fail) and low-value types (i.e., suppliers likely to fail) could exist in principle. However, insofar as customers care about supply disruption, suppliers who are unlikely to go bankrupt may not www.nera.com 7 be able to distinguish themselves sufficiently from those who will. As a result, customers choose suppliers based on the information they can observe, such as price. The result is a market for “lemons” in which only low-priced suppliers at risk of failure can enter (or at least there is a preponderance of such entrants). The retail price cap exacerbates the problem of adverse selection because competition can only take place at prices below the cap. When most of the industry is not making a profit anyway,24 that means the only viable business model for an entrant is to price below other suppliers, potentially at an unsustainably low rate, in the hope of an upside. Absent any upside occurring, bankruptcies must follow. Third, we may also characterise a regulatory failure that exacerbates these market failures: an inefficiency in the SoLR process that undermines the competitive process. Some SoLR process is likely to be needed to ensure continuity of supply, but the SoLR process is a per se distortion to competition. It replaces decisions made by customers on their preferred supplier, based on preferred combinations of price and quality (including risk), with decisions made by a regulator. The basis for those decisions is unclear and non-transparent (arguably necessarily so, given the confidential information that suppliers may have to submit). However, the frequent use of the SoLR process in recent years has meant that a material proportion of customers who changed suppliers did so through Ofgem’s decision-making, rather than through an independent choice.25 For instance, in 2021, around one in three switching customers changed supplier through the SoLR arrangements. As a result, the locus of competition has shifted from being effective at attracting customers to winning beauty parades organised by Ofgem, which will not promote greater consumer engagement with the market. These market and regulatory failures result in distortions to competition and negative consequences for consumers, including: • Disproportionate allocation of costs to non-switchers: The excess costs of failed suppliers are borne by all customers and suppliers in the market. Customers who do not switch must bear the costs of honouring the credit balances of customers who switched to inefficient entrants. • Inefficient entry and distorted competition: Inefficient entrants may under-price the services they finance through credit balances and insure through the arrangements that spread costs over the wider market. These entrants capture market share from suppliers who set prices efficiently and their artificially low prices may deter the entry of efficient new suppliers. In particular, business models that rely on expensive but high-value investments, such as promoting consumer engagement with managing their energy use and carbon footprint, may not be viable under current arrangements. • Increased costs of finance for the market as a whole: If investors are unable to distinguish between efficient and inefficient entrants, they will demand higher returns. Those demands may deter new efficient entrants who are likely to be undercut by inefficient competitors. • Undermining consumer confidence in the market: To the extent that customers are concerned about supply disruption, frequent supplier failure may discourage switching, soften competition in the market, and result in higher prices. www.nera.com 8 The Direct Cost of Supplier Failure from the SoLR Process Could Be Between £1.7 and £2.1 Billion Abstracting from the theoretical cost of knock-on effects of supplier failure, the direct cost of supplier failure raised through industry levies and environmental obligations is substantial and likely to run to billions of pounds. The costs comprise three main components that are likely to be recovered from consumers and society: wholesale energy costs, credit balances, and payments under the RO scheme. We describe and estimate each cost in the following sections. Wholesale Costs in Excess of Price Cap Allowances for Appointed SoLRs Could Reach £1.5 Billion First, at least in 2021, the appointed SoLRs will most likely seek to recover the difference between current actual wholesale costs and the wholesale cost allowance within the cap on prices they can charge consumers. Ofgem sets a new price cap for each six-month period. To allow for the cost of buying wholesale energy during each price cap period, Ofgem averages contract prices for wholesale energy during an “observation period” spanning six months, ending two months before the start of the next price cap period. These contract prices refer to deliveries during that price cap period and the one after.26 Ofgem refers to this as a “6-2-12” rule: six months of observations of prices in actual trades, ending two months before the beginning of the next price cap period, for contracts to deliver energy over a 12-month period.27 Therefore, the wholesale allowance is set in stone two months before the start of each price cap period, based on trades dating back eight months before the start of the price cap period. As such, it can only reflect increases in wholesale prices with a lag. In a rising market, such as in 2021, that means wholesale cost allowances were materially out of the money (i.e., lower than actual prices). Such conditions undoubtedly contributed to