CMA reform proposals laid bare

Issues affecting electricity generators and the energy market as a whole.

CMA proposals to reform energy market break cover as 2-year investigation rumbles towards its conclusion next month

The Competition and Markets Authority (CMA) published a comprehensive set of reform proposals in a 45-page document issued back on 10th March. The deadline for submissions in response to the provisional decision on remedies passed early last month and the final report is due in just a month’s time. So what are the key changes and how are they likely to impact the Big Six Suppliers that are the focus of reform discussions? We decided to take a closer look.

Investigations by the CMA have found that 70% of domestic customers of the six largest energy firms are still on the more expensive ‘default’ standard variable tariff (SVT). Its latest analysis reveals that potential savings for these customers have risen substantially over the last two years so that the average customer could now save £300 per year by switching to a cheaper deal. This means that customers are paying about £1.7 billion a year “more than they would in a competitive market”.

One of the more eye-catching reforms being proposed is the creation of an Ofgem-controlled database of disengaged customers who have been on SVT for more than three years. This will allow rival suppliers to target marketing to these customers. The CMA is also proposing a temporary safeguard price control (also called a transitional price control) through to 2020, to protect customers on prepayment meters, whose options are more limited. This should reduce the bills of some 4m households on these meters by a total of £300m a year. This vulnerable group is currently only able to access tariffs which are around £300 per year more expensive than for other customers. However the rest of the market has been spared imposition of price controls.

The CMA is also proposing measures to reset the relationship between Ofgem, the Department of Energy & Climate Change (DECC) and the industry, so that decisions are made more efficiently, on the basis of readily available and accurate information, the impact on consumers clearly laid out.

These measures include requiring the largest suppliers to provide fuller information on their financial performance, and increased public consultation by DECC on policy decisions being taken that will be a major driver for consumer prices in the future. For example, the CMA press release reports “the fact that energy and climate policies are expected to make up 37% of the household cost of electricity by 2020”, showing “the very real impact that policy making and regulatory decisions can have on consumer bills”.

Other proposed measures include:
• Strengthening the ability and incentives for third party intermediaries such as price comparison websites (PCWs) to help customers find better deals by giving them access to relevant information like customer meter numbers and allowing them to negotiate exclusive deals with suppliers. This will be accompanied by a requirement for PCWs to be transparent about how they cover the market and the information on display.
• Removing the 4 tariff rule which limits competition and innovation. This will enable suppliers and PCWs to offer tariffs designed for certain customer groups.
• Removing restrictions on the ability of new suppliers to compete for prepayment customers and reduce barriers such as debt issues that make it difficult for such customers to switch.
• A requirement that the approximately 700,000 households on non-Economy 7 restricted meters are allowed to switch to cheaper single-rate tariffs without requiring a meter replacement.
• Helping microbusinesses through improved price transparency, tackling ‘rollover’ contracts with greater notice periods and ending termination fees which prevent switching as well as moves to prompt and engage.
• Ensuring that certain measures in Ofgem’s programme to help provide domestic customers with clearer information are prioritised and ensuring that all measures concerning domestic and microbusiness customer information are ‘road-tested’ prior to introduction.
• Ensuring that the Contracts for Difference (CfDs) process where the government supports investment in low carbon generation is carried out transparently so that the impact on customer bills is assessed beforehand. There should be a clear rationale for the allocation of funding to different technologies and for the exceptional circumstances when competitive auctions are not used.
• Ensuring that both electricity and gas settlement processes are reformed to lower costs to consumers by enabling more accurate measurement of consumption and more efficient supply - and to enable the full benefit of smart meters to be realised.
• Introducing a locational pricing system for transmission losses incurred when transporting electricity to reduce the overall cost to customers.
• Improving the policy and regulatory framework to provide a clear division of responsibilities and transparency in relation to policy creation and implementation and changes to industry codes. This includes strengthening Ofgem’s independence, reporting powers and ability to drive forward changes.

These changes would be brought in via a combination of CMA Orders and recommendations to Ofgem and government. This publication follows the provisional findings last July and addendum published in December 2015 which highlighted a range of problems hindering competition in the energy markets, including the extent to which customers are disengaged and shortcomings in regulation and the ability to deliver change across the sector.
Taking a deeper look into remedies proposed which will have a direct impact on wholesale energy trading there are some specific recommendations designed to tackle areas which are being seen by CMA as having an Adverse Effect on Competition (AEC):

The CfDs AEC:
• CMA is making a recommendation to DECC to undertake and consult on a clear and thorough impact assessment before awarding any CfD outside the CfD auction mechanism.
• It is making a recommendation to DECC to undertake and consult on a clear and thorough assessment of the appropriate allocation of technologies and CfD budgets between pots.

The Locational Pricing AEC
The CMA proposes an order (the ‘Locational Pricing Order’) on National Grid (and amendments to National Grid’s licence conditions) that would set out, among other things: (i) the formula to calculate the transmission loss factors (which ultimately feeds into the imbalance charges) for this purpose
• an obligation on National Grid to create a load flow model
• an obligation on National Grid to create a networking mapping statement and collect annually relevant network data
• an obligation on National Grid to appoint third party agents to collect metered volumes data and to calculate annually the transmission loss factors pursuant to the principles set out in the order and using the models created, and information collected, pursuant to the order.
• an obligation on National Grid to direct Elexon, as appropriate, to update the networking mapping statement and carry out other administrative tasks that are necessary to the calculation by the third party agents; and
• an obligation on National Grid to raise any consequential code modification.
• a recommendation to Ofgem to support National Grid by taking necessary steps that might facilitate the implementation of the Locational Pricing Order.

Electricity Settlement AEC
The remedies package proposed to address the Electricity Settlement AEC and/or associated detriment is as follows:
A recommendation to DECC to consult on amending the provisions of the Smart Energy Code that prohibit suppliers from collecting consumption data with greater granularity than daily unless a customer has given explicit consent to do so.
A recommendation to Ofgem to:
• conduct a full cost benefit analysis of the move to mandatory half hourly settlement, including analysis of costs, benefits and distributional implications as well as mitigating measures;
• start the process of gathering evidence for the analysis as soon as practicable;
• consider the cost-effectiveness of alternative design options for half hourly settlement such as a centralised entity responsible for data collection and aggregation; and
• consider options for reducing the costs of elective half-hourly settlement, including (i) whether any of these options are likely to delay or accelerate the adoption of mandatory half-hourly settlement; and (ii) any challenges that may arise or benefits that may accrue from the existence of two settlement systems, including in particular the possibility of gaming/cherry picking behaviour.
The CMA is also making a recommendation to both DECC and Ofgem that they publish and consult jointly on a plan setting out:
• the aim of the reform for half-hourly settlement;
• a list of proposed regulatory interventions (including code changes),
• and the relevant entity in charge of designing and/or approving such interventions, that are necessary in order to implement the half hourly settlement reform;
• an estimated timetable for the completion of each necessary intervention; and
• where appropriate, a list of relevant considerations that will be taken into account in designing each regulatory intervention.

We would love to get your views on whether you think these recommendations make good sense to you and whether they will work to make the market more efficient and competitive. Do let us know?

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