The UK’s Independent on Sunday newspaper this week revealed that the government regulator believes deliberate price fixing may have occurred within the New Electricity Trading Arrangements (Neta). Ofgem chief executive Callum McCarthy hopes that the Department of Trade and Industry (DTI) will shortly reinstate Ofgem’s right to investigate such abuses.
McCarthy said that since the trading exchange was set up in March, he suspected that companies had knowingly abused the market. “There have been some instances where prices have unusually changed, which looks very hard to justify in normal market conditions,” he said. While price-fixing is harder under Neta than it was under the old electricity “pool”, McCarthy said companies could still withhold generating capacity to influence prices.
McCarthy doesn’t yet know who it was or whether it was deliberate, but some time between March and August he noticed an unusual rise in the wholesale price of electricity. The spike could have been the result of a sudden surge in demand from industry or simply thousands of people simultaneously turning on their electric kettles, but McCarthy suspects something more sinister.
Ofgem lost is powers to investigate suspected price-fixing – known as “market abuse clauses” – last year after British Energy and AES challenged the regulator. The Competition Commission ruled that there was no need for the clauses.
McCarthy has applied to the Department of Trade & Industry to have his powers reinstated, albeit in a different form. And according to government sources, energy minister Brian Wilson is weeks away from making a decision. This will come at a critical time for Ofgem, created in 1999 through the merger of the electricity and gas regulators with the dual responsibility of promoting competition and protecting consumers’ interests. As well as investigating market manipulation, it is in the middle of a series of reviews that will shape the UK gas and electricity markets for years to come.
“[Without the DTI powers] the market will be more open to manipulation, and quite simply electricity prices will be higher. Ofgem has an obligation to protect the interests of consumers,” he said.
If the DTI backs Ofgem, it is likely to spark an outcry. Trade body the Electricity Association said in a letter to the DTI that it was “strongly opposed” to Ofgem’s proposals and that new abuse clauses would deter new generators from entering the market.
More immediately, Ofgem will soon present a report to the Government on Neta and its impact on smaller generators, such as environmentally friendly combined heat and power stations.
The UK government wants 10 per cent of electricity supply to be generated by renewable sources by 2010. The Labour administration has inserted a get-out clause, saying that its target applies only so long as the cost is not too high, but with renewable only contributing 2 per cent today, it’s an ambitious target.
Ofgem’s report is expected to reveal that Neta, which has generally pushed prices down, hasn’t been great news for lower-margin renewable suppliers. And McCarthy says that if the government is serious about hitting its target “then there is no doubt [state] intervention is necessary”.