Energy: Bix Six electricity and gas suppliers to face competition inquiry
11:06 27 March 2014
Britain’s Big Six energy suppliers are to face a full-scale competition investigation after regulator Ofgem said profits in the sector quadrupled to more than £1billion in three years.
Ofgem said a probe by the Competition and Markets Authority would “consider once and for all whether there are further barriers to effective competition”.
“Profit increases and recent price rises have intensified public distrust of suppliers and highlight the need for a market investigation to clear the air,” it said.
Ofgem has launched a consultation on its proposals which it must complete before making a final decision on referring the sector to the CMA.
It comes in the wake of intense political pressure over rising household bills amid a continuing squeeze on real-term wage rises.
The investigation would be the first full-scale competition probe into the energy market and would see the UK’s biggest suppliers come under an unprecedented level of scrutiny, with the threat of being broken up.
Ofgem said it had already introduced a series of reforms which come fully into force from next month but had proposed a full CMA probe to reassure consumers and back up its attempts to achieve a “simpler, clearer and fairer energy market”.
It comes a day after Big Six supplier SSE announced it was slashing profits to pledge a price freeze on bills until January 2016, putting pressure on rivals to do the same.
Today’s Ofgem announcement concludes an assessment carried out with the Office of Fair Trading and the CMA.
It confirms previous concerns about barriers preventing smaller suppliers entering the market, and the large market shares held by the bigger companies.
The report found that retail profits, from supplying gas and electricity to homes and businesses, increased from £233million in 2009 to £1.1billion in 2012.
Ofgem said there was “no clear evidence of suppliers becoming more efficient in reducing their own costs” and further evidence would be required “to determine whether firms have had the opportunity to earn excess profits”.
It also said declining consumer confidence, with 43% not trusting energy companies to be open and transparent, could deter people from “engaging with the market” and getting a better deal on tariffs.
There was also concern over whether “vertical integration” − energy firms having both energy production and household supply divisions − was in consumers’ interests.
Ofgem said a market investigation would determine conclusively whether these ought to be separated.
SSE yesterday appeared to forestall the announcement when it announced it would introduce a legal separation between its retail and wholesale arms within a year.
In addition to the CMA referral, Ofgem said it was increasing the level of penalties for rule breaches.
Chief executive Dermot Nolan said: “Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices.
“The CMA has powers, not available to Ofgem, to address any structural barriers that would undermine competition. Now consumers are protected by our simpler, clearer and fairer reforms, we think a market investigation is in their long-term interests.
“I want to make sure that consumers are put at the heart of this market, so we will continue to take action to help consumers.
“This includes from today putting the industry on notice that any new serious breach of the rules which comes to light will be likely to attract a higher penalty from Ofgem.
“I am determined that energy companies use our reforms to transform their relationship with consumers.”
Energy Secretary Ed Davey said: “This is tough action based on a detailed independent expert assessment of the state of competition in Britain’s energy markets. leading to the first ever market reference for the energy markets.
“This is just too important for people to rely on guesses about how to fix the energy markets. If we get it wrong, consumers will pay the price.”
Shadow energy secretary Caroline Flint said: “Yesterday’s price freeze from SSE showed that a price freeze is possible. Today’s confirmation that the energy market is broken shows that it’s needed for all customers.”
The energy market has been at the centre of the political debate for the last six months after Labour pledged to force suppliers to freeze bills.
Citizens Advice chief executive Gillian Guy said: “Households have been bearing the brunt of a failing energy market for too long.
“We’ve been calling for a competition inquiry since 2007. It’s important this long-awaited investigation gets to the root cause of rising prices and results in a competitive and transparent market that works for all consumers.
“Prices are up 33% since 2010, seven times the increase in annual earnings.”
British Gas owner Centrica welcomed an independent review “free from political interference”, but said competition in the market was already “intense” and rejected the suggestion there might have been “tacit co-ordination” with rivals.
Chief executive Sam Laidlaw also voiced fears that a lengthy probe could damage confidence at a time when investment is needed.
It said retail energy prices were among the lowest in Europe while the number of suppliers and level of switching was growing.
Centrica also said “vertical integration” of its supply and production arms was in the interests of customers “promoting security of supply and helping protect customers from volatile price movements”.
Mr Laidlaw said: “Anything that clears the air and helps rebuild trust in the industry must be a good thing.
“Britain’s energy market is highly competitive and we believe that a full independent review by a respected regulatory authority would demonstrate precisely that.
“Competition is working, providing choice for consumers and some of the lowest prices in Europe.
“We hope that a lengthy review process will not damage confidence in the market, when over £100 billion of investment in new infrastructure is needed.
