 R approaching over to you. Good morning and ladies and gentlemen. Welcome to this 19th meeting in 2015 of the Economic, Energy and Tourism Committee. I welcome members back after the summer recess and welcome our witnesses who I'll introduced in a moment. Anybody joining us in the public gallery and I remind everyone to turn off or at least turn to silent all mobile phones and other electronic devices so they don't interfere with sound equipment. from Richard Lyle. Item 1 on the agenda, we are continuing our inquiry into security of supply and giving evidence this morning are the competition and markets authority. I'd like to welcome, starting on my left, we have Simeon Thornton, who's the project director, energy market investigation, Sheila Scobie, who is head of devolved nations and CMA representative in Scotland. Tony Curtin Price, a senior economist, energy market investigation and Chris Privet, who is the legal director. Welcome to you all and thank you for joining us. Before we get into questions, I think Mr Thornton, you were wanting to say something just by way of an introductory statement. Thank you convener for inviting the CMA to give evidence to the committee's inquiry. I would like by way of introduction just to give set out briefly the remit of the energy market investigation how the work conducted to date relates to security of supply and where we are in the overall process because we haven't actually completed the investigation yet and inevitably that will be reflected in the answers that we give to you today. First, on the remit, the CMA, as you said, is currently undertaking an investigation into the supply and acquisition of energy in Great Britain. This covers both electricity and gas. It covers both wholesale and retail markets except that with retail markets we're only considering retail supply to households and micro businesses, so we're not considering retail supply to larger businesses. The geographic coverage is the whole of Great Britain, so the outcomes will clearly be of relevance to Scottish consumers and businesses. It's important to note at the outset that a market investigation is a legal process which is governed by the Enterprise Act 2002. The decision makers are not the CMA's board or indeed the CMA's chief executive but a group of independent members and in this case the chair is Roger Whitcomb and he's supported by other members, Martin Cave, Bob Spedding, Leslie Ainsworth and Malcolm Nicholson. Just a word about the focus of market investigations. The group is required to address a specific statutory question which is whether any features or combination of features are likely to prevent, restrict or distort competition and if such features are found that constitutes what we call an adverse effect on competition or an AEC and where we do find those AECs then the group must identify potential remedies either to address the AEC directly or alleviate its effects and those remedies can take the effect, the form of a recommendation to government or indeed of own action by the CMA through our order making powers and those order making powers are quite stringent and quite wide-ranging. Now in this case the reference was made to us on the 26th of June 2014. We have 18 months to complete the inquiry that's a statutory timetable and that takes us to Christmas Day this year of all days. We do have the option of a six month extension if the members deem that necessary. There are various milestones between the reference and the final report and we've just reached one in this investigation with the publication of our provisional findings document in July and that set out the members' views on provisional views on where there might be adverse effects on competition and indeed a set of potential remedies to address those adverse effects on competition. The purpose of publishing that document is to get parties' views on the evidence that we have looked at and the analysis we've conducted so needless to say they are provisional views they may well change before the final report. Next key milestone is what we call the provisional decision on remedies which will be October and then as I said the final report in December. Just very briefly on a relationship with our study in security of supply the focus of the investigation is on competition in general rather than security of supply in particular and a lot of the work that we've done and some of the publicity that's surrounded it has focused on issues such as consumer engagement in retail markets or the design of the overall regulatory framework that doesn't directly relate to security of supply and that said we have looked at a number of areas of the policy regime in particular wholesale market rules and regulations that do have a bearing on security of supply. We've sent you a short note setting out what those are that as we'll go into the details in the discussion later on just to say the group has not found an AEC in relation to some quite significant areas so the overall design of the wholesale market which is what we call self-dispatch reforms to imbalance prices that often was introduced and dex introduction of a capacity market which I know you've been discussing in the inquiry to date. We have provisionally found AECs in relation to the pricing of transmission losses and the mechanism for allocating CFDs and also and I did want to highlight this one in particular the group has provisionally found AECs in relation to the settlement system for both gas and electricity. Again we can go into the details later on but I'm noting your call for evidence that you I think rightly identify the importance of demand side response as a mechanism for improving security supply in the future particularly with new intermittent generation coming onto the system. All I would say at this stage is that we don't think there will be substantive demand side response from domestic customers unless you change the settlement system so I think that is something worth discussing. Is that okay? Again we're very happy to be here today and if the meeting is helpful then we'd be very happy to come back once we've done our final report and discuss that with you. Thank you very much for that introduction. I should say if you can decide amongst yourselves who's best place to answer the questions that are asked and I'll let you pass it on to whomever and the only other plea I'd make at the start is you'll appreciate you know we are not technical experts we are mere politicians and laypersons so some of some of the terms and language that might be used might be a little above our heads so if you can bear that in mind and try and simplify it as best you can that's very helpful. If anything's not clear then let us know or if it seems irrelevant we can move on. Okay thank you. Okay we'll move on to the question there's a number of issues you mentioned that I think we're keen to pick up on around capacity markets, location of pricing, you know, contacts of difference and settlement so can I just start and pick up the capacity market issue that you touched on? I think you said there were a number of concerns that had been raised with you about the operation of the capacity market and how that might impact on security of supply can you say a little bit about what those concerns were and then how you came to the conclusion that the capacity market is broadly competitive? Of course I should say first of all that I guess we considered two questions in relation to the capacity market firstly was there a coherent rationale for introducing it because it is quite a major change and secondly is the design competitive just a quick word on the first if I may we found there was a coherent argument for the introduction of the capacity market um deck stated aim is to introduce it because they were concerned that in an energy only market which is what we had before the introduction of the capacity market um investors potential investors in generation might be sceptical about their ability to recover their costs partly because prices will need to spike to really high levels um and with the onset of more intermittent renewables you've got greater volatility and prices so we think there is a coherent argument um we have observed in the last few years for example that generators have not generally earned um a rate of return that allows them to cover their cost of capital so that some support for the argument that um additional support is needed in order to encourage that investment in thermal capacity and other forms of capacity now on to the concerns that were raised with this I think there were three um one related to the length of contracts available through the capacity market um the second was about the mechanism for recovering costs from the market and the third was about the penalty mechanisms in place um on the length of agreements one supplier in particular argued to us that it wasn't fair that if you're a new generating plant