Two internal logics: the Labour Party and the CMA – one more useful than the other
Catherine Mitchell, IGov Team, 14th April 2015
The Labour Party published its manifesto on Monday 13th April. Many of the promises to do with energy have been well trailed before: for example, ‘ambitious domestic carbon reduction targets, including a legal target to remove the carbon from our electricity supply by 2030, and a major drive for energy efficiency’; ‘an Energy Security Board to plan and deliver the energy mix we need, including renewables, nuclear, green gas, carbon capture and storage, and clean coal; and best known of all: ‘Labour will freeze energy bills until 2017, ensuring that bills can fall but not rise, and we will give the regulator the power to cut bills this winter. During the freeze, we will reform the energy market so that it delivers fairer prices and a better deal for working families’.
There were also welcome policies about bringing down ‘energy bills by making homes more energy efficient, delivering a million interest free loans for energy home improvements in the next Parliament’. For those on low incomes, making ‘200,000 homes warm every year, delivered street-by-street by local authorities and community organisations. Privately rented properties will have to meet a decency standard, bringing warmth to a further three million homes’ and driving housing standards up ‘by creating a national register of private landlords’.
However, the most interesting points are that:
- The generation and supply businesses of the ‘Big Six’ energy companies will be separated. They will be required to open up their books; and
- they will have to sell their electricity through an open exchange;
- We will simplify energy tariffs and make it easier for people to compare prices to get the best deal. We will protect small businesses by ending unfair contracts and automatic rollovers to more expensive tariffs.
- A tough new energy watchdog will enforce our reforms, with powers to strip energy companies of their licences if they repeatedly harm the interests of consumers, and protect off-grid households’;
Of course, the devil is in the detail. What exactly does it mean that ‘the generation and supply companies be separated’? Is this entirely separate ie a forced sale; or is this continued ownership with a joint overall CEO of a board which owns the companies, while the companies act as separate companies – two very different propositions.
But the Labour Party is showing internal logic – maybe they ‘get’ that to transition from here to a sustainable, secure and affordable system is a systemic issue; and that the problems within the current energy system requires both joined up thinking and fundamental reform.
Effectively, the LP has said (1) that the link between prices and rising profits of the Big 6 is not clear enough, and (2) the Regulator has not kept on top of the issue; so (3) they are going to break up the big companies so they cannot self supply thereby keeping the electricity market illiquid, which makes it hard for non traditional business models (NTBM) and new entrants to enter (which would introduce a new competitive element); and (4) they will force electricity through a pool to increase liquidity and transparency, again an improvement for NTBM and new entrants and, one would have thought, competition; and (5) they will have a tough watch dog to make it happen. This all has a strong story and logic.
Compare this with the CMA’s own internal logic in its Updated Issues paper. As their Terms of Reference says: ‘The gas and electricity markets authority has reasonable grounds for suspecting that a feature or a combination of features of the market or markets for the supply and acquisition of energy in GB prevents, restricts or distorts competition’. And the ‘problem’ they are investigating is whether one or more issues give rise to an adverse effect on competition in the markets for the supply or acquisition of electricity and gas in GB (para 2).
They find, so far, that there are minimal problems from market rule changes since NETA in 2001 (para 41); that the design of the new capacity market is broadly competitive (para 55); that there are relatively strong arguments for replacing ROCs with CfDs (para 58); that there is no evidence that the Big 6 earned excessive profits from generation business or that market prices have been above a competitive level (para 72) or that firms have the ability to increase profits through co-ordinated market power (para 74); that there is no evidence of insufficient liquidity in the gas market and that liquidity is sufficient for new entrants (para 78); they do not think there are significant problems with regard to transparency (para 95); and liquidity does not seem to be distorting competition or acting as a barrier to entry (para 100); and vertically integrated firms do not have the ability to foreclose generators (para 103/107) and therefore there is no real problem of VI.
They do have a few minimal concerns in a few areas. For example, possible overpayment for generators from EBSCR along with the CM payments (para 45, see here for another view); they think there are clear arguments in favour of locational pricing and are concerned at their absence (see below for more discussion) (para 47); they are worried about a lack of competition in the CfD allocation process for renewables (no mention of nuclear) and worried that the pot of money for renewables is divided into 3 (para 59, see below for further discussion) although they do say they recognise competing aims of the mechanism, including innovation (para 61); and they also recognise there are issues to do with Codes and their process which may undermine competition (para 201).
