Letter by BizzEnergy
INTRODUCTION
Set up in 2000, BizzEnergy is the largest independent
energy supplier in the UK. The company is aiming to make a complex
market sector simple by challenging the industry norm and developing
innovative, flexible and efficient ways to serve customers across
the UK.
The company's aim is to deliver the highest
quality service to small and large customers, and to lead market
innovation. Examples of this innovation include BizzEnergy aiming
to become the first electricity supplier to allow its customers
to fully serve and control their accounts online, and BizzEnergy
being the market leader in implementing Smart Meters as part of
our supply contract.
BizzEnergy welcomes the opportunity to submit
a briefing paper on energy prices to the Business Enterprise and
Regulatory Reform Select Committee prior to the evidence session
with Malcolm Wicks, Minister of State for energy, and looks forward
to further engaging with the Committee on this important issue
in the future.
ENERGY MARKET
OVERVIEW
As the Committee will be well aware, the UK
energy market is dominated by British Gas, Npower, E.ON, Scottish
and Southern, Scottish Power and EDF, with few opportunities for
new market entrants. The "Big 6" share about 99% of
the energy market and current low levels of fragmentation in the
energy marketplace give these large utilities great power to dominate
market developments and to prevent new entrants from gaining a
foothold. Independent energy suppliers in the UK have approximately
only 1% of the UK's energy market share. BizzEnergy believes that
this figure must grow in order for the UK's energy market to develop
and customers to benefit.
The current lack of competition and regulation
has not escaped the observation of industry watchdogs. In September
2006, for example, energywatch demanded a full inquiry into energy
market competition stating:
"Major problems with electricity generation
and upstream gas supply mean the UK energy market is anything
but competitive . . . There needs to be increased competition
in Gas and Electricity markets. A licence obligation, backed by
effective regulatory monitoring and enforcement could achieve
this".
While industry watchdogs have clearly outlined
the situation, there has thus far been little action to either
address the lack of competition in the marketplace or increase
Ofgem's regulatory powers.
ENERGY PRICES
BizzEnergy is very concerned about the level
of price rises in the wholesale market, especially at a time when
it appears that there is a significant element of `super profit'
being made by the generators as a result of Carbon Allocations.
BizzEnergy, at present, only supplies SME customers
under term contracts. The prices included in these contracts are
set against the wholesale market prices at the time of the contract
being agreed. This is the case because BizzEnergy sources its
energy wholesale from the market. Therefore, the recent price
rises in the UK are embedded within BizzEnergy's contracts.
One of the biggest concerns facing companies
like BizzEnergy is that with the "Big 6" having their
own power stations, with direct access to energy sources (electricity
or gas), this leads to market inconsistencies and aids the anti-competitive
structure of the market. By restricting access to these supplies,
the wholesale prices of energy on the market can be massively
affected. The liquidity of the wholesale market is currently very
poor and sporadic due, in part, to this level of vertical integration.
As a matter of practice, vertically integrated suppliers are likely
to contract with their own generation before trading in the market,
thus removing vital liquidity from the energy market. This has
a direct impact on independent energy suppliers such as BizzEnergy
and its potential new customers.
The Government's recent announcement in support
of an increase in the use of nuclear power is an important development
ensuring greater diversity of supply. However, unless the problems
in the wholesale market caused by the dominance of vertically
integrated energy companies, are addressed, then the opportunity
to diversify may be lost as new entrants will be reluctant to
come into a market which does not have a fully-functioning wholesale
market for their product. This in turn may delay the development
of new-build nuclear facilities as the incumbents will be under
no competitive pressure to bring on stream new nuclear supply
in a timely fashion.
The global demand for nuclear power means that
new companies are emerging to meet this demand. It is important
that the UK market is not foreclosed to these companies because
of market entrance difficulties and inherent anti-competitive
market structures. New energy generators will have to use existing
suppliers to get product to market. However, large suppliers will
probably rather build their own generation facility, but in their
own time.
In the current energy market, a consequence
of the current distortion of wholesale pricing is the absence
of a reliable price benchmark. Without this, and with the nature
of financial reporting of energy companies, it is difficult to
determine what profits are being made and by whom. If this lack
of transparency continues, how can the public—or indeed
regulators—have confidence that UK energy customers are
getting a fair deal?
Liberalisation of the retail markets was intended
to address the issues arising from vertical integration by increasing
competition in the generation and the supply of energy. However,
the combination of liberalisation and changing the trading arrangements
has, in fact, favoured the development of large, vertically integrated
suppliers. As a result, barriers to market entry either stop entry
altogether or require a new entrant to ally itself with one of
the existing players.
While there is some choice, it must be stated
that most offerings are "similar shades of grey, not vibrantly
different". Some observers state that electricity markets
are working well because 1 in 5 customers (mainly domestic) switch
suppliers in the UK. However, just because customers switch does
not indicate that there is the right level of healthy competition.
While there may be some retail competition, there is not sufficient
wholesale competition. Additionally, although the UK gas and electricity
markets still measure highly for competitiveness against other
EU Member States, as prices have increased dramatically the significant
financial advantages for consumers of switching suppliers are
steadily being eroded.
BizzEnergy calls for:
— Clear and effective regulation from
Government that will limit the negative impact of vertical integration
in the UK energy market. In the current environment where no one
seems willing to challenge the prevailing wisdom that markets
are better than regulation, one of the unintended consequences
of liberalisation is that the market is taking the easy option
and passing the higher costs on to consumers.
— New rules on market transparency.
The problem of concentration is undeniably made worse when dominant
companies are not required to reveal basic supply information
to smaller market players.
— Licencing separation. This would
increase market transparency and increase market confidence.
CONCLUSION
Clearly, competition benefits not only suppliers
but also consumers. Increased competition and an end to the privileged
position held by certain suppliers would offer higher quality
and more varied services to energy users at lower prices. This
would lead to a well functioning competitive market, which would
ensure sufficient investments in power plants and transmission
networks thereby helping to avoid interruptions in power supplies
and protecting security of supply. An increased degree of transparency
would, additionally, minimise distortions in the market, and thus,
the market would be more robust, and ultimately, the customer
would be better served.
BizzEnergy thanks the Chair of the Committee
for the opportunity to provide this briefing paper to the Business
Enterprise and Regulatory Reform Select Committee, and would welcome
any further enquiries from members on the issues raised.
23 January 2008
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