UK energy regulator Ofgem announced today that it was referring the energy market to the Competition and Markets Authority (CMA) for a full competition investigation to improve consumer trust and “provide confidence needed for investment in the sector”.

The recent assessment of the energy market in March, prepared by Ofgem with the Office of Fair Trading (OFT) and CMA, showed that competition isn’t working as well as it should for consumers.

It showed increasing distrust of energy suppliers, uncertainty about the relationship between the supply businesses and the generation arms of the UK’s six largest suppliers, and rising profits with no clear evidence of suppliers reducing their own costs or becoming better at meeting customer expectations.

Dermot Nolan, chief executive of Ofgem, said:  “Now is the right time to refer the energy market to the CMA for the benefit of consumers.

“There is near-unanimous support for a referral and the CMA investigation offers an important opportunity to clear the air. This will help rebuild consumer trust and confidence in the energy market as well as provide the certainty investors have called for.

He added: “The energy market is also going to change rapidly over the next few years with the roll-out of smart meters, the government’s electricity market reforms, and closer integration with European energy markets. 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.”

Under investigation

The CMA will begin its investigation immediately and is likely to publish final decisions by the end of 2015.

The CMA can decide which features of the market to focus on in its investigation and use its powers to address any structural and behavioural issues that would undermine competition.

The main areas that Ofgem would also expect the CMA to look at include:-

  • the relationship between the supply businesses and generation arms of the six largest suppliers
  • barriers to entry and expansion for suppliers
  • the profitability of the six largest suppliers
  • whether or not there is sufficient competition between the large energy suppliers
  • the trend of suppliers consistently setting higher prices for consumers who have not switched
  • low consumer engagement that contributes to weak competitive pressure in the market.

Energy suppliers’ profits

The average retail profits for the six larger suppliers have increased from £233 million in 2009 to £1.1 billion in 2012, while the average overall profits for supply and generation increased from £3 billion in 2009 to £3.7 billion in 2012.

The assessment does not come to a conclusion as to what is the appropriate profit margin for the industry but notes the recent increases and questions the suppliers’ contentions that five per cent is a fair retail margin.

While the evidence on profitability is not conclusive, the rise over the last few years allied to no clear evidence of increased efficiency indicates a possible lack of effective competition.

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