21 Mar 2011

Ofgem orders energy ‘big 6’ to sort out complex pricing

Business Editor

As the UK’s big six energy firms are ordered to sort out their complex price structures, Business Correspondent Siobhan Kennedy says consumers will finally be able to “compare apples with apples”.

Finally, a collective sigh of relief by consumer groups and lobby firms in the energy industry. For years, they’ve been asking – nigh on begging – for Ofgem, the energy regulator, to come down tough on the proverbial “big 6” energy suppliers and force them to change their anti-competitive ways.

Ofgem now appears to have granted them their wish. Although the regulator, oft accused of being weak and toothless, stopped short of referring the industry to the Competition Commission(CC), it did, for the first time, conclude that the market was not functioning properly and was anti-competitive and most importantly, anti-consumer.

And it did hold out the prospect of a referral to the CC unless the energy companies come up with a plan for change. And fast. There are five main areas of concern, three of which warrant particular attention and could go some way to restructuring Britain’s energy market as we now know it. The first relates to the customer. Ofgem concluded that the sheer number of tariffs was too confusing and served to prevent customers trying to switch to competitors. Of those who did brave the jump, some 40 per cent actually ended up switching to more expensive deals so opaque was the small print.

Consumers will finally be able to shop around and compare apples with apples, as opposed to apples with something that’s not even vaguely in the fruit department.

So Ofgem says the whole market needs to be simplified and suppliers must provide one, comparable, unit rate price. The upshot is consumers will finally be able to shop around and compare apples with apples, as opposed to apples with something that’s not even vaguely in the fruit department.

Secondly, there’s a push to open up the market to new suppliers. There is lots of talk from the likes of Tesco and Sainsbury’s that they’re about to make the next big splash, but funnily enough it never seems to be forthcoming. Ofgem has concluded that’s because the “big 6” have such a stranglehold on the market that other, smaller entrants can’t get a look in.

So it’s going to force the big suppliers to auction off 10 to 20 per cent of the power they generate, which it hopes will make it much easier for new players to get a foothold in the market, rather than trying to compete alongside the big guys and getting drowned out. The end-game here of course is to push prices down. Something which blatantly hasn’t worked so far.

More from Channel 4 News: Government to stop ‘outrageous’ energy price hikes

Ofgem: energy firms are ordered to sort out their complex price structures. (Getty)

Lastly, and this the most important crackdown of all, Ofgem is to demand more transparency on pricing. This goes to the very heart of the problem in Britain’s energy market. The story goes like this. British Gas & Co say they are forced to raise their prices because the price they are paying for energy in the wholesale market is rising. Their hands are tied. They would like to keep prices low but they simply cannot afford to keep absorbing the price rises and not passing them on to the consumer.

So they hike our bills then three weeks later they report massive profits. It’s an accusation that’s been levelled at the “big 6” for years but this is the first time Ofgem found evidence that “consumers are not provided with sufficient clarity about how retail prices relate to suppliers’ costs.”

The elephant in the room here is whether or not the energy companies are actually deliberately profiteering by buying energy in the wholesale market at one price and selling it on to consumers at another.

You could argue that anyone on the street could have concluded that several years ago, but it’s nonetheless significant that Ofgem’s finally come round to the industry’s way of thinking. The elephant in the room here is whether or not the energy companies are actually deliberately profiteering by buying energy in the wholesale market at one price and selling it on to consumers at another (higher) price. Ofgem asked the “big 6” to provide greater transparency in its 2008 review, but it was ignored. So now the regulator appears to have the bit between its teeth.

And this one singular outcome could be the game-changer the market’s been waiting for. The big question is what happens if the “big 6” find a way of wriggling out of Ofgem’s demands, as people already suspect they will.

What happens if they find a way of deploying, as they are so fond of doing, complicated and scientific arguments about how the wholesale market works and why it renders change virtually impossible. If that happens, will Ofgem follow through on its threat and refer them to the Competition Commission? All the language now says it will.