27th July 2015
On 7 July 2015, the Competition & Markets Authority (CMA) published its provisional findings arising out of its investigation into the market for the supply and acquisition of energy in Great Britain. The CMA has identified a number of features of the wholesale and retail markets for electricity and gas that it provisionally considers gives rise to an adverse effect on competition (AEC). The CMA invites comments on the provisional findings and proposed remedies by 31 July 2015.
The CMA has provisionally found that:
These issues are considered further below.
The CMA found that competition in the wholesale gas and electricity generation markets generally works well. There is no evidence to suggest that the main energy firms earned excessive profits from their generation business or that wholesale market prices were above competitive levels. One feature of the market that does constitute an AEC, however, is the absence of locational pricing for transmission losses. The CMA provisionally found that the current system of uniform charging for electricity transmission losses creates a system of cross-subsidisation that distorts competition between generators and is likely to have both short-run and long-run effects on generation and demand (higher costs and inefficiencies in location of generation plants).
The CMA also identified the mechanisms for allocating Contracts for Difference (CfDs) as a feature giving rise to an AEC. CfDs are long-term contracts which are intended to provide stable and predictable incentives for companies to invest in low-carbon generation. They form a key part of the Electricity Market Reform Programme and are intended to reduce investors’ exposure to volatile and rising fossil fuel prices. This is done by paying a variable top-up between the market price and an estimate of the long-term price that is needed to bring forward investment in a given technology, known as the “strike price”. The CMA has found that some elements of the CfD allocation process currently in place potentially restrict the use of competition in setting the strike price in the future. The CMA also has concerns about the division of technologies into particular “pots” under the CfD. It calls for the Department of Energy & Climate Change (DECC) to regularly monitor this division and provide a clear justification for the allocation of budgets between pots.
The CMA considers that vertical integration of energy generators and suppliers is not problematic for competition. In particular:
The CMA is concerned that many microbusinesses appear to show limited engagement with the energy market and have little apparent interest in, or awareness of, their ability to switch supplier. For example, in 2013, 45 per cent of microbusinesses were on default electricity tariffs – these would not have been actively negotiated between the energy provider and customer. Potential remedies are discussed below.
The CMA has identified three particular areas in which domestic retail markets may not be working well for customers:
The CMA investigation has shown that savings that are available to a significant number of domestic customers are ignored. Those customers who are associated with certain demographic characteristics, such as low incomes, tend to be less engaged with the domestic retail energy markets; specifically, they tend to stick with the same supplier. Reasons why customers are prevented from understanding the energy market and making informed decisions about their supplier and tariff include the use of conventional meters which are not always visible, user-friendly or informative, and the public perception – of the complexity and burden of the process associated with trying to find a better energy deal; as well as a lack of access to the internet. The CMA is concerned that the lack of customer engagement gives energy suppliers a position of unilateral market power, thus affecting their behaviour and causing suppliers to exploit their position through their pricing policies(such as pricing their SVT above a justifiable level).
Using tariff data over the period 2012 to 2014, the CMA found that customers who were on a tariff with the cheapest of the ‘Big Six’ energy firms were paying around £95 less than a customer on a tariff with the most expensive of the ‘Big Six’ energy firms. The CMA does not yet have the same level of information regarding mid-tier suppliers to be able to include them within the analysis; however, evidence does suggest that the average domestic prices offered by the ‘Big Six’ are above the competitive benchmark level, with tariffs being offered by mid-tier suppliers around £30-£40 cheaper than the cheapest tariff offered by a ‘Big Six’ energy firm.
Ofgem has been criticised in the provisional findings, with the CMA noting some decisions Ofgem took that did not have the effect of promoting competition:
In Ofgem’s defence, the CMA also noted that the later two of these decisions were taken against a background of the DECC stating its readiness to use its powers to implement changes in primary legislation if Ofgem did not act, with implications for Ofgem’s independence.
The CMA is consulting on a number of remedies (aimed at giving customers information to help them make choices) and market-opening measures (which aim to remove or reduce barriers to entry, or make it easier for customers to switch). These include:
Remedies not being considered include:
The background to the CMA’s market investigation was major concerns about the effectiveness of competition in the energy market, accusations of profiteering by the ‘Big Six’ energy companies and a loss of trust and engagement on the part of energy consumers.
The CMA’s report recognises that competition is working well in the wholesale gas and electricity market, despite the presence of vertically integrated firms. However, the CMA has highlighted specific features of the retail market that it considers may be hindering competition. The CMA’s main concern is that customers may have limited awareness of their ability to switch or a lack of interest in switching. One of the CMA’s key recommendations is the introduction of a ‘default’ regulated tariff for those disengaged customers who do not switch. Whilst welcome from the consumer perspective, this is a relatively soft change given the original speculation of a more radical measure to break-up the ‘Big Six’ energy companies. Given that the CMA presently lacks sufficient data regarding prices/costs of mid-tier suppliers, such companies might anticipate receiving requests for information.
The CMA has further questions, as addressed in its provisional report, which will need to be answered before a comprehensive picture of the current state of competition within the energy market can be drawn; for example, whether the average domestic prices offered by the ‘Big Six’ are above those that would be expected in a well-functioning competitive market. The CMA plans to publish its final report by the end of the year.
If your business is likely to be affected by the ongoing market investigation or if you require further information, please feel free to contact any member of our Competition or Energy teams.