the series of supplier failures in Winter 2021/22. In Figure 3, we compare the price cap to the concurrent (i.e., day-ahead) price of gas with forward contract prices as traded on 29 October 2021, the latest in our current dataset,28,29 and with the ensuing price cap. As shown, the price cap eventually rises to the elevated level of forecast wholesale prices (represented by the dashed blue line), but it will only reach that level in Summer 2022. In the meantime, throughout 2021, the price cap has persistently under-remunerated suppliers for the high cost of wholesale electricity or gas. www.nera.com 9 When a supplier exits the market, the SoLR is obliged to provide energy to the customers of the exited firm. The failed supplier may actually have hedged the energy purchases for its customers’ demands at prices witnessed during the observation period. However, the SoLR can only buy the required volumes at current wholesale prices, which are higher (currently, at least). Figure 4 compares the SoLR’s “buy-out price” for gas (i.e., the difference between the wholesale cost allowance set and the cost of replacing that gas at contemporaneous market prices between April 2020 and October 2021). The corresponding graph for electricity shows a similar picture. When a supplier fails, the SoLR faces exposure to the difference between the historical prices embodied in the price cap allowance and the current price of replacing that energy at short notice. The cost to the supplier of hedging those exposures at the date of acquiring new customers is given by the price of the forward contracts on the day in question (the yellow line shows that forward price for the “balance of season” contract, one of the relevant hedging contracts). Since the start of 2021, those prices (in combination with the other hedging contracts that make up the wholesale allowance) have sat above the wholesale cost allowance embedded within the price cap (green line). The shortfall (red line) represents the costs that the SoLR cannot recover from its own customers and will, therefore, need to claim from other customers. Concurrent Price Price Forecast Price Cap www.nera.com 10 As the figure shows, a SoLR would have benefitted slightly from acquiring customers from supplier failures in 2020, because the concurrent wholesale prices tended to be slightly below the wholesale cost allowance in the price cap. However, season-ahead wholesale electricity prices rose from £65 to £314 per MWh between January and September 2021. In a period of historically high and rising wholesale energy prices, SoLRs incur large losses for taking on the customers of the failed energy suppliers. In the worst case, if a supplier failed on 5 October 2021 (none did), a SoLR that immediately purchased all of the energy embodied in the wholesale cost allowance in current and future caps would incur a loss of over £400 per acquired electricity customer and over £700 per acquired gas customer relative to the wholesale cost allowance. Combining these estimated hedging losses with the reported details (dates and customer numbers) of the actual supplier failures, as listed in Appendix A, we can estimate the total cost to SoLRs driven just by differences in wholesale energy prices at the date of failure relative to the hedged prices baked into the price cap. Our analysis suggests that SoLRs would have incurred a cost of around £1.5 billion due to the need to purchase large volumes of energy at high prices, compared with the wholesale cost in the price cap. Assuming SoLRs do not accept these costs to acquire new customers, this amount will be claimed via the SoLR mutualisation process, spread over all suppliers and ultimately recovered from all customers. Honouring Credit Balances May Cost Customers £345 Million Second, SoLRs can claim remuneration for taking on the credit balances of the customers of failed suppliers and also for the costs from acquiring new customers such as additional IT, operational, and communication costs. The bankruptcies during 2021 are too recent for Ofgem to have awarded any LRSPs. However, in 2018 and 2019, Ofgem awarded roughly £46 million in SoLR charges. Of this, Ofgem awarded £36.9 million to recover a portion of credit balances, whilst the remaining £8.9 million covered acquisition costs. As a lower-bound estimate, we can scale up the SoLR payments from 2018 and 2019 by the number of customers affected by supplier exits in 2021 to date versus the number in the earlier period. Doing so makes no allowance for any rise in the loss on wholesale energy purchases, but still gives an estimate of roughly £100 million to cover credit balances and acquisition costs in 2021. Price Cap Allowance Wholesale Price Balance of Season Total Loss of Suppliers (To Be Mutualised) Gas www.nera.com 11 This figure is likely to underestimate LRSP payments for 2021, since SoLRs in 2018/19 were able to earn a positive margin on buying wholesale energy at contemporaneous prices and selling it at the price cap. Consequently, SoLRs were able to claim a lower proportion of credit balances for recovery through LRSPs. As demonstrated in the previous section, the reverse is true in 2021; SoLRs are making large losses per customer to procure the necessary volume of energy at current wholesale prices. In turn, SoLRs will claim a higher percentage of credit balances to be recovered in LRSPs. The credit balances held by the failed suppliers in 2021 are unknown. However, multiplying previous estimates of the average credit balance per customer held by suppliers