Ofgem has proposed significant measures that will help small suppliers compete and drive down energy prices.
Energy regulator Ofgem has announced final proposals to take a step towards a genuinely competitive gas and electricity market – and the lower prices that this will bring.
If the proposals are enacted – which seems likely considering the responses from the big energy suppliers so far – suppliers will find it harder to conceal facts and profiteer.
The new rules will also make it easier for smaller suppliers to survive and compete, which should help to reduce prices and increase choice for people like you and me.
The problem with energy supply
I'm going to simplify this a little, as it's rather more complicated than this, but here's the gist:
Energy suppliers buy gas and electricity from the wholesale market up to two years in advance, which they then sell on to us. Suppliers aren't forced to reveal what price they paid for that energy to anyone.
Your energy supplier can therefore raise prices to customers, claiming it must do so because it bought at the peak of wholesale prices 18 months ago, when it might not have bought much at that time at all.
More transparency
This should be a lot harder now with electricity. Ofgem intends to make wholesale suppliers publish the prices for wholesale electricity that they buy and sell up to two years in advance.
The other problem with energy supply
The big six are both wholesale suppliers – selling energy to each other and to other energy companies, and retail suppliers – selling energy to you and me.
The big companies that supply most of us with energy also sell it wholesale. Since they control the wholesale market they easily squeeze out small retail suppliers like Ovo and First Utility, and make it harder for them to survive, to offer low prices, and to take a larger market share.
Lower prices
However, Ofgem proposes that wholesale suppliers will have to stick to the wholesale prices they have set, and they'll have to accept any reasonable requests from small suppliers to buy electricity.
With more suppliers able to buy longer-term wholesale electricity more easily at lower prices, these savings can then be passed on to me and you.
More can be done
Ofgem describes the changes as a “more” level playing field, rather than a truly level one.
Darren Braham, founder of small supplier First Utility, said: “The way the market operates today acts as a barrier to effective competition by penalising independent suppliers and providing an unfair advantage to the big six.”
While calling the proposals a positive move, he cautions: “The concern is that they will be complicated to design, implement and manage, and won’t completely solve the problem.”
He hopes this is just a first step for Ofgem. The only way to create a genuinely open and competitive market and to drive prices down to the best levels customers can get is to force wholesale suppliers to sell all of their energy on the open market.
They shouldn't be allowed to hold supply back to use themselves, especially since they could all too easily limit the supplies they're selling when long-term prices are low, and when small suppliers need supplies most.
Backed up by fines
The Government, through the Energy Bill, is looking to give itself the power to force suppliers to sell more energy on the open market if necessary. That's good news if politicians are strong enough to use those powers. In the meantime, one concern I have about the proposals is that Ofgem intends to just use fines to back them up.
Fines are not the most effective way to encourage good behaviour, as years of penalties to banks have shown. Fines can also end up punishing innocent customers and shareholders, rather than the senior managers in charge of conduct, who should set appropriate financial rewards for their staff for good behaviour.
Ofgem wasn't reassuring. When I asked it whether any penalties would be calculated to nullify any benefit that the supplier got by breaching the new rules, it couldn't comment, so I looked through the history of its fines over the past 12 years. It's had mixed success.
Energy companies are regularly found to breach their licence conditions and they receive penalties for them. Ofgem fined many firms for misselling a dozen years ago, but it's still fining for misselling today, with SSE receiving the largest fine to date of £10.5 million this year. Read SSE fined record £10.5 million for mis-selling energy.
Yet most companies have not been fined twice for the same failure and Ofgem has been laying into companies with larger fines and other penalties in recent years. In the past six years it has made the big suppliers pay at least £26 million. In the six years before that, they collectively paid just £3 million.
After battling to prevent rogue sales and pressure tactics since at least 2002, it has had some recent, notable successes: almost all the big six have stopped door-to-door sales, which all too easily encourages aggressive sales tactics.
Ofgem hasn't had to fine any company twice for customer service failures such as complaint handling. You might find that hard to understand, considering the number of complaints they still receive, but perhaps those failings today are not as large and widescale as they used to be.
[SPOTLIGHT]Ofgem fined many of the suppliers for preventing customers from switching in the early noughties, but it has not felt the need to do so since then. We can hope this means this is no longer a major problem – thanks to the fines.
Ofgem's been busy lately
I've often been critical of energy regulator Ofgem, but things have changed a lot since it was three years' old, back in 2001, when it crowed about being “awarded” by parliament for its “light touch”.
Looking at the 12 years since then, some power has shifted from the energy companies who lobby politicians and the regulator, and moved a little towards the customer
Thanks to the regulator, customers must now be given 30 days' notice before price rises. Ofgem also confirmed that those who are asked to pay a higher price on variable tariffs should normally be allowed to leave without being charged an exit penalty, provided you start the switch quickly.
Ofgem has taken steps to protect vulnerable customers, such as those in debt, and has reduced the premiums that those using prepayment meters pay.
The regulator received extra powers in 2011, and has used them to force suppliers to give back millions to customers or consumer groups.
To resolve individual complaints, Ofgem approved Ombudsman Services, a private company, to handle disputes and to force energy suppliers to compensate you, where necessary.
Slowly but surely, Ofgem has been making things better. I was as surprised as you are.
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