Ofgem's inquiry
4. On 21 February Ofgem launched its own inquiry,
looking specifically at the energy supply markets for households
and small businesses. We were surprised by this announcement,
given that it came little more than five weeks after Ofgem's Chief
Executive, Alistair Buchanan, had met the Chancellor of the Exchequer,
and stated that "Britain's competitive market in energy is
working".[8]
5. Mr Buchanan told us Ofgem's inquiry was a response
not only to public concern over energy prices, but also to the
apparent synchronisation of the energy companies' price increases
earlier this year, both in terms of timing and magnitude.[9]
Ofgem is conducting its inquiry using powers under the Enterprise
Act, which gives it access to detailed company information
that is not usually publicly available. It intends to publish
its initial findings in September 2008. The probe was greeted
with some scepticism by our witnesses. Allan Asher, Chief Executive
of Energywatch, told us: "I do not think a 'quickie' by Ofgem
while people are doing their day jobs is going to get very far".[10]
6. Wholesale gas prices have increased throughout
2008. As a result, we expect gas and electricity bills for domestic
consumers to rise significantly in the near future, over and above
the increases already announced this year, with serious consequences
for millions of households, and especially the fuel poor. Industrial
consumers now face prices above European levels. If these price
differentials are sustained, they will affect the competitiveness
of the UK economy, and put many thousands of jobs in manufacturing
at risk.
7. We welcome Ofgem's inquiry into the energy
markets. Our written and oral evidence has highlighted serious
problems in the functioning of a number of aspects of the markets
for gas and electricity. We are particularly concerned by the
perception that Ofgem has already predicted the outcome of its
inquiry, by stating at the outset that it has seen "no clear
evidence that the market is failing".[11]
We hope this perception is proven wrong, and intend to scrutinise
the regulator's findings thoroughly.
8. Once Ofgem announced its probe, we decided
to conduct our inquiry quickly to feed into and inform its work.
Accordingly, at this stage we have not concluded whether the problems
with the energy markets we have identified can best be tackled
through direct action by Ofgem, or through further investigation
by the Competition Commission itself. Considering this in depth
would have extended the length of our inquiry and so prevented
its conclusion before that of the regulator. We received a significant
amount of contradictory evidence, particularly in relation to
the functioning of the wholesale markets for both gas and electricity,
which was a cause of deep concern to the Committee, and emphasises
the magnitude and importance of Ofgem's task. We will examine
their analysis when it is available and we will look with particular
care at their recommendations for further action.
9. We appreciate that Ofgem will have some difficult
decisions to make. In doing so, it must take account of the Government's
overarching priorities for energy policy as set out in its 2007
Energy White Paper, which are to cut carbon emissions and maintain
security of supply.[12]
The market structure must deliver these, while also providing
competitive prices for consumers. In addition, Ofgem will need
to weigh two factors carefully—the effect regulatory uncertainty
may have on firms' investment decisions at a time of general consensus
that such decisions are needed urgently if electricity supplies
are to remain reliable and adequate beyond the middle of the next
decade; and the desirability of a thorough investigation into
the market that might improve its long-term competitiveness.
10. We received a large volume of written evidence,
for which we are grateful. We also took oral evidence from the
consumer watchdog, Energywatch; representatives of industrial
consumers—the Energy Intensive Users' Group, the Major Energy
Users' Council and the Chemical Industries Association; the large
independent electricity generators—British Energy, Drax
Power, and International Power; the regulator—Ofgem; oil
and gas producers—BP, Shell and ExxonMobil; small energy
retailers—Welsh Power, BizzEnergy and Electricity4Business;
the 'Big 6' energy companies—Centrica, EDF Energy, E.ON
UK, Npower, Scottish and Southern Energy, and Scottish Power;
and finally the European Commission. Oral evidence from the Minister
for Energy, Malcolm Wicks MP, in January 2008, has also informed
our conclusions. We would like to express our thanks to all those
who contributed to our evidence-gathering.
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