Last week the CMA published the latest findings of its Energy Market Investigation, the “Summary of provisional decision on remedies”. More simply, the document lays out what the CMA proposes should be done to “fix” the UK retail energy market, given its previous conclusions that many consumers overpay significantly. In this post I will attempt to lay out my thoughts on the remedies, and the extent to which they are good or horrifically bad ideas. Spoiler: one or two are horiffically bad. I also won’t deal with everything the document lays out, so sorry if anyone has particularly strong opinions on the locational adjustments for transmission losses.
Before looking at the content of the document however, it might be worth asking why the CMA should be setting out energy policy at all? In many areas the findings go beyond looking at increasing competition and start to take issues of affordability and equity into account. These are explicitly political issues which should be discussed by DECC and parliament, rather than by a body of government which principally deals with real and potential abuses of market power. There has been a lack of debate on these issues, particularly at the last election, as politicians waited to see what the CMA had to say. This is a shame and hopefully there will be more democratic debate before any of the proposals are enacted.
Reforms to small and micro business tariffs
These reforms are all welcome and broadly bring the market into line with the domestic sector. This is one area where common sense has really won out, such as eliminating the practice by which consumers can be automatically rolled over onto far more expensive tariffs if they don’t give notice three months before their contract ends.
Verdict: generally pretty sensible and inoffensive
Rating : 8/10
Removal of the retail market reform simplification rules
The CMA has recommended removing the simplification rules which were implemented under OFGEMs retail market reforms. These rules were put in place to make the landscape of policies clearer to consumers, and to make choosing the right tariff easier. The CMA’s logic for scrapping these rules has two elements. First is to promote increased choice and innovation. However, there is no clear evidence presented that there was a larger degree of innovation or competition before the current rules were in place. Furthermore, there is now far greater innovation in the marketplace due to the rise of smaller retailers, who are offering diverse tariffs ranging from green source, zero standing charge and even micro CHP products. The second reason is in order to allow retailers to offer discounted tariffs to certain groups of customers, e.g. through price comparison websites. This will certainly not increase competition, either between PCWs or between retailers, as it will make choosing a tariff far more complicated for consumers and increase the time and effort costs associated with switching.
It is also interesting to note that, for the most part, the report completely ignores the role in the market played by smaller suppliers. There was one reference to the hope that “more efficient suppliers gradually replace less efficient suppliers”. However, they fail to see that by placing additional regulatory demands on the big six suppliers, they are only enhancing their inefficiency. The report doesn’t make it clear whether they would prefer to see a market where consumers are spread among smaller suppliers or whether it would be happy to see the market dominated by larger suppliers but with lower prices. This is an important distinction as the policy it recommends may make one scenario more likely than another.
Verdict: misguided and harmful to consumer understanding
Transitional price cap for customers on prepayment meters
The CMA has also decided, because customers on prepayment meters are the group which is most significantly overcharged, that the market in its present state will not reduce prices sufficiently quickly to a level it deems appropriate. Because of this, it is recommending that a price cap for these consumers should be implemented until the market is sufficiently competitive. This is ridiculous for two reasons. First is the issue of path dependency, that as soon as government makes it their responsibility to keep prices low it becomes very difficult to ever let go of the reins and allow the market to dictate prices. Second is that it will be difficult to engage consumers in the transitional period if the government is still ensuring that they are not charged more than it deems to be fair. A better solution would be to increase competition in the prepayment tariff market, and to hope that the potential large savings for customers will incentivise them to switch. This, in the short run, may mean that more prepayment customers would be overpaying for their energy, and that these same customers may be at risk for greater fuel poverty. However, in the long run they will benefit from a more competitive market and the lower prices this will bring. The idea that customers from poorer socio-economic backgrounds, which the majority of prepayment customers are, are incapable of being engaged in markets is a fallacy. These consumers are able to respond to price signals in other areas of consumption, such as when choosing which supermarket to shop at, and energy should be no different.
Verdict: solves the problem in the short term, but makes competition in the future more difficult
Role of ‘third party intermediaries’ (price comparison websites)
Given the total lack of any analysis of the effect of price comparison websites on energy markets, or how consumers engage with and percieve them, it is surprising that the report’s authors have chosen to place so much faith in them as a mechanism for lowering prices. They crop up in a couple of different settings. The first is in the recommendation to remove the code of conduct rules for price comparison websites which require them to give a “whole of market” view to consumers. Instead the CMA sees them as having a role more similar to a broker who has specific deals with energy companies, and channels consumers towards where it has the best profit. In my experience this is not what consumers expect, and the CMA has provided precisely zero evidence to back up their position. Consumers go to a comparison site such as “compare the market” in order to, you guessed it, compare the market. Price comparison websites make a vast amount of commission on sales, and this price becomes factored into the cost of electricity tariffs and result in higher prices for everyone.
The second place that TPIs crop up is in solving the problem that electricity retailers currently benefit from disengaged customers. As a remedy to this, price comparison website should have access to a database of consumers who haven’t switched recently . This is an interesting idea, and while the huge amount of spam may be annoying, it looks like a good way to make it easier for price comparison websites to know who they could target with the largest inventive to switch.
It is a shame that the focus on third party intemediaries makes no mention of other community or non-profit groups who might want to form ‘switching-clubs’. These sort of groups have the huge advantage of being able to engage consumers and leverage market competition, without the negative effects on prices that a reliance only on commercial brokers would involve.
Verdict: somewhat irresponsible to place so much faith in price comparison websites with no market or consumer data to back up their plans, bu the register of disengaged consumers could work well
Allocation of Contracts for Difference
The report highlights the cost placed on consumers by inefficient and uncompetitive allocation of contracts for difference, the new support mechanism for renewable energy generation. In particular, it has a problem with the way in which OFGEM divides money between the ‘pots’ allocated between different technologies. If I were OFGEM I would be slightly offended by their conclusion, that OFGEM should think about what they are doing more and the potential impacts on energy prices paid by consumers. In my experience OFGEM spends a huge amount of time in making sure it’s decisions are justified and evaluated. The reccomendations mainly involve a couple of impact assessments and consultations… Great.
Verdict: the report recognises the potential adverse effects of having to ‘pick winners’ and support some technologies over others, but fails to come up with a solution that involves anything substantial
Let’s hope that the findings in the report are subject to democratic debate and discussion and not just waved through. Hopefully, given that some of the reccomendations go directly against the direction OFGEM has been pursuing, there will be some resistance. The report does show that more research needs to be conducted on the role that intermediaries can play, and the effect that they have on prices in the market. There are also larger questions about where the source of decision making in energy policy should be, and the extent to which it is democratic to contract out decision making to a body like the CMA.