The CMA Energy Market Investigation

The CMA Energy Market Investigation

Final report: further analysis

27 June 2016


Final report: further analysis PwC 1

Introduction and summary analysis 2

Detailed remedy analysis 6

Appendix – Summary of the CMA’s remedies 15

Contacts 30

Contents



The Competition and Markets Authority (CMA) published its Final Report from the Energy Market Investigation on 24 June 2016. The decision builds on the Provisional Findings and Provisional Decision on remedies published in July 2015 and March 2016, respectively.

Despite widespread commentary (and criticism) of the Provisional Decisions, the CMA has not made any substantive changes to the remedies proposed in March

In most cases, the remedies reaffirm the CMA's commitment to market solutions. They form a package of targeted, and in some cases temporary, interventions which are aimed at increasing competition and customer engagement. In this document, we analyse each of the CMA’s final remedies to help industry participants and stakeholders chart the course ahead. This report follows a similar structure to the further analysis report we published after the CMA’s Provisional Decision on remedies.

We summarise the impact of the CMA’s remedies and where there are changes from the Provisional Decisions in the table below

We present separate impact scores for larger suppliers/shippers, smaller suppliers/shippers, generators, DECC/Ofgem and industry bodies and consumers. For the impact scores we consider how much the remedy is likely to change market behaviour and/or raise costs, lower revenues or increase the burden for market participants. We use the notation below:

/ - No material change from the Provisional Decisions

Minor - Minor change(s) from the Provisional Decisions

- Significant adverse impact

- Significant beneficial impact

- Broadly neutral or modest impact

Our analysis indicates that:

In most cases, the CMA’s remedies have a positive impact on consumers. However, we question whether the introduction of customer databases will be welcomed by domestic and microbusiness consumers, and for this reason assign a negative score for customers for this remedy.

Introduction and summary analysis

https://assets.digital.cabinet-office.gov.uk/media/559fc933ed915d1592000050/EMI_provisional_findings_report.pdf

https://assets.digital.cabinet-office.gov.uk/media/5706757340f0b6038800003b/Provisional-decision-on-remedies-EMI.pdf

http://pwc.blogs.com/energy_spotlight/2015/07/further-analysis-of-the-provisional-findings-from-the-cmas-energy-market-investigation.html



Ofgem (and/or DECC) emerge as the stakeholders most impacted by the CMA’s remedies. We indicate adverse impacts for the regulator and DECC to reflect the significant increase in workload and capability each organisation will need to find. However, with these additional responsibilities will come additional market influence.

Smaller suppliers fair slightly better than larger suppliers, largely because they are less likely to be adversely impacted by remedies targeted at sticky customers.

Note: We have numbered the remedies to align with the appendix to this report (and our previous report) that lists and describes each of the CMA’s provisional remedies in more detail. We note the CMA does not use this short-hand. We list the remedies next to the same AEC used by the CMA in Chapter 20 of the Final Report.

Remedy

Impact

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The CfDs AEC

1 DECC to undertake and disclose the outcome of an impact assessment before awarding CfDs outside the auction mechanism

/

2 DECC to undertake and consult on a clear and thorough assessment of the appropriate allocation of technologies and CfD budgets between pots

/

The Locational pricing AEC

3, 4, 4a An order on National Grid, supported by Ofgem, to calculate imbalance charges using locational transmission losses Minor

The Electricity settlement AEC

5,6 Ofgem to carry out a full cost benefit analysis on the move to half-hourly settlement, as soon as possible, and that DECC and Ofgem consult jointly on a plan setting out the aim and approach for half-hourly settlement

/

7 A recommendation to DECC to consider whether it is appropriate to remove other potential barriers for suppliers to collecting consumption data with greater granularity than daily for the purpose of implementing mandatory half-hourly settlement

Minor

The Gas settlement AEC

8 Ofgem to ensure implementation of Project Nexus by 1 February 2017 Minor

9 Gas suppliers to submit all meter readings for non-daily metered customers to Xoserve as soon as they become available, at least annually for non-smart customers, or monthly for smart

/



Remedy

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10 Ofgem to take appropriate steps to ensure the development and delivery of a performance assurance framework concerning unidentified gas, as soon as reasonably practicable

Minor

The Prepayment AEC

11 Allow suppliers to set prices to prepayment customers on the basis of regional cost variations /

12, 13 Capping the number of gas tariff pages per supplier (at 12) and giving Ofgem the power to transfer pages between suppliers.

/

The RMR AEC

14 Withdrawal of the simpler choices component of the retail market review and a new standard of conduct on the design of tariffs

/

The Domestic Weak Customer Response AEC and the Prepayment AEC

15, 16 Establish a programme to promote engagement in the domestic retail market through changes in the information customers receive

Minor

17, 18 Price comparison websites (PCWs) and other third party intermediaries (TPIs) to gain access to the ECOES and SCOGES databases

Minor

19 Mandatory participation for all electricity and gas suppliers in Midata. An increase the scope of information collected and, after customer consent, an ability for PCWs and TPIs to access customer data

Minor

20, 21 A requirement on suppliers to disclose data on disengaged customers to Ofgem to be used in a newly created Disengaged Customer Database

Minor

22, 23, 24

Make all single-rate electricity tariffs available to all customers on restricted meters, require suppliers to remind these customers in regular communications that they have the option to switch supplier and make Citizens Advice become a recognised provider of information and support to customers on restricted meters.

