Ofgem Asks for Energy Market Investigation

Ofgem, the UK energy watchdog, today acted to remove uncertainty from the energy market by proposing a market investigation by the Competition and Markets Authority (CMA).

A market investigation will once and for all clear the air and allow the CMA to ensure that there are no further barriers to effective competition. An investigation would reassure consumers and complement Ofgem’s reforms for a simpler, clearer and fairer energy market.

Today’s State of the Market assessment, prepared jointly with the Office of Fair Trading (OFT) and CMA, confirms Ofgem’s previous analysis of why competition is not working as well as it could. As well as reinforcing concerns about barriers to entry for independent suppliers and persistent high market shares of the largest energy companies, the report includes further evidence and shows:

• declining consumer confidence with 43 per cent distrusting energy companies to be open and transparent. This may deter consumers from engaging in the market and prevent them from getting a better deal for their energy
• continuing uncertainty over whether the vertical integration of the large energy companies is in consumers’ interests
• retail profits increasing from £233 million in 2009 to £1.1 billion 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, and
• suppliers consistently setting higher prices for consumers who have not switched.

Given these problems Ofgem believes a referral to the CMA is timely and necessary because:

• CMA’s more extensive powers can address any long-term structural barriers to competition
• A market investigation would conclusively determine whether vertical integration is in consumers’ interests or whether there should be more separation between the largest companies’ supply businesses and generation arms
• Ofgem’s reforms for a simpler, clearer, and fairer market have created a safer space for consumers to shop around for a better energy deal while a CMA investigation takes place.
• Major change is coming with the roll-out of smart meters. A CMA investigation will ensure that there are no further barriers that prevent consumers from making the most of the transformation smart meters will bring to the energy market.

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. 

“I want to make sure that consumers are put at the heart of this market, so we will continue to take action to help consumers. This includes from today putting the industry on notice that any new serious breach of the rules which comes to light will be likely to attract a higher penalty from Ofgem. I am determined that energy companies use our reforms to transform their relationship with consumers.”

Ofgem will launch a consumer engagement campaign to help consumers take advantage of the simpler, clearer, fairer reforms to get themselves a better energy deal. Also, Ofgem said that it is continuing with its work to increase transparency and have today published its latest look at retail and wholesale prices for consumers.

Ofgem has also today announced that it will substantially increase the level of penalties it imposes for breaches coming to light in the future. Ofgem will continue to make timely changes to protect consumers’ interests, in parallel with any CMA investigation.

Press release, March 27, 2014; Image: SUSPLAN