you can get a 15-year contract but if you're investing in dsr a demand side response capability you only get a one-year contract and I think that we thought in principle well that you know we see the argument however um the reason we didn't find an ac here was twofold firstly um we didn't see evidence of dsr projects that had significant capital outlays currently being frustrated by their system so it seemed more of a theoretical concern for the future than a practical concern today and deck I think is alive to it secondly this specific issue is being considered in front of the the court or one of the european courts and so for those two reasons we decided not to pursue it further um the second question again same supplier actually argued to us that there would be a better way of recovering the cost of the capacity market now these mechanisms and indeed all of those that we're going to discuss in today's cfds are recovered from consumer bills um it was put to us that it would be better if they could be recovered at the peakiest points in the year there are things called triads which are the basically the three half hours which are the highest um uh highest amount of demand and um we considered this question and we thought that the current approach to recovering the costs of the capacity market um seemed appropriate basically they recovered according to the share of supply in peak times between november and febru we thought that that gave the right sort of incentives to providers of capacity whether it's dsr or conventional capacity and we didn't see a problem thirdly just to finish on the penalty mechanism side we did uh we published in um january an issue uh updated issue statement which is a kind of update on our thinking and we did flag up then a question about the penalties that you pay if you secure payment under the capacity market but don't deliver the capacity in practice and our concern was all these penalties don't look particularly stringent because all you do is you lose the capacity payment so it seems like a kind of one-way bet however um parties argued to us that it's not just that's not the only penalty available under current reforms and we might touch on these later uh off jams current reforms to imbalance prices we will expect to see much peakier prices in the future so at times of system stress which is when you will need this capacity you'll not just lose the capacity payment if you fail to provide capacity you'll also be exposed to some quite high prices now under the reforms that are proposed by off gem and have recently been adopted these prices could go to £6,000 a megawatt hour so that's about 50 times the current retail price so you know i think the members were convinced that given that there wasn't really a concern at the moment around the the kind of stringency of the penalty payment so overall to summarise capacity market the members were convinced it was it was a good idea to introduce it and the various design issues that we looked at none of them seemed to us to be sufficiently material to represent an AEC. Thank you it was a very helpful summary um do any members want to follow up on anything on the capacity market otherwise we will we can move on thank you um okay i'll bring in um chick brody who's got questions on self-dispatch. Thank you um good morning i wonder if i firstly may ask a question about the capacity market in terms of a report that said a number of concerns were raised with us relating to specific aspects of the operation and design of the capacity market i wonder if you can answer two questions one is there is uh an elephant in the room i use that phrase again in terms of the national grid and i'd like to understand how you approach their approach to the competitive market being wholly monopolistic and the second thing is i wonder if you explain why in your opinion if we have a competitive process that there seems to be an on-going process of when one of the six larger firms who are both generators and retailers in some cases uh when one puts out a price change then you know within weeks the rest of the generators put out a price change largely in line with with the initial promotion of a price change so i wonder if you can answer about national grid and competition and the impact that has on the market and secondly why is it that we seem to be you know followed the leader when it comes to prices being issued okay well to take the national grid question first in relation to the capacity market um their role is is twofold really um so the process works by which the secretary of state will say this is our required security standard and in this case it's three hours what they call loss of load in other words a probability that there will be in a particular year three hours in which someone somewhere was being disconnected um and then national grid takes that and says okay I think we need to procure x gigawatts of capacity so that's their function there um and they also hold the auction and the auction itself was a competitive one and delivered um 50 gigawatts of capacity at about 20 pounds a kilowatt which is rather less than than people expected ex ante so i think national grid's role you're right it is a monopoly but was to facilitate competition in relation to the capacity market um in relation to national grid's other functions of balancing the system in the context of our investigation we've clearly had to understand them because it's pretty fundamental understanding how the wholesale market works but we have in terms of the the object of our investigation it's been on the competitive elements of the wholesale and retail markets so the only bits that we've not explicitly taken a view on is the natural not monopoly regulation of national grid and the distribution companies well the reason is that these market investigations are about effective competition and so we've looked at the competitive elements there are other mechanisms in place for people to take a view on uh off-gem regulation of natural monopolies and indeed another part of the CMA is currently looking at a decision that off-gem made in relation to distribution prices so if someone disagrees with what off-gem does in relation to its regulation of national monopolies that is appealed to the CMA and we do another investigation then maybe helping with this in a situation where the national grid and we've just had two such one situation certainly in scotland which is deeply regrettable where it has a situation where it although doesn't control supply measures the demand the the estimate that they can then by by the transmission charging pricing determine what the supply is going to be of course we know the implications that of you know reducing supply while demand appears to be increasing is there will be enough ultimately an increase in pricing so they have a major impact in the competitive marketplace and yet they sit there you know with i know that you say they're controlled by off-gem but that was again another issue that cropped up in our questioning about the relationship between off-gem and the national grid why have you not looked at the implications of national grid's role in the market because they do they do have an impact on the marketplace why has that not been looked at so that we can determine exactly what impact that's having on the retail price of energy well we have looked at the rules and regulations that underpin the wholesale market so one of the areas i flagged up was in balance prices do those give the right signals to market participants and clearly national grid has an important role there we haven't looked at the specific mechanisms that off-gem uses to regulate national grid because as i've said that can be if people have problems with that then they can refer that specific aspect of often's decision to the cma and we will conduct another exercise and there is a parallel exercise carrying on so that's just in terms of our remit would you like me to to consider the the second question about prices it is one of the questions that we looked at in this investigation and i think it's probably fair to say that it was one of those areas around which there were concerns in the build-up to often's investigation of the markets to us and it's pretty it's true as you say that there is a certain amount of what we might call parallelism in pricing behavior so one company will announce a change and the other ones will follow suit now why might they do that well i think there are a number of arguments one is they're generally subject to the same cost pressures so they all purchase in wholesale markets and there are some differences in their purchasing strategies but the extent to which prices are going up they generally will all consistently feel those pressures and the second observation is that uh and this is i think what the companies themselves have put to us uh they don't want to be the first to move if prices are going up because