by the number of customers affected by the SoLR process in 2021 would indicate additional mutualised costs of £345 million.30 Mutualised RO Costs May Add a Further £252 Million Third, the RO scheme places an annual obligation on electricity suppliers to obtain and present ROCs to Ofgem in proportion to the amount of renewable electricity they have supplied over the course of each obligation year. The obligation year runs from April to March, but suppliers have until the end of August to present ROCs to Ofgem, or until the end of October to pay the buy-out price if they have not acquired enough ROCs. Upon bankruptcy, a supplier defaults on their obligation under the RO. Defaulted obligations are mutualised at the administratively determined buy-out price, set at £50.05 per ROC in 2020/21 and £50.80 in 2021/22. Our analysis assumes that any supplier that defaults between April and October (inclusive) defaults on: (a) its entire obligation from the previous obligation year (for which it has not yet had to pay the buy-out cost) and (b) the obligation of the current obligation year, pro-rated to the share of the year that has elapsed so far. A supplier that defaults between November and March defaults only on the latter. This method puts an upper limit on the estimate of the default costs, as some suppliers that defaulted in September or October may have presented ROCs by the 31 August deadline to submit certificates, rather than waiting for the 31 October deadline for paying the buy-out price. Based on the 2020/21 and 2021/22 obligation rates and buy-out prices, we estimate RO mutualisation costs of almost £252 million.31 However, £147 million of this relates to the 2020/21 obligations of suppliers that defaulted in September or October, some of which may have presented ROCs in time for the August certificate deadline. The remaining £100 million (a lower-bound estimate) relates to 2020/21 ROCs for suppliers that defaulted before the end of August 2021 and 2021/22 ROCs for suppliers that defaulted after the beginning of April 2021. Implications Together, based on the calculations above, the three cost drivers discussed (wholesale energy costs, credit balances/acquisition costs, and RO mutualisation) set the cost of the supplier failures of 2021 that will be mutualised at between £1.7 and £2.1 billion. Estimates vary and other published estimates are as high as £2.6 billion, depending on the assumed level of credit balances that failed suppliers owe to each household.32 The total costs to society will depend critically on how SoLRs respond to the challenge of acquiring new customers in current inflated market conditions. Estimating the costs of the SAR for Bulb is still more challenging. The government has granted Bulb a £1.7 billion loan on top of the £1.7 to £2.1 billion to be mutualised through the SoLR process. Assuming Bulb exhausts the entirety of the loan and does not repay it, mutualisation costs could amount to £3.8 billion. In principle, the same three categories of costs should apply, insofar as loans from the Exchequer are necessary to pay for unhedged www.nera.com 12 volumes of energy, honour credit balances, and purchase ROCs. However, under the SAR, Bulb will continue to operate and its customers will continue to have a call on the value (unknown at time of writing) of whatever hedging instruments and capital it had at its disposal, which should mitigate the costs for society. Of course, not all the costs described above are costs borne by society as a whole. The beneficiaries of underhedged suppliers will be generators and/or importers of gas experiencing an uplift on the prices at which they sell. Active switching customers may also have benefitted in the past from under-priced energy deals. These benefits to individuals offset part of the cost of credit balances and ROCs that are mutualised across all customers (including vulnerable and/or sticky customers). Options for Reform The current arrangements around supplier exit privatise the benefits of success and socialise the costs of failure. Therefore, it is not a coincidence that suppliers have been failing and imposing costs on consumers. The underlying market failures have not escaped the notice of policymakers and of Ofgem in particular. In 2019 and 2020, Ofgem consulted on a series of reforms that would strengthen incentives to pursue more stable business models at less risk of failure.33 The strongest remedy amongst these possible policies was to require suppliers to protect a portion of their own credit balances. Ofgem’s proposal would have ensured that, when suppliers failed, the collective of consumers did not foot the whole bill. It would also have directly addressed the underlying market failure prompting moral hazard: Protecting credit balances would force suppliers to fund their activities from capital markets rather than from customers (the least well-informed source of finance), with the aim of reducing the size and frequency of failures. Despite favouring further protection for credit balances in its consultation, Ofgem ultimately abandoned this policy, at least pending development of a more detailed model that was still under development at the end of 2021. Ofgem’s reasons for doing so were varied, including: • Conceptual errors in its cost-benefit analysis: Ofgem estimated the benefits of insuring credit balances by taking the total insurance premium and comparing it with the likely payout based on a fixed number of actual SoLR events. Accordingly, the proposal to mandate insurance would