CMA probe should include wholesale gas markets, says Yeo

The UK’s wholesale gas markets should be included in the Competition and Market Authority’s (CMA) energy probe, warned energy and climate change chairman Tim Yeo.

Yeo wrote to the CMA late last week urging the authority to reconsider its decision not to investigate wholesale gas market competition, saying the probe would be “compromised from the outset” due to the dominant role the market plays in determining the cost of power generation and household heating.

“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,” Yeo said.

The CMA said it is “not minded to investigate” the UK gas market, which is one of the most transparent and liquidly traded energy markets in Europe, but will focus its investigation on the “opaque” wholesale power market as well as energy company profits within the retail sector.

Yeo’s warning to investigate the gas market echoes a similar recommendation from energy secretary Ed Davey that the investigation pay as much attention to the gas market as the electricity sector.

“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,” Davey said in a letter to Ofgem and the CMA.

“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,” he added.

But a spokesman for the CMA told Utility Week the probe would still address the issue of profits, for gas and power, through its investigation into the retail market.

“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,” the CMA spokesman said.

“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,” he said.

The CMA believes that “opaque prices and/or low levels of liquidity” in wholesale electricity markets may create a barrier to entry for both retail and generation sectors, but said it believes the gas wholesale market does not share “the potentially harmful features that have been identified in wholesale electricity.”

“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 said.

The CMA are expected to respond to Yeo’s letter “very shortly”, the spokesman added.