The U.K. regulator Ofgem has referred the energy market to the Competition and Markets Authority (CMA) for a full investigation.

Among other things, Ofgem expects CMA to examine, "the relationship between the [retail] supply businesses and generation arms of the six largest suppliers."

It's a question which is never asked in the U.S., and one which need not be asked in true free markets like Texas where pure retail companies are under no obligation to buy from generators who also own REPs.

However, when capacity markets start getting introduced, suddenly pure retail suppliers are compelled to subsidize the fixed costs of their competitors' generation -- from which pure retailers receive no benefit (the generation can be used to optimize the integrated book of the generation/retail owner).

It's a situation distinct from a retail supplier affiliate owning transmission and distribution assets -- where it's uncontested that such T&D company shall receive a regulated return and, more importantly, must operate its assets in a non-discriminatory manner, since payment for the assets is compelled by the government.

However, in the capacity market, there are compulsory wealth transfers from pure retail suppliers to generators, some of whom own competing retail companies, but unlike with T&D assets and despite the compulsory nature of the capacity market, the return, or profit, from the capacity market isn't regulated, nor are the assets participating in the capacity market ordered to operate in a non-discriminatory manner as T&D assets must.

Back to the U.K., Ofgem noted in a report that, "Retail supply entry and the expansion of smaller suppliers have not significantly disrupted the market structure or conduct of incumbent retail suppliers."

"Even if current trends continue, this position is unlikely to change in the short to medium term. We also remain concerned that the increased competitive pressure from the small suppliers is confined to certain parts of the market."

Ofgem noted that the CMA has remedy powers that Ofgem does not, including the ability to make structural reforms if needed. "Any such reforms might help mitigate the adverse features arising from vertical integration, incumbency or other market features."

"Vertical integration is an important feature of the electricity market. It could have many benefits, but could also be harming competition. We therefore think this key feature of the market warrants further investigation by the CMA. The six largest electricity suppliers directly own around 70 per cent of generation capacity and all but one (British Gas) own capacity equivalent to their domestic supply needs. This feature is less relevant to the gas market, which is less vertically integrated and where imports through pipelines and LNG terminals link the GB market to international commodity markets," Ofgem said

"[V]ertical integration also has potential costs. It can create barriers to entry in supply if new entrants face difficulties accessing wholesale products as a result, or face higher costs for the products they can purchase. Following our liquidity work, we have implemented remedies in the market targeting these concerns. Our remedies aim to increase wholesale liquidity and improve price formation, to improve independent generators’ prospects for securing investment and allow independent suppliers to buy the wholesale products they need to compete. One industry group and two independent generators expressed concerns that vertical integration has considerable downsides, concurring with our conclusion that it can reduce the availability of wholesale market products and also contribute to less transparent wholesale market pricing. One respondent in particular noted that, in addition to the benefits we describe, vertical integration allows companies to avoid mark-to-market and collateral requirements through self-supply," Ofgem said.

See More: Ofgem: Decision to make a market investigation reference in respect of the supply and acquisition of energy in Great Britain