Dermot Nolan speech at Utility Week Live: Embracing transformation and the CMA’s remedies
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Supply and Retail Market
Our CEO Dermot Nolan was speaking on 17 May 2016 at the Utility Week Live conference.
“Thank you for inviting me to speak at this year’s Utility Week conference on the future of utilities.
I was interested to see how the organisers have divided the programme over the two days.
Day one is all about ‘embracing transformation’.
Tomorrow is about ‘enabling transformation’.
I don’t know if it was deliberate but the programme seems to imply – subconscious or otherwise – that often people resist change.
That people don’t tend to embrace change, particularly when we’re talking about transformative change.
As the scheduling suggests, you have to embrace transformation before you can enable it.
I’m not qualified to judge whether the energy industry is more or less resistant to change than other industries.
I’m a regulator not a psychiatrist.
The old stereotype of boring old utilities doing the same thing in the same way for years no longer holds true.
The energy industry has had to cope with increasing amounts of change over the last decade.
The industry has had to adapt. And it has, in many cases very successfully.
But the pace of change is accelerating.
Ten years from now – even sooner – the energy landscape will be transformed.
Smart meters, smart grids, demand-side response, faster switching, new business models are either here or will be soon.
Independent suppliers are rapidly growing their market share too at the expense of the incumbents.
I’m sure you’ll be hearing a lot about all this over the next two days.
I want to focus more on the remedies – or changes if you will – proposed by the Competition and Markets Authority.
These changes, together with the innovations I have just mentioned, have the potential to transform the market.
To make the market more competitive.
So that competition works for all, not just for a few.
And ultimately I believe it’s in the industry’s interest to embrace this transformation.
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When the energy industry was privatised in the 1990s, competition did deliver for a while.
Costs were cut and efficiencies were made, driving down prices for consumers.
But two years ago we referred the market to the Competition and Markets Authority because we believed competition was not working as well as it should for all consumers.
Next month the CMA publishes its final report and formally hands the reins over to us to implement its remedies.
Its two-year investigation has found that the large energy suppliers have been overcharging millions of households over the last few years.
The six largest suppliers are charging customers who have never switched far more than their new customers.
And the gap between ‘the have switched’ – and ‘the have nots’ – is widening.
The CMA’s solution, perhaps not surprisingly for a competition regulator, is to inject more competition in the market.
Key to that is fixing the information asymmetry – apologies for using economists’ jargon – which has left many people disengaged and paying over the odds.
According to research carried out for the CMA last year, 23% of people did not know that they can change tariff with their existing supplier.
Worse, some 46% of people surveyed thought there are no real differences in prices charged by suppliers – despite the annual savings from switching from a standard variable tariff to the cheapest fixed deal growing to over £300.
Many believe the switching process is too difficult even though 83% of those who have switched said it was easy.
Nearly three in ten people said it would be difficult to find the best deal for them, with the figure rising among the vulnerable.
When asked, those aged over 65 or without qualifications were by far the least likely groups to switch in the future.
One way to fix this information asymmetry is by sharing data.
The CMA has proposed setting up a database holding the names and addresses of people who have been on a standard variable tariff for at least three years.
By sharing this data, other suppliers will be able to offer them better deals.
To keep their customers, suppliers will have to compete on price and customer service too.
Because if they don’t people will vote with their feet and their business will suffer.
Clearly there will need to be safeguards on data privacy to make sure households are not overwhelmed by mailshots.
Ofgem, which will run the database, is talking to the CMA and Information Commissioner about how to do this.
No market is perfect. Not everyone is going to switch.
The CMA’s remedies are about empowering consumers with the knowledge to make informed choices. The rest is up to them.
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The CMA has also proposed the removal of Ofgem’s rule which prevents suppliers from offering more than four tariffs to consumers.
It has said that the rule restricts competition and choice for consumers.
We accept this. We want consumers to enjoy the benefits of a wider range of tariffs as soon as possible.
So we’ve decided that from now on enforcing this rule is not a priority while we take steps to formally remove it.
Following the CMA’s recommendation, we will also be introducing a new principle requiring suppliers to make sure that any new tariffs they introduce are not misleading.
