“Some companies manage their risk through long-term contracts, others by going upstream – vertical integration is just one business model and in our view, a rational one.” Katherine Marshall, CMA Project Director, SSE
This autumn representatives from the CMA (Competition and Markets Authority) visited our headquarters in Perth and the nearby Clunie Power Station as part of their inquiry into the GB energy markets. At SSE we believe it is important to be open and transparent through this process, so here is a brief overview of the key points we made.
Our approach to the inquiry as a whole is to be constructive and engaged, demonstrating why we think the market works for customers, but also showing our openness to consider further changes that are in customers’ genuine interests.
In response to the first theory of harm, which relates to liquidity in the market, we have argued that our approach to the N2Ex exchange, and the work of Ofgem in building on this, have led to a wholesale electricity market which is now liquid. Record volumes are traded on the ‘day ahead’ market and it’s easy to buy and sell electricity. The only potential obstacles to liquidity relate to credit issues for smaller participants – a difficult issue to address, but one that is not stopping small supplier growth – and the carbon floor price, which is changed so easily (and often) that it is a barrier to long term liquidity. That’s why SSE advocates legislating it in primary legislation.
The second theory of harm centres on vertical integration, which we believe helps customers and is basically about operating a diverse company. In many markets companies ‘go upstream’ to balance profit fluctuations – a good thing for keeping prices stable and promoting investment – but that does not necessarily impact negatively on other participants.
Some companies manage their risk through long-term contracts, others by going upstream – vertical integration is just one business model and in our view, a rational one, though it is far from the only way to run a business in European energy markets. That does not mean, however, that we cannot be more transparent and we discussed ways of doing this, including our announcement in March this year to separate our generation and retail supply businesses.
When addressing the third theory of harm, which looks at whether generation market participants can influence prices, we showed the CMA how diverse and competitive the UK generation market is, with its low HHI (Herfindahl Hirschman Index- an indicator of market concentration).
There are already so many variables involved, and such significant safeguards in place (including penalties) which act to prevent this type of unwanted market behaviour, that we could not think of any reforms that would benefit customers and investors. We believe that the real focus for generation is getting on with the Capacity Market process.
The fourth theory of harm asks whether customers are sufficiently engaged, and we argued that they are. Just 10 per cent of our customers have not taken visible action in the last ten years, be it switching or changing product, and many of those may have actively chosen not to. We also talked about the need to measure engagement in many ways, highlighting the Consumer Futures data that showed how switching in almost every comparable market has dropped off in recent years.
We also highlighted to the CMA the importance of affordability and simplicity. Our recent YouGov survey showed how “cost” (64 per cent) is more important to customers than “reliability” (22 per cent) or “sustainability” (14 per cent) when it comes to energy. But to help to do things like extend our price freeze beyond 2016 we explained the need for the ever-rising burden of funding government policies to be taken off energy bills, so that those least able to afford it pay the least. This is critical given that 40 per cent of customers are unaware that they pay for these policies on their bill in the first place.
We also explained to the CMA that there is a strong case for ending regional pricing differentials due to varying networks charges by establishing a single national charge, allowing for no cost differential for customers whether they live in Aberdeen, Aberystwyth, or Abingdon. This would allow for fewer tariffs and make energy prices simpler for customers – and polling tells us two thirds of customers agree this approach is best. This has been a political issue in Wales and the Scottish islands recently.
Ultimately, ours is just one view in a big inquiry and the market is evolving dynamically with EMR (Electricity Market Reform), RMR (Retail Market Reform), elections, quicker switching, and the oncoming smart meter roll-out dramatically shifting the landscape.
However, SSE has advocated improvements that work for customers and investors alike, and we will continue to engage with the CMA and other stakeholders to ensure the energy market continues to operate in the interest of both customers and investors.