/

25 Transitional price cap for prepayment customers from 2017 to the end of 2020 Minor

The Microbusiness Weak Customer Response AEC

26,27 Broad range of modifications to microbusiness contracts including additional requirements on tariff disclosure and prohibition of certain conditions in auto-rollover contracts

/



Remedy

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28 Ofgem to establish a programme to promote engagement of microbusinesses through changes in the information microbusiness customers receive

/

29, 30 A requirement on suppliers to disclose data to Ofgem on disengaged microbusiness customers to be used in a newly created Disengaged Customer Database

Minor

The Governance AEC

31 DECC to amend legislation in order to clarify Ofgem’s statutory objectives and duties /

32 DECC and Ofgem to publish detailed joint statements concerning proposed DECC policy objectives that are likely to necessitate parallel, or consequential, Ofgem interventions

/

33 Ofgem to publish an annual State of the Market Report and modify the generation and supply licence

conditions of the Six Large Energy Firms’ to change the way companies report profits and costs to Ofgem Minor

The Codes AEC

34, 35 Ofgem to publish a cross-cutting strategic direction for code development (the ‘Strategic Direction’) and to be given

the power to modify industry codes in certain exceptional circumstances /



Detailed remedy analysis In this section we update our analysis on each remedy from our previous further analysis report. For each remedy we indicate whether the CMA has made a change from the Provisional Findings in March; we assess the impact of the remedy on five different parties and summarise our analysis with commentary. For the impact scores we consider how much the remedy is likely to change market behaviour and/or raise costs, lower revenues or increase the burden for market participants:

/ - No material change from the Provisional Decisions

Minor - Minor change(s) from the Provisional Decisions

- Significant adverse impact

- Significant beneficial impact

- Broadly neutral or modest impact

We present separate impact scores for larger suppliers/shippers, smaller suppliers/shippers, generators, DECC/Ofgem and industry bodies and consumers.

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Remedy

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Commentary on remedy and changes from March Change from

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CfD

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1

DECC to undertake and disclose the outcome of an impact assessment before awarding CfDs outside the auction mechanism

/

This remedy seeks to encourage DECC to provide stakeholders with greater transparency and analysis when awarding CfD contracts outside the auction process. The impact should be a net benefit for generators, apart from those companies that might have hoped to receive large CfD allocations outside the auction mechanism in the future.

2

DECC to undertake and consult on a clear and thorough assessment of the appropriate allocation of technologies and CfD budgets between pots

/

Greater transparency on the allocation of CfD funding will allow potential bidders to make informed decisions regarding the projects they undertake. This is most likely to impact DECC, in terms of greater workload and may lead to less discretion in their decision-making. Conversely it is likely to lead to positive effects on the approach to investment taken by generators. In their response to the CMA, DECC



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expressed concerns with this remedy, especially where, in the long term, value for money might be optimised if Government offers support to technologies that have not yet come down the cost curve and where that cost reduction may be dependent on continued UK deployment.

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An order on National Grid, supported by Ofgem, to calculate imbalance charges using locational transmission losses

Minor

The CMA reiterate their analysis that this remedy may result in a reduction in the cost of meeting electricity demand of between £158 million and £190 million (over the period 2017 to 2026). However, the CMA admits to an incorrect understanding in the Provisional Decisions of full and semi marginal pricing.

Minor change. The CMA have revisited their proposed allocation of 100% of losses to generators in Provisional Decisions and instead suggest the allocation should remain as it currently is: 45% to generation with 55% to supply. This means there will be winners and losers across suppliers and generators. The impact of locational pricing will be greatest for parties in remote geographical locations. Making the changes will also require effort from code administrators and Ofgem.

The CMA has removed some of the prescriptive steps included in the Provisional Decisions and replaced them with broader implementation guidelines for National Grid. It has also added a recommendation for Ofgem and the industry to “assess alternative solutions” to locational pricing and to “consider whether to develop and implement a further code modification based on the most effective solution.”

The change will be effected through an order on National Grid, rather than through the industry change process.

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Ofgem to carry out a full cost benefit analysis on the move to half-hourly settlement, as soon as possible, and that DECC and Ofgem consult jointly on a plan setting out the aim and approach for half-hourly settlement

/

Moving to half hourly settlement is a material change in the operation of electricity settlement. It will allow suppliers to match the costs of their electricity purchases to the price of their electricity sales, incentivising the introduction of time-of-use tariffs. The impact on suppliers will depend on the level of development of their own settlement systems. The reforms will also likely require changes to the network codes. If the changes allow customers to take advantage of time of use pricing they may be able to reduce their energy bills.



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7

A recommendation to DECC to consider whether it is appropriate to remove other potential barriers for suppliers to collecting consumption data with greater granularity than daily for the purpose of implementing mandatory half-hourly settlement

Minor

We indicate little impact across parties, given consumption data monitoring is already widely regarded as an important step in realising the benefits of smart metering.

Minor change. The CMA remove reference to the Smart Energy Code, recognising that it is suppliers’ licences that restrict suppliers collecting more granular consumption data than daily.

