The CMA Summary of Provisional Decisions: a mixed bag of good and bad, but overall misses the real issues faced by the GB energy system
Catherine Mitchell, IGov Team, 10 March 2016
The CMA has announced its Energy Market Investigation Summary of Provisional Decision on Remedies (with a shorter version available here). The full version will be published shortly. Overall, it is a mixed bag – quite a few good things; some bad things. However, the CMA, by virtue of its Duties, has to investigate the energy market within the dimension of competition, and to this extent its remit is bound to be too narrow to make meaningful recommendations to meet the energy challenges facing GB.
The challenges facing energy systems around the world, including GB, cannot be resolved by Business As Usual governance solutions. These energy system challenges broadly fall in: the impacts and opportunities of new technologies (whether supply, demand or operation); flat or falling demand; infrastructural needs (to be paid for by the flat or falling demand); decarbonisation requirements; and affordability concerns. This requires a ‘new’ governance framework to enable solutions. BAU governance simply will not meet those challenges, as so clearly stated by Audrey Zibelman, Chair of the NY REV Public Service Commission (the NY State equivalent of Ofgem).
Working from the principle that improving competition will provide meaningful solutions to current challenges of the GB energy market, as the CMA does in this report, misses the point that energy is a multi-dimensional whole energy system. Solutions have to reflect that and as such the CMA is only able to address a few problems of the energy market, in an overly narrow way. The CMA original Statement of Issues was a useful document which did set out energy system challenges, and the boundaries of the CMA investigation thereby making clear it would be unable to deal with certain issues. It is regrettable that this latest document did not at least make reference to these points.
The Good Points
The points raised around electricity and gas settlement; issues around RMR and prepayment meters; issues around trying to improve customer response are useful. The latter may be improved by some of the suggestions of the CMA – but the CMA misses much of the argument because of its remit. The recommendations on improving transparency within companies, and on data capture and transfer are also welcome. This range of ‘good’ points covers, in fact, many of the points raised by the CMA – so there is much in the report to be supported rather than not – it is just that the overall report is too narrow and limted in its focus.
The Bad Points
The recommendation that Ofgem take on more roles is a step in the wrong direction and discussed further below. The CMA, because of its economic world view, has chosen not to learn the painful lessons of the RO with respect to CfD ‘pots’; and it has also come out in support of locational pricing, thereby choosing to ignore the decade long ‘war’ around transmission pricing arguments within Ofgem. Locational pricing is just one of those issues that most people support in principle (like apple pie) but sadly is far more complex when dealing with the realities of renewable energy deployment which has to be sited in particular places – for example, in the case of wind energy, where there is wind and where there is space. The CMA has taken a simplistic economic view which is depressing given the evidence. Finally, the CMA has ducked the real issue of Codes – which is self-regulation – and simply recommends that Ofgem publish a cross-cutting strategic direction for code development and that legislation be developed to enable Ofgem intervening in Code situations in certain exceptional circumstances
Role of Ofgem, and its relationship to DECC
The CMA report passes more responsibility to Ofgem. IGov has already been critical of the amount of control and involvement Ofgem has within the GB energy system (here, and a shortened version here), and its impact in terms of Ofgem’s lack of flexibility and nimbleness. Ofgem has had to add in new responsibilities around the social and environmental aspects of energy to their economic responsibilities over the last decade or so. This is unfortunate given that they operate in a system where DECC’s guidance is unclear about the appropriate trade-offs.
IGov has argued that Ofgem should be stripped back to being an economic regulator, and another body – an Energy Policy Committee, which would have hierarchy over the economic regulator – should deal with those trade-offs. The CMA’s recommendations appear to make the current already bad situation worse by strengthening the economic aspects of the Ofgem Duties but not assigning the other responsibilities elsewhere. As it reads, the social and environmental aspects of energy policy become relatively less important within Ofgem. This is a step in the wrong direction, and almost totally ignores the reality of energy system governance needs and challenges.
At the same time as this broad momentum of increased responsibility to Ofgem (not supported by IGov), it does try to inject some legitimacy and transparency into the GB policy decision making process – which is supported by IGov. This is not fundamentally dealing with the source of the problem – which is that the GB governance structure unfit-for-purpose – but it is at least trying to improve the current situation in some ways. The CMA recommends that DECC and Ofgem publish detailed joint statements concerning proposals for DECC policy objectives, to include, where appropriate, a list of relevant considerations in designing the policy. It also recommends that Ofgem publish annual State of the Market Reports, and create a new unit (an office of the chief economist) to take responsibility for the State of the Market.
For those of us over a certain age, this report provides a certain amount of déjà vu. Presumably the CMA is relevant in certain circumstances but treating energy as a widget like any other commodity, as it does in this report, reads from another age. The ICT revolution has come to energy just as the price of low carbon, decentralised technologies have come down thereby enabling new energy economics, new energy system operation, new business models and customer involvement. You would not know this though from this report.