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on Jul 24, 14 • posted by rhoggett •

New Thinking Blog: The Boundary of The CMA Energy Market Investigation

The Boundary of The CMA Energy Market Investigation

Catherine Mitchell, IGov Team, 24th July, 2014

About Catherine: http://geography.exeter.ac.uk/staff/index.php?web_id=Catherine_Mitchell

The CMA has just announced the Statement of Issues for its Energy Market Investigation. Overall, it is a good document and explicitly invites parties to tell them, with reasons, if the issues they have identified should or should not be within scope, and if any issues have been missed. The submission deadline is 14 August 2014 – not great for some of us going on holiday in August – and should be sent to EnergyMarket@cma.gsi.gov.uk.

As the Statement of Issues (SoI) says:

On 27 June 2014 Ofgem, in exercise of its powers under sections 131 and 133 of the Enterprise Act 2002 (the Act), made a reference to the Chair of the Competition and Markets Authority (CMA) for an investigation into the supply and acquisition of energy in Great Britain.
The CMA, acting through a group of independent members selected from its panel, 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 a part of the UK. If the CMA decides that there is such a prevention, restriction or distortion of competition, it will have found an ‘adverse effect on competition’ (AEC).

The SoI says that the terms of reference for the investigation allows the CMA to look at any competition issue connected with the supply or acquisition of gas and electricity in Great Britain, including both retail and wholesale markets, except that, in the case of retail markets, only the retail supply of households and micro-businesses are included within the reference. The retail supply of larger business customers was excluded from the reference on the basis that Ofgem found little evidence of harmful features in these markets.

The SoI also says that the investigation will focus on the detrimental effects on gas and electricity customers that might result from any AEC, considering both short- and long-term impacts. Such impacts could take the form of:

Higher prices to customers.
Reduced service quality to customers.
Reduced choices of product and supplier.
Reduced innovation.
Insufficient supply in the future, as a result of underinvestment, increasing the probability of energy outages.

The SoI sets out are certain key characteristics of energy markets, some of which in the Statement reads in a rather old fashioned way but again they ‘welcome observations on these and whether there are others we should consider’.

Non-storability and the need to balance generation and demand in real time:
Natural monopoly characteristics of transmission and distribution
Volatility of demand and generation costs
Small-scale customers do not respond to short-term wholesale price changes/methods of rationing are blunt
Prevalence of regulation:
The external costs of climate change

The SoI also, in a very welcome manner, says that they must be forward thinking because of the changes taking place within the sector. The changes they cite are:

The roll-out of smart meters to all households and businesses by 2020.
A fundamental change in the types of plants expected to be generating electricity over the next few years, as fossil fuel plants are increasingly replaced by renewable generation, with different cost and operating characteristics, and in particular a growing share of capacity and output of wind generation, which is dependent on weather conditions.
A significant change in the policies designed to incentivise investment in low carbon generation, notably through the introduction of Contracts for Difference (CfDs).
The introduction of capacity payment mechanisms to incentivise investment in the generation capacity required to meet future demand.
The reforms introduced by Ofgem in an attempt to improve liquidity in wholesale power markets, notably through the ‘Secure and Promote’ Licence Condition, and the reforms to the regime of imbalance pricing.
The reforms arising from Ofgem’s Retail Market Review, including those relating to tariff simplification.

The SoI sets out their 4 high level hypotheses for investigation – the areas where harm to competition may occur:

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.

Finally, it sets out areas that are not minded to investigate:

Wholesale gas markets
Gas interconnection and storage.
Regulation of revenues from transmission and distribution.

All of this is relevant. There may be gaps, you may disagree with some of their points but they are open to knowing what those are. Anyone who is interested in moving towards (1) an efficient, secure and sustainable energy system; which is (2) regulated in a transparent and accountable manner; and (3) does not work on the primary presumption that the interests of the companies involved take precedent over customers should send in their views.