On 27th June 2014, Ofgem referred the market for the supply and acquisition of energy in Great Britain to the Competition and Markets Authority (CMA). This article briefly describes the nature of the CMA investigation, market issues highlighted as context for or to be addressed by the investigation and five related opportunity areas for innovators in the UK energy market.
The investigation
Ofgem ran a consultation on referring the gas and electricity supply markets to the CMA in May 2014 – respondents approved the move, with the following main reasons:
- Restore consumer confidence
- Fix problems with the market
- Support investor confidence
CMA will determine what if anything restricts or distorts competition in supply and acquisition of energy in GB.
The approach to be adopted by the CMA team is:
- define gas and electricity supply markets
- assess nature of competition
- reach a view on whether anything prevents, restricts or distorts competition;
- decide whether CMA/ others should take action to remedy any ‘adverse effect on competition’
Detrimental effects on customers requiring some form of response could include: higher prices, reduced service quality; reduced choice of product or supplier; reduced innovation; insufficient supply in the future
The scope of the investigation includes wholesale and retail markets, and for the latter for supply to households and micro-businesses only. The investigation may address aspects such as industry code requirements, roles of third-party intermediaries and bundled ancillary goods and services. It will not address wholesale gas markets, gas interconnection and storage, and regulation of revenues from transmission and distribution. The scope of the investigation has been challenged by the Environment and Climate Change Select Committee, who prefer the wholesale gas market to be within scope.
Market issues
A long list of market issues has been highlighted as context for or to be addressed by CMA’s investigation. Issues of particular relevance for innovation and disruption, in brief, include:
Structural inertia
- Vertical integration
- Market power – supply concentration/ tacit coordination
- Central system operator and one transmission/ distribution network
- Degree of regulatory and political intervention
- Regulatory dampening on early-stage expansion
- Single European energy market
Wholesale market inefficiencies
- Opaque pricing, liquidity and imbalance pricing reforms
- Contracts for difference to underwrite price for low carbon generation technologies
- Capacity markets to incentivise investment in generation
- Electricity storage costs
- Economic disincentives for independents (retailers and generators):
- High transaction costs to avoid imbalance costs (up to 1 hour before delivery)
- High hedging costs (illiquid market in hedging products)
- Poor quality price signals (driving investment decisions)
- Credit and collateral costs, regulatory and system costs
Retail market inefficiencies
- Tariff simplification
- Micro-generation/ on-site renewables
- Smart metering
- Time-of-use tariffs
- Switching/ customer inertia
- Disconnect between wholesale price signals and consumer behaviour
- Public mistrust and reputational risk
It’s a long list, so it’s unsurprising that the CMA is expected to take 18 months to complete the investigation.
Opportunity areas
The instigation of this investigation has highlighted a range of issues that may be restricting or distorting competition in the UK energy market. These shed light on areas of market inefficiency and unmet or poorly met customer needs, which suggest where the priorities for innovation lie.
Some areas in the UK energy market offering opportunities for innovation include:
Smart energy
Smart energy is about more than just smart meters: smart energy is about the technical and commercial elements needed to introduce intelligence into energy consumption without the need for human intervention – it’s about personalised tariff structures, immediate and automated switching on price signals, predictive maintenance and zero-outage, self-organising local energy markets, automated energy management, microgrid balancing mechanisms and so on
Decarbonising transport and heat
Today, transport and heat are dependent on fossil fuels: if we are to reduce emissions towards 0%, some ubiquitous alternative to fossil fuels is required for transport and heat – two enormous and complex challenges face us, firstly of changing to an alternative transport fuel (as well as building the enabling supply and distribution infrastructure, and changing how the automobile industry works) and secondly of transitioning the nation’s boilers (alongside reducing demand by transforming construction techniques and materials, and improving the energy efficiency of the existing housing stock).
Energy storage
Demand for energy storage technologies is being driven by the move to electric vehicles (batteries) and the deployment of renewable generation (dealing with intermittency and mismatch in supply/ demand): electricity is currently very costly to store, and energy storage is very much the missing transformative technology in the energy sector – whilst technology breakthroughs are desirable (and the realm of R&D), commercial innovations and novel business models may be an earlier driver of opportunities
Local networks
Local energy networks, microgrids and energy service companies (ESCOs) are being actively discussed in industry fora, though clear commercial models have yet to emerge: there is increasing de facto local involvement in energy systems through distributed generation, demand response, group purchasing schemes, and so on – for value to be realised a change in value chain configuration is required with value flows from traditional energy system players (e.g. the big 6) to new players closer to end consumer
The retrofit problem
Centralised network models have not provided the economic incentives to encourage the mass uptake of smaller scale renewables and energy efficiency improvements required to reduce the emissions footprint particularly of the existing building stock: with several government-backed schemes over years having failed at driving change at scale, the solution may lie in an alternative direction – looking for business models predicated on reducing energy bills to £0 (who would benefit, for example, from a change to charging for household services rather than energy supply?)
Conclusion
TVF has tracked innovation in the energy market for over 10 years and worked with new ventures targeting new business models, new go-to-market approaches and new products and services.
The energy market offers plenty of obstacles to innovation, many of which the CMA investigation promises to consider.
Does the investigation offer a chance to reshape the market and its institutions to support greater freedom for innovation and experimentation? We hope so and will be following its progress keenly.
In the meantime we continue to track developments in the opportunity areas described above and, if you are active in one of these areas, we are keen to learn more about your ambitions and achievements.
The Venturing Firm 