Today (10 March) the Competition and Markets Authority (CMA) has published a summary of its provisional decision on remedies to address the lack of competition in the UK energy market.
These will be implemented after its investigation formally concludes in June 2016. They address the adverse effects on competition that the CMA identified in their provisional findings in July 2015; see our article for more details.
Retail energy markets
The CMA's remedy proposals are intended to encourage a greater number of consumers and micro-businesses to switch to more competitively priced deals and they go further than pure "transparency-based" remedies, which the CMA has put in place in the context of previous market investigations such as the private motor insurance and payday lending inquiries. Those investigations focused on how to encourage consumers (at large) to access the information they need, assess whether a provider's products meet their needs and then act on that information by switching to an alternative provider, but stopped short of more interventionist, pricing-based remedies. In contrast, in the energy inquiry, the CMA has now proposed a safeguard price control until 2020 to protect "vulnerable" customers with pre-payment meters, whose options the CMA argues are more limited.
The remedies include:
- An Order forcing gas and electricity suppliers to give Ofgem the details of their domestic and microbusiness customers that have been on a default tariff for three or more years (unless those customers opt out). These details will be put on a database that rival suppliers can then access and use for postal marketing
- A temporary safeguard price control to protect customers on prepayment meters, which the CMA argues would reduce their bills by a total of £300 million a year
- Giving price comparison websites access to databases that will enable them to make more effective use of customer data
- Removing the 'retail market reform' restrictions such as the four tariff rule, which in practice have hindered competition rather than helped consumers
- Making it easier for new suppliers to compete for pre-payment customers and for those customers to switch suppliers, even when they are in debt.
The CMA has stopped short of imposing a price control for customers on their supplier's standard variable tariff (SVT) as previously contemplated. It has decided, on balance, that regulating prices more broadly (bearing in mind 70% of the Big Six suppliers' customers are on SVTs) would harm competition by reducing the incentive for customers to seek better deals. The CMA is no doubt mindful of previous attempts to impose price cap remedies (such as the SME banking review in 2002) which were heavily criticised for distorting competition in the marketplace. Interestingly, one of the CMA panel members, Martin Cave, has published a dissenting opinion, arguing that the remedy does not go far enough and the price cap should apply to all SVTs, which would effectively amount to a system of price regulation (and an acceptance that liberalisation of the energy supply markets has failed).
The CMA's focus on "vulnerable" customers on pre-payment meters also echoes parallel inquiries by the FCA into the credit cards market, and by the renewed focus on overdraft customers and their ability to switch in the context of the retail banking market investigation. It shows that competition authorities are increasingly willing to use the flexible market investigation regime to consider the impact on particular customer sub-segments (even if they do represent a separate "market" for competition law purposes).
Wholesale energy markets
As the wholesale price of electricity represents just under half the total cost of supplying electricity to domestic customers, the CMA think it is vital to ensure that competition operates well in the wholesale market. They identified two areas where it didn't: the mechanism for allocating Contracts for Difference (CfDs); and the absence of locational charging for transmission losses.
For CfDs, they recommend that DECC undertakes and consults on a clear and thorough impact assessment before:
- Awarding any CfD outside the CfD auction mechanism (as the FIDeR framework ended up costing £250-£310 million per year more than it would have done if there had been a competitive auction)
- Allocating technologies between 'pots' and the CfD budget to the different pots, and should finalise its proposals for the allocation of technologies and budgets at least one year ahead of each auction so that bidders can make informed decisions about whether to progress a project before an auction.
For transmission losses, they propose to place an Order on National Grid, and amend National Grid's licence conditions, to require that variable transmission losses are priced on the basis of location, and to assign 100% (rather than the current 45%) of losses to generators.
Underpinning the energy market is the regulatory framework and the CMA identified that this too was stifling competition, so a 'reset' that would 'recalibrate' the relationship between DECC and Ofgem (putting Ofgem at the heart) is needed. The remedies cover five specific areas: Ofgem's duties and objectives; the relationship between DECC and Ofgem; impact of policy and regulation; financial reporting; and industry code governance.
The CMA recommends:
- That DECC amends primary legislation to clarify Ofgem's statutory objectives and duties and remove any (actual or perceived) constraint on Ofgem's ability to pursue its principal objective (which is protecting the interests of existing and future customers) by promoting effective competition where this is appropriate. Specifically, they recommend removing section 1C from sections 4AA of the Gas Act and 3A of the Electricity Act
- Legislation to establish a clear process requiring Ofgem to publish opinions on all draft legislation and policy proposals that are relevant to its statutory objective and likely to have a material impact on the GB energy markets
- DECC and Ofgem should publish detailed joint statements setting out action plans for the implementation of proposed DECC policy initiatives that are likely to need Ofgem intervention
- Ofgem should publish an annual 'State of the Market Report' and should modify the licence conditions of the 'Big Six' energy firms so that they have to report separately on their generation and retail supply activities, giving Ofgem greater scrutiny over their financial returns
- Giving Ofgem more of a say, and a proactive role, in Code development, including the power to modify the Codes in certain exceptional circumstances.
Smart metering and half hourly settlement
The CMA believe the move to smart metering by 2020 will make it easier for customers to switch energy supplier and obtain a better tariff, but it is vitally important that the timetable for the rollout is adhered to and they expect Ofgem to use its powers to penalise suppliers for not meeting the deadlines.
Tied in with smart metering, and the proposed retail market reforms, is electricity settlement. The CMA are keen to move to mandatory half-hourly settlement for domestic customers and want Ofgem to conduct a full cost-benefit analysis of this as soon as possible. They want DECC and Ofgem to publish and consult jointly on a plan and timetable for this.
For gas settlement, the CMA recommends that Ofgem ensures implementation of Project Nexus by 1 October 2016, and develops a performance assurance framework to increase the accuracy of the gas settlement process at the latest within one year of the CMA's final report (which is due in June 2016).