Tim Yeo, the Energy Select Committee Chairman and former Cabinet minister has written to the head of the Competition and Market Authority’s (CMA) energy probe calling for the UK’s wholesale gas markets to be included in the investigation.
The CMA to date has explicitly excluded the wholesale gas market because they view the wholesale gas market as one of the most transparent and liquidly traded energy markets in Europe.
The CMA have announced that they will instead focus their investigation on the more “opaque” wholesale electricity market as well as energy company profits.
However Yeo believes this is an error citing the 2012 price fixing scandal and the influential role the wholesale price of gas plays in the retail gas and retail electricity price (where it is the second largest source of generation) as reasons for its inclusion.
The wholesale gas market price fixing scandal raised its ugly head in September 2012 following claims from a whistle-blower that gas traders had tried to manipulate the UK’s NBP (National Balancing Point) gas price, published by ICIS Heren, a price-reporting agency.
To the surprise of many however, Ofgem and the Financial Conduct Authority found no evidence that UK wholesale gas prices were being manipulated.
In his letter to David Currie, the CMA’s chairman Yeo said:
“I am surprised that the CMA has suggested that it is ‘not minded to investigate’ the wholesale gas market, and I am writing to urge it to reconsider.
“The CMA inquiry must not only ensure the entire energy market is operating competitively, it also has an important role to play in re-establishing confidence in an energy market that has lost the trust of consumers.
“Without tackling such a major part of the energy system – where one large player in particular plays such a significant role – the inquiry cannot hope to do this.
“No stone should be left unturned in this inquiry or we will never restore the consumer trust that has been so badly eroded in the last five years of above inflation price rises”
This imbalance in the approach of the CMA has already rung alarm bells within DECC with Energy and Climate Change Secretary of State Ed Davey calling for equal consideration to be made of both the gas and electricity markets.
Davey said:
“Analysis of the profit margins of the energy companies shows that the average profit margin for gas is around three times that of electricity. For some companies the profit margin is actually more than 5 times the average profit being made on supplying household electricity.
“There is also evidence that British Gas, the company with the largest share of the gas domestic supply market, has tended to charge one of the highest prices over the past 3 years, and has been on average the most profitable”
The CMA defended their decision saying:
“Not making the wholesale market one of our theories of harm – in the way we have with wholesale electricity – doesn’t mean it is completely excluded from the investigation”
“In his letter [Davey] queried why falls in the wholesale price were not being passed through to the retail market, which would suggest a potential problem – but just to restate that we don’t have a view on whether there is yet – with retail rather than the wholesale market. And profitability is something you would look at in the context of retail market.
“The potentially harmful features that have been identified in wholesale electricity [do not feature in the gas market]. In particular, the market is less vertically integrated and shows higher levels of liquidity. Furthermore, the wholesale gas market is connected to other markets through import pipelines and liquefied natural gas import terminals, making it part of a wider international market for gas”
The CMA have said that they will respond directly to Yeo however there is no sign that they are now willing to include the wholesale gas market in its investigation. Those wanting and expecting a market wide review from the CMA are likely to remain disappointed.