only result in net social benefits in Ofgem’s analysis if the insurance industry repeatedly under-priced the insurance premium and lost money systematically on the product. In practice, the true social trade-off is between the cost of administering insurance (i.e., the gross margin within the premium) and the benefit of a reduction in the number of SoLR events. • (Misplaced) concerns about access to working capital: Some suppliers argued that being forced to insure their risks would remove a free source of working capital and that would feed into customer bills.34 Such arguments overlooked that customers bear the cost of working capital even if they provide that working capital to suppliers, just not through the headline bill. By loaning money to energy suppliers, customers incur an opportunity cost measured with reference to the next best alternative forgone (e.g., saving, repaying a mortgage or a credit card, or consuming goods or services). www.nera.com 13 Having stopped or deferred work on protecting credit balances, Ofgem implemented a series of conduct remedies instead with the aim of monitoring the performance of commercial businesses. These included milestone assessments (i.e., upon reaching a certain size, a supplier would be subject to an assessment of its financial health) and principles that would be written into supplier licences regarding an obligation to maintain their financial health and operational capability. Given the challenge of enforcement, these measures ultimately failed to prevent large-scale supplier bankruptcies. Ofgem launched a new consultation in November 2021 on various aspects of the price cap, including the potential impact of increased wholesale volatility on the default tariff cap. On 15 December, Ofgem launched an Action Plan for increasing financial resilience, which includes eight “immediate” actions to be delivered early in 2022: 1. Increased monitoring and data collection: Ofgem’s Action Plan suggests that a lack of data has hampered its market monitoring efforts, so it will seek to obtain more comparable data from suppliers. The importance of additional data will depend critically on the purposes to which Ofgem puts it and runs the risk of placing burdens on suppliers (and customers). 2. Stress testing: At first, Ofgem will be developing simple what-if tests to assess the viability of suppliers’ businesses. Ofgem states that it will share the results with suppliers to encourage them to develop risk management frameworks. It will also use the results to assess whether suppliers have breached their licence conditions. It is as yet unclear what Ofgem will do in the context of a breach under current circumstances as further enforcement action could merely prompt the failures the stress testing is intended to prevent. Moreover, any stress testing arrangements will need to be carefully designed to be transparent, proportionate, and non-discriminatory. 3. Management control framework: Ofgem is asking suppliers to describe their management control framework. Ofgem plans to provide direction on required improvements. This proposal will deliver reduced supplier failures if and only if Ofgem has better incentives or information on how to design the internal reporting structures of supply businesses than those businesses themselves. 4. Review of the Financial Responsibility Principle and Operational Capability Criterion: Supplier licences already have obligations under the Financial Responsibility Principle (Supplier Licence Condition (SLC) 4B) and the Operational Capability Criterion (SLC 4A). It is not entirely clear how, having failed to date, these licence conditions will have more teeth in the future. Ofgem’s own view, expressed in the Action Plan, is that it anticipates being able to better enforce these conditions under a new market monitoring regime, though the details that would support that are not yet available. 5. Protecting credit balances: Ofgem has previously consulted on automatic refunds of excess credit balances and a threshold model for credit balances aimed at protecting and/or reducing credit balances above a threshold. Ofgem has signalled its intent to continue to review these and (potentially) other options for protecting credit balances. www.nera.com 14 6. Managing new customers and growth: In tandem with its Action Plan, Ofgem published a Statutory Consultation on changes to its existing regime of reviewing supply businesses as they grow at specific milestones. The aim of such measures is to nip precarious suppliers in the bud before the capital at risk can grow. 7. Governance and accountability: Ofgem plans to explore measures to strengthen the regulatory framework around governance processes of supply businesses and fit and proper tests for licence applicants. 