U.K. energy supply probed


London, U.K. — (METERING.COM) — October 7, 2008 – Overall the transition from monopoly gas and electricity supply to competitive markets is well advanced and continuing to develop in the U.K., but there are areas where the transition now needs to be accelerated. Moreover many consumers are not yet benefiting fully from the competitive market and vulnerable consumer groups are disproportionately affected.

These are among the key findings of a probe into the energy supply market for domestic and small business consumers launched by the regulator, Ofgem, in February. The aim was to establish how far competition is working to deliver value to money to customers.

The domestic gas and electricity markets were opened up to retail competition ten years ago and price controls were removed six years ago.

The probe found that while there are six substantial companies competing for the business of domestic consumers, the national gas market and each of the former regional electricity markets are still highly concentrated. Moreover, no significant “competitive fringe” – companies of a markedly different scale and business model offering a material threat to the “big 6” – has developed.

The level of consumer participation in U.K. energy supply markets is amongst the highest of any retail energy market throughout the world, and the annual switching rate of 18 percent compares well with other retail services, such as fixed and mobile telecommunication, insurance products, mortgages and personal current accounts. However, since such consumers are in a minority, action is needed to encourage a greater proportion of consumers to actively seek out competing price offers and switch suppliers.

Since market opening, energy suppliers have widened considerably the range of tariffs available to consumers, and they compete actively for those consumers who seek out the best deal in the market by offering keenly priced products. While there is no evidence of cartel activity in pricing, there are instances of differential pricing that are of concern. Among these are that the five former incumbent electricity suppliers charge electricity customers in their former monopoly areas higher prices than comparable “out-of-area” customers, and in some cases customers taking only electricity under a single fuel arrangement are charged higher prices, but in neither case is there a cost basis for these practices.

Prepayment meter pricing is another area of concern, with the price premium charged to customers differing significantly between suppliers, between geographic regions and over the range of energy consumption. Prepayment price premiums at the lower end of the consumption range appear to have a sound cost justification, while those at the upper end of the range do not, and action is necessary to ensure that the premium charged to all prepayment customers is placed on a sound cost basis.

Based on its review Ofgem recommends five actions to accelerate the transition to fully effective competition:

  • Promoting more active customer engagement
  • Helping consumers make well informed choices
  • Reducing barriers to the entry and expansion of new suppliers
  • Helping small business consumers
  • Addressing concerns over unfair price differentials.

Garry Felgate, chief executive of the Energy Retail Association (ERA), described the review as “timely and thorough,” saying: “The report demonstrates that the energy market is working in the interests of most consumers.”

Ed Mayo, chief executive of the new consumer body Consumer Focus, said:  “Ofgem has gone some way to highlight action to bring about fairer pricing but we remain concerned that there is a lack of true competition across the country. Ofgem should step up its work to bring more competition among the big six, encourage new entrants and increase trading, or consumers will be at risk of not seeing sustained improvements.”

Ofgem’s findings are now open to consultation and the regulator intends to seek agreement with the suppliers on proposed reforms.