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8 Ofgem to ensure implementation of Project Nexus by 1 February 2017

Minor

Minor change. The Final Report changes the recommended implementation deadline for Project Nexus from 1 October 2016, as it was at Provisional Decisions, to 1 February 2017. It also seeks for Ofgem to be more proactive in ensuring the effective implementation of the project, e.g. by requiring relevant parties to carry out further testing, and intervening if parties fail to meet agreed milestones.

9

Gas suppliers to submit all meter readings for non-daily metered customers to Xoserve as soon as they become available, at least annually for non-smart customers, or monthly for smart

/

The requirement to submit meter readings more frequently than the current levels may have some cost implications for suppliers, but is likely to already form part of their planning for the roll-out of smart meters.

10

Ofgem to take appropriate steps to ensure the development and delivery of a performance assurance framework concerning unidentified gas, as soon as reasonably practicable

Minor

Establishing the new performance assurance framework will involve effort. In addition to set-up costs there are likely to be on-going costs to achieve the performance levels specified in the finalised framework. This may also require changes to the Uniform Network Code.

Minor change. The CMA has removed some of the detailed requirements set out at Provisional Decisions to give Ofgem more flexibility in how it implements this remedy.



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11 Allow suppliers to set prices to prepayment customers on the basis of regional cost variations

/

Ofgem’s retail market review included a provision that price differences between payment methods must be the same across GB. This recommendation opens up the potential for suppliers charging on the basis of regional cost variations. This should improve economic efficiency by ensuring that prices are reflective of genuine cost differentials on a regional basis.

12, 13

Capping the number of gas tariff pages per supplier (at 12) and giving Ofgem the power to transfer pages between suppliers.

/

The number of gas tariff pages a supplier holds sets a limit on the number of prepayment tariffs it can offer to the market (11 tariffs per page). The CMA has found that the larger energy suppliers hold a significant majority of the available gas tariff pages, thereby possibly creating a barrier to innovation for small and mid-tier suppliers. The CMA proposes restricting the number of gas tariff pages to 12 per supplier and giving Ofgem the power to transfer pages between suppliers if need be. This will reduce the number of tariffs that larger energy suppliers can offer their prepayment customers, while increasing the number for smaller suppliers.

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14

Withdrawal of the simpler choices component of the retail market review and a new standard of conduct on the design of tariffs.

/

This remedy reverses many of the controversial elements of Ofgem’s retail market review (which was only finalised in 2013). The CMA recommends the removal of the ‘four tariff rule’ and ban on complex tariffs. It also proposes to remove restrictions on bundling and on discounting. This is expected to be welcomed by energy suppliers, meaning they can focus specific offerings on niche customer groups again. (Although RMR may have helped some suppliers to gain customers).

However, as part of this remedy, the CMA propose introducing an additional standard of conduct on the design of tariffs so that customers can easily compare value-for-money with other tariffs suppliers offer.

On balance this remedy remains a positive move for suppliers by the CMA.



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Establish a programme to promote engagement in the domestic retail market through changes in the information customers receive

Minor

A stronger onus on Ofgem to test new measures designed to improve customer engagement before they are introduced. This will involve testing and implementing changes to various elements of the information customers receive (bill design, tariff naming, etc.). It will impact suppliers during implementation, requiring changes in the information available on websites, bills and annual statements, but we regard the impact to be low.

Minor change. The final remedies shift away from recommending that domestic bills include a market-wide “cheapest” tariff message, to proposing that information be provided to customers on “cheaper” tariffs available across the markets. The CMA has also removed the option of suppliers participating in the Ofgem-led research and instead recommends that Ofgem implements a licence condition change to obligate them.

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Price comparison websites (PCWs) and other third party intermediaries (TPIs) to gain access to the ECOES and SCOGES databases

Minor

The CMA hope that by allowing PCWs and TPIs access to consumption, metering and other customer data, it can be used in more innovative ways in order to encourage greater engagement and switching by domestic energy customers. For example, if PCWs and other TPIs had access to the ECOES and SCOGES databases, they could retrieve meter numbers using only the addresses provided by a customer, therefore potentially speeding up the switching process or avoiding a transfer error.

Minor change: The CMA increase the scope of the remedy beyond PCWs to include TPIs.

19

Mandatory participation for all electricity and gas suppliers in Midata. An increase in the scope of information collected and, after customer consent, an ability for PCWs and TPIs to access customer data

Minor

The Midata programme allows customers of registered companies to access electronically a range of data fields stored by the company on their accounts. By granting third party intermediates (TPIs) access to the Midata databases, they could fulfil a new role in the energy market, acting as brokers between customers and suppliers. This is likely to increase competitive pressures on suppliers with a large number of customers on non-competitive tariffs.



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Minor change: The CMA increase the scope of the remedy beyond PCWs to include TPIs. This will increase the range of companies that might compete to access and use customers’ Midata.

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A requirement on suppliers to disclose data on disengaged customers to Ofgem to be used in a newly created Disengaged Customer Database

Minor

The CMA hopes the creation of the disengaged customer database will stimulate competitive pressure in the market. Larger suppliers are likely to be more adversely effected than smaller suppliers, given they have a larger number of disengaged customers.