they lose customers um so if someone else has moved and increased their prices um they're subject to the same pressures then others will tend to follow now what we didn't see when looking at this question was any evidence of what's called tacit coordination so we looked in particular for example of a situation in which one company would announce its price change another one would do something else and then the original company that announced the price change would change its mind because that sort of activity could have given the impression of tacit coordination between the players we didn't find any evidence of that what we found was the subjects are basically the same cost pressures and a commercial pressure which is not to increase prices on the standard variable tariff until they absolutely have to forgive the pressure that they may share is the wholesale price of energy and i if you look and i've done it the last six years companies reports of the six large six companies the cost pressures and the structures are different so it's unfair to say i think i think wholesale price probably about 46 of the of the end price so it's not true that they're all subject to the same cost pressures because their operations are different yes so why are we accepting that as a reason well they're not identical you're right but they and i think we note this in the report although they might have different strategies they still are subject to the same underlying drivers wholesale price is one as you say it's about 50% the other ones are network costs which are generally passed through those have been increasing social and environmental obligations those are increasing all of these are have a strong element of commonality between firms notwithstanding the fact that as you say they have different strategies to try and hedge those risks so i think that is an important observation when we're trying to consider why they might probably change prices at broadly the same time anyone else any other view do you have any views on that what must it mean that mr Thornton is speaking for the for the team if anybody wants to add anything or you're welcome to okay thank you okay lose me gold thank you very interested in your provisional findings particularly uh wanted to ask you about the uh transmission pricing and the implications of that because clearly you're finding uh that the absence of locational pricing for transmission losses provisionally uh you've you've judged to be anti-competitive it's a it's a hot topic within this inquiry and and generally in debate in scotland because it relates so closely to transmission charging and the argument that's been made um before this committee by off jaman national grid in relation to transmission charging is that if that seems to be locationally linked then there would be a cost to consumers although there would clearly be benefits to scotland generators there would equally be compatible and very substantial cost to scotland consumers um your conclusion is that in spite of the locational charging the fact that there isn't locational pricing means that consumers are losing out substantially could you explain the basis of that and also in particular i think the figure you used as an annual cost to consumers in scotland and the north of england of the current system is 40 million pounds which is a big number if you if you reduce that from scotland and the north of england to scotland alone could you identify what the cost was to consumers of the current system certainly so um you're right the current transmission charging arrangements do have some locational elements and the bit that you were talking about is called transmission network use of system charges which is basically the cost for using the transmission network um what we've identified is that there is no method for locationally charging for losses now losses is the other the heat that's dissipated from the wires if when you transport electricity over long distances it's about just under two percent of total generation across um Great Britain um and the important point to note is that the losses you incur differ according to your geographical location so if you're a consumer located near to generation then when you consume you generally incur fewer losses if you are a generator located near to lots of generators you generally incur higher losses um so those losses do differ sorry the costs do differ by geographical location but the charging regime doesn't so what happens currently is that consumers and generators all pay the costs of losses irrespective of where they are in the country uh and the members have provisionally found that this as you say creates a distortion that's a distortion in competition between generators because it arguably leads to potentially inefficient dispatch has that kind of short run effect in the long run it might also have some impact on where both generators are located and also companies that consume large amounts of electricity are located two figures that might be of interest to you um and these figures come from um work that was done in 2011 and we'll be looking to update that so these are all provisional figures um in terms of an overall benefit to the system of introducing um locational charging for transmission losses we estimated it was about 160 to 275 million at MPV as I said those are figures in the public domain but we were looking to update those with further evidence in our final report and the transfer you mentioned um because consumers in Scotland generally located close to generation and those in England they would according to the same analysis be a transfer of about 40 million um we haven't at the moment broken that down between north of England and Scotland we are doing further work and our own analytical work to try and understand that but that is the basic position I think as you've set it out it's set out correctly this is dealing with losses which currently are socialised across the country rather than locationally charged it's helpful when when transmission charges have been to TNUS has been discussed in this committee the fact of transmission losses has been one of the explanations offered for that but in fact what you're saying is that the the those charges don't at all reflect the actual losses in transmission so if there's a benefit to consumers in Scotland on the north of England of 40 million pounds um from a change of the kind you've suggested clearly one person's benefit is another person's loss would that principally come from consumers in the south of britain or principally come from generators so I think probably it makes sense to think about transfers from consumers to consumers and generators to generators so on the consumer side it's consumers in south of England to north and and Scotland on the generator side there is a broadly equivalent but for some reason slightly different which I can't uh roughly about 40 million transfer from generators in the north and scotland to generators in the south so those those transfers are broadly equivalent that would mean then if if the conclusion of your report is that this is anti competitive and it needs to be adjusted then it's it will potentially be good news for consumers here but the generators power companies who currently complain about the impact on their profitability of transmission charges will find that they're facing a greater burden if you like of transmission charging because it will then reflect more accurately the actual cost of transmission from scotland to market sales where that's that's an accurate summer that's very helpful given the recommendation you've made and and potentially very significant implications of that what's what would be the most likely route in your view assuming that that your provisional finding is upheld and that government decides to act upon it what would follow from that I'm quite cautious about speculating simply because history suggests that decisions can and views can change from provisional findings to the final report what I would say is that in the remedy's notice we set out a number of options if indeed this ac finding is upheld one of which would be to introduce uh locational charging for losses ourselves through an order and the other would be a recommendation in this case it would be to off-gem who presumably would raise a modification in the code code modifications process so those are the two routes of course there is still a route an option which is that uh on the basis of the additional evidence and analysis that we do and that parties present to us members think it's not worth it so that both of those are still in plain that's that's useful to understand you'll be aware that off-gem themselves have made a uh modification to the transmission charging regime as it impacts on renewable generators in scotland to reduce effectively to reduce the burden on renewable generators in scotland by modifying the way in which