Competition in energy markets

In our summary of the government’s Annual Energy Statement 2013 we noted Ofgem’s intention to work closely with the competition authorities to develop a system of analysis of competition in the market.

On 25 November 2013 Ofgem published an open letter from Ofgem, the Office of Fair Trading (OFT) and the Competition and Markets Authority (CMA) to the Secretary of State on Competition in Energy Markets. (CMA will replace OFT from April 2014).

The open letter

The letter sets out how the framework for an assessment of competition in energy markets and the conduct of such an assessment will be taken forward by the authorities.

Building on work already carried out by Ofgem, the authorities aim to provide an assessment of how well competition in the markets for gas and electricity is serving the interests of households and small firms in Great Britain, in particular in the light of recent market developments.

The work will focus on the retail side of these markets. It will also address the impact of the vertical supply chain on competition and on customers, considering, for example, the impacts of vertical integration and access to wholesale energy markets.

A basis for this already exists in current and planned cooperation between the OFT/CMA and Ofgem. Ofgem has concurrent competition law powers with the OFT/CMA which have been strengthened by the Enterprise and Regulatory Reform Act 2013, under which the CMA will itself have an expanded role in promoting competition in areas covered by sector regulation. The authorities will be able to draw on the OFT’s experience in other markets, for example where switching, complexity and/or transparency for consumers is a concern, in areas of potential discrimination between groups of consumers, and in issues arising from vertical integration.

First stage - framework for assessment - December 2013

The proposed first stage of this work is to settle a framework for preparing the assessment, intended to be published in December 2013. The framework is likely to include structure, behaviour and outcomes in retail gas and electricity markets. It will need to consider both the demand (consumer) and supply (supplier) sides of the markets, to assess consumers' abilities to access, assess and act on information and how companies might make it harder for consumers to do this. Ofgem will consult with relevant consumer and SME organisations.

Second stage - first assessment March 2014

The authorities hope then to publish a first assessment before the end of March 2014. They are conscious of the need to move relatively swiftly, given the extent of public concern. Rapid action does mean that the authorities will not be able to take full account of new consumer research which Ofgem is also commissioning, nor of the impact of Ofgem’s Retail Market Review, since not all suppliers will have completed implementation of all RMR elements. The authorities believe that this trade off is worthwhile to enable a quick response to government’s concerns. Ofgem expects to publish the outcome of its consumer research in late spring 2014, to complete its first annual review of the state of the retail energy market and create a baseline against which progress can be assessed.

Next steps

Each of Ofgem and the OFT/CMA will then need to consider next steps. These range from “do nothing”, to identifying specific issues for further focus, to proposing specific reforms or a market investigation reference.

We await the publication of the framework in December 2013. In the meantime, if you would like to discuss the potential implications of these proposals or other energy market matters, please do not hesitate to call or email your usual CMS contact, or one of the team below.