Submission to CMA energy market investigation

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Submission to CMA energy market investigation

University of Exeter Energy Policy Group response to the CMA Energy Market Investigation Statement of Issues

1. Introduction  The EPG welcomes this CMA investigation. The Statement of Issues (henceforth the Statement) states that the investigation (para 2) ‘is required to determine whether any feature or combination of features of each relevant market prevents, restricts or distorts competition in connection with the supply or acquisition of any goods or services in the UK or part of the UK’. The Statement sets out its initial theories of what might be adversely affecting competition and what those adverse outcomes might be. Such impacts could take the form of higher prices to customers; reduced service quality to customers; reduce choices of product and supplier; reduced innovation; insufficient supply in the future, as a result of underinvestment, increasing the probability of energy outages. The Statement sets out the CMAs initial 4 high level hypotheses for investigation – the areas where harm to competition may occur – and asks for comments on them or for other Theories of harm. The Statement’s 4 Theories of harm are:

  • Theory of harm 1: Opaque prices and/or low levels of liquidity in wholesale electricity markets create barriers to entry in retail and generation, perverse incentives for generators and/or other inefficiencies in market functioning.
  • Theory of harm 2: Vertically integrated electricity companies harm the competitive position of non-integrated firms to the detriment of customers, either by increasing the costs of non-integrated energy suppliers or reducing the sales of non-integrated generating companies.
  • Theory of harm 3: Market power in electricity generation leads to higher prices.
  • Theory of harm 4: Energy suppliers face weak incentives to compete on price and non-price factors in retail markets, due in particular to inactive customers, supplier behaviour and/or regulatory interventions.

 

We, the Energy Policy Group (EPG) of the University of Exeter, see these Theories of harm, which we agree lead to negative impacts for customers, as being outcomes of another Theory of harm: the current structure of the energy system, and its current form of governance (discussed further in Section 2 and Section 5). Thus, efforts can be made (as has already occurred) to improve the competitive outcomes of the current system, but ultimately those efforts cannot really succeed unless the fundamental problem, the structure of the energy system, is dealt with. Because we would argue that the 4 Theories of harm put forward by the CMA are outcomes of our additional Theory of harm, we have not proposed it as a Fifth Theory of harm. However, the CMA may prefer to think of it as a proposed 5th theory of harm. Moreover, because it has overlaps with all the Theories of harm it is possible to break down our additional Theory of harm to provide additional hypotheses for the CMA’s 4 Theories of harm. For example, the CMA’s first theory of harm might additionally investigate whether the design of the current bilateral market leads to opaque prices. We strongly urge the CMA investigation to broaden its scope to explore whether the structure of the energy system is the fundamental block to enabling better service for customers, more choice of products and so on. This would alter the focus of the CMA investigation somewhat from narrowly looking at means to improve competition within the current system to looking at the means of improving competition, including through re-regulation. This submission is set out in the following way: Section 2 examines the negative aspects of the current energy system structure; Section 3 sets out the changing economics of energy and its disruptive qualities; Section 4 comments on the 4 Theories of Harm in the Statement; and Section 5 looks at additional areas that EPG would hope the CMA would incorporate into its investigation.

 

Read the full EPG Submission: UoE Energy Policy Group submission to CMA Aug 2014

Submitted by: Catherine Mitchell, Bridget Woodman, Matthew Lockwood, Oscar Fitch Roy, Tom Steward and Richard Hoggett 14th August 2014 CMA website link: https://assets.digital.cabinet-office.gov.uk/media/53f1bce1e5274a48c100000f/UoE_Energy-Policy_Group-response_to_IS.pdf

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