However, the key CMA concerns relate to weak competition pressure on the standard variable tariff (SVT) customers, in other words that competition may not be working effectively in certain segments of the GB retail energy markets. The CMA have three hypotheses why this may be (para 132 and following section): inactive customers (and they intend to work out why this is), supplier behaviour (although the CMA does not see undue herd like behaviour by the Big 6 (para 153); and regulatory interventions (ie RMR, social and environmental policies; settlement and reconciliation etc).
Thus, what we end up with from the CMAs Updated Issues paper is a series of non-problems of competition; some problems in the lack of competition where the answer is more competition; and then the biggest issue overall that of explaining why customers don’t switch and why supply profits have continued to rise faster than input prices – ie insufficient competition.
Where does this take them? What kind of solutions can they offer, given that they say that there is minimal problems from the institutional structure? And will this help GB plc?
The CMA is a body which has a remit to look only at competition, and they assess competitiveness either academically (eg running a model to see whether a centralised versus self-dispatch market is more or less efficient (para 40) or individually (ie there is no particular problem with liquidity, transparency, self-dispatch, big 6 market power etc etc). What they have not so far done is looked at these issues from a whole system perspective ie a systemic view and ask: does the sum of these issues add up to barriers to competition – as their ToR suggests it can. Their interpretation of their ToR appears to be choosing a narrow interpretation of competition rather than placing their investigation of competition into the wider context of Government policy – ie moving towards a sustainable, secure and affordable energy system (the one stated exception to this is para 61 and the CfD design). They do not appear interested in assessing the value of desirable spillovers from one area (ie competition) to sustainability or security. For example, a centralised dispatch electricity market is better for zero marginal cost, variable power, which will make up the majority of electricity in the future, and DSR.
Competitive technology and fuel blind rules and incentives, as our system is based on, favours large, well established companies which can access corporate finance etc, and this de factor supports the conventional system. The CMA is focused on ensuring competition within this system in general – which again, de facto, maintains the current system – rather than interpreting their Terms of Reference to either investigate short term competitive decisions within the desired aim of Government policy of moving to a sustainable and secure system or (preferably) investigating the competitive aspects of the transitional needs to a low carbon energy system, which would take account of longer term issues.
Moreover, unfortunately, so far, the CMA is not ‘helping’ within the practical challenges of energy policy. For example, they say there are clear arguments in principle for locational pricing for constraints and losses (para 47). Locational pricing of the transmission network has been a problematic policy area for at least 10 years, and a decision was recently agreed by Ofgem. The EPG had a small part in Ofgem’s Project Transmit, reviewing three academic inputs and inputting our own viewpoint. By supporting the pure competitive arguments of locational pricing, the CMA has possibly, hopefully not, opened up the ‘old’ debate yet again.
Similarly, the CMA is worried that the 3 pots of money within the CfDs (Para 59) for renewables – ‘runs the risk that projects from one pot may be displaced by more expensive projects from another’. Again, lessons should be learnt from the history of the RO which began as a non-banded technology support programme (ie one big pot against strong opposition which argued that it would simply support the cheapest technology and large companies with access to cheap funds, thereby leading to an industry made up of large companies without connection to individuals or local authorities). The RO suffered 17 or so changes to try, including by introducing technology bands (or pots), to make it a workable policy, before a small scale FIT was implemented at the end of the 2000s. The CMA says it will think further about this issue and one hopes they will take note of the practical, real-world experience of policies. In many ways therefore, the CMA’s internal logic is at best maintaining the status quo and at worse taking us back 10-15 years.
The Labour Party on the other hand is looking at the millions of fuel poor homes; the lack of knowledge within the Regulator about the link between prices and profit; the issues raised (as they were to the CMA) by smaller companies about liquidity, lack of transparency and so on; the development of NTBM and their impacts elsewhere in the world; and the systemic nature of the problem of transforming GB to a low carbon energy system. Their internal logic is trying to improve the system for those that have to use it and pay for it and this is to be welcomed.
It is however very welcome that the CMA has introduced a new 5th Theory of Harm (ToH, para 192 onwards) which is looking at the broader regulatory framework, including the current system of governance. It is this ToH combined with a broader interpretation of their ToR which could enable the CMA to choose to investigate more complex, socially relevant, competitive issues.
The Energy Policy Group (EPG) input a submission to the CMA’s Statement of Issues. We then gave oral evidence, the summary of which is now up on the CMA’s website.
Posted by: rhoggett
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