Update: UK electricity market given clean bill of health by CMA

The Competition and Markets Authority (CMA) has cleared the UK’s big six energy firms of anti-competitive behaviour on the country’s wholesale electricity market and confirmed that the wholesale gas market should remain outside the scope of its probe into competition in the energy sector.

According to the initial findings of CMA’s major energy market inquiry published on Wednesday the big six “are not gaining a competitive advantage in terms of product availability” at the UK power market in spite of long-running concerns over a perceived lack of liquidity.

The CMA published an updated issues statement on Wednesday morning giving detailed insight into the direction of its ongoing probe. The statement largely praised the design of the market itself, as well as the Department of Energy and Climate Change’s (DECC) ongoing reforms.

The initial findings mean the forced break-up of any vertically integrated company, which although extreme, had been considered a realistic prospect by some in the industry – is now virtually certain not to happen.

Electricity Market Reform issues

However, some specific areas of electricity market design were signposted as ripe for further investigation. These were planned reforms to the balancing market alongside an absence of local pricing, and a possible lack of competition in the allocation mechanism for contracts for difference, DECC’s new subsidy model for low-carbon power generators.

“We will continue to develop our analysis in these areas and would welcome further views and evidence from interested parties,” the CMA said.

The CMA is concerned that collective reforms enacted by the government and energy regulator to bring forward more investment in generation could provide excessive rewards to generators investing in new capacity.

The DECC Electricity Reform Market (EMR) programme has been constructed around offering additional subsidy support to renewable and thermal generators through its respective Contracts for Difference (CfD) and Capacity Market reforms.

But a parallel initiative driven by the energy regulator Ofgem to provide more appropriate compensation to those generators that help balance the system at time of system scarcity, known as cash out, could overcompensate generators that have secured contracts through the new Capacity Market, the CMA warned.

The industry, led by the balancing and settlement code operator Elexon, is consulting on new cash out reforms that aim to price imbalance based on the most expensive 1MWh balancing action taken. The proposed modifications would reward generators handsomely for responding to system shortfalls and penalise suppliers caught short of contracted positions (see EDEM 3 February 2015).

The CMA has also questioned the proposal to introduce a reserve scarcity price, which could allow cash out prices to peak at £6,000 (€8,155)/MWh, in conjunction with the Capacity Market.

With Ofgem seemingly intent on implementing a new system of balancing costs for the start of Winter 2015 – a move that industry experts are anticipating will lead to increased volatility on wholesale prompt and near curve electricity products – the CMA’s interjection could lead to further consultation and delays in the process of balancing reforms.

The CMA also highlighted inconsistencies with the government’s CfD subsidy scheme that is being phased in to replace existing Renewables Obligation (RO) mechanism in support of renewable developers.

Despite taking on the appearance of a competitive process last year, the CMA has expressed concerns that earlier and prospective government interventions to influence the award of CfDs could lead to their allocation in an inefficient and costly manner.

Wholesale gas market

The CMA had embarked on the investigation with the view that wholesale gas markets would remain outside its scope, to the dismay of some politicians and utilities.

“We have conducted a more detailed assessment of this question, and this overall conclusion has not changed,” the authority said.

Its assessment focused on whether some larger companies had the power to exercise ‘unilateral market power’ and influence pricing. It concluded this is unlikely in the highly diversified and liquid British gas market.

“We found that Statoil is the one company that might have the ability to raise wholesale prices by withholding output in an exceptionally cold winter,” it said. “However, Statoil is unlikely to have the incentive to sustain the output reductions required to raise prices,” it added.

Statoil said on Wednesday that it is imperative that the mechanisms regulating marketing and trading are trusted by the market. “In general, we support transparent and open systems that provide accurate market information and commodity reference prices for all parties involved,” Statoil said.

A number of utilities had said that due to the deeply interwoven nature of the British gas and power markets, any investigation of one would ultimately end up encompassing the other.

The CMA undertook analysis on patterns in both markets and concluded that similar trends in both trading and hedging indicated that concerns over vertical integration may have been overstated.

“If there were fundamental deficiencies in liquidity in electricity, or if vertically integrated firms were forming their electricity hedges by trading internally, we would expect to see that comparable gas products are traded further ahead than electricity in external markets; but that was broadly not the case,” it said.

“Similarly, if vertically integrated firms gained an advantage in electricity from having the option to trade internally, we might expect to see them hedging further ahead in gas than in electricity; but again, that was broadly not the case,” it added.

The CMA’s final analysis of the investigation is scheduled to be published in November or December. Henry Evans, Jamie Stewart and Albert Evans