the transmission charges have been calculated is there a danger of government policy or official policy in response to these things moving in two different directions at the same time um i'm trying to is that connect and manage is that the yeah it's trans operation trans project transmit project so um my understanding but it's not been a particular focus of the investigation is that connect and manage was to try to facilitate rapid access to the transmission system and then deal with the charging afterwards as opposed to a queuing system now i don't think there was any inconsistency between that facilitating access approach and approach that would charge losses in a cost-reflective way it is the case you know with lots of elements of government policies that they might move in different ways but i don't think that would be an argument for having one policy try to deal with all different objectives thank you very much if i i get it down what zoom in just said and bring it back to something you mentioned at the outset which is one of the key next steps in the investigation is the preparation of the provisional decision on remedies and in the build-up to issuing that document the group will be very much considering what is the appropriate remedy to any provisional ac finding were it to be cemented and in doing so they'll consider what sort of remedy is effective and what sort of remedy is proportionate and so at the moment no decisions have been taken on on that and one aspect of their considering what is the effective and proportionate remedy is exactly as you articulated the interplay of potential future regulations and and other government measures thank you very much okay i think gordon with all wants to follow some of this up just a very quick question on the report that you produced energy market investigation locational pricing in the electricity market in great britain dated 23 of febri 2015 he said that locational pricing would have distributional consequences for both generators and consumers consumers in areas where generations plentiful but transmission constraint for example scotland would enjoy lower prices academic research suggests that an average domestic consumers would benefit from an estimated 64 pounds of annual energy bills this means that in broad terms that consumers in the north would be net beneficiaries from increased locational pricing and that the geographical distribution of fuel poverty means that reducing bills in the north would tend to help to alleviate fuel poverty so given those circumstances and the fact that you identified it as an AUC how do we go about getting an element of locational pricing introduced and do you intend to do any more investigation on the subject hand over to tony for some of the details in a minute but in terms of how we might do it again provisional provisional finding if if members do decide this is an AUC that should be remedied there are two roots one is to recommend to off-chem that they should encourage a code modification to be raised now codes are rather a kind of obscure area of the overall regulatory framework but they're the detailed rules that set out who does what and the traditional way in which these sorts of rules will be changed is through a code modification process now there have been some attempts to do this over the last 20 years and they have tended to take many years and end in end with no no clear outcome in some cases it's been judiciary reviewed for timing purposes etc so that is one root the other root is that the CMA could use its automaking powers to change license conditions to require companies to raise such a modification in the code modification process so those are the two main roots and I think you know in taking a view on which is the most appropriate members will want to see and take a view on which is most likely to remedy the problem we've identified just to add your the 64 pound figure you referred to was largely made up of a benefit from resolving pricing of transmission constraints rather than losses the the difference is if you want to think about it so losses is as simon said it you know if you're transporting milk and you spill milk that's the loss the transmission constraint is if you're transporting milk but actually the road can't take any more now the the so most of that 64 pounds was about the transmission constraint and not the losses the reason that we didn't pursue the transmission constraint issue is there's a european process that's in place to decide whether or not geographical areas should be considered as one market or several markets that regulation has just come into force and there's a there's a process by which at least every three years off-gem has to report to the european level as to whether markets should be unified or split whether there should be a single price or uh or several prices in different geographies um and our view was that given that given that that substantial uh piece of work has to be done through the european process that's just been put in place that that was the right place to consider that question i think it's also fair to say that um as sonny said we we did flag up the question of transmission constraints as well as losses at an earlier stage um we were persuaded by the party's arguments that implementing a system of transmission locational pricing for transmission constraints will be more complicated than that for losses and so that was another consideration in thinking that um we should hold off on the constraints side on the losses side there's a fairly simple mechanism for implementing it so that's not a compelling argument okay i know Lewis wants to come back in just one follow-up question for Mr McDonald's question um if you were to make a conclusion or recommendation uh that this is an aec what would be a realistic timescale to expect a change to come through in terms of policy i can say something there i mean if uh the aec is firmed up then if the cma then chooses to uh use its order making powers there was a statutory timeframe which applies to that process and that is will be a legal document uh which the cma would produce and the timeframe for that is six months subject to a one-off extension of up to a further four months uh if the cma makes a recommendation then at that point uh this is the alternative to the order then through a recommendation the cma effectively hands over implementation to whichever body it's made a recommendation to be that government be that off-gen and at that point the cma ceases to have control over the process and therefore the implementation time period is very much in the hands of others and that time frame and that lack of control is some is a factor that the cma takes into account when deciding upon how effective a particular remedy route will be okay and how how then would the cma decide whether it was an order or whether it was an issue that you passed on to a third party very much depends on a case by case basis um in the circumstances of the evidence before the cma and the group uh depending on um whether the body being recommended to would take it forward how they would take it forward and when in in the group's view that would be likely quite often the cma works quite closely with a body if there will be a recommendation to understand uh that that body's perspectives on it for example if you look at the uh government there's a commitment to implement or to respond formally to a recommendation made by the cma within 90 days now that's not obviously a cast iron guarantee they will implement but at least it is a response similarly but by working with off-gem then the group can get a view on on the likelihood of off-gem taking forward a particular recommendation okay okay okay but i just want to come back because i think what you've said and and answered to gordon mcdonald as well emphasised that there there may be choices here for government as between assisting generators or assisting consumers and clearly this committee will want to have that in mind in enriching recommendations when you talked about doing more work to identify the benefit to consumers in scotland of an increased locational element i wonder how early you're likely to have conclusions from that uh how quickly you might be able to quantify the cost of these losses uh not being reflected in charging to scottish consumers and whether the this committee could have access to that information i guess that the next staging point is the provisional decision on remedies and we would certainly look to flag up updated analysis at that stage and that's currently scheduled for october so that will not be the final answer but that will be an updated analysis okay and in terms of the analysis between scotland and north of england would would you be able to write to the committee about that in the meantime with your best estimate of what that actually looks like um we so i guess one consideration is um we're subject