CMA publishes final energy market reforms

The UK’s Competition and Markets Authority (CMA) recently concluded its UK energy market investigation, setting out a wide range of reforms to modernise the market for the benefit of customers.

Over 30 measures will be brought in after the most comprehensive investigation into the UK energy market since privatisation. These will drive down costs by increasing competition between suppliers and help more customers switch to better deals, whilst protecting those less able to benefit from competition. The CMA will also bring in technical and regulatory changes to modernise the market and ensure it works in consumers’ interests.

The investigation found that 70% of domestic customers of the six largest energy firms are still on an expensive ‘default’ standard variable tariff. As these customers could potentially save over £300 each by switching to a cheaper deal, the CMA will be enabling more of them to take advantage. It found that customers have been paying £1.4bn/y more than they would in a fully competitive market.

Suppliers will be ordered to give Ofgem details of all customers who have been on their default tariff for more than three years, which will be put on a secure database to allow rival suppliers to contact customers by letter and offer cheaper and easy-to-access deals based on their actual energy usage. Ofgem will control access to the database and carry out testing on the frequency and form of communications, to ensure it is effective in helping customers move on to better deals. Customers can opt out at any time if they wish.

The options to switch are far more limited for the 4mn households on prepayment meters. For these customers, a transitional price cap will be introduced which will reduce bills by around £300mn/y. The cheapest tariffs for such customers are currently £260 to £320 a year more expensive than those available for direct debit customers. The price cap will remain in place until the introduction of smart meters removes the limitations on such customers accessing better deals.

The CMA is also introducing a range of measures to revitalise competition and reduce the costs borne by customers. These include pressing ahead with reforming outdated systems for measuring and charging energy that distort competition between suppliers, reducing the costs of transmitting electricity and using competition to help ensure that financial support for low carbon generation is allocated at the lowest cost to customers. Price comparison websites (PCWs) will also be enabled to allow them to play a more active role in helping customers find the best offers for them and they will be given access to meter data which will enable customers to search instantly for deals.

The measures will also tackle specific issues faced by microbusinesses (those that employ fewer than 10 people) – 45% of which are on default tariffs. Suppliers will now be required to publish their prices for such customers and will no longer be able to lock them into expensive ‘rollover’ contracts.

Ofgem will also be given much greater influence over the detailed codes that govern the working of the market – and which currently give undue influence to established industry participants over decisions that affect competition and consumers – and more powers to enable it to scrutinise the performance of the market and suppliers as well as the impact of policy.

Roger Witcomb, Chairman of the Energy Market Investigation, said: ‘Competition is working well for some customers in this market – but nowhere near enough of them. Our measures will help more customers get a better deal and put in place a modernised energy market equipped for the future.’

The changes will be accomplished via a combination of CMA Orders and recommendations to Ofgem and government. The CMA is to publish a timetable setting out this remedies implementation process over the next six months.

Industry reaction
Many industry observers were unimpressed with the results of the review, calling it a ‘whitewash’ and a ‘damp squib’. Justin Bowden, National Secretary of the GMB, the union for workers in the energy sector, condemned the report’s publication. He said: ‘The CMA is a toothless waste of space that should be abolished and replaced by government itself taking over the regulatory role with powers to cap prices subject to control by Parliament.  And as for the CMA report, it spends over a thousand pages simply tinkering with a broken and failed model for the UK electricity supply sector.

He continued: ‘It is high time government developed a credible energy policy and fulfilled its responsibility for ensuring that the UK has a balanced low carbon energy mix which includes renewables, gas and nuclear power. As part of this credible energy policy, the remit of the Nuclear Decommissioning Authority (NDA) should be changed to the Nuclear Development Authority and charged with ensuring that a fleet of new nuclear power stations are brought onstream to replace the coal-fired and nuclear stations being decommissioned.’

‘The government should ensure that the gas in the UK is available as a transitional fuel to heat homes rather than relying on supplies from overseas,’ he concluded.