The Competition & Markets Authority has indicated that it is unlikely to recommend sweeping changes to the wholesale power and gas markets. Instead, the CMA appears set to focus on retail competition and whether large energy suppliers are abusing their market power and overcharging customers on standard variable tariffs.
The CMA is also looking at the issue of overcharging within small businesses, and has noted that small firms on rollover contracts are paying way over the odds for their energy.
The Authority today issued an update on the progress of investigation into the UK energy market. While the report details ‘current thinking’ and not final findings, it appears to put the wholesale market largely in the clear.
The report notes some issues with liquidity, such as access to granular, non-standard products, but indicates that prices and practices appear to be largely transparent and that historical reforms have achieved some level of progress.
The CMA did not express a view on whether vertical integration was a barrier to competition but its observations did not indicate strong concern.
EMR levers
The Authority also expressed broad support for policy interventions such as the Capacity Market and the Contracts for Difference regime. But it suggested that some elements of the policy and regulation might need to be rethought.
For example, how EMR policy levers such as the capacity mechanism interact with Ofgem’s reforms to cash out prices for generators. One part of that reform, so-called ‘reserve scarcity pricing’ could lead to generators with capacity contracts being overcompensated, the CMA noted, so it was probably unwise to try and implement it at the same time as launching the capacity market.
Also, the CMA highlighted some issues with the CFD mechanism, namely separating it into pots at the potential expense of one technology over another, and that there is room for the Secretary of State to override the competitive process anyway.
Outside of EMR levers, another concern was around the lack of locational pricing of constraints or losses. If any move to implement location-based prices were recommended by the CMA, it could mean significant changes to the market, and would also mean different prices for customers in different areas. The CMA has called for evidence to support any such proposal.
Small businesses
The CMA highlighted concerns that small businesses were paying over the odds for their energy. It noted that the margins made by suppliers from their small business customers were much higher than domestic and I&C customers, and that that pricing transparency was lacking. The CMA now wants to gather data on prices paid by small businesses, particularly those with fewer than 10 employees and a turnover of less than €2 million.
Households
For domestic consumers, the CMA noted that it was largely the poor, the old, the disabled and the uneducated that were paying the most for their energy by remaining on standard variable tariffs and not switching supplier.
They were paying on average up to £234 a year more than they needed to by not switching tariff or supplier, the report noted, although it made no mention of the fact that many would not be able to access the cheapest tariffs due to credit requirements and some of the practices of the independent suppliers.
Responses to the CMA statement must be submitted by 18 March.
Read the full statement here.
