Overheating on retail energy prices? Prime Minister announces annual competition review

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Summary: On 23 October 2013, the Prime Minister announced an “annual audit of competition” for retail energy supply. The announcement comes at a time of rapid reform and frenzied political interest in energy markets. The review will further add to the regulatory burden on energy companies and is characteristic of a general climate of interventionism in the sector. Should it identify competition concerns, it is likely to lead to more intensive antitrust or regulatory intervention.

Competition and regulatory law experts Andrew Hockley and James Marshall examine how the Prime Minister’s annual competition review of retail energy will impact energy suppliers.

Energising competition in the sector

On 23 October 2013, the Prime Minister announced an “annual audit of competition” for retail energy supply. The announcement comes at a time of rapid reform and frenzied political interest in energy markets. The review will further add to the regulatory burden on energy companies and is characteristic of a general climate of interventionism in the sector. Should it identify competition concerns, it is likely to lead to more intensive antitrust or regulatory intervention.

Annual competition review

The annual review of competition will be conducted by the energy regulator, Ofgem, in conjunction with the Office of Fair Trading (“OFT”) and the new UK competition authority, the Competition and Markets Authority (“CMA”), which takes over from the OFT in April 2014 (see below for an outline of the UK competition reforms).

No further details have been published on the form of the review, what issues it will examine or how competition will be assessed. However, the Secretary of State for Energy and Climate Change will outline the proposals in the annual energy statement in the last week of October. The first review is expected to commence within weeks. From a legal perspective, it is not clear that the review will add anything to existing obligations on energy companies to compete fairly, or to Ofgem’s regulatory powers to promote competition within the sector.

Despite the increased scrutiny, the likely central role of the OFT and CMA alongside Ofgem is encouraging. It suggests that the review will focus primarily on competition issues, rather than political or public policy questions. Ofgem, the OFT and CMA will gather information to determine whether there are any features of the market which prevent, restrict or distort competition for the supply of retail energy. Reviews of this type frequently result in more detailed investigations by the CMA or Ofgem, and/or other forms of regulatory intervention (see below).

While the review will focus on the retail sector, it seems likely to increase the regulatory burden on all energy sector operators. The regulators will also need to assess upstream production and transmission in order to understand properly how competition works in the downstream retail market. Consequently, all energy companies – from wholesale gas suppliers, to transmission and distribution operators, to generators, traders and suppliers – may be expected to participate in the review.

Heating up the pace of energy reform

The annual competition review of retail energy will be the latest of a number of reviews and reforms, both in the UK and EU-wide.

In particular, Ofgem recently completed its Retail Market Review and has introduced a series of staggered reforms to reduce retail energy bill complexity, increase consumer engagement and drive competition.

The first Retail Market Review changes, which include restrictions on fixed-term contract renewal and unilateral variation of bills, entered into force on the same day that the Prime Minister announced the annual competition review. From 31 December 2013, retail suppliers will be subject to a tariff cap and will have to provide enhanced information to facilitate customer switching. The Prime Minister’s announcement does not reveal great confidence in these measures. In addition:

  • The Energy Bill 2013 provides for Electricity Market Reform (“EMR”). EMR will introduce subsidies for renewable generation development and a capacity market to support future supply security;
  • In June 2013, Ofgem published its proposed licence amendments to improve liquidity in the wholesale electricity market. Ofgem proposes to require generation licensees to “secure and promote” liquidity through increased supply and trading obligations. This followed a detailed review to “identify and remove barriers to competition in the wholesale energy markets”¹; and
  • Both the UK and European authorities are examining suspected price manipulation in the wholesale energy markets.

Rising political temperatures

In addition to increasing regulatory oversight, political temperatures are rising in line with energy bills.

Both the Government and the opposition Labour Party have been critical of the energy regulator, Ofgem. In particular, politicians have criticised Ofgem’s apparent inability to help reduce energy bills, or to promote competition with the energy sector. The Prime Minister has stated that he “believe[s] in intervening in the energy market” and has questioned Ofgem’s independence on the basis that the Leader of the Opposition Ed Miliband “had appointed five of the nine” board members.²

Meanwhile, the Labour Party has pledged to freeze retail energy prices for two years should it win the 2015 election, and to replace Ofgem with a new energy regulator with the power to set retail prices.

Even former prime ministers are getting involved. Sir John Major has called for a “windfall tax” on energy suppliers.

Cooling investment incentives

The pace and frequency of reform and political comment seem likely to increase uncertainty and reduce incentives to invest in the UK energy sector.

It is difficult to reconcile the laudable aims of EMR – facilitating the £110 billion of investment needed to replace and upgrade the UK’s electricity infrastructure and supporting the move to low carbon generation required to meet the UK’s carbon reduction obligations – with the current regulatory uncertainty. Indeed, Centrica has shelved plans to invest in a new gas storage project, citing lack of government support for such projects.³

Reforming competition in the energy sector

In addition to the specific proposals for a competition review of the retail energy sector, the UK competition regime is undergoing substantial reform. The reforms are likely to result in more antitrust scrutiny of the energy sector, both by Ofgem and the CMA.

From 1 April 2014, the UK competition landscape will be transformed with the replacement of the OFT and the Competition Commission by the CMA and the introduction of a number of substantive legal and procedural changes. In particular, the CMA will play a central role in promoting competition in the regulated sectors, including energy.

The CMA will cooperate closely with Ofgem and the other sector regulators to ensure that the regulators use their powers to enforce competition law in their respective areas. Should the regulators fail to use competition law powers appropriately, the CMA may take control of cases and commence investigations on its own account. For more information on the UK competition reforms, see the BLP American Bar Association Article (9 July 2013).

Next steps

Further details on the annual competition test will be set out in the annual energy statement by the Department for Energy and Climate Change, with the first review likely to begin shortly afterwards. This provides energy companies a very short period to prepare.

The various other reforms are continuing to be implemented. The energy supply licence changes have been introduced by Ofgem and will take effect at various points up to 31 March 2014. EMR will be implemented in 2014. The UK competition reforms have been passed and will come into effect on 1 April 2014.

 


 

¹ Wholesale power market liquidity: final proposals for a 'Secure and Promote' licence condition, Ofgem consultation 88/13, 12 June 2013.

² Prime Minister’s Question Time 23 October 2013, Hansard, 23 October 2013, Column 298.

³ Centrica plc. press announcement, 23 September 2013.

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