Promoting competition and protecting customers? Regulation of the GB retail energy market 2008–2016

Abstract

In 1999 the GB retail energy market was open to competition for residential customers. In 2008 Ofgem began a series of regulatory interventions, notably a nondiscrimination condition and subsequently a restriction to four "simple tariffs". This reversed its previous policy of minimal intervention. This paper explores the reasons for this change of policy, drawing upon the responses of economists and others to Ofgem and Competition and Market Authority (CMA) consultations. It argues that key factors were a significant increase in energy prices before 2008, the reduced involvement of economists in senior roles at Ofgem, and systematic changes in Government policy and the statutory regulatory framework. Finally, the paper examines what the CMA Energy Market Investigation had to say about this in 2016. The CMA found that these were inappropriate regulatory interventions, and laid part of the blame on arrangements for governance of the regulatory framework.

Australia's National Electricity Market after Twenty Years

“…The broad‐based increase in electricity prices since 2009, combined with the regressive nature of the price increases, has destabilised virtually the entire electricity sector reform agenda, with increasing questions about the desirability of markets and of decentralised decision making for electricity (Quiggin ). These questions reflect the combination of: the essential service characteristic of electricity and gas, which means consumers cannot ‘exit’ energy markets, especially those who cannot afford to go ‘off‐grid’; and a broader macroeconomic concern about the impacts of capitalism, ‘free’ markets and globalisation on household income and wealth inequality. Moreover, retail electricity price re‐regulation has occurred in Great Britain, due partly to a view that the increase in electricity prices from the mid‐to‐late 2000s was greatest for the most financially vulnerable households (Littlechild, ).…”

The paradox of regulatory discretion

“…Tasked with regulating utility sectors guided by efficiency criteria rather than electoral concerns, IRAs would ensure the financial viability of the sectors, mandate cost‐reflective tariffs, and improve quality of service (Majone, 1997). Over time, competition would ensue, and ex ante regulation would become lighter or disappear entirely (Littlechild, 2019). Today's evidence is that regulation has not disappeared; rather, regulators face increasingly complex challenges given the pace of technological innovation and the multiplicity of regulatory objectives that they need to satisfy.…”

“…By 2007–2008, there was a major concern about the competitiveness of the industry, 26 with Energywatch, a body representing consumers, and Ofgem's fiercest critic, arguing that energy markets were failing consumers and that the then competition watchdog, the Office of Fair Trading (OFT), should step in. Littlechild (2019) offers a detailed documentation of the prevailing political climate at the time, which led to a series of unsuccessful interventions aimed at reregulating the retail energy market. He argues that there was a “reduced involvement of economists in senior roles at Ofgem” (Littlechild, 2019, p. 126) that led inter alia to economically uninformed retail energy market policies that went against the experts' consensus and advice—specifically, the nondiscrimination obligations for energy suppliers adopted following the Energy Supply Probe 27 in 2009 and the simplification of tariffs introduced in light of the Retail Market Review initiated in 2010 28 .…”

“…Littlechild (2019) offers a detailed documentation of the prevailing political climate at the time, which led to a series of unsuccessful interventions aimed at reregulating the retail energy market. He argues that there was a “reduced involvement of economists in senior roles at Ofgem” (Littlechild, 2019, p. 126) that led inter alia to economically uninformed retail energy market policies that went against the experts' consensus and advice—specifically, the nondiscrimination obligations for energy suppliers adopted following the Energy Supply Probe 27 in 2009 and the simplification of tariffs introduced in light of the Retail Market Review initiated in 2010 28 . Both policies attracted wide criticism from the academic community at the time of their introduction and were scrutinized in great detail by the CMA (Hviid & Price, 2012; Littlechild, 2014).…”

The CMA’s assessment of customer detriment in the UK retail energy market

“…Strictly speaking, the policy and the present paper refer to Great Britain (that is, the UK excluding Northern Ireland) but the term UK is more familiar internationally. 2 E.g Littlechild (2014Littlechild ( , 2016aLittlechild ( , 2016bLittlechild ( , 2017bLittlechild ( , 2018bLittlechild ( , 2019Littlechild ( , 2020aLittlechild et al (2016a…”