to quite stringent rules in terms of due process um and that's consistent with our quite stringent powers that we have and so an implication of that is that when we present new information we do so across the board in public and tool parties so i think it would be problematic for us to update analysis on the individual basis i don't know if you want to that i entirely agree with what simian said and i would add to that as part of this legal process we obviously receive an awful lot of information which is confidential from the parties which are active in this market and as part of our uh investigatory powers we have a duty to protect the confidential information that companies submit to us um there are limited very limited circumstances in which we can disclose them and one of the gateways through which we do is the publication of our findings on an interim basis which might be provisional findings or the provisional decision on remedies or ultimately in the final report and that is i think the committee's first port of call i would suggest of of that information certainly draw to your attention happy to write to you on publication to highlight the updated analysis thank you okay i think we want to move on and look at a slightly different topic which is um contracts for difference and i'll bring in Dennis Robinson thank you convener and good morning um within your report you've sort of noted that there's perhaps a lack of evidence as to dex approach um to the separation of the technologies with regard to the the funding with the cfds um and in terms of you know if we're looking at the best outcome for consumers what impact do you think that the decision um for the separation out of the technologies with the cft is going to have on the consumers and the security of supply um well there i think there are two two aspects of cfts um that we looked at allocation cfts um one of them was the decision not to allocate a certain proportion of cfts on a competitive basis and the other was the definition of different budgets and pots as you identify and in the first case we think there's fairly compelling evidence that the dex decision not to allocate five offshore wind projects on a competitive basis earlier in 2014 led to increased prices for consumers and it was of the order of maybe 300 million pounds a year so quite material amounts of money about one percent of electricity revenues on the second question on the one that you specifically highlight um uh it's difficult to conclude what the specific impact will be of dividing technologies into different pots and the reason i say that is that um the bidders responded effectively to dex decision so dex created two pots and put different budgets in each and unsurprisingly in the budget in the in the pot in which there was a smaller budget there were fewer bidders so it's difficult for us to replicate exactly what would have happened in the in the in the case of having just one budget and one single pot but in principle one can think that um dividing those different technologies into different parts is likely to increase the price for consumers overall um in terms of the impact on security of supply i mean potentially one could use that division of technologies into pots to differentiate technologies according to their security of supply characteristics so for example you could put intermittent technologies in one and more stable firm technologies in another that has not been our understanding of what deck has done to date but it could be a particular mechanism that they pursue tony i don't know if you want to add anything more um no i think that captures it but in reference of do you not think that the the methodology used by deck is actually disadvantage ing investment in certain areas and if we look at for instance the onshore and insure wind technologies um which you know scotland in terms of we say in terms of our resource and ability to create the the wind energy that would obviously ensure security of supply i don't think we're being there's a disadvantage to the way that this is being decided and you know i'm trying still to understand the methodology that deck have used here um and i'm not quite sure i've grasped that yet not quite sure of i've grasped the methodology that deck have actually possibly you and me both actually um and we have we have actually said in the report that it wasn't clear to us the basis on which the division of technologies to pots was made so i've given you a kind of plausible argument about how you might do it i don't think that is how deck did it and indeed our recommendation generally in this area is that there should be greater transparency about the decision-making process so the costs and benefits because as you say some of these technologies are much cheaper than others there may be legitimate reasons for wanting to foster some technologies if we think deployment in GB can reduce the costs but that but i'm sorry are those political and there may be there may be uh how shall i put it technocratic or technology based reasons or cost-based reasons for wanting to deploy certain technologies there may be but that needs to be amenable to scrutiny and analysis and our main concern really is that those decisions that have been taken to date haven't been and so the more that we can put that evidence and information into the public domain the better the decision-making process so i put it to you in terms of what's being brought forward i'm not sure you're able to answer this but if i put to you what's being brought forward with regarding to cfd we have created a situation where many companies are going to feel disadvantaged to invest in technologies which could could and probably would ensure security supply for the future but they're being disadvantaged by the what has been brought forward by deck at the moment and do you have specific technologies in mind here or technologies probably wind and solar yes so that would be what's called pot one technologies those are the cheaper technologies and i think we did raise a question and we do we do acknowledge they are cheaper because some people say that actually they're more expensive but we do do we agree that they are cheaper well certainly on a on a required subsidy basis and technology basis yes they are cheaper now there's one complicating factor which is intermittency but if you compare onshore wind and offshore wind they're equally intermittent arguably but one is much more expensive than than the other now again there might be legitimate reasons in terms of bringing down the costs of offshore wind clearly Great Britain and Scotland in particular has a lot of expertise in that area but let's set out the analysis and evidence and to date we haven't seen that are you going to continue to monitor where we are with this and trying to understand the the approach from deck and if it's not in the interest of consumer at the end of the day and security of supply for the future can you challenge the i'll say something about that maybe then hand over to Chris the remedy here i think that we have floated in our remedy's notice is one about greater scrutiny and transparency of costs and benefits so in other words greater rigor to the decision making process rather than a recommendation that x or y should not be done so that's where the members are at the moment rather than something more stringent Chris i don't know if you're looking yeah i absolutely agree what the group hasn't done is looked at the relative merits of which technology should be in which pot and which is more cost effective than others the group is concerned about or in the provisional findings that group articulates its concerns about the rigor has been said to the decision making process about how those how those technologies are allocated and how the budget is then allocated between them and with that rigor in place that would then give the appropriate level of public scrutiny to assess how those decisions are taken which is absent at the moment and do you envisage that you would be able to take that forward then it's absent at the moment do you envisage that given that you've perhaps got concerns as to where we are that you could or in fact would be looking at this in the future it's clearly an issue that is alive one in terms of the investigation we've got a potential remedy out there and in the event that that is a remedy that we stick with in terms of a recommendation then government has undertaken to respond on that within three potential remedies yes indeed in fact we can write to you i mean it's it's sorry the remedy the detail of the remedy we can certainly set out it's in our remedies notice and we'll write to you with with the ins and outs of that but that's a potential one at the moment yeah thank you i think paddock harry wanted to follow this up yeah thank you mr Thornton's later answers actually got to to some of the the issues i was going to follow up on it