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CMA sets out case for energy market reform

The CMA has today published its provisional findings after a comprehensive year-long investigation into the energy market.

In a summary of its provisional findings published today, the Competition and Markets Authority (CMA) has highlighted a range of problems hindering competition in the market, including the extent to which consumers are engaged in the market and shortcomings in regulation and the ability to deliver change across the market. It also points to the need for a coherent and transparent approach to responsibilities and policy implementation by those overseeing the industry.

In addition to the provisional findings, the CMA has set out an initial list of possible measures which could increase competition and ensure a better deal for customers.

The average household currently spends about £1,200 on energy each year. For the poorest 10% of households, energy bills now account for about 10% of total expenditure. However, widespread consumer disengagement is impeding the proper functioning of the market. An extensive survey of 7,000 people in Great Britain found that over 34% of respondents had never considering switching provider.

As a result, the report has found that dual fuel customers could save an average of £160 a year by switching to a cheaper deal. About 70% of customers are currently on the ‘default’ standard variable tariff (SVT) despite the presence of generally cheaper fixed-rate deals. Lack of awareness of what deals are available, confusing and inaccurate bills and the real and perceived difficulties of changing suppliers all deter switching – and the higher price levels reflect that suppliers can charge higher prices to these disengaged customers.

Regulatory interventions designed to simplify prices, such as the ‘four-tariff rule’, are not having the desired effect of increasing engagement, and have limited discounting and reduced competition. Instead the CMA proposes that the regulatory approach to the retail market should be based on clear principles that allow the benefits of competition to be gained and promote measures, such as smart meters, that will increase engagement, while specifically targeting disengaged consumers to prompt them to shop around. Alongside this, the CMA will also be considering whether safeguards such as a transitional price cap on the most expensive tariffs are needed to protect customers until other measures have led to a more competitive market.

Electricity prices have risen by around 75% and gas prices by around 125% in the last 10 years. Much of the recent increases are down to increased environmental and related network investment costs. Future energy prices will be heavily influenced by decisions being made about investment in generation capacity and renewables. The government’s approach to both of these, which is based on competition, is a very positive step to ensuring that decisions can be taken that provide value for money to consumers. However, the additional costs for bills can be considerable when a competitive process is not used.

The CMA report also points to a lack of transparency that is hampering trust in the sector. Wider availability of financial information, and more effective communication of the impact of decisions on bills, alongside a clear and transparent demarcation of responsibilities between the Department of Energy & Climate Change (DECC) and Ofgem – and a clearer, independent role for Ofgem – would assist in making sure that policy is efficient, effective and targeted at the right areas.

After a comprehensive examination, the CMA has provisionally found that competition in the wholesale gas and electricity generation markets works well, and the presence of vertically integrated firms does not have a detrimental impact on competition. It has also found that there is no strong case for returning to the old ‘pool’ system for the wholesale electricity market.

Roger Witcomb, Chairman of the energy market investigation, said:

There are millions of customers paying too much for their energy bills – but they don’t have to.

Whilst competition is delivering benefits to increasing numbers of customers, mainly through the growth of smaller suppliers with cheaper fixed-price deals, the majority of us are still on more expensive default tariffs. Many customers do not shop around to see if there’s a better deal out there – let alone switch. The confusing way energy is measured and billed can make comparing deals understandably daunting.

The result is that some energy suppliers know they don’t have to work hard to keep these customers. It’s notable that there are such high levels of complaints about customer service.

However, there are other maybe less visible factors which can have just as significant an effect on bills. We don’t think that regulatory interventions have always benefitted competition and customers. Technical issues around measurement of consumption and pricing and the slow process in introducing changes that could bring widespread benefit can also play a part.

We are also concerned about the impact of the high cost of low carbon electricity. While absolutely not disputing the need to move towards cleaner forms of energy, the move will have a significant impact on bills, and we need to ensure that the process of bringing clean electricity into the market is carried out efficiently and transparently and at the lowest possible cost. There is an issue with trust in this market, and one of the most effective ways of restoring that is through transparency in all parts of the market, be it in the implementation of policy, in regulation or in energy company accounts.

We’ve been able to shine a light on all the different areas of this market and identify which parts are working well and where the problems are. We now want to focus on what we can do to tackle the problems we have provisionally found.

We want to look at ways we can make customers more active. Smart meters have the potential to transform customer understanding and engagement and their speedier introduction could have particular benefits for prepayment customers, who undoubtedly get the worst of things at present. We want to look at technical and regulatory reforms further up the chain that could also benefit competition and the customer.

These measures can and will help deliver change but we are also aware that we cannot expect an overnight transformation. Many customers could continue to overpay for an essential product. For the poorest 10%, energy bills make up nearly a tenth of their total spending. So as well as helping customers become more active we want to consider carefully whether some sort of protection is warranted whilst other changes take effect. We wouldn’t introduce such a move lightly and would need to consider its effect on competition but it is something we feel is right to look at closely.

Ofgem announced its decision to refer the energy market in June 2014. The CMA has been carrying out its own comprehensive, independent investigation to see if there are any features of this market which prevent, restrict or distort competition and, if so, what action might be taken to remedy them.

Over the course of the investigation to date, the group has commissioned and completed a survey of 7,000 domestic customers; received over 100 submissions from energy suppliers, generators, government bodies, consumer groups, academics and other interested parties; held over 30 formal hearings with these parties; visited power plants and customer service offices in Scotland, England and Wales and published updates and more than 20 working papers.

The full provisional findings report along with 36 appendices will be published later this week. The CMA will now consult and hold detailed discussions with all interested parties on the findings and possible remedies as it moves to publish its final report by the end of the year. Before then it will also publish its provisional decision on remedies where it will indicate the measures and actions it intends to include in that final report.

All information relating to the investigation, including the timetable for the rest of the investigation as well as submissions, hearing summaries and working papers, is available on the energy market case page.

Submissions in response to the provisional findings and notice of possible remedies are invited in writing by 31 July 2015 either by email [email protected] or to:

Project Manager
Energy market investigation
Competition and Markets Authority
Victoria House
Southampton Row
London WC1A 4AD

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