This is in line with our new approach to regulation which puts the onus on suppliers to put consumers first.
Acting promptly also shows our commitment to implementing all the CMA’s remedies.
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The CMA has decided that parts of the energy market like pre-payment meters may need more direct intervention.
The 4 million households on pre-payment meters are typically more vulnerable.
Yet the cheapest deals on the market aren’t available on pre-payment meters.
With many stuck on these meters because they are in debt, those most in need are denied the benefits of competition.
I’m particularly alarmed that they are even worse off than they were a year ago.
While we have seen direct debit deals get much cheaper, tariffs for those stuck on pre-payment meters have barely fallen and are now over £300 a year more expensive than the cheapest deals.
The CMA has recommended that these pre-payment customers are put on a temporary so-called ‘safeguard cap’, which will save them an estimated £80 a year.
This is an example where the CMA has decided that more regulation – even if it’s temporary – is needed to protect the vulnerable.
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Other remedies have attracted fewer headlines but have just as much potential to transform the market.
Take industry codes.
These are the technical protocol governing how the system operates – for example how suppliers transfer customers who have switched.
The codes have been drawn up and are still governed by the industry.
This means they tend to favour the needs of the companies who were around at the time and not new entrants like independent suppliers.
The CMA said that the way these codes are governed stifle innovations like smart meters and competition.
It’s one of the worst examples where parts of the industry, far from embracing transformation, are actively resisting it.
Or at the very least dragging its feet.
The CMA wants us to give the regulator the power to intervene and make changes to the codes where necessary so that they work for all participants, new and old.
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The changes proposed by the CMA aren’t the only ones taking place in the energy landscape.
We are on the road towards a lower carbon energy system which is transforming how we generate, distribute and use energy.
Last month solar generated more electricity than coal over 24 hours for the first time.
And on Tuesday morning last week Britain generated no electricity from coal for the first time since the first coal plant was built in 1882.
As our generation mix changes, we need a more flexible system to manage more unpredictable flows of electricity.
We want network companies to embrace – and enable – these changes using the incentives in our RIIO price controls.
We have encouraged them to invest in innovation through our £500 million Low Carbon Networks Fund, and its successor, the Networks Innovation Competition.
The transformation of the energy system is inevitable.
Companies who fail to innovate to provide new services for the industry and consumers will lose out to those who do.
So ultimately it’s in the industry’s interest to embrace this transformation, even though it may disrupt their business model and cause some pain in the short term.
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The CMA investigation has been a long process.
I know it’s created a lot of uncertainty for the industry.
But after two years, we’re almost there.
Not everyone will be happy with the changes the CMA is proposing.
I’ve read reports that some players are thinking about a legal challenge.
I respect companies’ right to disagree. They will take action as they see fit.
But I urge the industry to get behind the entire package of remedies.
It’s not a sort of regulatory pick n’ mix where you can choose the ones you like most and pass on the rest.
The industry has had their consultations and hearings with the CMA.
Now is the time to finalise the details of how best to implement these remedies and make them work.
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I said at the beginning that it was in the interests of industry to embrace transformation.
In the case of innovations like smart grids and demand-side response, they are happening whether the industry likes it or not.
But the changes proposed by the CMA need the industry’s backing.
It’s a narrow window of opportunity.
The CMA’s key remedies like the database and safeguard tariff for pre-payment meter customers are only in place until 2020.
By then the smart meter rollout is due to be completed, which we hope will make it easier for households to engage in the market and switch supplier.
If the industry does not deliver on the CMA remedies and get competition back on track, plans to regulate electricity and gas prices more widely may go back on the table.
The CMA originally proposed imposing a safeguard tariff to cover the estimated 20 million of households on a standard variable tariff.
It’s fair to say that suppliers did not exactly welcome the idea.
The safeguard tariff will now just apply to for those on pre-payment meters.
Like the industry, I hope we don’t have to resort to more regulation and intervention in the market.
Competition – with protection for the most vulnerable – is the best way to bring about the kind of transformation we want.
So let’s all work together to embrace transformation to deliver a more competitive, innovative and fairer energy market for all.”