“A prolonged period of uncertainty could damage investment at a time when Britain’s energy security is being seriously challenged.”
Mr Laidlaw said there was a risk of the lights going out because energy companies would put investment in their generation arms on hold while the review was carried out in case they were forced to sell them off.
E.ON chief executive Tony Cocker said: “We will review the detail set out in today’s report. A full market investigation by the Competition and Markets Authority is the only way to restore full public confidence to the energy sector and depoliticise the whole issue.
“Whilst we have already made a large number of changes such as running our businesses separately, simpler tariffs, simpler bills and further investment in levels of service, a full investigation will once and for all get to the heart of any structural issues that exist or are perceived to exist and help us to all deal with many of the myths and misinformation that surround the energy market.”
SSE said it believed that the energy market in Britain was competitive, had brought significant benefits for customers, and that much had been done in recent years to make it more transparent and easier to understand, ranging from greater liquidity in the wholesale electricity market to simplification of tariffs in the retail markets.
In addition, there has been significant investment in energy infrastructure - SSE alone has invested over £7 billion in the last five years.
A statement said: “Nevertheless, many of the key features of the energy market have become politically contentious and been subject to significant change designed to achieve a mixture of objectives. Ofgem states this morning that it believes a referral offers the opportunity ‘once and for all’ to clear the air.
“SSE has demonstrated consistently its appetite for reform that is in the interests of customers and during the forthcoming consultation will argue constructively that a market reference should provide a platform for achieving greater political and regulatory stability for the GB energy market, for the benefit of customers and the investment in the country’s energy system that they need.”
Alistair Phillips-Davies, chief executive of SSE, said: “Regulators, politicians, customers and SSE all want the same thing: an energy market that not only works for customers, but is also trusted and seen to do so. We welcome any efforts to clear the air, and in the meantime SSE will continue with its positive agenda for customers including its price freeze until at least 2016.”
EDF Energy said its chief executive Vincent de Rivaz first called for an independent competition inquiry into the gas and electricity market in September 2011.
He said: “Our industry should approach the proposed market investigation with an open mind. We must not be defensive.
“An inquiry won’t restore trust by itself. Earning trust remains the prime responsibility of the energy companies who deal directly with their customers every day. However, the inquiry will be an important opportunity to establish the facts in a wholly transparent way. EDF Energy will demonstrate that we are acting fairly in the interests of customers.
“At a time when the structure of companies supplying gas and electricity is under scrutiny, we need to show the benefits to customers of businesses that invest, generate trade and supply energy.
“We help ensure security of supply in an increasingly complex and volatile world energy market at a time when recent events in Ukraine remind us that this remains an issue.
“Companies like EDF Energy with a view of the whole system are best placed to meet customers’ straightforward need for clean, reliable power at a fair price. We are also able to take a long-term view and have the scale and commitment to make the big investments needed for the UK’s energy future.
“To meet this huge challenge, we are investing in extending the lives of Britain’s 15 low carbon nuclear reactors, building new wind and gas electricity generation, as well as preparing for the first in a new generation of nuclear power stations at Hinkley Point in Somerset. We are also investing to make sure our coal stations remain available to keep the lights on until new sources of low carbon electricity generation are ready to take their place.
“We have already taken steps to be transparent about our business, to simplify bills and tariffs and to bear down on costs for consumers. Customers also want issues to be resolved quickly, accurately and conveniently and we have worked hard to offer better service.
“However, the industry must accept that this rising scrutiny is caused by a mistrust of energy companies’ motives and actions. That is why I will welcome an inquiry. I agree with Ofgem’s conclusion that it will clear the air once and for all and remove uncertainty from the market. This will end the lingering suspicions that hang over the industry and undermine trust.
“An inquiry will allow EDF Energy to show competitors, regulators and customers that we have acted fairly and will continue to do so. Where we have fallen short in any way, we will remedy this.”
Keith Anderson, chief corporate officer of ScottishPower, said: “We welcome the proposal for the Competition and Markets Authority to undertake an investigation of the energy supply and generation market and will contribute fully to it.
“The CMA is the ultimate authority to consider important questions of competition and whether markets operate in the public interest. Now is the time for the acknowledged experts to consider differing perspectives on the market, resolve uncertainties and provide authoritative answers as to whether there are problems and if so, what measures are appropriate to address them.
“It is important that the CMA is now left to get on with its job, free of distraction so that it can conduct a thorough review and produce authoritative answers. It will be equally important not to pre-empt this evidence-based process, in order to retain the confidence of investors during the period of the investigation.
“It is crucial that we have an energy market which commands the trust of the consumer and gives generators and suppliers the regulatory and political certainty needed to provide the very considerable investment in capacity that the UK requires this decade.”