Energy: Ofgem orders Competition and Markets Authority investigation into electricity and gas markets
11:57 26 June 2014
A full investigation should be held into the UK’s energy market in a bid to “rebuild” consumer trust, Ofgem ruled today.
The electricity and gas regulator said the Competition and Markets Authority (CMA) probe should ensure “once and for all” that competition works effectively.
The investigation, expected to take around 18 months, will look at the relationship between the supply businesses and generation arms of the Big Six energy firms.
It will also study the Big Six’s profits, as well as any barriers to entering the market.
Ofgem chief executive Dermot Nolan 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.”
Ofgem said earlier this year that soaring household bills and intensifying public distrust highlighted the need for an investigation which will determine whether the Big Six companies were making excess profits, after they quadrupled to more than £1 billion in three years.
British Gas owner Centrica has previously warned that the probe could create uncertainty and threaten the billions of pounds worth of investment needed to keep the lights on.
Ofgem said the number of customers switching suppliers had fallen in recent years, while consumer trust had also slumped, with 43% saying they didn’t trust energy suppliers to be open and transparent in their dealings with them.
The regulator noted that the average retail profits for the big six had increased from £233million in 2009 to £1.1billion in 2012, while profits for supply and generation rose from £3bn to £3.7bn in the same period.
The CMA will begin its investigation immediately and is likely to publish final decisions by the end of 2015.
Energy Secretary Ed Davey said: “This is a major step towards ensuring that the UK’s energy market really does work for consumers and springs from the first annual competition assessment which I asked Ofgem and the CMA to undertake. Having a full energy market investigation with real teeth is something that the last government failed to do time and time again.
“Everyone should give their full support to this independent investigation. While it is under way we’re not slowing down the reforms that are giving people a better deal on their energy, including £50 taken off average household bills, the number of smaller energy suppliers almost trebling since 2010, faster and easier switching and simpler tariffs and bills.”
Caroline Flint, shadow energy and climate change secretary, said: “Rising energy bills are causing a cost-of-living crisis. That’s why Labour will break up the big energy companies, put an end to their secret deals, make tariffs simpler and fairer - and freeze energy bills until 2017.
“The launch of a full market investigation is a clear admission that Britain’s energy market is broken and that radical action is needed. However, it shouldn’t paralyse politicians from taking action now, so while this investigation is happening, consumers should be protected from any more unfair price rises by freezing energy bills until 2017.”
Which? executive director, Richard Lloyd, said: “This is a watershed moment for the broken energy market and millions of people struggling to cope with spiralling bills.
“The investigation must leave no stone unturned in establishing the truth behind energy prices, and while it takes place Ofgem must continue its renewed, tougher approach to protecting consumers. Energy companies must also not wait for the outcome of this inquiry but make urgent changes now to do better by their customers.
“We need to see radical reforms to fix the big six that will inject more competition into the market and help rebuild trust by giving consumers confidence that the price they are paying is fair.”
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 said it would expect the CMA to look at 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, and low consumer engagement that contributes to weak competitive pressure in the market.