competition and entry in the gb electricity retail market.pdf - Frontier ...

2 Frontier Economics | January 2011
innovate remains strong, particularly following the imminent roll-out of
smart meters and the increased opportunities that this could bring.
As expected in a market with the characteristics of electricity retail,
there are barriers to entry particularly for smaller suppliers. Further,
there are not many “easy wins” in terms of lowering these barriers.
Instead there will be an associated cost connected with reducing them.
Clearly any policy change that comes with a cost should be pursued
only if there is sufficient certainty that it will deliver a more than
compensatory benefit. Policy makers should therefore be sure that
there is a sufficient case for sacrificing some static efficiency to
increase entry on the basis that this will deliver more dynamic
efficiency in future.
In our view, the main barriers, and options to reduce them, include the
following.
• Dealing with Government policy and regulatory intervention:
Government has increasingly used suppliers to deliver policy, both
to meet environmental objectives and social obligations. The
number of policies, and their cost and complexity, has grown
rapidly. These act as a barrier to entry and growth, particularly for
smaller suppliers that reach the thresholds for participation.
Further, as these requirements have increased, the importance of
competition seems to have been downgraded. There are an
increasing number of regulations that essentially limit competition
between suppliers. One of the most commented-upon examples is
the introduction of the non-discrimination licence provisions in
2009. Ofgem should review the impact of these regulations as part
of its current retail market investigation given that their impact is
likely to have weakened competition. Reform of this policy is not
only an easy win, but should also be a pre-requisite to any further
action to reduce other barriers to entry since other options to
promote competition are likely to come with higher risks and costs
associated with them.
• Liquidity: The recent focus on liquidity being the biggest barrier to
entry may have been over-played. However, it is the case that
smaller suppliers have found less liquidity for tailored “shaped”
products of a small clip size that match their retail portfolio. The
recent evidence is that this may be changing: the products and
volumes available on exchanges are continuing to increase and
Executive Summary