Tag: energy markets

In June 2014, the Gas and Electricity Markets Authority (which governs the energy regulator, Ofgem) referred Great Britain’s retail and wholesale gas and electricity markets to the Competition and Markets Authority (CMA). The market is dominated by the ‘big six‘ energy companies (British Gas, EDF, E.ON, npower, Scottish Power and SSE) and Ofgem suspected that this oligopoly was distorting competition and leading to higher prices.

The CMA presented its report on 10 March 2016. It confirmed its preliminary findings of July and December 2015 “that there are features of the markets for the supply of energy in Great Britain that result in an adverse effect on competition”. It concludes that “the average customer could save over £300 by switching to a cheaper deal” and that “customers could have been paying about £1.7 billion a year more than they would in a competitive market”.

It made various recommendations to address the problem. These include “requiring the largest suppliers to provide fuller information on their financial performance” and strengthening the role of Ofgem.

Also the CMA wants to encourage more people to switch to cheaper suppliers. At present, some 70% of the customers of the big six are on default standard variable tariffs, which are more expensive than other tariffs available. To address this problem, the CMA proposes the setting up of “an Ofgem-controlled database which will allow rival suppliers to contact domestic and microbusiness customers who have been stuck on their supplier’s default tariff for 3 years or more with better deals.”

Another area of concern for the CMA is the 4 million people (16% of customers) forced to have pre-payment meters. These tend to be customers with poor credit records, who also tend to be on low incomes. Such customers are paying more for their gas and electricity and yet have little opportunity to switch to cheaper alternatives. For these customers the CMA proposed imposing transitional price controls from no later than April 2017 until 2020. These would cut typical bills by some £80 to £90 per year. In the meantime, the CMA would seek to remove “restrictions on the ability of new suppliers to compete for prepayment customers and reduce barriers such as debt issues that make it difficult for such customers to switch”.

Despite trying to address the problem of lack of competition, consumer inertia and barriers to entry, the CMA has been criticised for not going further. It has also been criticised for the method it has chosen to help consumers switch to cheaper alternative suppliers and tariffs. The articles below look at these criticisms.

Podcast

Competition and Markets Authority Energy Report BBC You and Yours (10/3/16)

Articles

Millions could see cut in energy bills BBC News (10/3/16)
Shake-up of energy market could save customers millions, watchdog says The Telegraph, Jillian Ambrose (10/3/16)
UK watchdog divided over energy market reforms Financial Times, Kiran Stacey (10/3/16)
How the CMA energy inquiry affects you Which? (10/3/16)
UK watchdog accused of bowing to pressure from ‘big six’ energy suppliers The Guardian, Terry Macalister (10/3/16)

CMA documents
CMA sets out energy market changes CMA press release (10/3/16)
Energy Market Investigation: Summary of provisional remedies Competition and Markets Authority (10/3/16)

Questions

  1. Find out the market share of the ‘big six’ and whether this has changed over the past few years.
  2. What, if any, are the barriers to entry in the gas and electricity retail markets?
  3. Why are the big six able to charge customers some £300 per household more than would be the case if they were on the cheapest deal?
  4. What criticisms have been made of the CMA’s proposals?
  5. Discuss alternative proposals to those of the CMA for dealing with the problem of excessive prices of gas and electricity.
  6. Should Ofgem or another independent not-for-profit body be allowed to run its own price comparison and switching service? Would this be better than the CMA’s proposal for allowing competitors access to people’s energy usage after 3 years of being with the same company on its standard tariff and allowing them to contact these people?

The UK energy industry (electricity and gas) is an oligopoly. There are six large suppliers: the ‘Big Six’. These are British Gas (Centrica, UK), EDF Energy (EDF, France), E.ON UK (E.ON, Germany), npower (RWE, Germany), Scottish Power (Iberdrola, Spain) and SSE (SSE Group, UK). The Big Six supply around 73% of the total UK market and around 90% of the domestic market.

Energy suppliers buy wholesale gas and electricity and sell it to customers. The industry has a considerable degree of vertical integration, with the energy suppliers also being involved in both generation and local distribution (long-distance distribution through the familiar pylons is by National Grid). There is also considerable horizontal integration, with energy suppliers supplying both electricity and gas and offering ‘dual-fuel’ deals, whereby customers get a discount by buying both fuels from the same supplier.

Smaller suppliers have complained about substantial barriers to entry in the industry. In particular, they normally have to buy wholesale from one of the Big Six. Lack of transparency concerning their costs and internal transfer prices by the Big Six has led to suspicions that they are charging more to independent suppliers than to themselves.

Under new regulations announced by Ofgem, the industry regulator, the Big Six will have to post the prices at which they will trade wholesale power two years in advance and must trade fairly with independent suppliers or face financial penalties. In addition, ‘a range of measures will make the annual statements of the large companies more robust, useful and accessible.’ According to the Ofgem Press Release:

From 31 March new rules come into force meaning the six largest suppliers and the largest independent generators will have to trade fairly with independent suppliers in the wholesale market, or face financial penalties. The six largest suppliers will also have to publish the price at which they will trade wholesale power up to two years in advance. These prices must be published daily in two one-hour windows, giving independent suppliers and generators the opportunity and products they need to trade and compete effectively.

But will these measures be enough to break down the barriers to entry in the industry and make the market genuinely competitive? The following articles look at the issue.

Articles

Boost for small energy firms as Big Six are ordered to trade fairly on wholesale markets or face multi-million pound fines This is Money, Rachel Rickard Straus (26/2/14)
Energy firms told to trade fairly with smaller rivals BBC News, Rachel Fletcher (26/2/14)
Ofgem ramps up scrutiny of Big Six accounts The Telegraph, Denise Roland (26/2/14)
‘Big six’ told to trade fairly – will it make a difference? Channel 4 News, Emma Maxwell (26/2/14)
Energy regulator Ofgem forces trading rules on ‘big six’ suppliers Financial Times, Andy Sharman (26/2/14)

Information
Ofgem tears down barriers to competition to bear down as hard as possible on energy prices Ofgem Press Release (26/2/14)
The energy market explained Energy UK
Gas Ofgem
Electricity Ofgem
Energy in the United Kingdom Wikipedia
Big Six Energy Suppliers (UK) Wikipedia

Questions

  1. Describe the structure of the UK energy industry.
  2. What are the barriers to the entry of new energy suppliers and generators in the UK?
  3. To what extent is vertical integration in the electricity generation and supply industry in the interests of consumers?
  4. To what extent is horizontal integration in the electricity and gas markets in the interests of consumers?
  5. How will requiring the six largest energy suppliers to post their wholesale prices for the next 24 months increase competition in the energy market?
  6. Is greater transparency about the revenues, costs and profits of energy suppliers likely to make the market more competitive?
  7. Identify and discuss other measures which Ofgem could introduce to make the energy market more competitive.