Ofgem refers the energy market for a full competition investigation
27 Jun 2014 02:33 PM
- Investigation is the
best way to ensure there are no barriers to effective competition in the energy
market
- It will help to rebuild
consumer trust and provide confidence for investors
- Ofgem will continue to
protect consumers as planned major changes to the energy market are
introduced
Ofgem is referring the energy
market to the Competition and Markets Authority (CMA) for a full investigation.
This follows on from Ofgem’s proposal in March and the following
consultation. An investigation should ensure, once and for all, that
competition works effectively for consumers, by bearing down on prices while
driving improvements in customer service and innovation. It will also help
provide the confidence that is needed for investment in the energy sector and
complement Ofgem’s recent reforms to make the market simpler, clearer and
fairer for consumers.
The recent assessment of the
energy market, prepared by Ofgem with the Office of Fair Trading (OFT) and CMA,
showed that competition isn’t working as well as it should for consumers.
It showed increasing distrust of energy suppliers, uncertainty about the
relationship between the supply businesses and the generation arms of the six
largest suppliers, and rising profits with no clear evidence of suppliers
reducing their own costs or becoming better at meeting customer
expectations.
Dermot Nolan, Ofgem
Chief Executive, said: “Now is the right time to
refer the energy market to the CMA for the benefit of consumers. There is
near-unanimous support for a referral and the CMA investigation offers an
important opportunity to clear the air. This will help rebuild consumer trust
and confidence in the energy market as well as provide the certainty investors
have called for.
“The energy market is also
going to change rapidly over the next few years with the roll-out of smart
meters, the government’s electricity market reforms, and closer
integration with European energy markets. A CMA investigation should ensure
there are no barriers to stop effective competition bearing down on prices and
delivering the benefits of these changes to consumers.”
As well as playing a full role
assisting the CMA, Ofgem will continue its work to protect consumers. These
include pushing forward on next-day switching, improving the support available
for vulnerable consumers in finding the best energy deal, developing new rules
for brokers to follow in the non-domestic market, and continuing to ensure that
consumers make the most of recent reforms to make the market simpler, clearer
and fairer.
The CMA will begin its
investigation immediately and is likely to publish final decisions by the end
of 2015. The CMA can decide which features of the market to focus on in its
investigation and use its powers to address any structural and behavioural
issues that would undermine competition. Ofgem would fully expect the CMA to
consider the action it has taken to intensify competition and protect
consumers. The main areas that Ofgem would also expect the CMA to look at
include:
- the relationship between the
supply businesses and generation arms of the six largest
suppliers
- barriers to entry and expansion
for suppliers
- the profitability of the six
largest suppliers
- whether or not there is
sufficient competition between the large energy suppliers
- the trend of suppliers
consistently setting higher prices for consumers who have not
switched
- low consumer engagement that
contributes to weak competitive pressure in the market.
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Notes to
editors
1. Further
information
By law Ofgem had to consult with
stakeholders before making a final decision on a referral to the CMA for
investigation.
View our 'decision
document' on our consultations page: Decision to
refer the energy market to the CMA.
The first annual competition
assessment was carried out by Ofgem, the OFT and the CMA. It analysed the state
of competition in the household and small business markets. View the report
at: State of the
Market Competition Assessment
2. The headline findings of the
assessment were:
Weak customer
response: Switching has fallen over recent years. There was a
brief spike in late 2013 but no indication of a permanent increase. Consumer
trust has also fallen significantly: 43 per cent of consumers did not trust
energy suppliers to be open and transparent in their dealings with them in
2013, compared to 39 per cent in the previous year. This low level of consumer
engagement is not consistent with a competitive market.
Continued evidence of
incumbency advantages: The market shares of the six largest
suppliers in gas and electricity have not changed significantly over time and
they all have a high proportion of customers who never, or rarely engage in the
market. They are able to charge higher prices to these "sticky"
customers while making cheaper deals available to more active
customers.
Possible tacit
co-ordination: The assessment has not found evidence of explicit
collusion between suppliers. However, there is evidence of possible tacit
coordination reflected in the timing and size of price announcements and new
evidence that prices rise faster when costs rise than they reduce when costs
fall. Although tacit coordination is not a breach of competition law, it
reduces competition and worsens outcomes for consumers.
Vertical integration and
barriers to entry and expansion: The six larger suppliers all own
energy infrastructure such as power stations and supply businesses. This makes
it difficult for new entrants (who don’t own such assets) to compete
against them, particularly in the electricity market. Ofgem’s reforms to
open up the wholesale power market aim to tackle this. However there are wider
issues with vertical integration which need a close review. While the market
share of independent suppliers has grown in the last year to five per cent
there are barriers to entry and expansion which may prevent them from posing a
disruptive competitive threat.
Profitability: The average retail profits for the six larger suppliers have increased from
£233m in 2009 to £1.1bn in 2012. The average overall profits for
supply and generation increased from £3bn in 2009 to £3.7bn in
2012. The assessment does not come to a conclusion as to what is the
appropriate profit margin for the industry but notes the recent increases and
questions the suppliers’ contentions that five per cent is a fair retail
margin. While the evidence on profitability is not conclusive, the rise over
the last few years allied to no clear evidence of increased efficiency
indicates a possible lack of effective competition.
3. About Ofgem
Ofgem is the Office of the Gas
and Electricity Markets, which supports the Gas and Electricity Markets
Authority, the regulator of the gas and electricity industries in Great
Britain. The Authority's functions are set out mainly in the Gas Act 1986,
the Electricity Act 1989, the Competition Act 1998 and the Utilities Act 2000.
In this note, the functions of the Authority under all the relevant Acts are,
for simplicity, described as the functions of Ofgem.
4. For further press information
contact:
Chris Lock:
020 7901 7225
Dafydd Wyn: 020 3263 9943
Lisa O’Brien: 020 7901 7426
Out of hours media contact number: 07766 511470