8. Extension of the new supply application assessment period: Alongside its Action Plan, Ofgem published its decision to extend the current moratorium on new licence approvals until summer 2022, whilst Ofgem designs new arrangements to ensure financial resilience. Ofgem’s moratorium on new entry is a reaction to the immediate market failures surrounding existing arrangements and represents a complete reversal of a 20-year policy arc to promote new entry. Over the medium- to long-term, Ofgem has indicated that it will also seek to address the underlying problem of mutualisation of credit balances and RO payments and develop a longterm framework for prudential regulation. At this stage, neither has been specified in detail. Ofgem’s current proposals for addressing recent supplier failures are primarily a framework for addressing the problem rather than specific actions to address supplier failures themselves. Neither are they specified in sufficient detail at this stage for firm conclusions to be drawn as to how successful they will be as a package. Over the coming months, Ofgem will need to turn that framework into a series of specific measures. The likely measures to emerge from Ofgem’s broader process fall into three (overlapping) buckets: those that reduce the ability of energy suppliers to take risk, those that limit their incentives to do so, and those that limit the costs of failure when it happens. Table 1 sets out an illustrative, far-from-exhaustive list of 15 options for actions Ofgem could consider taking under the programme of work it proposes to improve prudential regulation of supply businesses or on associated reforms to the price cap. The table groups the options for reform into three broad categories: • Mechanisms to reduce mutualisation of costs, when failure occurs: These mechanisms limit the ability of failing suppliers to mutualise costs, when they fail. These mechanisms would require suppliers to subject their strategies to more informed lines of credit and the strictures of capital markets. Therefore, they directly address the market failures resulting from mutualisation and reduce the instances of supplier failure themselves by preventing unsustainable businesses from operating in the first place. These are the lightest touch remedies which, if well designed, are likely to be the most effective: they directly tackle the underlying market failures and www.nera.com 15 frequently work to address the underlying incentive problems in the current regime. Chief among these mechanisms are those requiring the protection of credit balances and risk exposures through letters of credit, insurance, parent company guarantees, and/or evidence of risk capital. • Conduct remedies: These mechanisms require Ofgem to approve or analyse supplier behaviour and potentially to force changes in their commercial strategy. Although a spectrum of conduct remedies exists, the proposals generally require more intrusive regulation and the substitution of regulatory judgement for commercial judgement. They also require enforcement and checking that suppliers are complying with their obligations: conduct remedies can also put Ofgem in a difficult position by requiring it to make fine commercial judgements that have material (and potentially existential) impacts on the businesses concerned. Once the immediate pressure surrounding the recent supplier failures is off, the temptation may arise to eschew tough decisions that could result in future bankruptcies. • Changes to the price cap: The existing price cap is a regulatory intervention that exposes suppliers to specific risks, such as forecasting the number of customers who at the end of fixed price deals will roll onto default tariffs. Insofar as the price cap does not price these risks or recover total costs, it may artificially depress prices and promote riskier business models. Changes to the price cap could de-risk it for suppliers and allow them to compete using more sustainable business models. In tandem with the Action Plan, Ofgem published a “Call for Input” on adapting the price cap methodology. Ofgem’s proposed options included: – A reopener in exceptional circumstances to address volatile wholesale markets; – Quarterly updates to the price cap to reduce the length of suppliers’ exposure; and – A fixed-term default tariff where Ofgem sets prices every month for customers beginning new contracts that month. Fixed-term tariffs would be valid for six-month periods and backed by exit fees. In analysing options for revising the price cap, Ofgem has focussed in part on ensuring that customers are not subjected directly to wholesale energy prices. However, customers face the costs of wholesale price volatility, whether or not they are exposed to that volatility directly. If the revised cap regime continues to place risks on suppliers, suppliers will need to pass through the costs of the risk capital required to bear those risks, or else further failures will ensue. Some measures would fall into two or more of these groups. The efficient mix of reforms will depend crucially on their specific designs and the mix that Ofgem intends to employ is unclear. The balance of text in Ofgem’s Action Plan is heavily skewed towards conduct remedies, which may or may not reflect the balance of action. However, conduct remedies alone are unlikely to be sufficient without some material changes to suppliers’ incentives to take excessive risk and ability to mutualise costs, such as greater protection for credit balances and increased risk capital requirements. www.nera.com 16 Table 1. Options to Reduce Market Failures in the Energy Supply Market Reform Option Target NERA Comment Mechanisms to reduce mutualisation of costs, when failure occurs Hedging: Protect hedging exposures Ability to take risk Require firms to demonstrate a quantity or risk capital or letter of credit covering that risk capital, potentially given their hedging profile. Hedging & Credit Balances: Ensure the value of assets remains with customers Cost of failure Current arrangements split credit balances (which move to the SoLR) from debit balances and in-the-money hedges (which stay with creditors). Credit Balances: Expose customers to credit balance risk Incentive to take risk May encourage consumers to choose suppliers more