Working Paper: The governance of retail energy market services in the UK

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Working Paper: The governance of retail energy market services in the UK

The governance of retail energy market services in the UK: A framework for the future   

Nick Eyre and Matthew Lockwood

UKERC Working Paper

Introduction:

This Working Paper is the first output of research on retail market governance in the theme on “Decision making”, within the UKERC Phase 3 Programme (2014-19)i . Retail markets are the main commercial interface for most people with the energy system. Current retail energy market governance in the UK is characterized by a quite complex mix of arrangements that have evolved over time. The scale of governance is increasingly complex, for both technical and political reasons, with a trend towards multi-level governance. The role of EU institutions has increased and this seemed set to continue until the EU Referendum; some energy governance is now devolved (although to different extents in Scotland, Wales and Northern Irelandii); and some local government is beginning to play a more active role. However, the principal level is still the nation state, and that is therefore our predominant focus.

The existing market model, developed during the liberalization reforms of the 1980s and 1990s, is essentially a liberalised market system, in which each energy user buys energy units (kWh) from a retail supplier. The dominant suppliers are large, vertically integrated companies (the ‘Big 6’), although there are smaller competitors who have gained some market share in recent years. The supplier purchases energy in the wholesale market, pays the requisite transmission and distribution charges (to the network companies) and fulfils other requirements of regulation and policy in accordance with its supply licence. So the supplier is the single point of contact for the energy user with the energy system – this is often described as the ‘supplier hub’ model. This arrangement has proved controversial in two ways. First, there have been doubts about whether the retail market is sufficiently competitive to avoid unreasonably high profits. These concerns apply particularly to specific groups of customers including vulnerable households and ‘sticky’ customers who have a low propensity to change supplier. The concerns led to an investigation by the Competition and Markets Authority, which proposed some remedies in 2016.

Secondly, there are concerns about the extent to which new policies have been added to the original model. In particular, these relate to new challenges related to decarbonisation of the energy system which were not foreseen at the time of liberalization. Delivering these policies via the supplier hub adds to complexity of the supply business, arguably deterring market entry; it also arguably privileges energy suppliers in the delivery of these new services (such as energy efficiency, microgeneration and smart metering) leading to energy supplier delivery when other business models might be more innovative or cost effective.

We define these services that are being added to the supplier hub as ‘retail energy market services’. They are ‘retail’ in the sense that they relate to the use or generation of energy by actors too small to engage in energy wholesale markets; but they are a 4 broader category of services than energy units, often outside the scope of the activities covered by the supply licence and therefore potentially in competition with organisations other than energy suppliers. In this sense, ‘retail energy market services’ are a broader category than ‘retail energy supply’, as licensed by Ofgem. Their governance currently sits, somewhat uncomfortably, across the boundary of energy market regulation and the governance and regulation of other services.

Despite these issues, the regulation and governance of retail markets has been subject to less research and scrutiny than wholesale markets. In particular, in the UK, the Electricity Markets Reforms in the 2013 Energy Act introduced very significant changes that affected wholesale markets, including a substantially decreased role for competition, but assumed the continuation of a largely centralized, competitive, supplier hub model of retail markets. The CMA investigation, with a relatively narrow remit, has not changed this fundamental structure.

The paper seeks to investigate the governance of retail energy markets in this new context. To understand both the governance system and the policy paradigm that has produced it, it is necessary to take a brief look at the history of energy governance since the 1980s. The next section of the paper therefore looks at the origins of governance of retail energy markets in the UK: including the notion of governance, the changes during the market reforms of the 1980s and 1990s, the origins, how these played out and the new challenges for retail energy market services that are now emerging that are putting pressure on the existing governance framework. Section 3 sets out some concepts from political science theories of institutionalism and how these might explain the changes that are occurring as a drift in the original paradigm of competitive markets that originated at the point of market liberalization. Section 4 then sets out a proposed framework for thinking about governance options with the range of new technologies, market actors and retail energy market services that are now emerging. Section 5 draws some preliminary conclusions

Date: 17 Nov 2016

Download Paper: retail market governance working paper.pdf

 

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