Corrective Competition Policy in Electricity Markets

Detailed Explanation With Case Laws

1. Introduction

Corrective competition policy in electricity markets refers to the legal and regulatory measures used to correct situations where competition is weak, distorted or harmed. Electricity markets can face problems because some companies control large generation capacity, networks or customer bases. These conditions can create market power, barriers to entry, anti-competitive agreements and unfair trading practices.

The purpose of corrective competition policy is to restore effective competition, protect consumers and ensure that electricity prices and services are determined through fair market processes.

2. Why Corrective Policy Is Necessary

Electricity markets have special characteristics. Electricity must generally be produced and consumed at almost the same time, and network infrastructure can create natural monopoly conditions. These features can allow companies with significant market power to influence prices or restrict competitors.

Corrective policy may therefore address:

abuse of a dominant position;

anti-competitive agreements;

discriminatory access to networks;

barriers to market entry;

excessive market concentration;

information sharing between competitors; and

manipulation of wholesale electricity markets.

In Great Britain, Ofgem and the CMA have concurrent competition-law powers over specified activities in the gas and electricity sectors. Chapter I of the Competition Act 1998 addresses anti-competitive agreements, while Chapter II addresses abuse of dominance. (Ofgem)

3. Market Monitoring

The first corrective mechanism is continuous monitoring. Regulators examine prices, market concentration, trading behaviour, liquidity, complaints and the conduct of major energy companies.

Ofgem states that it monitors wholesale energy transactions and the behaviour of companies and traders. It can also refer markets to the CMA where there are reasonable grounds to suspect that market features restrict or distort competition. (Ofgem)

Monitoring allows regulators to identify problems before they cause significant long-term harm.

4. Competition Law Enforcement

Where a company abuses its dominant position or competitors enter an anti-competitive agreement, enforcement action may be taken.

Possible corrective measures include:

directions to change conduct;

legally binding commitments;

financial penalties;

changes to contractual arrangements;

improved access for competitors; and

consumer redress where appropriate.

Ofgem can impose penalties of up to 10% of turnover for infringements of the Competition Act 1998. (Ofgem)

5. Correcting Barriers to Entry

Effective competition requires new companies to be able to enter the electricity market.

Regulators may therefore intervene where an incumbent controls essential infrastructure or prevents competitors from accessing important markets.

A useful example is the EPEX/EEX investigation. Ofgem investigated whether EPEX had abused a dominant position by failing to enable rival Nord Pool to participate in certain electricity trading auctions. EPEX offered commitments to enable Nord Pool's participation and to improve its internal competition-law training. (Ofgem)

This demonstrates how corrective competition policy can use commitments rather than only financial punishment.

6. Structural and Market Remedies

Corrective policy may also involve changes to market structure. These can include:

separating certain activities;

improving wholesale-market liquidity;

facilitating independent suppliers;

competitive procurement;

improving network access; and

introducing competitive tendering.

For example, Ofgem has developed an Early Competition framework for certain onshore electricity transmission projects, under which competitively appointed transmission owners can compete for infrastructure opportunities. (Ofgem)

7. Wholesale Market Integrity

Competition policy also overlaps with rules against wholesale-market manipulation. REMIT prohibits market manipulation and insider trading and requires certain inside information to be published. (Ofgem)

InterGen Enforcement Case (2020)

Ofgem found that InterGen breached Article 5 of REMIT concerning market manipulation. The case demonstrates the importance of preventing misleading information and trading behaviour that can interfere with fair price formation in electricity markets. (Ofgem)

8. Major Energy Market Investigation

CMA Energy Market Investigation (2014–2016)

Ofgem referred the Great Britain energy market to the CMA in 2014 because of concerns about barriers to competition, supplier relationships, consumer engagement and other market features. (Ofgem)

The CMA subsequently investigated the market and introduced remedies after finding an adverse effect on competition. The investigation demonstrates that corrective competition policy can address market-wide structural problems, rather than focusing only on individual companies. (GOV.UK)

9. Consumer Protection

The ultimate purpose of competition policy is not simply to increase the number of companies. Effective competition should produce benefits such as better prices, greater choice, improved service and innovation.

Corrective measures may therefore focus on making markets easier for consumers to understand and switch within. Ofgem's earlier energy-market reforms, for example, sought to make the market simpler, clearer and fairer for consumers. (Ofgem)

10. Conclusion

Corrective competition policy is an important part of electricity regulation. It combines market monitoring, competition-law enforcement, regulatory commitments, access remedies, competitive procurement and wholesale-market controls.

The EPEX investigation illustrates correction of barriers affecting rival market participants, while the InterGen case demonstrates intervention against wholesale-market manipulation. The wider CMA Energy Market Investigation shows that regulators can also address structural weaknesses affecting competition across an entire energy market.

Thus, for PhD-level energy law, corrective competition policy can be understood as a continuing process through which law and regulation identify market failures and introduce proportionate remedies to restore effective competition, protect consumers and maintain market integrity.