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Competition in Energy Markets – STARKS – November 2022 OECD discussion

This presentation by Mary STARKS, Partner at Flint Global, was made during the discussion “Competition in Energy Markets” held at the 74th meeting of the OECD Working Party No. 2 on Competition and Regulation on 28 November 2022. More papers and presentations on the topic can be found out at oe.cd/ciem

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Mary Starks, Partner at Flint Global
Competition in energy markets
Overview of energy markets
Agenda
/01
Background to the energy crisis /02
Policy responses /03
Transition to Net Zero /04
What should competition authorities be aware of? /06
Global energy markets are unique and have very different dynamics to both other commodity and non-commodity markets.
Overview of energy markets
IEA, Share of oil reserves, oil production and oil upstream investment by company type, 2018, link
State-owned entities have a pivotal role in
energy markets, whose primary motivation
may not be profit-maximisation
Energy markets are highly influenced by
geopolitics e.g. OPEC
Share of oil reserves, oil production and oil upstream investment by company type
Energy markets have been rocked by back-to-back shocks in the last two years: the COVID-19 pandemic and the Russia’s full-scale invasion of Ukraine in
February 2022.
Background to the energy crisis
COVID-19 led to an unprecedented fall in energy prices, whilst the
recovery in 2021 saw prices surpass pre-pandemic levels
Russia curbed gas exports to Europe by 80% in response to
sanctions. Gas and electricity prices have spiked as a result
Brookings Institute, Getting out of the coronavirus economic contraction, link
IEA, World Energy Outlook 2022
High energy prices have exacerbated already rising levels of inflation across the world, leading to a cost-of-living crisis in many countries.
Policy responses to the crisis
Supply-side and demand-side measures have been taken to protect
the security of supply and prevent black-outs in winter 2022
Many countries have implemented measures to support vulnerable
consumers unable to afford higher energy prices
S&P Global Commodity Insights, Commodity Tracker: 4 charts to watch this week, link
Financial Times, How do household energy bills compared across Europe, link
Looking past the energy crisis, the transition to Net Zero by 2050 is a challenging target. Governments and, to an extent, regulatory authorities have a role
in ensuring the transition is successful.
Transition to Net Zero (1)
IEA, Net Zero by 2050: A Roadmap for the Global Energy Sector
Electricity demand will increase
as sectors undergo
‘electrification’, e.g. in
transportation, residential and
industrial heating, and industrial
production (steel, concrete)

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Competition in Energy Markets – STARKS – November 2022 OECD discussion

  • 1. Mary Starks, Partner at Flint Global Competition in energy markets
  • 2. Overview of energy markets Agenda /01 Background to the energy crisis /02 Policy responses /03 Transition to Net Zero /04 What should competition authorities be aware of? /06
  • 3. Global energy markets are unique and have very different dynamics to both other commodity and non-commodity markets. Overview of energy markets IEA, Share of oil reserves, oil production and oil upstream investment by company type, 2018, link State-owned entities have a pivotal role in energy markets, whose primary motivation may not be profit-maximisation Energy markets are highly influenced by geopolitics e.g. OPEC Share of oil reserves, oil production and oil upstream investment by company type
  • 4. Energy markets have been rocked by back-to-back shocks in the last two years: the COVID-19 pandemic and the Russia’s full-scale invasion of Ukraine in February 2022. Background to the energy crisis COVID-19 led to an unprecedented fall in energy prices, whilst the recovery in 2021 saw prices surpass pre-pandemic levels Russia curbed gas exports to Europe by 80% in response to sanctions. Gas and electricity prices have spiked as a result Brookings Institute, Getting out of the coronavirus economic contraction, link IEA, World Energy Outlook 2022
  • 5. High energy prices have exacerbated already rising levels of inflation across the world, leading to a cost-of-living crisis in many countries. Policy responses to the crisis Supply-side and demand-side measures have been taken to protect the security of supply and prevent black-outs in winter 2022 Many countries have implemented measures to support vulnerable consumers unable to afford higher energy prices S&P Global Commodity Insights, Commodity Tracker: 4 charts to watch this week, link Financial Times, How do household energy bills compared across Europe, link
  • 6. Looking past the energy crisis, the transition to Net Zero by 2050 is a challenging target. Governments and, to an extent, regulatory authorities have a role in ensuring the transition is successful. Transition to Net Zero (1) IEA, Net Zero by 2050: A Roadmap for the Global Energy Sector Electricity demand will increase as sectors undergo ‘electrification’, e.g. in transportation, residential and industrial heating, and industrial production (steel, concrete)
  • 7. Authorities will have to consider how to resolve issues which the transition away from fossil fuels will raise in terms of incentives and market structures. Transition to Net Zero (2) High gas prices mean renewables generation has become more competitive. But more investment is needed to achieve Net Zero Renewables will challenge price formation in electricity markets. Reforms needed to address price cannibalisation and squeezing out IRENA (2022), Renewable Power Remains Cost-Competitive amid Fossil Fuel Crisis, link Wood Mackenzie, Are power markets helping or hindering the energy transition, link
  • 8. Producer market power What should competition authorities be aware of? (1) 1 Firm failures and impact on competition 2 Policy and regulatory responses to the energy crisis and impact on competition 3 Keep an eye on long-term contracts and excessive margins Identify where market concentration is increasing Advocate for market-based price formation and price signals Issues arising from the energy crisis
  • 9. Price formation in electricity markets What should competition authorities be aware of? (2) 1 Competition law hindering progress on sustainability 2 Anti-competitive behaviour in declining markets 3 Repurpose existing tools to address price cannibalisation & squeezing out If appropriate, letters of comfort or derogations from competition law Look for anti-competitive behaviour & take a view on mergers or state-aid Issues arising from the transition to Net Zero
  • 11. Contact If you need any more information, please speak to: Mary Starks Partner marystarks@flint-global.com
  • 12. Who we are Helping clients anticipate, interpret and respond to developments in policy and politics. We help our clients succeed in an increasingly complex world by providing advice at the point where government and business meet, with an authoritative perspective on both. We are experts in policy, political analysis, regulation and competition. Our clients come from many countries and operate in many sectors, including digital, tech, telecoms, media, financial services, life sciences, manufacturing, retail, transport and energy. Advising investors on political and regulatory risk and opportunity throughout the investment cycle. Offering high-level strategic advice and technical expertise on transactions and regulation and competition matters in the UK and EU. Policy and political analysis Markets and investor advisory Competition and regulation