Memorandum submitted by BizzEnergy
POSSIBLE ANTI-COMPETITIVE BEHAVIOUR IN THE
UK'S ENERGY MARKET
BIZZENERGY
1. 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.
2. 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.
3. BizzEnergy welcomes the opportunity to
submit written evidence to the Business and Enterprise Select
Committee Inquiry into Possible Anti-Competitive Behaviour in
the UK's Energy Market, and looks forward to further engaging
with the Committee on this Inquiry as it progresses. BizzEnergy
is available to provide supplementary written evidence to the
Committee, and would welcome the opportunity to provide oral evidence
in due course.
INTRODUCTION
4. 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 Domestic and smaller end of the SME 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 suppliers
of energy in the UK have approximately only 1% of the UK's energy
market share. BizzEnergy believes that this is an unnaturally
low share and that figure must grow in order for the UK's energy
market to develop and achieve meaningful diversity and for customers
to benefit.
5. 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".
6. 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.
7. The UK energy market was originally designed
around the separation of generation and supply; with the primary
premise that parties could enter the market as either generators
or suppliers and not necessarily both. Current trading arrangements
have, however, given rise to vertical integration, which those
who are vertically integrated argue makes for efficient and effective
risk management and lower costs to the customer. However, the
cost of this is the loss of liquidity, transparency and competition
in the market—major conditions required in order to ensure
a robust, liberalised and efficient market.
8. In addition to this, while profits within
some sections of the energy industry appear to be excessive, it
is very difficult to judge whether this is the case. Company accounts
normally provide a strong, reassuring and robust commentary to
all stakeholders but this is not possible in the UK due to the
international nature of two thirds of the "Big 6".
9. This paper provides details of BizzEnergy's
position and its response to the terms of reference for the Business
and Enterprise Select Committee Inquiry into the UK energy market.
ANSWERS TO
INQUIRY QUESTIONS
1. Whether the current market structure encourages
effective competition in the retail markets for gas and electricity
10. Whilst BizzEnergy believes that the
basic UK energy market design is sound, the natural outcome of
the drivers from such a design is consolidation and vertical integration.
As a result of this, the market then looks to find an equilibrium
and, as such, the existence of five or six players each with approximately
20% market share all similarly structured, tends to reduce the
stimulus for competition.
11. These large players therefore, by necessity,
adopt a systems-based approach to customer service and products—fitting
customers to standardised products rather than bespoke solutions.
Smaller suppliers are more commercially flexible and should be
able to service customers' requirements more precisely. This offsets
the benefits of scale and sustains the competitive market.
12. A further tendency for markets in this
position is to:
— Increase barriers to entry.
— Develop sophisticated customer retention
strategies restricting the ability of customers to switch.
— Introduce increasingly complex trading
arrangements.
13. An effective market design needs to
have transparent costs and prices in order to stimulate and encourage
both competition and new entry. Unfortunately, the current design
does not have the required level of transparency and therefore
does not stimulate effective competition for either generation
or supply from a new entry perspective.
14. Two thirds of the market players have
integrated European financial accounts and it is therefore impossible
to identify what profits are being made from the UK. Further,
these accounts do not reliably or effectively separate generation
or supply profits, so even if UK accounts were to be published
a new entrant would need to enter both sides of the market to
access any available margin with confidence.
15. The current market design was supposed
to facilitate entry into generation or supply separately and not
require parties to enter both. Bizz is, therefore, concerned that
the current structure does not encourage effective competition
as per the original market design.
16. An obligation to report segmented gas
and electricity supply business accounts will further remove the
ability of larger players to cross-subsidise their activities.
17. We are also mindful that security of
supply is a big issue and that alternative market arrangements
as laid out in Appendix 3 may be worth some consideration.
2. Whether there is effective competition
in the wholesale markets for gas and electricity
18. Vertical integration, as it exists in
the UK, reduces the need for the vertically integrated players
to use the wholesale market. Each company has sufficient generation
to supply their domestic and SME customer base. Larger I&C
customers are generally supplied on market related shorter term,
index type transactions.
19. Companies, therefore, naturally tend
to hedge their sales from their own generation first and then
to the extent that there is a need to trade in the market. Thus,
liquidity in the wholesale market is focused on the first season.
Liquidity beyond this point is poor and declining (See Appendix
2).
20. To give a specific example of this,
BizzEnergy seeks to benefit customers by offering them a choice
of contract length of up to four years. We are risk adverse and
wish to hedge out any liability incurred in the wholesale markets.
The best products for us to use are a combination of baseload
power (24 hours a day) and peak power (7.00 am to 7.00 pm weekdays).
These products do not, however, trade reliably in the market.
