Following a 38% increase in profit margins made by energy companies towards the end of 2010, Ofgem (the energy and gas regulator) began an investigation into the activities of energy companies. The review by Ofgem was aimed at determining whether or not consumers should be better protected from the powerful energy companies, many of whom had previously raised prices, forcing some consumers to pay an extra £138 per year. At the time, it was believed that Ofgem might request support from the Competition Commission, but it seems as though the big size energy companies have had a lucky escape. They will not be referred to the Competition Commission, even though critics, in particular First Utility – Britain’s largest independent energy supplier – suggest that Ofgem’s proposals are unlikely to be effective. It seems that the big six have shown sufficient co-operation with Ofgem.
A key reform that Ofgem hope to implement will try to reduce the power of this oligopoly by making it easier for new entrants to gain market share. One such proposal would see the big six auctioning off up to a fifth of the electricity they generate. As the owners of Britain’s power stations, new companies cannot buy gas and electricity on the open market and this reform aims to change that. However, there are concerns that this will be ineffective, as the big six may simply outbid the smaller companies or even just buy and sell electricity from each other, thereby keeping their dominant positions in the market. Although the big six have received constant criticism from all sides, the lack of government support for a Competition Commission inquiry may be related to the need for these companies to invest £200bn in Britain by 2020 to help create and build new energy sources, including wind farms and nuclear power. Without this investment, Britain’s energy supply could be in jeopardy. The following articles consider this energetic debate.
Articles
Ofgem may be blown away by the power of the ‘Big Six’ energy companies Telegraph, Rowena Mason (23/6/11)
Ofgem pledges to get tough with ‘big six’ energy companies Guardian, Miles Brignall (22/6/11)
Scottish power investigated over ‘misleading’ marketing campaign Independent, Sarah Arnott (23/6/11)
Ofgem and ‘Big Six’ need to put some energy into cleaning up their acts Telegraph, Richard Fletcher (23/6/11)
In search of a coherent energy policy Independent, David Prosser (23/6/11)
UK suppliers face tough power auction reforms Reuters (22/6/11)
Ofgem: ‘We are watching energy companies closely’ BBC News (22/6/11)
Data
Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change
Questions
- What is the role of Ofgem? How does it relate to the Competition Commission?
- What factors have contributed to the investigation by Ofgem into the ‘big six’ energy companies?
- How much power does Ofgem actually have to implement reforms?
- What are the characteristics of an oligopoly? To what extent does the energy market fit into this market structure?
- What are the main barriers to entry that prevent new companies from competing with the ‘big six’? Are the reforms likely to help them?
- What other proposals have been suggested by parties other than Ofgem in bid to help new competitors and customers? Are any likely to be more effective than those proposed by Ofgem?