Whilst customers will be given the option to opt-out of the database and marketing from rival suppliers can only be by post, there remain outstanding questions on the level of protection needed for vulnerable customers and whether many customers will welcome additional postal marketing. The creation and maintenance of the database will also have significant cost and capability implications for Ofgem.

Minor change: the CMA has added an order on Ofgem to put in place privacy safeguards around accessing the database, test aspects of the marketing letters to disengaged customers; and monitor the impact of the database with a view to maximising its effectiveness.

22, 23, 24

Make all single-rate electricity tariffs available to all customers on restricted meters, require suppliers to remind these customers in regular communications that they have the option to switch supplier and make Citizens Advice become a recognised provider of information and support to customers on restricted meters.

/

A set of remedies designed to improve the engagement of customers on restricted meters during the transitional phase before the full rollout of smart meters is complete. The requirement to offer single-rate tariffs to restricted meter customers is one of only two remedies introduced by the CMA that does not apply to small suppliers.



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25 Transitional price cap for prepayment customers from 2017 to the end of 2020

Minor

Minor change: The CMA has not changed its broad approach to calculating the prepayment price cap. However, the CMA has changed all of the input values to the price cap calculation. These are the benchmark costs (made up of wholesale, operating and policy costs), the headroom, the network costs calculation and the PPM uplift (the difference in costs to serve between a DD and PPM tariff). Overall, the impact of these changes is a small increase in the level of the reference price cap, on 30th June 2015, at medium levels of consumption. In addition:

The CMA has removed the notion of a dual fuel cap and now seem to be using single fuel gas and electricity caps.

The CMA has set two specific caps at both nil and medium consumption. For a supplier’s tariff to be compliant, it must sit below the line joining these two points at all other values of consumption.

The indexation approach has moved from annual to seasonal adjustments.

The price cap will not apply to customers with next generation SMETS 2 meters (as an incentive for suppliers to accelerate the roll out of these meters). We note, however, that this could reduce the appetite for customers to take a SMETS 2 meter if they fear they will lose the price cap protection.

The remedy is also likely to impact Ofgem: after the CMA has set the initial level of the cap the rolling update of the cap will be controversial and will be likely to fall to Ofgem.

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Broad range of modifications to microbusiness contracts including additional requirements on tariff disclosure and prohibition of certain conditions in auto-rollover contracts

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The additional reporting requirements for suppliers will add some costs to suppliers, as will the inability to apply termination fees to OOC, evergreen and default rollover contracts.

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28 Ofgem to establish a programme to promote engagement of microbusinesses through changes

/ Similar to remedy 15, but for the Microbusiness sector.



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in the information microbusiness customers receive

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A requirement on suppliers to disclose data to Ofgem on disengaged microbusiness customers to be used in a newly created Disengaged Customer Database

Minor

Similar to remedies 20/21 but for the Microbusiness sector. To be eligible for inclusion in the database a microbusiness customer must have been on their suppliers’ default contract for three or more years. Reception to this mechanism has been understandably mixed, we question whether consumers will welcome greater marketing contacts.

Minor change: the CMA has added an order on suppliers to send a letter to each disengaged microbusiness customer, prior to being included on the database, explaining the proposed use of the customer’s details, and including an opt-out mechanism. In addition, Ofgem has been asked to put in place privacy safeguards around accessing the database, test aspects of the marketing letters to prompt disengaged customers; and monitor the impact of the database with a view to maximising its effectiveness.

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DECC to amend legislation in order to clarify Ofgem’s statutory objectives and duties

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This remedy would strengthen Ofgem’s remit to promote effective competition in the sector. It achieves this through revisions to Ofgem’s statutory duty to give regard to other measures to protect consumers other than the promotion of effective competition. The cost of implementing such a change will be low, and the extent to which the clarification would make a material difference to Ofgem’s decisions is questionable.

32

DECC and Ofgem to publish detailed joint statements concerning proposed DECC policy objectives that are likely to necessitate parallel, or consequential, Ofgem interventions

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The CMA notes that the relationship between Ofgem and DECC could be recalibrated in order to recognise Ofgem’s independence and enhance coordination. This remedy is likely to be low impact outside Whitehall. It is aimed at creating greater coordination of regulatory duties and policy objectives between Ofgem and DECC.



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Ofgem to publish an annual State of the Market Report and modify the generation and supply licence conditions of the Six Large Energy Firms’ to change the way companies report profits and costs to Ofgem

Minor

This will result in additional reporting requirements for the large energy suppliers, which will be specified in modifications to their licence requirements. The remedy also proposes that the six large energy companies change the presentation of their wholesale energy purchase costs to reflect a standardised hedging strategy (as opposed to actual). The remedy also stipulates the creation of a new unit within Ofgem to centralise expertise and manage delivery of the new responsibility.

Minor change: The CMA has added a requirement for Ofgem to develop a price monitoring regime to monitor wholesale energy purchases on a ‘relevant basis’, such as opportunity cost.

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Ofgem to publish a cross-cutting

strategic direction for code

development (the ‘Strategic

Direction’) and to be given the

power to modify industry codes in

certain exceptional circumstances

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Setting a “Strategic Direction” for code development represents a significantly more proactive role for Ofgem. The remedy also gives more power to Ofgem to implement ongoing modifications to the codes.



