Summary: BLP antitrust and competition partner James Marshall summarises the provisional recommendations made by the CMA as part of the UK Energy Market Reform. The areas for are identified as; Retail; Wholesale; Regulatory. Interested parties have until 7 April to comment on the proposals. The CMA’s final report is due by 25 June 2016.
On 10 March 2016, the Competition and Markets Authority (CMA) published the summary of its provisional decision on remedies to address problems hindering competition in the UK energy market. The long-awaited report follows an 18-month investigation into the supply and acquisition of gas and electricity in the UK retail and wholesale markets. The full provisional report is expected to be published during the week of 14 March.
The CMA has identified three categories of remedies:
- Retail market remedies, aimed at easing customer switching and protecting low-income consumers on prepayment and restricted meters;
- Wholesale market remedies, to increase the rigor of non-auction awards of renewables Contracts for Differences (CfD) and introduce cost-reflective transmission loss pricing; and
- Regulatory remedies, to recalibrate the roles of Department of Energy and Climate Change (DECC), Ofgem and the industry. Ofgem’s duties will be clarified, and the Big Six energy suppliers will face additional financial and performance reporting.
These provisional recommendations are explored further below. Interested parties have until 7 April to comment on the proposals. The CMA’s final report is due by 25 June 2016.
Retail Market Remedies
The CMA’s proposals are intended to make it easier for consumers and microbusinesses to switch to more competitively priced energy tariffs. According to the CMA, approximately 70% of domestic customers of the ‘Big Six’ are on the most expensive default standard variable tariff (SVT). In particular the CMA’s analysis revealed that, in total, customers may have been paying an estimated £1.7 billion a year more than they would in a competitive market.
In its provisional findings, published in July 2015, the CMA identified a range of concerns that impede competition in the retail market, including widespread consumer “disengagement”, regulatory inadequacies and a need for greater transparency. In particular, the CMA cited “lack of awareness of what deals are available, confusing and inaccurate bills and the real and perceived difficulties of changing suppliers” as creating an adverse effect on competition.
The CMA has thus proposed a suite of measures to address its concerns, including:
- the creation of an Ofgem-controlled database of disengaged domestic and microbusiness customers that have been on a standard variable tariff for more than three years. This would allow competitors to target those customers more easily;
- abandoning the four-tariff rule introduced by Ofgem following its retail market review in 2013;
- a temporary safeguard price control to remain in place until 2020 for pre-payment meter customers, which would reduce bills by a total of £300million per year; and
- making it easier for new suppliers to compete for pre-payment customers and for those customers to switch suppliers, even if they are in debt.
Wholesale Market Remedies
In the wholesale sector, the CMA’s provisional findings identified two areas in which competition in the wholesale market did not operate effectively: (i) the mechanisms for allocating Contracts for Difference (CfDs); and (ii) the absence of locational charging for transmission losses.
For CfDs, the CMA recommends that DECC undertakes and consults on a clear and rigorous impact assessment before awarding either a CfD outside the competitive auction process or allocating technologies between ‘pots’ and the CfD budget to the different pots.
For transmission losses, the CMA suggests imposing a requirement that variable transmission losses are priced on the basis of location, and that 100%, rather than the current 45%, of losses are assigned to generators.
Regulatory Governance Remedies
Finally, the CMA’s remedies package includes a ‘reset’ to clarify and recalibrate the relationship between DECC, Ofgem and the industry. The proposals concern five areas:
- Ofgem’s duties and responsibilities;
- the relationship between DECC and Ofgem;
- the analysis of the impacts of policy and regulation;
- the regime for financial reporting; and
- governance of the industry codes.
To address these concerns, the CMA recommends:
- the introduction of new legislation to clarify Ofgem’s statutory objectives and duties;
- increased consultation by DECC on policy decisions;
- requiring Ofgem to modify the licence conditions of the ‘big six’ energy firms so they have to provide separate financial reports for their generation and retail supply activities; and
- giving Ofgem a more proactive role in code development, including the power to modify the codes in certain exceptional circumstances.
The CMA’s provisional remedies had been due at the end of January 2016. This timetable was delayed to allow the CMA more time to consider the responses received in relation to its provisional findings and possible remedies in relation to the prepayment sector of the market (published in December 2015). Consequently, publication of the CMA’s final report into the energy market investigation has also been delayed from April until June.
The CMA is expected to publish the full text of its provisional decision during the week of 14 March 2016. The CMA invites interested parties to comment on its decision by 7 April 2016. The deadline for publication of the CMA’s final report is 25 June 2016, after which the CMA’s remedies will be implemented.