Member Article

On 28 March 2022 the government published its paper Taking charge: the electric vehicle infrastructure strategy¹ (Taking Charge) and an accompanying document, Government response to the CMA’s Electric vehicle charging market study (the Response).²

At the current roll-out of approximately 600 public chargepoints installed every month, there will be close to 90,000 chargepoints in the United Kingdom by 2030. The government estimates the country will need by that time at least 300,000 and perhaps as many as 700,000 public charge points. As the government notes, the scale of the challenge is significant.

Market-led

The government proposes a market-led rollout of public charge point installation. It anticipates that the private sector and investment community will be attracted by the market growth potential and future demand certainty. These are indeed positives. The expectation of profits is crucial. Currently, the outlook would appear positive given that The National Audit Office reported that the cost of home charging could be between 59% and 78% lower than charging at public charge points. Indeed, The Energy Saving Trust estimated that for a single driver, driving 10,000 miles each year, the price difference would be £420.³ Expressed in simple terms, charge point installers and operators are attracted by this price difference, measured against their major costs (installation cost, capital cost of the charge point, electricity). The lower this price difference, and the higher their costs, the less attractive is the market.

Although the government wants a market-led approach, it recognises there are challenges for infrastructure providers. The government proposes, therefore, to provide some support. This includes access to the data that infrastructure providers need to identify potential business opportunities and areas of need. Also, for the least commercially viable segments of the market, public funds will be available. In practice this will probably take the form of competitive tenders run by local authorities with some form of subsidy provided to the winning tenderer. In addition, recognising the difficulty and time that it takes for infrastructure providers to engage with multiple organisations (transport, energy, planning) to obtain necessary permissions and licences, the government promises to ‘make clear guidance available to make these processes as smooth as possible⁴.

Competition and Competition Law

The accepted economic models of industrial economics identify that the lower the level of competition, the more likely it is that prices will be higher, product quality and choice lower, with a lower level of innovation. At the same time, each operator in this concentrated market will earn higher than normal levels of profits. As the number of competitors increase, prices lower, quality improves and innovation increases. However, each operator’s profits reduce.

Competition law seeks to curb businesses in highly concentrated markets, by ensuring they do not abuse their excessive market power (dominant position). It also seeks to ensure that market players compete, and do not dampen competition by entering into agreements that control prices, limit production, or otherwise restrict the expected ‘usual’ case of head-to-head competition.

Exclusivity

The validity of long periods of exclusivity for capital intensive projects is recognised by decisional practice in the UK and elsewhere under competition law. The classic example is a gas storage unit located at an industrial customer's premises. No gas supplier would make the capital expenditure of installing the unit with a customer if the customer could within a short period of time move to another gas supplier. Consequently, a period, up to 20 years for the largest gas storage units, has been accepted as a legitimate period of exclusivity for the supplier and customer to enable the supplier to amortise the cost of the storage unit.

In May 2021 the Competition and Markets Authority (CMA) decided not to refer the market in the United Kingdom for electric vehicle charging for an investigation (the Market Study)⁵. It had concluded that it did not have reasonable grounds for suspecting that any feature, or combination of features, of the market in the United Kingdom for electric vehicle charging, restricts or distorts competition. Furthermore, it had received no representations to this effect. However, following an investigation and then closure of a case, the CMA unusually published an open letter to motorway service operators and electric vehicle chargepoint operators on 8 March 2022.⁶ In the letter the CMA identified that ‘Long-term exclusive arrangements in this sector can be a barrier to investment by, and competition from, rival [charge point operators] (potentially foreclosing them) and impede the take up of [electric vehicles]. A period of exclusivity in agreements may be acceptable in certain circumstances, including in order to support significant investment in nascent sectors. However, each case needs to be assessed with due consideration for its specific circumstances and must be evaluated in the light of its own facts.’

As a general expression the balancing act for the CMA is whether allowing a period of exclusivity will be sufficient for the business to invest in the significant number of charging points that will be required, but not so long as to unfairly foreclose competitors from being able at some point in time to offer its products/services. A disincentive to invest would be an outcome that works against the accelerated roll-out of charge points that the government seeks.

Aren't monopolies bad?