Appendix – Summary of the CMA’s remedies The CMA’s final report highlights the following features of the market as having adverse effects on competition (AEC):

1. The mechanisms for allocating Contracts for Difference (The CfDs AEC).

2. The absence of locational adjustments for transmission losses (The Locational Pricing AEC).

3. Electricity and gas electricity settlement processes (The Electricity and Gas Settlement AECs).

4. Prepayment customers, weak customer response from domestic customers and the ‘simpler choices’ component of the Retail Market Review rules (The

Prepayment, Weak Domestic Customer Response and RMR AECs).

5. Weak customer response from microbusiness (The Microbusiness Weak Customer Response AEC).

6. Governance of regulatory framework and industry codes (The Governance and Codes AECs).

For each of these AECs, we have:

set out the remedies proposed by the CMA to address the AEC, and

provided additional details relating to the specific features and/or implementation of the remedy.



1. The mechanism for allocating future Contracts for Difference (CfDs)

The CMA believes that DECC’s decision to allocate early Contracts for Difference (CfDs) through an administrative rather than a competitive allocation process is likely to have led to consumers paying substantially higher costs.

The CMA also questions the evidence for allocating the CfD budgets into pots for different technologies. It suggests that it is unclear whether this approach provides value for money for consumers. The CMA calls for greater transparency in future.

The CMA makes clear that it is not considering any remedies that would “undo” any of the CfDs already granted.

Proposed remedy

Responsible

stakeholders

Remedy-specific details

1

Undertake, and disclose the outcome of, a clear

and thorough impact assessment before

awarding any CfD outside the CfD auction

mechanism.

DECC Impact assessment should clearly explain why DECC considers that the project is

not feasible for the competitive auction process.

Consultation should occur at two stages:

Before entering into negotiations with prospective generators

After negotiations with prospective generators and the provisional agreement

of a strike price.

2 Undertake and consult on a clear and thorough

assessment of the appropriate allocation of

technologies and CfD budgets between pots

DECC Consultation should focus on the extent to which short-run costs of supporting low

carbon generation are affected by DECC decisions.

DECC’s proposals for the allocation of technology and budgets should be finalised

at least one year ahead of auction.



2. Absence of locational adjustments for transmission losses

The CMA has suggested that the lack of locational pricing for transmission results in:

higher short-run costs and inefficient signals for electricity consumption; and

higher long-run costs as a result of inefficient decisions in relation to new investment in generation or plant extensions and closures.

The introduction of locational pricing for transmission losses should favour existing generation in areas of high demand such as London and the South East and disadvantage generators in more remote areas. It would also make future generation projects in remote areas more expensive.

Proposed remedy

Responsible

stakeholders


3

An order (the ‘Locational Pricing Order’) on

National Grid (and amendments to National

Grid’s licence conditions)

National Grid The Locational Pricing Order and licence amendments would set out:

Ensure that, at all times, imbalance charges (and specifically the estimated

volumes of imbalance) are calculated such as to be locationally sensitive to

transmission losses;

Ensure that the imbalance charges are calculated, as of 1 April 2018, on the basis of

the principles set out in the order;

Assume responsibility for the calculation of the transmission loss factors if the

BSCCo and/or any other agent appointed for that purpose fails to perform its

duties within this context; and

Raise a code modification proposal to modify the BSC in line with P229.

4,

4b

Support National Grid by taking necessary steps

that might facilitate the effective and timely

implementation of the Locational Pricing Order

Assess alternative solutions to the remedy as

implemented based on full marginal pricing and,

if and when appropriate, consider whether to

develop and implement a further code

modification based on the most effective

solution.

Ofgem,

National Grid



3. Electricity and gas settlement processes

The CMA has suggested that the settlement processes that arise due to the advance purchase of gas and electricity by suppliers is a potential area of competition concern. In particular, without timely and accurate settlement, suppliers are unlikely to be incentivised to deliver the best outcomes for customers.

Remedies to improve the electricity settlement process

Proposed remedy

Responsible

stakeholders


5 Conduct a full cost benefit analysis of the move to

mandatory half-hourly settlement, including

analysis of costs, benefits and distributional

implications as well as mitigating measures

Ofgem The remedy also recommends that Ofgem should:

Start the process of gathering evidence for the analysis as soon as practicable;

Consider the cost-effectiveness of alternative design options for half-hourly

settlement such as a centralised entity responsible for data collection and

aggregation;

Consider options for reducing the costs of elective half-hourly settlement, including

(i) whether any to delay or of these options are likely accelerate the adoption of

mandatory half-hourly settlement; and (ii) any challenges that may arise or

benefits that may accrue from the existence of two settlement systems, including in

particular the possibility of gaming/cherry picking behaviour, and

Consult, as part of the implementation of half-hourly settlement, on a proposed

modification to the provisions of SLC 47 that prohibit suppliers from collecting

consumption data with greater granularity than daily unless a customer has given

explicit consent to do so.

6 Publish and consult on a plan setting out the aim

and approach for half-hourly settlement

DECC and Ofgem The plan should include:

A list of proposed regulatory interventions (including code changes);

The relevant entity in charge of designing and/or approving such interventions,

that are necessary in order to implement the half-hourly settlement reform;



Proposed remedy

Responsible

stakeholders


An estimated timetable for the completion of each necessary intervention; and

Where appropriate, a list of relevant considerations that will be taken into account

in designing each regulatory intervention.

