Guidance

Energy Security Bill factsheet: Energy network special merger regime

Updated 1 September 2023

We estimate that introducing the Energy Network Special Merger regime could save energy consumers up to £420 million over 10 years^{[footnote 1]}.

Why are we legislating?

Energy network companies are regional monopolies because they solely provide the network services in their regions of Great Britain. Ofgem regulates how much they can spend (and therefore how much can be passed on to consumers through energy bills) by setting price controls. This involves comparing data from all energy network companies, referred to as benchmarking. If more networks are consolidated into fewer companies through mergers and acquisitions there is a potential detriment to Ofgem’s ability to benchmark in setting price controls, through a reduction in the number of independent entities that can be compared.

We are amending primary legislation (the Enterprise Act 2002) to require the Competition and Markets Authority (CMA) in certain circumstances to assess whether a merger between energy network companies substantially prejudices Ofgem’s ability to carry out its functions when Ofgem compares data from all these companies to set price controls. This is a more appropriate test to reflect the way that energy network companies are regulated, compared to only assessing for substantial lessening of competition, because as regional monopolies, there is no direct competition between them. This type of “special merger” legislation is something that has already been successfully implemented in the water industry, a similarly regulated sector, and we are largely replicating this approach for energy networks. We estimate this could save energy consumers up to £420 million over 10 years^{[footnote 2]}.

How the Bill will achieve this

Introduces a New Test: The Energy Network Special Merger regime seeks to change the emphasis on what the Competition and Markets Authority (CMA) investigates when energy network companies merge with one another, to help account for the fact that energy network companies are regional monopolies that do not compete for market share. Instead of asking whether there is a substantial lessening of competition, we are amending the Enterprise Act 2002 so that the CMA will focus on whether the merger substantially prejudices Ofgem’s ability, as the independent economic regulator, to make comparisons between energy network companies (a process known as benchmarking) to regulate energy network companies’ spending through the price control process. The CMA will also be empowered to consider whether there is a consumer benefit from the merger that outweighs this prejudice.

CMA Actions and Powers: The Competition and Markets Authority will be required to take reasonable and practicable actions where it concludes that the merger has or may substantially prejudice Ofgem’s ability to benchmark, up to and including preventing it from taking place. Those actions will be aimed at remedying, mitigating, and/or preventing the prejudice and any adverse side effects. This should therefore help prevent energy network companies from making excess profits at consumer expense. We are incorporating the energy network special mergers regime into the existing framework for the UK’s general merger regime, which assesses whether a merger results in a substantial lessening of competition.

Fees: Section 121 of the Enterprise Act 2002 empowers the Secretary of State to order that fees are to be paid upon the occurrence of certain events, such as CMA investigating and intervening in a merger under their existing investigatory regime. Our policy is for this existing power to be amended to also include an energy network special merger investigation as one of those events. The Enterprise Act 2002 (Merger Fees and Determination of Turnover) Order 2003/1370 (“the 2003 Order”) was made under section 121 and provides for fees to be paid in pursuance of general merger investigations and water merger investigations. The 2003 Order needs to be amended to ensure that fees are also payable under the Energy Network Special Merger regime.

FAQ

Why didn’t Government consult on this policy?

Consulting publicly was inappropriate due to market sensitivities. This was necessary to reduce the likelihood of fast and reactionary mergers between energy network companies being triggered and completing before the proposed Energy Network Special Merger regime comes into law.

We have consulted with Ofgem and Competition and Markets Authority, who are familiar with how network companies operate and their concerns about how to attract investment. We have also considered lessons learnt from the long-established water merger regime. Therefore, this policy is well informed.

There will be an opportunity for network companies (and others) to input into Ofgem’s consultation on the statement of methods (i.e., the statement on how Ofgem assess the impacts of a merger of their ability to benchmark).

Background

Ofgem is the Office of Gas and Electricity Markets. Ofgem is a non-ministerial government department governed by the Gas and Electricity Markets Authority (GEMA) and to which many of GEMA’s statutory functions are delegated (in respect of which it acts on behalf of GEMA). GEMA determines strategy, sets policy priorities and makes decisions on a wide range of regulatory matters, including price controls and enforcement.

The price control is the main method that GEMA (via Ofgem) uses to regulate the amount that energy network operators can charge suppliers, who in turn pass the costs on to consumers. Setting an effective price control will be of increasing importance as the UK’s energy demands change as we work towards our decarbonisation and energy security goals. If more networks are consolidated into fewer companies through mergers and acquisitions there is a potential detriment to Ofgem’s ability to set price controls, through a reduction in the number of independent entities that can be compared.

Merger review in the UK is primarily the responsibility of the CMA, which is an independent non-ministerial government department and is the UK’s principal competition and consumer protection authority. Under the general UK merger regime, the CMA investigates for substantial lessening of competition. The Energy Network Special Merger regime will apply to energy network companies that are licensed in Great Britain.

Further information

The following documents are relevant to the measures and can be read at the stated locations:

• For further information on consumer savings and how we estimate this could save energy consumers up to £420m over 10 years, please see the impact assessment^{[footnote 3]}.

1. Impact Assessment: NPV 2022-2031, 2020 prices, discounted to 2022. ↩

2. Impact Assessment: NPV 2022-2031, 2020 prices, discounted to 2022. ↩

3. Impact Assessment: NPV 2022-2031, 2020 prices, discounted to 2022. ↩