The Energy Security Bill – changes for competition and mergers in the energy sector, Deirdre Trapp, Rory Jones, Matt Hoser
On July 6, 2022, the UK government introduced the Energy Security Bill (the Invoice) which aims to “provide a cleaner, more affordable and more secure energy system”. The Bill has had its first and second readings in the House of Lords and will go through committee and report stages and a third reading in the House of Lords in September-October 2022, before moving to the House of Commons further late in the year.
The bill is based on three “key pillars”, namely: (i) leveraging investments in clean technologies; (ii) reforming the UK’s energy system and protecting consumers; and (iii) maintain the safety, security and resilience of energy systems across the UK. These policy pillars encompass a wide range of reforms, from carbon capture and hydrogen production to cybersecurity of smart devices, licensing of multipurpose interconnects, and just about everything in between. The bill is far too broad for a single article, so this blog will focus on some measures to enhance competition in the energy sector, particularly at the grid level.
For our take on the Bill’s proposed changes to Ofgem’s regulatory mandate and new technologies, please see our separate blog post here.
Bringing the competition down
The bill would introduce a new competition regime for the construction, ownership and operation of onshore network infrastructure, modeled on the existing competition framework for offshore transmission assets. The Bill would empower the Secretary of State to appoint a body to manage tenders and set tender criteria, and extend Ofgem’s power to issue regulations for tendering processes. invitation to tender.
Ultimately, this measure aims to improve the efficiency of investments and foster smart and flexible solutions, in particular those that will increase the ability of the UK electricity grid to adapt to the increased adoption of low carbon technologies. carbon (such as electric vehicles) in the years to come.
A new special merger regime for energy network companies
At the same time, the bill would introduce a new special merger regime, which aims to reduce the risk of mergers between network energy companies having detrimental effects on consumers. Unusually, the government did not consult publicly on the proposed special merger regime, lest a wave of reactionary mergers rush in before the proposed regime was introduced. Nevertheless, the proposal is not new: mergers of water companies in the UK have been subject to a similar regime since 2004, and Ofgem called for a special merger regime in 2010 to take account of the impact of qualifying mergers on Ofgem’s ability to effectively regulate energy companies through its price control processes.
So far, energy network mergers have been limited to the usual competition assessment by the CMA. For example, when considering National Grid’s acquisition of Western Power Distribution in 2021, CMA’s substantive assessment was largely limited to competition in the provision of new connections. On the other hand, the CMA may not have examined in detail the central question of the regional monopoly positions of National Grid and WPD in the distribution and transmission of electricity, respectively, since the effect of this merger on the efficiency Ofgem’s continued price controls fell outside its statutory mandate.
In line with its counterpart in the water sector, the proposed special regime for energy mergers would aim to preserve Ofgem’s ability to effectively benchmark energy companies against each other as part of its price monitoring processes. Price controls – such as the recently concluded RIIO-T2 processes (for energy transmission) and the ongoing RIIO-ED2 processes (energy distribution) – allow Ofgem to regulate the prices that companies energy networks charge by analyzing their business plans for a given five-year period. period. This involves considering proposed capital and operating expenditures, cost of capital, service level objectives, environmental initiatives and more, comparing company proposals with those in business plans. other companies’ price controls and taking into account historical underperformance or outperformance. The new regime aims to address concerns that mergers could lead to fewer companies to benchmark against each other at Ofgem, which could undermine the reliability of Ofgem’s benchmarking.
Under the bill, mergers between two energy network companies of the same type (i.e. two or more gas transporters, two or more electricity transmission companies or two or more electricity distribution companies electricity) would be subject to mandatory prior review. Other energy companies, such as those holding retail, interconnection and/or generation licenses, would continue to be subject to potential scrutiny under the CMA’s standard merger control framework. The new regime would involve consultation with Ofgem to determine whether the merger might affect Ofgem’s ability to make comparisons between energy network companies, which would issue guidance as to the criteria on which it would base its assessment and the relative weight given to these criteria. In addition, the CMA would consider any countervailing benefits to consumers resulting from the merger that may outweigh any negative effects on Ofgem’s ability to benchmark.
While the extent of activity under the new regime will depend on the number of energy network mergers, reviews are unlikely to be frequent, nor straightforward. By comparison, only four water mergers have been reviewed in the 18 years since the special water merger regime came into force – Mid Kent Water / South East Water (2006), South Staffordshire Water / Cambridge Water (2012), Pennon Group / Sembcorp Bournemouth Water Investments (2015) and Pennon Group / Bristol Water (2022). In all four cases, the CMA (or its predecessor, the Competition Commission) found at least one negative effect on Ofwat’s ability to benchmark itself in price checks, but also found efficiencies and /or customer benefits resulting from the mergers. In three of the four cases, the merging parties ultimately offered commitments to address the CMA’s concerns. Therefore, the water experience suggests that this kind of compulsory regime can have a deterrent effect on transactional activities.
The scale of the Bill’s ambition is remarkable and many of its measures – if passed – will hopefully bring significant benefits to consumers and the UK’s green transition. While the advent of onshore competition may spur competition in a way that encourages investment, the new special merger regime may make potential investors think twice about potential network mergers, given the likelihood of further examination in the future.
Please contact us or your usual contact on our Antitrust, Competition and Trade team if you have any additional questions or would like to discuss what your business can do to prepare for the coming into force of the bill. For more on antitrust developments around the world, including in relation to industry transformation and net zero, please refer to our report Global Antitrust in 2022: 10 Key Themes.