Select Committee on Business and Enterprise Eleventh Report


High energy prices affect both individual consumers, and the competitiveness of the UK economy as a whole. We decided to conduct an inquiry after the majority of the 'Big 6' energy companies raised their prices in early 2008. We announced our inquiry on 5 February; on 21 February Ofgem announced that it too would conduct a probe into the energy markets. We have accordingly shaped our inquiry to ensure that it can feed into Ofgem's work, for which a preliminary report is expected by the end of September 2008. We intend to look closely at Ofgem's findings when they are available.

We emphasise that our concern is to maintain a public policy environment in which UK energy prices for both domestic and commercial users are as low as possible, but also one in which the other crucial objectives of energy policy—environmental sustainability and security of supply—are delivered. We are aware of the urgent need to bring forward investment in new electricity generating capacity, transmission systems and gas storage. We are also aware that movements on world markets will directly affect energy prices in the UK. Nonetheless, while domestic policy cannot keep prices low when they are high elsewhere, and it would be short-sighted to impose a regulatory regime which kept prices low in the short term, but gave no incentives for investment in future capacity, we have concerns that the UK's energy markets are not functioning as efficiently as they should, and that UK prices may be higher than those in competitor countries.

We are concerned that Ofgem's terms of reference suggest it may pay relatively little attention to the wholesale markets, and, in particular, the wholesale gas market. Our overall conclusion on the functioning of both the gas and electricity wholesale markets is that there are significant questions that need to be addressed in the interests of both retail and business consumers. The price of gas determines the wholesale price of electricity, because gas-fired power accounts for around a third of the UK's generating capacity, and tends to provide the marginal source of generation to the market. We consider that the competitiveness of the wholesale gas market affects the competitiveness of the UK's energy markets as a whole, and deserves particular scrutiny.

We have also identified important issues that need to be addressed in the retail market itself. We have, however, recommended consideration of the merits of referring only two aspects of the markets to the Competition Commission at this stage (the forward gas market and the supply of electricity to the SME sector), and then only if Ofgem is unable to take sufficiently robust steps itself. We note, however, that no witness has brought forward evidence of active collusion in the wholesale or retail markets. It is clear, though, that in a retail market dominated by six major players, it is easy for those players to make informed judgements about the behaviour of their competitors. This alone can distort competition. The regulator therefore needs to remain very watchful.

We believe that there are very real problems that need to be addressed. This can best be done through improving market design, taking specific regulatory steps, and by continuing to work for liberalisation of European markets. Such an approach is more likely to bring real and lasting benefits to consumers. It is also less likely to inhibit the investment the UK needs so urgently if we are to "keep the lights on" as we lose a large proportion of our generating capacity around the middle of the next decade. It will, however, need Ofgem to demonstrate a rather greater sense of urgency than has been apparent so far.

Other things being equal, high fuel prices will inevitably lead to an increase in fuel poverty, that is in the number of households who spend more than 10% of their income on energy costs. We believe that the time is right for a root and branch review of government policy on fuel poverty. Energy suppliers' existing social assistance initiatives (which go well beyond specific tariffs) do not reach the vast majority of the fuel-poor. They also vary widely, confusing consumers and providing inconsistent coverage. Irrespective of its broader conclusions on the role of such tariffs, we believe the Government should define the criteria for both the prices charged by suppliers under the banner of social tariffs, and for identifying those customers that qualify for them.

Energy prices are likely to remain high, and the Government will have difficulty in increasing incomes rapidly enough to eradicate fuel poverty. If the Government remains committed to eradicating fuel poverty while reducing carbon emissions, it cannot rely on ongoing subsidy of fuel bills. This means that in the future, Government and industry efforts need to focus on improving the housing stock of the fuel-poor, as the most cost-effective means of reducing both their energy bills and their carbon emissions. We regret that funding for Warm Front, which provides support for housing improvements, has been cut, and hope it will shortly be increased. A great many households face a difficult winter; it is imperative that the Government reviews its approach to fuel poverty and does so urgently.

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Prepared 28 July 2008