Energy market to be probed by competition authority

Energy watchdog Ofgem has referred the energy market to the Competition and Markets Authority for a full investigation.

The energy market is to be fully investigated by the Competition and Markets Authority (CMA), after it was referred by regulator Ofgem.

In a statement, Ofgem said that “an investigation should ensure, once and for all, that competition works effectively for consumers, by bearing down on prices while driving improvements in customer service and innovation.” It said that the investigation was an “important opportunity to clear the air” in the market.

Ofgem first proposed its intention to refer the industry in March, but was waiting on the results of a consultation before acting.

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A lack of competition

Ofgem, the Office of Fair Trading and the CMA have now collectively come to the conclusion that the energy market isn't competitive enough.

They cite the fact that the market share of the Big Six (British Gas, EDF, E.On, npower, SSE and Scottish Power) has barely shifted over time. Customers who stuck with them were likely to be charged higher prices, while cheaper tariffs were made available to more ‘active’ customers who changed suppliers more frequently. Ofgem also said that companies' profits rose with “no clear evidence” that suppliers were trying to reduce their own costs and pass on savings.

The joint research also found that 43% of people didn’t trust energy suppliers to be transparent, up from 39% in the previous year.

New evidence showed that prices rise faster when costs increase, but reduce comparatively slowly when costs fall. This prevents customers from getting the best deals.

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Rebuilding trust and confidence

Dermot Nolan, Ofgem Chief Executive, said that the time had come to refer the energy market to the CMA “for the benefit of consumers,” citing the “near-unanimous support” for a referral and the benefits of an investigation that will hopefully restore “consumer trust and confidence” in the market.

Mr Nolan said: “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.”

The CMA says that it will be appointing panel members to its Investigation Group and will publish a timetable detailing the stages of the investigation soon. It will also publish an issues statement, making clear the investigation's scope and the questions it will look to answer.

Points of investigation

Ofgem expect the CMA investigation to focus on six main areas:

• the relationship between the supply and generation arms of the Big Six;
• barriers to entry and expansion for smaller suppliers;
• the profitability of the six largest suppliers;
• ehether there is sufficient competition between the largest energy suppliers;
• the trend for suppliers to set higher prices for customers who haven’t switched;
• and low customer engagement, i.e. people not switching, meaning there's little competitive pressure.

Response from the Big Six

In response to the announcement, Sam Laidlaw, CEO of Centrica (the parent company of British Gas), commented: “We want an energy market that is trusted by customers". Meanwhile, Tony Cocker, CEO of E.ON, noted that the investigation was “potentially good news for customers, good news for the sector and good news for Great Britain”, adding that his company had been calling for a full market investigation since 2011.

Vincent de Rivaz, CEO of EDF said that he did “not expect the investigation alone to rebuild trust; that remains our responsibility,” but the CMA would help to show how EDF could take a “long-term view” focusing on its customers’ interests.

Alistair Phillips-Davies, Chief Executive of SSE, commented that SSE had “an appetite for reform,” while npower’s CEO Paul Massara said that the announcement was a “first step” to “reinstall trust into the industry.”

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