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UK CMA sets out energy market reforms

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Hydrocarbon Engineering,


In a summary of its provisional decision on remedies published on 10 March 2016, the Competition and Markets Authority (CMA) has set out a comprehensive and wide ranging package of remedies to address the problems hindering competition, which it proposes to introduce following the conclusion of its investigation in June.

Although competition has benefited those customers who have switched to competitively priced fixed term deals, around 70% of the domestic customers of the six largest energy firms are still on the more expensive ‘default’ standard variable tariff (SVT). The CMA’s latest analysis reveals that the potential savings for these customers have risen substantially over the past two years so that the average customer could save over £300 by switching to a cheaper deal. The CMA’s analysis also shows that, in total, customers could have been paying about £1.7 billion a year more than they would in a competitive market.

The CMA’s proposals include a range of measures aimed directly at customers (including microbusinesses) to help and encourage a greater number to benefit from switching to more competitively priced deals. One of these is the creation of an Ofgem-controlled database of disengaged customers who have been on a SVT for more than three years, which will allow rival suppliers to target their marketing to those customers. The CMA is also proposing a temporary safeguard price control to protect customers on prepayment meters, whose options are more limited, which would reduce their bills by a total of £300 million a year.

The CMA is also proposing extensive measures to reset the relationship between Ofgem, the Department of Energy and Climate Change (DECC) and the industry, so that decisions are made efficiently, on the basis of readily available accurate information, with the impact on consumers clearly set out. These measures, some of which would require legislation, include requiring the largest suppliers to provide fuller information on their financial performance, and increased public consultation by DECC on policy decisions being taken that will be a major driver of consumer prices in the future.

The CMA also proposes that the system of self-regulation of industry codes needs to change, so that Ofgem is in a better position to ensure that measures that benefit consumers are introduced promptly.

Roger Witcomb, Chairman of the energy market investigation, said:

"We have found that the six largest suppliers have learned to take many of their existing domestic customers – some 70% of whom are on ‘default’ standard variable tariffs – for granted, not just over prices, but with their service and quality. Yet in those parts of the retail markets where competition is working, customers are benefiting to the tune of hundreds of pounds a year by switching. We’re proposing a wide range of bold, innovative measures to enable competition to grow further across the market so that millions more households will benefit.

"Clearing the way for competing suppliers, and price comparison websites, to alert customers to the savings they can make will shake up the industry. Given the scale of the problems and the potential savings on offer, we think bold measures like giving rival suppliers the chance to contact long standing SVT customers are justified.

"However, for customers on prepayment meters, a group which contains some of the most vulnerable customers, their options are far more limited. It’s more difficult for their suppliers to compete, more difficult for such customers to switch, and they have far fewer tariff choices. Energy is both an essential and expensive item for many of these 4 million households, whose cheapest tariffs are around £300 more expensive than for other customers. That’s why we’re proposing a transitional price control for them which will remain in place until 2020, by which time they too will be able to benefit from our measures, and from other future developments like the roll-out of smart meters.

"Given the number of customers paying too much, many of whom have never considered switching, we thought long and hard about whether to extend a price control for others on theSVT. We believe that over the longer term more substantial benefit for households and microbusinesses will come from making competition work better. In particular, since there are already plenty of competitive deals out there, what we need to do is to persuade customers to take them up. Regulating prices over such a wide part of the market would give customers even less incentive to seek better deals, and all suppliers would be under less pressure to drive prices down and improve customer service. And by creating that situation, it would prove difficult to remove in future.

"As well as those directly affecting customers, we are putting in place measures to address problems with the wholesale electricity market and the broader regulatory framework. The fact that energy and climate policies are expected to make up 37% of the household cost of electricity by 2020 shows the impact that policy and regulatory decisions can have on bills. The evident importance of these and other decisions affecting the future of the energy sector demands clarity and transparency – and a policy making and regulatory structure which is fit for this purpose.

"We think that this coherent and comprehensive package of reforms to address the problems we’ve found – including those which whilst less evident to customers can still have a huge impact on bills – will help transform the energy sector so that all customers benefit."

The main proposed measures to be introduced are:

  • An Ofgem-controlled database which will allow rival suppliers to contact domestic and microbusiness customers who have been stuck on their supplier’s default tariff for three years or more with better deals. This will be subject to strict safeguards so that customers can opt out at any time and to ensure that communication meets strictly controlled criteria.
  • A transitional price control for the 4 million households who are on prepayment meters, who face limited competition from suppliers and whose ability to switch and find better deals is far more limited than for credit and direct debit customers.
  • Strengthening the ability and incentives for third party intermediaries such as price comparison websites (PCWs) to help customers find better deals by giving them access to relevant information like customer meter numbers and allowing them to negotiate exclusive deals with suppliers. This will be accompanied by a requirement for PCWs to be transparent about how they cover the market and the information on display.
  • Removing the four tariff rule which limits competition and innovation. This will enable suppliers and PCWs to offer tariffs designed for certain customer groups.
  • Removing restrictions on the ability of new suppliers to compete for prepayment customers and reduce barriers such as debt issues that make it difficult for such customers to switch.
  • A requirement that the approximately 700 000 households on non-Economy 7 restricted meters are allowed to switch to cheaper single rate tariffs without requiring a meter replacement.
  • Helping microbusinesses through improved price transparency, tackling ‘rollover’ contracts with greater notice periods and ending termination fees which prevent switching as well as moves to prompt and engage.
  • Ensuring that certain measures in Ofgem’s programme to help provide domestic customers with clearer information are prioritised and ensuring that all measures concerning domestic and microbusiness customer information are ‘road-tested’ prior to introduction.
  • Ensuring that the contracts for difference process where the government supports investment in low carbon generation is carried out transparently so that the impact on customer bills is assessed beforehand. There should be a clear rationale for the allocation of funding to different technologies and for the exceptional circumstances when competitive auctions are not used.
  • Ensuring that both electricity and gas settlement processes are reformed to lower costs to consumers by enabling more accurate measurement of consumption and more efficient supply – and to enable the full benefit of smart meters to be realised.
  • Introducing a locational pricing system for transmission losses incurred when transporting electricity to reduce the overall cost to customers.
  • Improving the policy and regulatory framework to provide a clear division of responsibilities and transparency in relation to policy creation and implementation and changes to industry codes. This includes strengthening Ofgem’s independence, reporting powers and ability to drive forward changes.

These changes would be brought in via a combination of CMA Orders and recommendations to Ofgem and government.

This publication follows the provisional findings last July and addendum published in December, which highlighted a range of problems hindering competition in the energy markets, including the extent to which customers are disengaged and shortcomings in regulation and the ability to deliver change across the sector.

The CMA also published a range of possible remedies last July – followed by further proposals in October and December last year. The CMA has considered all comments received and discussed these measures with suppliers, regulators, government, consumer bodies and other interested groups.

Over the course of the investigation to date, the group has commissioned and completed a general survey of 7000 domestic customers; a further survey of over 1200 domestic tenants and received over 200 submissions from energy suppliers, generators, government bodies, consumer groups, academics and other interested parties; held over 40 formal hearings with these parties; visited power plants and customer service offices in Scotland, England and Wales and published its provisional findings, an addendum to its provisional findings, a main notice of possible remedies and two supplemental ones, and its provisional decision on remedies.


Adapted from press release by Rosalie Starling

Read the article online at: https://www.hydrocarbonengineering.com/refining/10032016/uk-cma-sets-out-energy-market-reforms-2725/


 

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