carefully. Does not reduce moral hazard and places the burden on consumers. Credit Balances: Protect credit balances above a defined threshold Cost of failure Ofgem is currently consulting on this through the threshold model. ROs: Stage Renewables Obligation payments over time to reduce exposure Cost of failure Could make an unsustainable business fail more quickly, before it can cause greater damage. Ofgem/BEIS is currently consulting on this matter. Conduct remedies to reduce the incidence of failure Tighter Reviews Ex Ante: Prudence review of business models Ability to take risk Requires Ofgem to have commercial judgement and may stifle innovation. Hedging Approvals: Ofgem reviews and approves a supplier’s hedging strategyv Ability to take risk Reduces the risk of suppliers under-hedging and leaving themselves exposed to the volatility of the wholesale market. Market Monitoring: Ofgem conducts repeated stress tests to assess the financial viability of energy suppliers Ability to take risk Similar mechanism to financial stress testing for banks. May be challenging to implement objectively and in a timely manner. Could be used to set risk capital requirements. Changes to the price cap to promote true competition and reduce supplier risks Price Cap: Ofgem’s Option 1—Enable suppliers to pass through current wholesale prices Ability and incentive to take risk Reduces the risk associated with the wholesale market but may lead to volatile bills for customers if it induces a shorter-term focus on hedging strategies. Successfully implemented in Spain. Price Cap: Ofgem’s Option 2—Quarterly wholesale price cap Ability and incentive to take risk Increases speed of pass-through from existing wholesale prices and limits supplier exposure, but still exposes suppliers to hedging risk. Price Cap: Ofgem’s Option 3—Fixed-term default tariff Ability and incentive to take risk Exit penalties will need to be large enough to ensure customer commitment. Likely to discourage engagement with the competitive energy market—customers may only switch two months a year without exit fees. Price Cap: Increase to reflect additional costs of insuring risks and operating a reliable business model Incentive to take risk More effectively price in the risk of taking on consumers of energy suppliers who exit ] the market. Price Cap: Increase to allow competition and innovation to develop beneath it Incentive to take risk This may enable innovation to support the transition to net-zero and reduce the “race to the bottom” model. Price Cap: Two-tier Default Tariff Cap with a higher price for SoLR customers or those rolling off fixedprice deals Incentive to take risk / cost of failure Protects customers who lose their supplier relative to current electricity prices, not the hedged price. Places some limited responsibility on customers to choose suppliers that are likely to survive. Customers who may benefit from unsustainably cheap rates in the short-run face higher prices later. Price Cap: Introduce true-up mechanism Incentive to take risk A true-up mechanism would reduce (but not eliminate) risk from wholesale market outcomes, although recovery of the true-up may itself be risky. Source: NERA analysis. www.nera.com 17 Conclusion The focus of British policymaking in the energy retail market since the late 2000s has been to promote entry and ultimately to cap prices with the aim of protecting disengaged consumers who had hitherto failed to engage with the energy market. The repeated exits of the last five years are, therefore, ironic: supplier failures show that, if anything, the market has too many suppliers and the presence of some destroys value for society. Price caps aimed at protecting sticky customers have contributed to creating a low-priced environment for active switchers, whose credit balances, costs of supply, and risks have been insured by the sticky customers the price caps were designed to protect. In 2021 alone, mutualised costs may total up to £2.1 billion. Meanwhile, the energy supplier Bulb was granted a £1.7 billion loan from the government that may not be repaid. Taken together, and assuming the loan to Bulb is entirely exhausted, these costs equate to roughly £140 per domestic energy customer in Great Britain. To put this number into context, the decision by the UK government in 2021 to increase national insurance by 1.25 percentage points requires a worker on £20,000 to pay an additional £130 per annum.35 Recent experience from the British energy market offers various lessons for other wholesale and retail energy markets (and the British market in the future), such as the following: • First, as with all energy market arrangements, regulations to promote access to energy supply markets require careful design to ensure that they do not distort competition, as they did in Great Britain. The excessive bankruptcies and moral hazard stem in part from policymakers’ unwillingness to accept the economic reality that, in competitive markets with switching costs, different customers pay different prices, depending on their level of engagement. As a result, by accident or otherwise, policymakers promoted inefficient competitors, not competition. • Second, there is a clear requirement for more reliable and well-founded cost-benefit analysis to inform regulatory decisions. If Ofgem had accurately assessed the costs and benefits of reform as part of its supply licence review in 2019/20, it may have been less swayed by spurious arguments put forward by some smaller suppliers. The market might have avoided many