On 26 October 2023, the Energy Act 2023 (Energy Act), the largest piece of primary energy legislation in over a decade, received Royal Assent and became law. The breadth of the Energy Act is impressive, covering areas such as energy infrastructure, energy efficiency, regulation of nascent technologies such as CCUS and hydrogen production and strengthening the regulatory landscape around more established sectors including offshore wind and oil and gas.
Over a series of briefings, our energy experts at Norton Rose Fulbright will look at the impact of the Energy Act across several areas. In this update, we explain changes made to the UK merger control and competition law regimes. In summary, these changes are:
- A new special merger control regime for “energy network mergers” enabling relevant mergers to be remedied or potentially even blocked in circumstances where the merger substantially prejudices Ofgem’s ability to carry out comparative benchmarking between companies when setting price controls by reducing the number of relevant comparators (making it significantly harder for Ofgem to assess efficient costs and ensure value for money for customers). This new regime came into force on 26 October 2023 when the Energy Act received Royal Assent.
- Extending Ofgem’s existing concurrent competition law powers to also apply to certain storage and transportation activities concerning carbon dioxide, with this change coming into force two months after the Energy Act received Royal Assent. The Energy Act also envisages that Ofgem’s concurrent competition law powers may be extended to cover heat networks in future.
Please see below for further detail.
Special merger control regime for “energy network mergers”
The UK merger control regime is set out in the Enterprise Act 2002 and operated by the UK’s primary competition authority, the Competition and Markets Authority (CMA). The CMA has jurisdiction to review “relevant merger situations” (see below).
When conducting a merger review the CMA is generally looking for competition concerns – a “substantial lessening of competition”. Most transactions are cleared after a Phase 1 review, usually unconditionally or possibly with remedies. More problematic transactions are referred for an in-depth Phase 2 review, the outcome of which could be unconditional clearance, clearance with remedies or prohibition.
The UK merger control merger also allows transactions to be reviewed on certain public interest or special public interest grounds, and there is a special regime for water mergers. The new special regime for energy network mergers is similar to the water merger regime and is intended to address a concern that a merger between energy network providers may not be problematic in terms of a loss of competition (if the providers are not direct competitors) but may prejudice Ofgem’s ability to compare data from such companies to set price controls, which in turn could harm customer interests.
Under the UK’s general merger control regime there is a “relevant merger situation” if: (a) two or more enterprises (businesses) have or will cease to be distinct (i.e. are brought under common ownership or control, with material influence the lowest level of control); and (b) the target’s UK turnover exceeds £70 million or the parties have a combined UK “share of supply” of at least 25 per cent with an increment. For the new special regime for energy network mergers, the share of supply test will not apply so the new regime will be triggered only if the target’s turnover exceeds £70 million – and this must be turnover in Great Britain, not the UK as applies normally.1
For there to be an “energy network merger”, two or more of the enterprises that cease to be distinct must be energy network enterprises of the same type. There is flexibility to revise the definition of “energy network enterprise” in future, but this is current defined as an enterprise holding:
- a gas transporter licence under s7 Gas Act 1986;
- an electricity transmission licence under s6(1)(b) Electricity Act 1989 (unless that licence was granted via a relevant tender exercise and no other electricity transmission or distribution licences are held or any such other licences were also awarded via tender); or
- an electricity distribution licence under s6(1)(c) Electricity Act 1989 (subject to the same exception as above regarding electricity transmission licences).
The CMA can refer an energy network merger for a Phase 2 review if this has or may be expected to cause substantial prejudice to Ofgem’s ability to carry out its functions under Part 1 of the Gas Act 1986 or Part 1 of the Electricity Act 1989 to make comparisons between energy network enterprises of the type involved in the merger. However, the CMA may decide not to make a reference if it believes any relevant customer benefits outweigh the prejudice, subject to first requesting and considering Ofgem’s opinion on this. At Phase 2, the CMA has a duty to impose remedies (which could mean prohibiting the merger) if a prejudicial outcome is ultimately found. An energy network merger could be reviewed for both competition concerns and for potential prejudice to Ofgem’s ability to carry out its price control functions.
Parties considering acquiring or investing in an energy network provider should also be mindful of the requirements of the National Security and Investment Act 2021 (NSI Act). Acquiring an entity which holds a gas transporter licence or an electricity transmission or distribution licence (or operating under a relevant exemption) would trigger a mandatory notification under the NSI Act, provided the level of control being acquired amounts to a relevant “trigger event”.
Ofgem concurrent competition law powers
While the CMA is the UK’s main competition authority, a number of UK sectoral regulators – including Ofgem – also have powers to enforce certain competition law provisions in their relevant sectors.
In all areas of the UK economy, the CMA can investigate and find infringements of the prohibitions against anti-competitive agreements (e.g. price fixing cartels) and the abuse of a dominant position under the Competition Act 1998 (the Chapter I and Chapter II prohibitions), and also has powers to conduct market studies and in-depth market investigations (potentially leading to remedies) if there are concerns that competition is not working well due to market features. The sectoral regulators can also enforce the Chapter I and Chapter II prohibitions in their sectors (in practice after agreeing whether they or the CMA are best placed to act), as well as to conduct market studies and request that the CMA undertake a market investigation in their sector.
Ofgem’s concurrent competition law powers had been limited to certain commercial activities in the gas and electricity sectors, but are extended under the Energy Act to also cover storage and transportation activities concerning carbon dioxide – specifically: (a) operating a site for the disposal of carbon dioxide by way of geological storage; (b) providing a service of transporting carbon dioxide by a licensable means of transportation; and (c) activities ancillary to such activities. This change comes into force two months after the Energy Act was passed.
The Energy Act also provides that future regulations regarding heat networks may give Ofgem (or the Northern Ireland Authority for Utility Regulation in respect of Northern Ireland) concurrent competition law powers regarding such networks.