it just seemed to me that earlier on in discussing the the way in which different generating technologies are treated it seemed almost as though we were still stuck in mr carson prices analogy of transporting milk as though it's all the same stuff it's not all the same stuff it doesn't come with the same social and environmental consequences and if we're in the middle of an agenda of re-engineering our energy system in order to to meet current and future priorities sorry i had a train of thought there it seems to me that the the obsession with asking only whether markets are operating efficiently seems almost myopic surely we need to have a broader sense of what is trying to be achieved here and you talked about fostering new technologies that that is a reasonable argument for justifying temporary inefficiencies isn't it i mean i think that to be honest we would use probably efficiency in a broader term than it than it's that it's sometimes used to look at wanting to minimise overall long-term costs and those long-term costs might be costs of more expensive technologies that can be brought down by deployment today it might be about innovation externalities it certainly will include the cost of climate change so ideally what one would do in a sort of social cost benefit analysis of the sort that we're recommending is set out transparently what is the evidence about supporting this technology rather than that technology what are the additional costs today in terms of consumer bills how might those be brought down in the future and yes there's going to be elements of judgment clearly in the in the previous world i was um i was um i should say this awfully i was dex chief economist that before before coming to the cma and that is the sort of work that we do try to make it transparent and try to set out the costs and benefits clearly um what i think we should avoid is a situation in which a kind of qualitative argument about this might be a good technology for the future means there's no constraint on the price that we pay today thank you thank you can i just remind members they should not be using their mobile phones in committee thank you um back to us yeah well indeed damn that technology okay we'll move on thank you i think lewis mcdonald's on to come in with a question on settlement issues yes yes i did um we've heard a lot again over the summer about the roll-out of smart meters and clearly if that goes according to the optimum potential then it may well address this question in any case but i think reading your provisional findings you're not satisfied that there is the necessary follow-up to the roll-out in order to ensure that costs are more accurately affected can you tell us first of all what the impact is on consumers and and indeed on the efficiency of the system in general of of of its current shortcomings and and whether short smart meters can address that in full absolutely um just if you just let me give a couple of um words of kind of introduction to the topic because it's not one that gets an awful lot of air time so obviously when you and i consume electricity we do so in real time and there's always a certain uncertainty about when we're going to consume and how much and that means that despite energy supply as best efforts there's always going to be some disparity between the amount of electricity that they've procured in advance through contracts and the amount of electricity that their customers actually consume and settlement is a system by which disparities between the amount they've procured and the amount their customers consume are identified and all the financial participants are made whole in the system so again it sounds kind of quite an arid area but it's quite important and the reason is i know you'll have heard in the course of this inquiry that the costs of electricity differ quite substantially over the course of a day so in peak times when we're all consuming electricity you have to deploy these plants i've got high variable costs off peak times the cost might well be negative with some of the subsidy regimes we have so high volatility of costs and that's going to increase in the future with more wind power so you can immediately see that there would be a benefit if we could encourage some customers to shift their consumption from peak times to off peak times there's a dividend there for all customers now the problem is that suppliers under the current settlement system have no incentive to affect this sort of change the reason is that they are remunerated or charged as the case may be as if their customers consumed according to a predetermined profile and that profile has been put in place because in the world of conventional meters there was no way of telling who consumed what when we just had to guess really our concern is that even with the introduction of smart meters and in principle we're all going to have smart meters by 2020 the system of settlement's not going to change so suppliers are still going to be remunerated as if their customers consumed according to a profile and the evidence that he's there that would allow for actually those incentives to be brought to bear time of used tariffs is not going to be used so it is as I said it's kind of not an issue that gets an awful lot of air time but is a fundamental one in terms of quantifying I think we haven't got there yet and we're going to look at the experience of other countries which have introduced smart meters and whether they've changed the settlement systems try and get a sense of the prize there but what I would say is that this issue is going to get bigger and bigger because the more you have wind power the more you have certain times of the day where the price is effectively negative and other times of the day particularly with the reforms to imbalance prices that often was introduced where prices could be very high up to 6000 pounds of megawatt hour it's a very very big prize there and unless we change the settlement system we can't exploit it and changing the settlement system if I understand you rightly would mean that that prize wouldn't go to the companies which were smartness that work in the market it would potentially go to the consumer and reflect the actual use of so there would be a reduction in overall costs if you can imagine that the consumption profile does something like this and you can make it flat overall costs are going to to fall for consumers and I think your conclusion is that what's needed is a firm plan to deliver this presumably alongside the roll-out to smart meters so is it a firm plan that is delivered over the next five years rather than something that has to be in place straight away I think we have been clear in the remedies notice and saying we wouldn't expect it to happen overnight but the experience of these code modification processes is that they can take a long time so if we don't start planning now it might be a very long time until we introduce it okay during the carpins go a follow-up question so a quick supplementary on that can I ask have you looked at how contracts for difference affects energy storage technologies we've talked about in this inquiry how energy storage might mitigate intermittency of other technologies for example and I wondered whether you looked at whether CFD was working for that particular technology well let me start with the kind of micro-end of energy storage because you know in the future I guess we hope there will be more electric cars storage systems there this settlement change that I'm talking about will be necessary in order to exploit those sorts of micro technologies for CFDs that are obviously orientated towards larger scale technologies to my knowledge there is no CFD for storage technologies that's correct but my understanding is that if you have a wind for example a wind turbine with a battery it's a much more attractive investment if that battery cost is low than a wind turbine on its own because that wind turbine can even out peaks in the in its output so it should be able that wind turbine plus storage should be able to benefit from the CFD regime more than a wind turbine on its own and just could I quickly ask what about you know like forms of energy storage that aren't directly linked to the wind turbine but you know as part of the whole system you know for example pump storage how does that work because I know that some of pump storage schemes in Scotland haven't gone ahead because of concerns about this so the short answer is we've not specifically addressed that in the investigation to my knowledge those sorts of plant would be remunerated under contracts that national grid would let for ancillary services under the current regime rather than CFDs but we've not explicitly taken a view on that. All right thank you. Yeah thank you I just wanted to pick up on some of the points that Lewis MacDonald was was talking about around smart meters and how that connects to