24 October 2008

The Electricity Market - Another Situation Made Worse By Regulation

It seems that suggestions that the energy market is not sufficiently competitive and requires more regulation are becoming an almost daily event. It seems to be the same story as the banking sector; the industry is already heavily regulated, but it is assumed that any problems must be due to the regulation not being tough enough. The validity of the existing regulation is rarely questioned.

When I looked around to see what the suggested regulatory reforms might be, I came across an
interesting article on the Ecotricity website outlining what they perceive to be the major regulatory failings. Ecotricity is a smaller supplier (around 35,000 customers) which invests heavily in wind energy. It is this kind of supplier which could provide innovative competition to the "Big 6," so their opinion of what is stiffling the sector is probably worth taking into consideration.

What is interesting is that they highlight seven issues, three of which have been created directly by the regulator, which are:

  • The cash flow issue created by the requirement that suppliers offer a quarterly payment option. The regulation may have been written with the honourable intention of giving customers more choice, but it will clearly present a problem to new and smaller suppliers who may have less access to credit (per point 1), but have to pay up front. In trying to increase the choice of payment terms, the regulator could be reducing the choice of suppliers.

  • The burden created by the social requirements placed on suppliers, which ties in with the previous point a little. By forcing suppliers to offer a range of payment options and adminster energy efficiency programs, the regulations place a disproportionate burden on smaller suppliers compared to the larger players.

  • The length of contracts being limited to 28 days, which impedes the ability of suppliers to carry out reliable business planning and limits entry into the market, compared to industries such as broadband, where income can be secured over a longer period.
There seems to be a recurring theme whenever the government regulates a market, one of unintended consequences; they put requirements into place which will supposedly benefit the customer by increasing competition or creating greater choice, but they often end up doing the opposite by creating barriers to entry into the market.

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