of the bankruptcies and associated costs in 2021. Ofgem delivering better analysis of policy is both a question of institutional focus and resources. • Third, where there is an identifiable and recognised market failure, policymakers ignore it at their peril. Their failure to grapple with the effect of mutualisation when the market failure became clear resulted in some of the large negative consequences for consumers. The project of designing electricity markets is one of compromise in designing a set of incentives to mimic atomistic, decentralised competition over an inherently centralised grid. The current set of compromises are not working. Therefore, Ofgem’s announced intention to reform the market is to be welcomed. However, ensuring that the new regime gives the right incentives to suppliers is critical to its success: rationally run commercial enterprises will respond to the incentives that markets offer. The job of the regulator and the policymaker is to design those incentives to harness the benefits of competition. Energy customers have a right to expect future regulation and policy to distort competition less than it has in the past. www.nera.com 18 Table 2. Options to Reduce Market Failures in the Energy Supply Market Supplier Exit Date SoLR SoLR Payment (£m) Domestic Customers Future Energy February 2018 Green Star Energy - 10,000 Gen4U July 2018 Octopus - 500 Iresa July 2018 Octopus 13.2 95,000 USIO Energy October 2018 First Utility 0.4 7,000 Extra Energy November 2018 Scottish Power 10.6 108,000 Spark Energy November 2018 Ovo 12.4 290,000 OneSelect December 2018 Together Energy 4.5 36,000 Economy Energy January 2019 Ovo - 235,000 Our Power January 2019 Utilita - 31,000 Brilliant Energy March 2019 Ovo 0.7 17,000 Solarplicity Supply August 2019 EDF 4.2 7,500 Total: 45.9 837,000 Source: Ofgem SoLR Decision Documents; Company statements. Table 3. Supplier Failures in 2021 Supplier Month of Exit New Supplier Domestic Customers Simplicity Energy January British Gas 50,000 Green Network Energy January EDF 360,000 Hub Energy August E.ON 6,000 PfP Energy September British Gas 82,000 MoneyPlus Energy September British Gas 9,000 Utility Point September EDF 220,000 People’s Energy September British Gas 350,000 Green Supplier Ltd September Shell 255,000 Avro Energy September Octopus 580,000 Symbio Energy September E.ON 48,000 Igloo Energy September E.ON 179,000 Enstroga Ltd September E.ON 6,000 Colorardo Energy October Shell 15,000 Pure Planet October Shell 250,000 Daligas Limited October Shell 9,000 GoTo Energy (UK) October Shell 22,000 Bluegreen Energy November British Gas 5,900 Ampoweruk Ltd November Yu Energy 600 Zebra Power Limited November British Gas 14,800 MA Energy Limited November SmartestEnergy 0 (300 non-domestic) Omni Energy Limited November Utilita 6,000 CNG Energy Limited November Pozitive Energy 0 (41,000 non-domestic) Social Energy Supply November British Gas 5,500 Neon Reef Limited November British Gas 30,000 Orbit Energy Limited November Scottish Power 65,000 Entice Energy November Scottish Power 5,400 Zog Energy Limited December EDF 11,700 Total: 2,564,900 Source: Ofgem SoLR decision documents. Appendix www.nera.com 19 Table 4. SoLR Hedging Costs Sum to Almost £1.5 Billion, Driven by Supplier Exits in September and November Exited Supplier SoLR Date of Bankruptcy Customer Numbers Cost per Customer—Elec (£) Cost per Customer—Gas (£) Total (£m) Simplicity Energy British Gas 27/01/2021 50,000 15 14 1 Green Network Energy EDF 27/01/2021 360,000 15 14 10 Hub Energy E.ON 09/08/2021 6,000 109 191 2 PfP Energy British Gas 07/09/2021 82,000 152 280 35 MoneyPlus Energy British Gas 07/09/2021 9,000 152 280 4 Utility Point EDF 14/09/2021 220,000 216 374 130 People’s Energy British Gas 14/09/2021 350,000 216 374 207 Green Supplier Ltd Shell 22/09/2021 255,000 244 412 167 Avro Energy Octopus 22/09/2021 580,000 244 412 380 Symbio Energy E.ON 29/09/2021 48,000 364 547 44 Igloo Energy E.ON 29/09/2021 179,000 364 547 163 Enstroga Ltd E.ON 29/09/2021 6,000 364 547 5 Colorardo Energy Shell 13/10/2021 15,000 324 547 13 Pure Planet Shell 13/10/2021 250,000 324 605 205 Daligas Limited Shell 14/10/2021 9,000 364 530 9 GoTo Energy (UK) Shell 18/10/2021 22,000 311 299 18 Bluegreen Energy British Gas 01/11/2021 5,900 206 299 3 Ampoweruk Ltd Yu Energy 02/11/2021 600 202 332 0 Zebra Power Limited British Gas 02/11/2021 14,800 202 332 8 Social Energy Supply British Gas 16/11/2021 5,500 267 445 4 Neon Reef Limited British Gas 16/11/2021 30,000 267 445 21 Orbit Energy Limited Scottish Power 25/11/2021 65,000 317 412 47 Entice Energy Scottish Power 25/11/2021 5,400 317 412 4 Zog Energy Limited EDF 01/12/2021 11,700 339 388 9 Total: 2,565,000 4,388 7,188 1,491 Source: NERA analysis. 1 “Bulb in special administration”, Bulb, 22 November 2021, available at https://bulb.co.uk/blog/bulb-special-administration. 2 NERA analysis of Ofgem’s Gas Supply Market Shares by Company: Domestic (GB), available at https://www.ofgem.gov.uk/energy-dataand-research/data-portal/retail-market-indicators. 3 “Energy Supply Probe—Initial Findings Report”, Ofgem, 6 October 2008, available at https://www.ofgem.gov.uk/sites/default/files/ docs/2008/10/energy-supply-probe---initial-findings-report.pdf. 4 Stephen Littlechild, “The CMA’s assessment of customer detriment in the UK retail energy market”, Energy Policy Research Group, University of Cambridge, 19 June 2020, available at https://link. springer.com/article/10.1007/s11149-020-09408-x. 5 “Energy Market Investigation, Final Report”, CMA, 2015, para. 19.267, p.1354. 