7

A recommendation to DECC to consider whether

it is appropriate to remove any other potential

barriers for suppliers to collecting consumption

data with greater granularity than daily for the

purpose of implementing mandatory half-hourly

settlement in the context of the review of the

Data Access and Privacy frameworks.

DECC Suppliers are currently subject to an “opt-in” clause, which prohibits them from

collecting electricity consumption data on a more granular than daily basis unless a

customer explicitly consented.

Remedies to improve the gas settlement process

Proposed remedy

Responsible

stakeholders


8

Ensure implementation of Project Nexus by 1

February 2017

Ofgem Implementation to be before, or as soon as possible after that date, once Ofgem is

satisfied that IT systems are ready for an effective implementation of Project Nexus

and do not pose risks to final customers;

To be achieved by monitoring closely the progress made through Ofgem’s role as a

chair of the three governance groups;

If appropriate, in order to ensure the effective implementation of Project Nexus,

amend the implementation process for Project Nexus (e.g. by requiring relevant

parties to carry out further testing), and set a new suitable implementation date for

Project Nexus; and

Take further measures where appropriate to achieve this objective (for instance if a

party fails to meet agreed milestones or causes a further deferral of the

implementation date).



Proposed remedy

Responsible

stakeholders


9 An order on gas suppliers (and amendments to

gas suppliers’ standard licence conditions) to

submit all meter readings for non-daily

metered supply points in GB to Xoserve as

soon as they become available

Gas suppliers Submissions must be made at least once per year, save for non-daily metered

supply points with a smart or advanced meter, which must be submitted at least

once per month

10 Establish a performance assurance framework

to increase the accuracy of the gas settlement

process

Ofgem A recommendation to Ofgem to take appropriate steps to ensure that a

performance assurance framework is established within a year of the CMA’s final

report.



4. Prepayment customers, weak customer response from domestic customers and the ‘simpler choices’ component of the Retail Market Review rules

The CMA thinks that the “simpler choices” component of Ofgem’s Retail Market Review (RMR) rules undermines competition. The relevant RMR provisions include the ban on complex tariffs, the maximum limit on the number of tariffs that suppliers are able to offer at any point in time, and the rules on discounts and bundling.

The CMA is also concerned about the impact on competition of 1) the limited awareness of and interest in domestic customers’ ability to switch supplier; 2) complex information provided in bills, the structure of tariffs and a lack of confidence in and access to price comparison websites; 3) uncertified meters or erroneous transfers; and 4) associated technical constraints of prepayment meters.

Proposed remedies specific to the Prepayment AEC

Proposed remedy

Responsible

stakeholders


11

Allow suppliers to set prices to prepayment

customers on the basis of regional cost

variations

Ofgem Modify suppliers licence condition to allow suppliers to set prices for customers on

dumb prepayment meters by applying regional cost variations which are applied to

other payment methods within the same core tariff, and deprioritise enforcement

action pending these modifications;

Take responsibility for the efficient allocation of gas tariff pages; and

Ensure that changes to the Debt Assignment Protocol are implemented by the end

of 2016.

12 Gas tariff pages – Capping and ability for

Ofgem to transfer

Six largest

suppliers, Ofgem

Undertakings from the six largest suppliers to:

Cap the number of gas tariff pages that a suppler can hold (at 12),

Provide relevant information for Ofgem to monitor the allocation of gas tariff

codes,

Allow Ofgem to mandate the transfer of one or more gas tariff pages to

another supplier; and

In the absence of the undertaking from the Big Six, a recommendation that Ofgem

achieve these aims through a new licence condition.



Proposed remedy

Responsible

stakeholders


13 Change in licence condition to achieve the

above

N/A Note: Following minor changes to the remedy, our commentary on this is now

merged into above remedy.

Proposed remedies concerning the RMR AEC

Proposed remedy

Responsible

stakeholders


14 Withdrawal of the simpler choices component

of the retail market review and a new Standard

or Conduct on the design of tariffs

Ofgem Removal of the following conditions:

Ban on complex tariffs,

The four tariff rule,

The removal of restrictions on the offer on certain discounts, bundled

products, reward points,

Prohibition against tariffs which would be exclusive (to new/existing

customers);

Introduce an additional standard of conduct on the design of tariffs so that

customers can easily compare value-for-money with other tariffs suppliers offer;

and

Remove the Whole of the Market requirement in the confidence code and

introduce a requirement for price comparison websites (PCWs) to be transparent

on the market coverage they provide.



Proposed remedies concerning the Prepayment AEC and the Domestic Weak Customer Response AEC

Proposed remedy

Responsible

stakeholders


15 Establishment of programme to promote

engagement in the domestic retail market

Ofgem and

suppliers

Programme to identify, test and implement measures to provide domestic

customers with different or additional information with the aim of improving

engagement in the domestic retail energy market. This includes the use of

Randomised Controlled Trials to test approaches where appropriate. Suggested

measures are:

changes to the information in domestic bills and how this is presented,

changes to information provided to customers on cheaper tariffs available

across the markets,

changes to the specific messaging that domestic customers receive in bills

once they move, or are moved, on to an SVT and/or other default tariffs, and

changes to the name of the default tariffs.

