27 Mar 2014

‘Big six’ face investigation over energy bills

Ofgem says a full investigation will “once and for all clear the air” over whether the “big six” are blocking competition in the energy market – and making customers pay more for gas and electricity.

The entire energy market was referred for investigation by the Competition and Markets Authority (CMA), after Ofgem found evidence to suggest millions of households may be paying too much for their gas and electricity.

The move comes after increasing pressure on energy suppliers from consumer groups and politicians to lower prices, and claims that the structure of the market itself is “broken”.

Ofgem cited rising energy bill and company profits, coupled with little evidence that suppliers were being “efficient” in reducing their own costs, as some of the reasons for the investigation.

It said that consumer confidence in energy companies was at just 43 per cent, which stopped people from engaging in the market and searching for a better deal.

Britain’s major six energy companies make up 98 per cent of the market: Scottish Power, British Gas, E.On, EDF Energy, Npower and SSE. Prime Minister David Cameron ordered a review of competition in the energy retail sector in October last year, following public outrage over high energy bills. His request followed a pledge by Labour Leader Ed Miliband to freeze energy prices and completely restructure the entire energy market if his party was elected in 2015.

Dermot Nolan, Ofgem Chief Executive, 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.”

‘Make or break time’ for suppliers

The announcement from Ofgem follows news on Wednesday that SSE is freezing its customers’ energy bills until 2016. SSE Chief Executive Alistair Phillip-Davies said the freeze would reduce profits for 2015 by £100m, but said “we felt the need to make a bold statement.”

Which? executive director Richard Lloyd said a full-scale investigation was an important step forward. “This investigation must work quickly to expose what is really happening in the energy market and confirm where competition is lacking,” he said. “It is make or break time for the energy suppliers, who should not wait to be forced into action but instead start now to put customers first, keep costs as low as possible and trade transparently.”

Ofgem said its report “reinforced concerns” about barriers to independent suppliers entering the market. The report also found:

  • retail profits increasing from £233m in 2009 to £1.1bn in 2012, with no clear evidence of suppliers becoming more efficient in reducing their own costs, although further evidence would be required to determine whether firms have had the opportunity to earn excess profits
  • suppliers consistently setting higher prices for consumers who have not switched.
  • declining consumer confidence with 43 per cent distrusting energy companies to be open and transparent.

Secretary of State for Energy and Climate Change 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.”