We have so often heard about abuses by dominant companies, particularly these days in relation to the technology sector, that it is reasonable at first glance to think all monopolies are bad. Yet there are permitted, even encouraged, monopolies of one sort or another. Perhaps the oldest recognised form is the patent. A patent is the recognition that a single legal person has the sole right to exploit an idea for a period of generally 20 years. The monopoly or exclusivity is granted as a reward for sweat of the brow work and exists to encourage innovators to produce ideas and so stimulate commerce and advance society. As an alternative, to ensure efficiency of capital use government will grant a monopoly for a period to infrastructure providers, such as a water company or, in a related way, grant a limited number of telecom licences. The monopoly granted provides the incentive for the significant capital expenditure required to provide the service.

One step away from monopoly is a concentrated market and there is a tension between regulators and companies where long-term capital expenditure is required. Such expenditure is required or encouraged by government, but companies are unlikely to make the investment if there are too many competitors. This raised what is referred to as the four-to-three debate in relation to 5G. The argument was that the enormous capital expenditure required for 5G roll-out could not be borne if competition undermined the investment. Some industry players argued that a typical country, for example the UK, could only support three major players. On this argument, in the United States the fourth and third largest mobile network operators Sprint and T-Mobile sought to merge. The same situation arose in Australia with the merger of VHA and TPG. Although both mergers were challenged by regulators, in the end the mergers were allowed. The key argument successfully used in both cases was that the merger would create a stronger third player better able to compete with the two leading operators. Behind this argument are important investment issues. The claim was that the merger would lead to increased investment, relieve capital constraints, combine limited spectrum, and reduce network build costs.

The above identify natural monopolies and government sanctioned monopolies, as well as examples where limited competition is regarded as providing a better outcome for society. In relation to charge point operators, the last is potentially relevant. In short, in economic theory in an industry with high fixed costs, a single firm (or small number of firms) can gain lower long-run average costs – through exploiting economies of scale.

Four legs good, two legs bad

So, a monopoly chargepoint operator would be optimal? The point is that there is a legitimate debate that a competition environment in which some form of monopoly, market concentration or exclusivity is permitted could encourage further investment and thus a faster and broader roll-out of charge points. The CMA acknowledges the point in its open letter. At the same time, in the Market Study the CMA identified 'long term exclusive arrangements' as a barrier to entry hindering the emergence of greater investment in motorway electric vehicle charging.

How the CMA engages with electric vehicle charging infrastructure businesses and their investors on this subject has the potential either to promote or dissuade investment. Applying competition law on a case-by-case basis risks creating a regulated environment that is fragmented and uncertain – two conditions that naturally dissuade investment. Perhaps it is partly a recognition of this issue why the CMA in its Market Study recommends a national strategy, engagement by energy regulators and a public body to monitor the sector.

The Government’s position

According to The Response, as regards chargepoint operators, the government identifies its £950 million Rapid Charging Fund that is to be used to support infrastructure across Great Britain’s motorways and major A-roads in locations where electrical connection is expensive and not commercially viable. The government identifies this could create 6,000 chargepoints by 2035 (but that is only 2% of the total minimum required and five years after the 2030 date when no new petrol or diesel cars will be sold). As regards the desire to have an open architecture, with chargepoints being usable by any vehicle owner, the government appears minded to use legislation if necessary, to ensure a common standard and for apps to be available that would share chargepoint data, allowing for free-roaming purchasing by customers based on best location and price. The government has also indicated an intention to create a regulatory body to oversee the foreseen regulations the government would adopt.

Comment

A strong theme in the government’s Taking Charge report is the promotion of competition between charge point businesses. This is in part a natural position for the government to take, but also a reflection of the government’s position in its document, The Response, which shows its strong support for the recommendations made by the CMA in its Market Study. The government will be keeping a close eye on developments given how nascent the market is (the current chargepoint market size is no more than 10% and may be only 5% of the size it needs to be by 2030 to meet expected demand). If the market-led approach shows that business is not accelerating the installation of chargepoints, it will be interesting to understand why. If it is because the balance between providing investor encouragement and promoting competition is weighed too much towards promoting competition, the government may need to step-in and make changes.

¹ HM Government, available at Taking Charge
² Department for Transport, March 2022, available at The Response
³ National Audit Office, Reducing carbon emissions from cars, 26 February 2021, s.2.26, available at Reducing carbon emissions from cars (nao.org.uk)
⁴ Taking Charge, page 55.
⁵ CMA, available at Final report - GOV.UK (www.gov.uk).
⁶ CMA, available at Open letter to motorway service area operators and electric vehicle chargepoint operators (publishing.service.gov.uk).