customers behaviour in the retail market. In the summary of your provisional findings this comes under a heading where phrases like weak customer response and inactive consumer base are used and I'm just wondering you know alongside the comments you make about smart meters and the comments you make about incentives for people to switch and to engage more actively in the market. I just wonder if there's a false assumption in here an unsafe assumption that that's what people want. Again this sense that a kind of abstract sense that markets must operate efficiently and people must all be players in the market as they were you know deciding which shop to buy a box of breakfast cereal from. Don't we need to start with an assumption or an understanding of how people want to engage with this and I wonder if if you've considered that most people just want to not think about it very much even if one day a smart meter will do some clever thinking about how their household is going to consume electricity. Most people don't necessarily want to be thinking of themselves as active consumers in a market they just want to press a switch and not pay too much of a bill. Yeah it's a fair challenge and I certainly don't think activity is an end in itself. We did do a survey of 7 000 customers across Great Britain and one of the findings perhaps unsurprisingly was that the number one attribute that customers care about is the price they pay for their for their gas and electricity and we also observed that there were substantial savings that could have been made by customers from switching that weren't being exploited so across all of the dual fuel customers of the six-star energy firms that was equivalent to about 14% or 160 pounds a year for some customer categories so those who were on standard variable tariff and paying by standard credit the average was 22% of their bill a year so that's 250 odd pounds these are very substantial amounts of money that we also observed that from our survey the people who engage least are generally those on low incomes low levels of education those with disabilities so I think that was quite a significant finding because had we found that it was generally those who were better off who were engaging less you might have concluded which just doesn't really matter to them but I don't think that's a very compelling argument given that evidence that the people who are engaging less and leaving most money on the table are those who are vulnerable against a number of characteristics another thing that struck us was that over a third of customers in the survey said they had never considered switching and slightly higher than that number said they did not know you could switch all of supplier tariff and payment method so in answer to your question I don't think we would expect to see lots of switching as a sign of activity but we would expect to see people engaged aware understanding their responsibilities and where there are material savings to be made for certain demographic groups for whom it's very important that those will be exploited there are loads of areas of life where we might imagine lots more rational decisions resulting in people saving money on wasting less food or buying less processed food on making fewer discretionary journeys that they don't necessarily need to make or or living closer to where they work we can't just assume that that's going to happen or even that actually people would choose to behave in strictly rational ways as though we're all participants in some theoretical kind of game theory exercise we're not we're human beings and we make kind of willy irrational decisions and quite a lot of the time we're comfortable with that and I'm just wondering still whether there's a an assumption built in here that rational behaviour is going to emerge when it it may in fact not I certainly you know what we have observed is probably the opposite of that and what we have observed is people not exploiting opportunities to to save money even though the actual costs of switching are not very great I think we're quite mindful of the points that you raise and one of the sets of remedies that we flagged up as ones to explore are you know behaviour remedies how can you frame certain decisions in a way that will facilitate people's decision making well and just assume they can do a calculus themselves it's also worth noting that we have identified specific barriers to engagement for certain categories of customer so those customers who are on prepayment meters for example and there is a higher proportion of those in Scotland compared to England have those sorts of demographic characteristics that I set out but also haven't been able to benefit from competition because they generally have fewer tariffs available to them and they pay more than customers who are not on prepayment meters so that's a category of customer who you know their rationality notwithstanding they can't engage because they don't have those choices so there are certain and customers in rental accommodation also seem to engage less so there are certain segments where there appear to be real constraints for the others where if you say there might be a question about whether they are rationally exploiting the opportunities on offer we have flagged up there might be ways of trying to nudge them into behaviour or trying to encourage them to engage or facilitate that decision making process and that's something that we're looking at thank you just to follow up on that and maybe take it the next stage further you have the information you've done the analysis you've talked about remedies and you've illustrated that perhaps maybe more education in some respects or whatever to assist consumers we've also identified as mr harby did a number of consumers who it's not because they are reluctant to it's because they may not have the ability to engage to try to save money in some respects what how do you how do you intend to try and address that aspect to try and ensure that the consumers who are probably some of the most vulnerable within our communities actually get a fairer deal well the the strategy that is set out in the remedies noticed is is three parts so the first is about ensuring the conditions for effective competition and under that bracket I would put the the settlement change that I mentioned earlier I think that'll that'll encourage suppliers to offer products that engage customers the second is about finding the means to improve customer engagement and that could encompass quite a wide variety of interventions maybe some of the questions are framed maybe specific proposals for overcoming barriers for customers on prepayment meters and the third area that we flagged up was transitional safeguards for certain types of customers who notwithstanding our efforts are unable to engage or or take advantage from from what's on offer so we flagged up one possibility which is to effectively put a ceiling on certain types of price for a certain period of time until such engagement comes forth clearly as we set out in the remedies notice that is not without its risks and we've raised a number of questions as to whether as to what the scope of such a safeguard tariff should be and indeed what some of the practical questions behind the design of it would be but I think we've got those three three prongs as it were of a strategy where the third one we would look at if we felt the first two weren't working if we look at you know the second aspect and I'm looking at the engagement have you set a time frame for this and have you estimated a cost was again I'm still I'm still trying to understand how you get the information out to consumer who themselves are maybe find it difficult to engage and it's not because of her reluctance to try and save money because they probably do they would always wish to save money if they could how proactive can you be or how proactive can you set out a marker for not yourselves but for others to be well um i'm just one for personal observation here when you look at the complaints that energy customers make about suppliers the vast majority of them relate to the bill and it's largely because you get a bill that says we thought you were going to pay this last month you actually paid this this is your outstanding balance this is the amount you pay by direct debit it's a very complicated thing to understand and that will be addressed for smart meters and the confusion around the bill and what you're paying the visibility about your consumption and and what you're paying for it I think will be improved so I think there is a there is a real possibility that smart meters will be part of that transformation um as for what other you know markers we can put out time scales um I think any remedy that we uh would look to introduce would have a time scale associated with it um Chris I don't know if you want to or Tony say something about that I mean I suppose what I would