This post is based on collaboration with Roger Duck uk.linkedin.com/in/rogerduck/ and comments on the issues from the viewpoint of the European and UK electricity system

In April and May 2014, Ofgem consulted on a proposal to make a “market investigation reference” to the newly formed CMA in respect of the supply and acquisition of energy (electricity and gas) in Great Britain.

We start by quoting advice to policy makers from the Office of Fair Trading (OFT):

‘For all interventions, it is important that a wide range of costs and benefits are considered. Failure to address indirect costs and benefits and possible spill-overs can result in a less effective policy and unnecessary economic costs across a range of markets.’

We take from this, that the scope of the question referred needs to be broad enough, to enable possible interventions to be examined, compared and evaluated.

On competition OFT also say:

• Effective competition in properly regulated markets can deliver lower prices, better quality goods and services and greater choice for consumers.
• Competition can create strong incentives for firms to be more efficient and to invest in innovation, thereby helping raise productivity growth.
• Policy makers should aim to protect and promote competition in markets in order to capture the benefits of markets for consumers and society as a whole.
• However, markets if not adequately regulated can potentially harm consumers.

We note that the consultation document is restricted to retail and wholesale markets, rather than the whole of the energy supply chain, and focuses on price competition. Price is clearly an important factor. However, there are other factors which consumers may wish to exercise choice on. Here are some examples based on the advice of OFT above:

1. Qualities of the product ( e.g. generation type, security of supply, impact on the environment of the whole generation and supply system, availability, flexibility)
2. More suppliers to choose from
3. Belief in supplier trustworthiness
4. How suppliers put the consumers own generated power to work to add value to society
5. Level of innovation being funded and delivered – both through low and high technology to address potential future shortages
6. Commitments and follow through, to phase out fossil fuels contributing to world wide society and planetary benefits

To broaden the focus to this wider range of factors on which competition could be offered, we are of the opinion that the scope of the referral to the CMA needs to include generation and transportation (transmission and distribution) in addition to retail and wholesale.  This would enable any resulting study to determine to what extent consumers have the opportunity to exercise this wider range of choices.

There is significant new technology coming down-stream from smart grids. One of the authors of this response has been engaged in the European FINSENY project, with specific focus on the role of regulation in the provision of electricity, which led to further work by both authors on the systemic structure of the electricity market in particular. They have also presented their conclusions to the European Commission Directorate General for Communications Networks, Content & Technology (DG Connect). Developments in smart grid technology could potentially support a new sort of energy marketplace which is much more like the marketplace for more tangible products. Such a market could enable real consumer choice on both the qualities of the power and its price, with a wide range of small and large suppliers to choose from. It could also allow ‘prosumers’ access to a range of back-up suppliers for when their own generation is not sufficient for their needs, and enable them to sell excess power to others. This sort of market place has the potential to be vibrant with real competition and to help move consumers out of their current state of passive disillusion and into proactive investment and choices.

The potential opportunities raised by smart grid technology (as well as smart meters) makes it paramount at this time to consider the needs of future users, and changes in the market and regulatory structure required to facilitate this, not just consider the market as it operates today.

Taking the previous three points together implies broadening of the referral to address the opportunities for competition generated by the whole system, today and tomorrow.

The whole electricity system can be characterised by five core and inter-related functions:

• generation,
• transmission / distribution,
• storage,
• consumption
• cleaning up

A system (such as that for electrical power supply and consumption) can only be assessed for current and future viability by understanding its intrinsic abilities to manage its inter-dependencies on its environment, e.g for access to raw materials, weather, investment, skills, and new technological opportunities. Also for its intrinsic abilities to manage its environment’s dependencies on itself, such as its ability to take action to resolve the negative impacts it has on the planet’s ecology, climate etc.

The five core inter-related components above create a system-in-focus, which needs to be set in context within a whole environment. We tend to consider the environment in terms of six domains: Economic, Societal, Technological, Ecological, Ethical and Material.

Broadening the referral in the manner proposed would expose far more of the complexity that needs to be considered when evaluating the impact of possible interventions on the viability and competitiveness of the overall power market. There are, however, useful design and modelling techniques which can be used to counteract this increase in complexity, being inherited by the resulting solution.  One such technique involves discovering repeating patterns (or fractals) in the solution and developing components which can be implemented, regardless of the level of detail at which the pattern is detected.   This would not only reduce complexity for ongoing maintenance, but would lead to more efficient market development plans. Over-restricting the scope of the redesign can lead to lack of recognition of these repeating patterns and paradoxically create more rather than less complexity in the overall solution.

For example, there is a need for a management activity to ‘balance’ supply and demand across the system. Doing this locally can enable efficient use of electricity. So the balancing of supply and demand, internal to a house or office or factory is one example of the ‘balancing function’ where the prosumer may also need to access local back-up supply, from a local supplier of their choice. The same balancing pattern would repeat amongst local suppliers. Then perhaps for a region and a country, then for Europe and for the world.

The same approach enables operational efficiency, in activities such as change of supplier, as the inherent complexity of the change is encapsulated within each instance of the balancing component, allowing for standardised interfaces, automation and self-management by the component of its internal structure. Such a geographically based layered solution could create significant opportunities for public engagement and investment in the local power marketplace, increasing local resilience / power security, choice and other competitive benefits.

There are techniques for managing the complexity generated in the solution, and such an approach would enable competition at all levels.

The concept of multiple organisations operating at different scales, would open up opportunities for mixed markets, extending consumer choice further. They could range from private enterprise based, social enterprise based, cooperatives, voluntary sector through to public sector. In such a climate, organisations and individuals could if they wish, choose to donate their spare generation to, for example, charities addressing fuel poverty.

There are opportunities to take investment decisions today which will move the industry forward into a more competitive footing, if the scope of the decisions on the effective competition in the market place are based on the whole electricity system and possibilities for the future.