The 18th energy market investigation since 2001: Will this one be different?
Are the Big Six energy companies really singing from the same hymn sheet, or is this perception unfair? Ofgem is going to review competition and prices in the energy market, according to an announcement by energy secretary Ed Davey today. What will the review look into, and what can it achieve?
Most of the UK’s so-called big six energy companies have announced price rises of up to 10 per cent in the lead-up to winter. Summoned before Parliament’s Energy and Climate Change (ECC) Committee on Monday, they were accused of acting in “concert” despite having very different business models – and deliberately making it nearly impossible to work out what they’re really up to.
Ofgem has only just completed a two-year review of the market. While it has found no evidence of any wrongdoing, it says the market is too opaque and confusing for people to make decisions about their energy supply. It published a series of rule changes in June 2013 to tackle “widespread consumer confusion over energy tariffs, poor supplier behaviour and lack of transparency which is stifling competition”.
As pressure grows to find out exactly what’s going on in the energy market, Davey’s announcement kicks off the government’s plan to conduct annual competition reviews of the energy market.
Davey announced that Ofgem, together with the Office of Fair Trading and the Competition and Markets Authority, would look into issues including profits and price rises, barriers to entry and consumer engagement.
Ronan O’Regan, who leads consultancy PWC’s electricity market reform team, tells Carbon Brief:
“Ofgem has traditionally carried out reviews aimed at the industry and those close to it. Now, the level of public and media scrutiny on the energy market means there is increased scrutiny on suppliers.
“By involving the Competition and Markets Authority and the Office of Fair Trading – as well as Ofgem – in the investigation, the government has ensured there will be an extra layer of intense scrutiny on the industry.There will be questions at first as the authorities decide who has oversight of which parts of the investigation.”
Switching
One big focus for previous investigations has been the ease with which people can change to more attractive tariffs.
In his energy statement at the House of Commons today, Davey said it should be much faster and easier for consumers to switch energy suppliers. “24-hour switching is my ambition”, he told the house. At present it can take up to five weeks to switch energy providers.
At the moment, consumers don’t tend to shop around very much for cheaper energy tariffs – which is a problem if your plan to cut bills relies on healthy competition. This was the main finding in Ofgem’s last review, and along with the government, it’s trying to make it easier for consumers to switch by simplifying the tariff system – a measure that will come in at the end of the year. In addition, the government has today released a policy paper on collective switching, where groups of people can get together to negotiate a cheaper tariff.
Others have criticised energy companies’ behaviour towards customers much more harshly. At Monday’s committee hearing, Ovo Energy’s Stephen Fitzpatrick took full advantage of his parliamentary privilege to accuse companies of taking advantage of this situation by loading costs on the ‘sticky’ customers while offering tariffs way below the odds to those who do switch. Fitzpatrick said the tactic meant the big six were overcharging customers to the tune of £3.7 billion per year.
Transparency
So the government wants to make the market work better by making it easier to switch providers at the retail end. But it’s likely that the new annual investigation by the three authorities will also want to look at the workings and structure of the energy market – and whether there are any problems behind the scenes, as the ECC committee MPs seem to suspect.
One area of contention is the relationship between wholesale energy and the retail market. Companies put the majority of their announced price rises down to the increasing price of wholesale energy.
But Ofgem disagrees. Its own data suggests wholesale prices were almost flat over the past year, rising by just 1.7 per cent. In urn, energy companies have criticised Ofgem’s approach to measuring wholesale prices over the past six months, saying it does not reflect the way they buy gas and electricity.
So what’s going on?
The energy market is known for being rather complex. As the most recent issue of Private Eye puts it rather nicely:
“[The big 6] are vertically integrated companies who not only produce oil and gas from the North Sea and elsewhere but also generate electricity as well as storing and trading energy, in addition to selling it to British consumers. And within such corporate structures, defining where and what profits are made is largely impenetrable from outside.”
Others have criticised energy companies’ account of what is going on with wholesale prices. Writing about British Gas’s price rise, energy blog Carbon Commentary says:
“British Gas needs to stop peddling inaccurate and misleading statements. In its public comments, it continues to contend that recent domestic price rises are driven by the rising wholesale costs of gas and electricity. But its own published information shows that this is not the case. In fact, the wholesale prices it pays are no higher than April 2011 and have actually fallen in the last six months. In contrast its electricity prices have risen by about 29% since 2011.”
O’Regan says that the announced annual investigation reflects increased efforts in government to understand how the wholesale and retail markets affect each other.
“The process started two to three years ago with segmental reporting, which is designed to understand how the big six account across generation and retail businesses. They are requesting increasing amounts of information from the industry to get to the bottom of how wholesale costs are built up.”
Ofgem says in a statement today that it is consulting on how to make energy profits clearer. It wants companies to complete full audits of their financial statements from this financial year onward and publish their annual statement earlier. It is asking for views on whether companies should publish more information about their trading activities and whether to review so-called transfer pricing within companies. This would look at how companies allocate revenues and costs between their businesses, especially when they are based in different countries.
The ECC committee is keen to get in on the action, too. It has now written to the companies for a detailed breakdown of their costs for wholesale energy prices, transporting energy to customers’ homes and the cost of energy and climate change policies.
Ofgem’s future
Ofgem is the UK’s energy regulator – but it’s come in for a fair bit of flak over recent months about the effectiveness of its market scrutiny. Labour’s shadow energy secretary, Caroline Flint, was particularly scathing about the announcement of the new annual review, commenting that the regulator has already investigated the market numerous times without anything coming of it. Quoted in the Guardian, she said:
“There have been 17 investigations into the energy markets since 2001. If you are today announcing the launch of a new annual review of competition in the energy markets, what on earth has Ofgem been doing all this time? And what do you expect them to find out in the next 10 months which they haven’t discovered in the last 10 years?”
In the context of those comments, it’s perhaps no surprise Flint wants to scrap Ofgem and replace it with a new energy regulator with the power to set retail prices – a power Ofgem itself lost 25 years ago.
On Monday, E.On boss, Tony Cocker, also seemed to cast doubt on Ofgem’s ability to oversee the market when he called for a Competition Commission investigation to “depoliticise” the energy debate.
In response, Ofgem said:
“Our reforms to make the retail market simpler, clearer and fairer are coming into force over the next few months. They should result in more vigorous competition between suppliers and we will be monitoring the market very closely. If we find that insufficient progress has been made, a referral to the Competition Commission is an option that would be considered.
“Ofgem has also confirmed plans to produce annual reports looking at the state of competition in the market and we have invited the OFT and new Competition and Markets Authority to provide input, and to support the development of a framework for competition assessment.”
The question of whether Ofgem is capable of addressing wrongdoing in the market arose in 2012 when a whistleblower apparently came forward with evidence of manipulation on wholesale gas trades. At the time, it seems Ofgem said it had no powers to tackle that area of the market.
The Department of Energy and Climate Change earlier this year announced it was giving Ofgem a new remit, which would include powers to deal with market manipulation in wholesale gas and electricity. That would include “unlimited fines and new access to information, including the power to enter premises”.
Davey said today that he is now consulting on whether to allow Ofgem to impose criminal sanctions on energy executives found to be involved in market manipulation.
So could an annual review with the added heft of the UK’s other competition authorities at least give a clearer view of the workings of the market? O’Regan says it appears government and the authorities believe there is scope to gain a better understanding of how the market functions. An annual review may help to give a picture of how it develops over time, he adds.
But it will also prove an expensive exercise – in terms of time, resources and money. But the current debate over energy bills has created a growing appetite for more clarity on how the energy market works. The test will be whether the new system of reviews is able to provide some answers.