The Competition and Markets Authority (CMA) is currently conducting an in-depth investigation into the supply and acquisition of energy. The CMA recently published an Issues Statement outlining its working views on potential competition concerns it has identified as part of its investigation. The Issues Statement has been accompanied by a number of detailed ‘Working Papers’ on specific issues.
On 3 March 2015, the CMA published a ‘Working Paper’ on DECC’s Electricity Market Reform (EMR) policies supporting low carbon generation and security of supply. In particular, the CMA is scrutinising the effects of DECC’s Contracts for Differences (CfD) and Capacity Market schemes on competition.
The EMR policies will result in payments to generators of billions of pounds in coming years, with CfD payments potentially reaching £2.5 billion per year by 2020/21. These costs are expected to be passed onto consumers. From a competition perspective, it is therefore important that the allocation process is conducted competitively and is as efficient as possible in terms of driving down costs.
Potential competition issues identified by the CMA at this stage include:
- whether the move from ROCs (not allocated competitively) to CfD auctions is positive in terms of driving down the level of support;
- how the early non-competitive allocation of CfDs sits within the general policy objective of using a competitive process to ensure the lowest possible price for consumers;
- whether separating the budget into different pots depending upon the technology used to generate low carbon electricity could distort competition by failing to award CfDs to the lowest-cost projects;
- whether the ability of CfD bidders to opt for ROCs could effectively put a floor on the strike price that bidders are prepared to pay in the auctions;
- whether generators have the ability and incentive to manipulate the CfD reference price; and
- whether the way in which the Capacity Market treats demand side response (DSR) could result in a distortion of competition.
A link to the CMA’s Working Paper can be found here.
The CMA invites comments and views on this Working Paper by 18 March 2015.
If - having considered all the evidence - the CMA finds that there are features of the energy market giving rise to an ‘adverse effect on competition’, it has broad powers to remedy these. Such remedies may include orders or recommendations relating to the operation of the Capacity Market and CfDs. The CMA has until 25 December 2015 to complete its investigation.
Please contact us if you have any questions or would like to discuss any aspect of this briefing.