16 Changes in licence conditions to achieve the

above

Ofgem Modification (following consultation) of licence conditions by Ofgem to obligate

suppliers to participate in Ofgem-led research.

17 Price comparison websites (PCWs) and TPIs to

gain access to the ECOES database

Gemserv An order on Gemserv to give TPIs and PCWs access upon request to the ECOES

database (Electricity Central Online Enquire Service) on reasonable terms and

subject to satisfaction of reasonable access conditions.

18 Price comparison websites (PCWs) and TPIs to

gain access to the SCOGES database

Xoserve An order on Xoserve to give TPIs and PCWs access upon request to the SCOGES

(Single Centralised Online Gas Enquiry Service) database on reasonable terms and

subject to satisfaction of reasonable access conditions.

19 Changes to the current specifications of Midata

phase two

DECC Mandatory participation for all gas and electricity suppliers

Scope increase to include greater detail on energy use and metering

Third party intermediaries (TPIs) should be able to seek customer consent on the

frequency with which they can access customer data through Midata



Proposed remedy

Responsible

stakeholders


20 Disclosure to Ofgem of disengaged customers

data

All suppliers An order on gas and electricity suppliers to disclose customers who have been on

standard variable tariffs for three or more years. Data would be updated every six

months and held in a secure cloud database. This would enable rival suppliers to

use the data for the purpose of postal marketing.

Prior to suppliers disclosing this data, a letter must be sent to each disengaged

customer explaining the use of their data, including an opt out mechanism.

21 Creation and operation of Disengaged

Customer Database

Ofgem Ofgem to create, operate and maintain a cloud database for the purpose of storing

the data submitted by gas and electricity companies above.

22 Make all single-rate electricity tariffs available

to all customers on restricted meters

Suppliers with

>50,000 domestic

customers

An order:

requiring such suppliers to make all their single-rate electricity tariffs

available to all (existing and new) domestic electricity customers on restricted

meters,

Prohibiting such suppliers from making their single-rate electricity tariffs

conditional upon the replacement of their existing meter.

23 Reminders for electricity customers with

restricted use meters

All suppliers An order requiring suppliers to remind domestic electricity customers on restricted

meters that they have the option to:

switch supplier,

switch to a single-rate tariff without having to change their meter or incur

replacement costs;

Provide customers on restricted meters contact details for Citizens Advice; and

Provide Citizens Advice with the information it may reasonably require concerning

customers on restricted meters in the format specified by Citizens Advice.

24 Citizens Advice become a registered provider

of information

Citizens Advice Citizens Advice to become a recognised provider of information and support to

domestic electricity customers on restricted meters.

25 Price cap for annual prepayment customers

until the end of 2020

All suppliers An order requiring suppliers to ensure that the annual bills paid by prepayment

customers do not exceed a specified cap, for a period until the end of 2020.



5. Weak customer response from microbusinesses

The CMA’s analysis has highlighted that prices for the microbusiness customers of the six largest suppliers could have been on average 6% lower (£230 million per

year) between 2007 and 2014 in a better-functioning market. The themes drawn out for this sector of customers are similar to those in the domestic energy sector, with

a focus on:

creating a framework for effective competition

helping customers engage; and

protecting customers who are less able to engage to exploit the benefits of competition

Proposed remedy

Responsible

stakeholders


26 Broad range of modifications to microbusiness

contracts

All suppliers An order requiring that:

Suppliers disclose the prices of all available acquisition and retention

contracts to non-domestic customers falling within a defined category. Either

through their own website or via a third party platform.

Suppliers disclose the prices of all their out of contract and deemed contracts

on their website.

Suppliers are prohibited from including conditions in auto-rollover contracts

that:

(1) prohibit a microbusiness customer from giving a termination notice up to

the last day of the initial fixed-term period;

(2) prohibit the microbusiness customer from giving a termination notice up

to the last day of the fixed-term roll-over period; and

(3) impose a termination fee and/or no-exit clause for the roll-over period

suppliers are prohibited from transferring microbusinesses to higher priced

contracts (in auto-rollover contracts) during their notice period.

suppliers are prohibited from including termination fees in their existing and

future out-of-contract and evergreen contracts.



Proposed remedy

Responsible

stakeholders


27 Licence condition modifications to implement

the above

Ofgem Ofgem to make any necessary consequential amendments to the suppliers’

standard licence conditions.

28 Establishment of programme to promote

engagement of microbusinesses by providing

different information

Ofgem A recommendation that Ofgem establish a programme to identify, test and

implement measures to provide microbusiness customers with different or

additional information with the aim of promoting engagement.

29 Disclosure to Ofgem of disengaged customers

data

All suppliers An order on gas and electricity suppliers to disclose customers who have been on

default contract for three or more years. Data would be updated every six months

and held in a secure cloud database. This would enable rival suppliers to use the

data for the purpose of postal marketing.

The order will also require suppliers, prior to disclosing the Microbusiness

Customer Data to Ofgem, to send a prescribed letter to each Disengaged

Microbusiness Customer, explaining the proposed use of the customer’s details,

and including an opt-out mechanism for the microbusiness customer, at any time,

to object to and prevent the proposed disclosure and use of their details.