Peak power does not trade out beyond the first year, and contracts
for two and three year baseload rarely trade. Bids and offers
are always available in the market, but the spreads are usually
large and the prices on offer usually significantly more than
the retail margin, and the prices at which trades can be transacted
frequently bear little or no relation to the offers that are being
made to customers by the vertically integrated players.
21. The issue for new entrant generation
is that in the absence of a reliable, deep and liquid market they
will be forced to sell their output to one of the vertically integrated
players on a long term contract, thus further depriving the market
of any new liquidity.
22. A further issue with the current wholesale
arrangements is "cashout". This is the mechanism by
which any imbalance in a player's contractual position is settled.
The mechanism for "cashout" is extremely complex, and
is recognised as such by the regulator. The prices are supposed
to represent the energy costs of settling the imbalances, but
these are widely acknowledged to be polluted with other costs
such as system operation costs. The impact of this pollution is
increased costs on smaller parties and non-vertically integrated
parties which has the effect of distorting competition. OFGEM
is carrying out a review of this, but has been doing so on and
off for some years, and the industry awaits its findings.
3. The implications of growing consolidation
in the energy market
23. BizzEnergy is frequently concerned by
vertically integrated players making offers to customers below
the (apparent) wholesale market level, making it exceedingly difficult
to compete. Proving the existence of predatory pricing is difficult
and complex. However, we did note a statement from EON in the
FT in March, "the company had lost money on its retail business
last year and expected to do so again this year". This was
an effective admission of cross subsidy and underlines the difficulties
faced by smaller players trying to enter the market who cannot
subsidise their accounts in this fashion.
24. The main issue—from BizzEnergy's
perspective—is the lack of transparency of energy suppliers'
accounts and the loss of a common reference price against which
to judge and measure the performance of the generation and supply
arms of the vertically integrated businesses. This inhibits the
opportunities to enter the market for new entrants, which we believe
should be a concern to regulators, the Government and most importantly
public confidence.
4. The relationship between the wholesale
and retail markets for electricity and gas
25. Whilst BizzEnergy cannot comment in
detail as we are not active in the gas market, there can be seen
a lag between price movement in the wholesale market and published
tariffs (see Appendix 5).
5. The interaction between the UK and European
energy markets
26. BizzEnergy has found the barriers to
entry in most European countries insurmountable. However, the
recent passing of an anti cross-subsidy law in Holland makes the
Netherlands market attractive and we are actively considering
setting up in that country in the next year.
6. The effectiveness of regulatory oversight
of the energy market
27. As a natural outcome, when a market
matures into a position of considerable integration and consolidation,
we would expect to see the need for increased regulatory scrutiny
and advocacy of consumer positions. The current trend, however,
appears to be the reverse, with light touch regulation and the
abolition of the consumer advocate energywatch being prime examples.
28. BizzEnergy believes that OFGEM is a
generally effective body, but that it has areas where its activities
are restricted. For example, it appears to take a literal interpretation
of the highly complex industry rules rather than a general and
purposeful interpretation. Thus, parties may be carrying out operations
that have the effect of inhibiting competition, but are still
compliant with poorly drafted industry rules.
29. In order to change, OFGEM must compete
with companies who, due to the nature of their size, have considerable
resources. The presence of the Competition Commission and the
appeals process creates an additional hurdle for OFGEM to clear
if any substantive changes are to be made against the views and
interests of the incumbents. This, by its nature, slows down the
speed and effectiveness of the Regulator.
30. To date, OFGEM has used relatively simple
measures of competition to assess the effectiveness of the market,
for example numbers of customers switching. We believe that this
is too simple for a mature market and that other more effective
measures should be developed. It rarely issues any information
on competition in the business markets, and it seems to make information
available on domestic markets no more frequently than once a year,
which is inadequate.
7. Progress in reducing fuel poverty and the
appropriate policy instruments for doing so
31. BizzEnergy is not an active supplier
of domestic customers, although we are looking to enter the market
later this year. Fuel poverty is a serious concern and we do not
believe that the current definition adequately captures the extent
of the issue in the UK.
32. For example, in its annual report published
in March 2008, the Fuel Poverty Advisory Group said more than
2.3 million of the most vulnerable households in England alone
are now forced to spend at least 10% of their income to heat and
light their homes.
33. We, therefore, believe that some urgent
work is required to identify those who need assistance and fall
within the real fuel poverty bracket. Fuel poverty, in our view,
is not just related to pre-payment meters nor to the level of
disposable income spent on fuel.