add is is linked to my answer earlier um which is we're at a stage in the investigation where the provisional decision on remedies hasn't yet come out so a lot of the thinking in this space is currently on going so there's a very it really is quite a limit to what we can say obviously time frame of implementation is a key factor so is the estimated cost as is the benefit of any given remedy and it's effectiveness and proportionality in addressing any ultimate AEC the group finds so it's very much I watch this space at this moment I'm afraid and tackling fuel poverty is obviously a priority on that I mean the group's priority is obviously answering the statutory question and one aspect of that is considering aspects of fuel poverty but I wouldn't say it's the key priority it is just one of the considerations taken into account when answering the statutory question here I mean I said it priority because it's still impacting in the most vulnerable groups within our communities and for me obviously I would have seen that as a greater priority actually That's just when we're talking about engagement with consumers and consumer behaviour clearly in a competitive sense there are parts of scotland parts of GB indeed which are competitively a disadvantage for consumers because they're not on the gas grid and there are I think it's fair to say some practices by electricity suppliers in some rural parts of Scotland which are anti competitive and make life very difficult for consumers are those practices something that would be subject to the current investigation and would you welcome evidence on those? Well to take the second first we certainly would welcome evidence on any matter that the committee thinks should be brought to our attention in relation I wonder whether you're talking about dynamic tele switched meters is that right the DTS meters and we have heard of the thoughts of constraints that those impose on customers and I'd probably put them in a bracket similar to prepayment customers to our knowledge DTS meters have a relatively restricted range of suppliers from which to choose now and we've also heard I think anecdotally that that some of the customers have difficulty actually using the technology effectively and you know whereas it was a good idea it may have passed itself by date I think in terms of a potential remedy probably I would look to smart meters again because when you alleviate that constraint of the meter in principle those customers should have free range of the suppliers they can choose from so I think really that that would be what we would suggest in terms of a likely remedy at this stage. Gordon MacDonald. I wanted to take this opportunity to ask you about interconnectors and what impact that has on the UK energy market and in particular what affect you know currently we're in a situation where UK electricity needs are about eight to ten per cent is met by the interconnectors to France and Netherlands and there are proposals to put in place other interconnectors from Norway and from Belgium when these come on stream what effect will that have on the energy market and you know the impact on existing UK generators and secondly is there any advantage that European generators using the interconnectors have over UK-based generator? I may be forced to hand over to Tony in a minute but the short answer is it hasn't been a great focus of our of our investigation we did look at some aspects of interconnectors so for example to what extent interconnectors can take part in the capacity market my understanding is that they will be able to in the future although there still is a question as to how they will be deraided so the question is you've got capacity through interconnector but the times in which in in GB that capacity is likely to be required is you know winter's day cold winter's day um it'll probably also be required on the other side of the interconnector so there's a question about how firm that capacity is and I think deck is currently doing some work about how to derate the interconnector capacity to include it in the capacity market so we didn't see a particular impediment to interconnection there in terms of whether companies are advantaged through using interconnector as opposed to current generators did you want to say something about Tony? Well again I should say it hasn't been a big focus it hasn't but we we are looking further at this I think the first thing is that more interconnection is basically a good thing for security of supply and that there's a big european push for more interconnection now there's a mechanism by which the transmission costs and the loss including the losses of interconnection are taken account of and fed back to the generators wherever that originating generator is and that's a europe wide regulation which is implemented in a specific way that's something that whose impact we're currently still investigating Given the size of dependence on interconnectors at present as much as 10% I mean why wasn't it a part of your feature of the energy market? It certainly was in terms of broadly looking at the competitiveness of the wholesale market because they are an important part of that and as I say there is a mechanism which is certainly in principle meant to be cost reflective and we're continuing to look at that I think also in terms I'll say generally is it in terms of the scope and the focus that's determined by the members and partly in response to the representations that are made to us and in relation to interconnection certainly in the period up to the provisional findings we did not receive representations that there was a problem with the regulatory regime for interconnection so it wasn't a point that people made to us now I think we have seen in some of the evidence that you've had over the last few months that a specific point about interconnections being made and that's why we're looking at it at the moment. I wonder if I may through Mr Thornton to ask Sheila Scobie who's head of devolved nations and CMA representative in Scotland. We've discussed the issue many times about the cost to Scottish consumers of transmission costs and the subsidy to those consumers in the southeast of England. Can you tell us what discussions you've had recently with off-gem and what their approach has been to I assume a fairly robust presentation to them on behalf of the consumers in Scotland because clearly the markets are somewhat distorted are they not? To answer that substantively or would you like to have a go first at the content? Yes. If this is about transmission network charges and how those are allocated that falls within I guess the natural monopoly regulation side of the work and again that would be appealable to the CMA if someone wanted to take a view on that. By CMA to off-gem in terms of these charges? So in relation to distribution there is an appeal currently ongoing which the CMA is considering and whenever a decision is made so the off-gem makes these decisions on a periodic basis in relation to transmission distribution whenever that decision is made it is appealable to the CMA so if people have a problem with it then it can be appealed and a panel of independent members will consider the issue. I mean just in terms of a general response I mean we do obviously have regular discussions with off-gem in relation to consumer concerns that either are brought to the CMA on behalf of consumers in Scotland or indeed to off-gem who also have a key role in terms of addressing consumer issues in Scotland. I mean my role is primarily here to ensure that people like the energy team that have been answering your questions today are fully apprised of the context in Scotland politically the political debate and the role of consumer bodies in Scotland to ensure that they have every opportunity to to get evidence of the kind that you've been discussing today and also to ensure that the energy team have appropriate access to policy makers who may be making decisions that are relevant in the Scottish Government. Thank you. Just for the avoidance of that. The substance of what you're saying around transmission losses leads me to the conclusion that the argument that says reduce transmission charges to favour a per-generator such as Longanedd is going in the opposite direction to the changes that you would want to make to favour consumers in Scotland on the north wing. Sorry, so in relation to losses the interests as it were the short-term parochial interests of consumers and generators are opposite? Okay, if there are no more questions can I thank you very much on behalf of the committee for coming along that's been a good quite lengthy session and I'm very grateful to you for explaining things as clearly and as simply as you were able to which is considerable assistance to the non-technical members of the committee. Thank you very much we will now have a short suspension. I'm going to private session I should say.