30 Creation and operation of Disengaged

Customer Database

Ofgem Ofgem to create, operate and maintain a cloud database for the purpose of storing

the data submitted by gas and electricity companies above.

In addition, Ofgem should put in place privacy safeguards, test aspects of the

marketing letters to prompt the Disengaged Domestic Customers who have not

opted-out; and monitor the impact of the database with a view to maximising its

effectiveness.



6. Governance of regulatory framework and industry codes

The CMA found that the regulatory framework may inhibit Ofgem’s ability to promote effective competition. This was due in part to existing legislation but was also attributed to a lack of formal coordination between DECC and Ofgem’s activities.

The CMA also suggests that the current industry-led code governance system does not deliver the timely change that is needed to support competition, innovation or wider policy objectives. The system also places a material burden on parties to the codes, particularly the smaller parties. In addition Ofgem is found not to have sufficient ability to influence the development and implementation phases of the code modification process.

Remedies to address industry governance issues

Proposed remedy

Responsible

stakeholders


31 Amend legislation in order to clarify Ofgem’s

statutory objectives and duties

DECC This should be initiated with a view to:

delete paragraph 1C from both sections 4AA of the Gas Act 1986 and 3A of the

Electricity Act 19891; and

set up a clear and established process for Ofgem to comment publicly, by

publishing opinions, on all draft legislation and policy proposals which are relevant

to Ofgem’s statutory objectives and which are likely to have a material impact on

the GB energy markets.

32 Publish detailed joint statements concerning

proposed DECC policy objectives that are

DECC and Ofgem These statements should set out:

1 This paragraph of the Act(s) specified in the Energy Act 2010 states “Before deciding to carry out functions under this Part in a particular manner with a view to promoting

competition as mentioned in subsection (1B), the Secretary of State or the Authority shall consider — (a) to what extent the interests referred to in subsection (1) of consumers would be

protected by that manner of carrying out those functions; and (b) whether there is any other manner (whether or not it would promote competition as mentioned in subsection (1B)) in

which the Secretary of State or the Authority (as the case may be) could carry out those functions which would better protect those interests.”



Proposed remedy

Responsible

stakeholders


likely to necessitate parallel, or consequential,

Ofgem interventions

a proposed action plan for the regulatory interventions needed and responsibility

for these;

an estimated timetable; and

a list of relevant considerations in designing the policy.

33 Publish an annual State of the Market Report

and modify the generation and supply licence

conditions of the Six Large Energy Firms’ to

change the way companies report profits and

costs to Ofgem

Large suppliers

and Ofgem

The State of the Market Report should provide analysis of:

the evolution of energy prices and bills over time;

the profitability of key players in the markets (e.g. the Six Large Energy Firms);

the social costs and benefits of policies;

the impact of initiatives relating to decarbonisation and security of supply;

the trilemma trade-offs; and

the trends for the forthcoming year.

It may be necessary to create a new unit within Ofgem, which would build expertise

across the different areas of the energy markets with a view to publish annually the

State of the Market Report.

The generation and supply licence conditions of the Six Large Energy Firms should be

modified by introducing requirements to:

report their generation and retail supply activities on market rather than divisional

lines;

report a balance sheet as well as profit and loss account separately for their

generation and retail supply activities;

disaggregate their wholesale energy costs for retail supply between a standardised

purchase opportunity cost and residual elements;

report prior year figures prepared on the same basis, and

Ofgem should take steps to develop a price monitoring regime that measures

wholesale energy purchases on a “relevant basis”, such as the opportunity cost.



Remedies related to industry codes

Proposed remedy

Responsible

stakeholders


34

Publish a cross-cutting strategic direction for

code development (the ‘Strategic Direction’)

Ofgem Ofgem is to:

publish a cross-cutting strategic direction for code development (the ‘Strategic

Direction’);

oversee the annual development of code-specific work plans for the purpose of

ensuring the delivery of the Strategic Direction;

establish and administer a consultative board in order to bring stakeholders

together for the purpose of discussing and addressing cross-cutting issues;

initiate and prioritise modification proposals that, in its view, are necessary for the

delivery of the Strategic Direction;

in exceptional circumstances, intervene to take substantive and procedural control

of an ongoing strategically important modification proposal, as appropriate; and

modify the licence conditions of code administrators to introduce the ability for the

administrator to initiate and prioritise modification proposals that, in its view, are

necessary for the delivery of the Strategic Direction or to improve the efficiency of

governance arrangements.

35 Initiate a legislative programme with a view to

giving Ofgem the power to modify industry

codes in certain exceptional circumstances

DECC This would also set out the provision of code administration and delivery services

activities that are licensed by Ofgem and specifying that such licence conditions

will include appropriate targets to incentivise code administrators to take on an

expanded role to be able to deliver pursuant to the Strategic Direction.



Contacts To have a more detailed discussion on any of the comments in this document, please contact:

Steve Jennings UK Power and Utilities Leader

T: +44 (0)7704 564513 E: [email protected]

Stuart Cook Head of Utility Strategy and

Regulation T: +44 (0)7764 988771

E: [email protected]

Stefan Bojanowski Utilities Strategy and Regulation

T: +44 (0) 7725 632994 E: [email protected]

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Documents

The CMA Energy Market Investigation