6 Stephen Littlechild, “The CMA’s assessment of customer detriment in the UK retail energy market”. 7 “Ofgem sets prepayment price cap to protect over four million households least able to benefit from competition”, Ofgem, 7 February 2017, available at https://www.ofgem.gov.uk/publications/ ofgem-sets-prepayment-price-cap-protect-over-four-millionhouseholds-least-able-benefit-competition. 8 Stephen Littlechild, “The CMA’s assessment of customer detriment in the UK retail energy market”. 9 NERA Analysis of Ofgem’s Retail Markets Indicators: Electricity Supply Market Shares by Company and Number of Active Domestic Suppliers by Fuel Type (GB). 10 With the notable exception of the exit of Enron/TXU in 2002. 11 “GB domestic energy supplier ‘health check’ analysis: 2018– present”, Cornwall Insight, June 2019, p. 6. 12 NERA analysis of Platts Power Vision data. 13 “State of the energy market 2018”, Ofgem, 2019, p. 3. 14 “Guidance on supplier of last resort and energy supply company administration orders”, Ofgem, 2016, p. 16. 15 Indeed, Ofgem itself has recently stated that “at the moment, we expect SoLRs to claim for their otherwise unrecoverable wholesale costs (i.e., the difference between the wholesale costs that they incur and the wholesale costs that they recover from their customers) and we note that claiming for such costs is permitted under the licence.” Ofgem Open Letter, Last Resort Supply Payment Claim Process, 29 October 2021. 16 “Guidance on supplier of last resort and energy supply company administration orders”, Ofgem, 2016, p. 15. 17 Renewables generators “produce” 1 ROC for every 1 MWh of renewable energy they produce. 18 “Renewables Obligation: Total obligation for 2020/21”, Ofgem, 25 August 2021, available at https://www.ofgem.gov.uk/publications/ renewables-obligation-total-obligation-202021. 19 “How you’re protected when energy firms collapse”, Ofgem, 14 October 2021, available at https://www.ofgem.gov.uk/news-andviews/blog/how-youre-protected-when-energy-firms-collapse. 20 Energy Act 2011: Special Administration Regime. 21 Ibid. 22 Bengt Holmstrom, “Moral Hazard and Observability”, The Bell Journal of Economics, Vol. 10, No. 1, 1979, pp. 74–91. 23 George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”, The Quarterly Journal of Economics, Vol. 84, No. 3, August 1970, pp. 488–500. 24 Stephen Littlechild, “The CMA’s assessment of customer detriment in the UK retail energy market”. Also see Ofgem Retail Market Indicators: Aggregate Profits in %:supply segment. 25 NERA analysis of Energy UK Electricity Switching Reports that cites roughly £6.4 million customers changing supplier in 2020. 26 For example, for the Winter 2021/22 cap period (October 2021 to March 2022), Ofgem observes average forward trading price for delivery in Winter 2021/22 and Summer 2022, as traded between February and July 2021. See “Default Tariff Cap: Decision Appendix”, Ofgem, November 2018. 27 The wholesale allowance in the price cap also includes proportional uplifts to account for monthly/daily/hourly shaping costs, demand uncertainty and energy losses. These uplifts collectively account for roughly a 20% (electricity) and 8% (gas) uplift relative to the fully hedged wholesale price. See “Default tariff cap level: 1 October 2021 to 31 March 2022, Annex 2—Wholesale cost allowance methodology v1.8, 1a Direct Fuel Cost Component”, Ofgem, 6 August 2021. 28 Electricity is 70% baseload and 30% peak, consistent with Ofgem’s price cap methodology. 29 Taken from Platts Powervision. 30 Credit balance figures of the average household obtained from Rik Smith, “12 million homes owed £1.5 billion by energy suppliers”, uSwitch, 24 April 2019, available at https://www.uswitch.com/ media-centre/2019/04/12-million-homes-owed-1-5-billion-energysuppliers/. 31 2020/21: Obligation rate = 0.471 ROCs/MWh; Buy-out price = £50.05/ROC. 2021/22: Obligation rate = 0.492 ROCs/MWh; Buy-out price = £50.80/ROC. 32 “Market Meltdown: How regulatory failures landed us with a multibillion pound bill”, Citizens Advice, 2021. The report assumes each household was owed £353 in credit balances based on analysis of their consumer service helpline. 33 “Supplier Licensing Review: Ongoing requirements and exit arrangements—Decision”, Ofgem, 26 November 2020. 34 “Statutory Consultation—Supplier Licensing Review: Ongoing requirements and exit arrangements”, Ofgem, 25 June 2020, para. 2.6. 35 Anthony Reuben and Tom Edgington, “National Insurance: What’s the new Health and Social Care tax and how will it affect me?”, BBC, 23 November 2021, available at https://www.bbc.com/news/ uk-politics-58436009. Notes About NERA NERA Economic Consulting (www.nera.com) is a global firm of experts dedicated to applying economic, finance, and quantitative principles to complex business and legal challenges. For more than six decades, we have been creating strategies, studies, reports, expert testimony, and policy recommendations for government authorities and the world’s leading law firms and corporations. 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Contact For further information and questions, please contact the authors: George Anstey Director +44 20 7659 8630 [email protected] Soren Christian Senior Consultant +44 20 7659 8760 [email protected] The opinions expressed herein do not necessarily represent the views of NERA Economic Consulting or any other NERA consultant. Please do not cite without explicit permission from the author. To receive publications, news, and insights from NERA, please visit www.nera.com/subscribe.