34. Energy prices will be minimized, and
therefore fuel poverty reduced, in the longer term by ensuring
competitive energy supply markets prevail. Specific market segments
may require innovative products and service arrangements, and
these are most likely to emerge when there are no barriers to
market entry or prohibitive requirements upon continued market
operation. Ultimately fuel poverty is a social issue that requires
a political solution; it should not be tackled primarily through
legitimising more cross-subsidy in a market that already manifests
insufficient transparency.
CONCLUSION
35. Vertically integrated parties (with
more than 10% market share in supply) should be obliged to transact
through an open market any volumes that they transfer between
their generation and supply businesses. They should be obliged,
by licence, to separate their generation and supply business accounts
and operate them in a sensible manner, as if they were a standalone
business [Market in Financial Instrument Directive].
36. In addition, they should be obliged
to separate UK licensed activity accounts and make them independently
available as if they were a standalone business. Segmenting accounts
between supply and generation may not be sufficient for the introduction
of due visibility within the "Big 6". It may be necessary
to go further and separately account supply activities between:
— I&C and smaller customer markets.
— For smaller customers, those activities
where they have been historically dominant and otherwise.
37. This approach allows vertical integration
and economies of scale, but establishes an openness and viability
of the underlying nature of transactions. OFGEM has indicated
that they believe I&C and gas markets are national whilst
the supply of electricity to smaller customers is still a regional
market and so this approach will reinforce their market overview.
38. 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.
— Licensing separation. This would
increase market transparency and increase market confidence.
39. Competition does benefit consumers.
However 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 better 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.
40. BizzEnergy thanks the Chair of the Committee
for the opportunity to provide this written evidence to the Business
and Enterprise Select Committee, and would welcome any further
enquiries from members on the issues raised. Additionally, Bizz
would happily provide oral evidence to the Committee as part of
the ongoing Inquiry.
APPENDIX 1
STATEMENT PREPARED BY DEEPAK LAL OF ECLIPSE
ENERGY FOR BIZZENERGY
The below is an excerpt from a BizzEnergy-commissioned
article by Eclipse Energy.
What is wrong with the power market?
The market is dominated by six big players.
Such market concentration is anti-competitive and it is deterring
new entry into the market. It is also making the market opaque
to the detriment of independent players and customers. We need
to borrow ideas from other markets to address the short-comings
of the power market.
Conventional wisdom?
The changes that we would like to see in the
power market are based on conventional wisdom. Some of this wisdom
has appeared in the principles underpinning the Market in Financial
Instrument Directive 2004/39/EC (MIFID) regulations. The objective
of MIFID was to create an open competitive market in the financial
services industry to safeguard the interests of stakeholders and
consumers. The impact of MIFID is to enhance the:
— transparency of the market;
— protection of customers.
Whilst the details of MIFID are specific to
the financial services market, the objectives are common to many
markets. Indeed, the wholesalers in the energy market are not
dissimilar to the brokers in the financial services market in
terms of meeting the needs of their customers through the traded
market. Many power market commentators will be making similar
points because the underlying objectives are broadly the same.
What needs to change in the power market?
The competitive landscape is such that the power
market is dominated by six vertically integrated players. The
Hirschmann-Herfindal Index (HHI) is a commonly used index that
provides a measure by which it is possible to judge whether there
is effective competition in a market. The HHI for retailing power
in the UK shows that the market is far too concentrated. An Ofgem
report on the domestic retail market put the HHI at about 1765
in March 2007[10]
and this level of concentration is undermining competition. New
entrants find it hard to challenge the dominance of the incumbents.
Further market consolidation (such as the takeover of Scottish
Power by EDF) is not in the interests of the end-consumer. The
question is whether specific action should be taken to reduce
market shares of the big six.
The concentration of market shares in retail
is inevitably going to have an impact upstream in both trading
and generation activities. This is evident by the poor level of
liquidity in the wholesale market.
The big six players are ensuring that the market
is opaque by doing bilateral deals. Such deals are not visible
to the rest of the market. The most insidious deals are those
done between the different divisions of the same company, particularly
between the generation and retail divisions. The lack of transparency
here means that independent players, particularly in the retail
market, are at a serious disadvantage because they do not know
whether they can procure energy on the same terms as the retail
divisions of the big six. The current arrangements also allow
the existing players to arbitrarily move profit margins between
the two divisions to the disadvantage of competitors.[11]
Enhanced reporting through a separation between the accounts of
the retail and generation divisions and an obligation to treat
all trading counter parties equally is likely to make a significant
difference to the creation of a fair competitive environment.
MIFID has shown the way by expecting better
reporting on deals to safeguard the market and the interests of
the stakeholders in the market. Further, a "best execution"
obligation under MIFID has put an onus on the service provider
to demonstrate that the service provider is getting the best prices
for its clients which implicitly requires audit trails to demonstrate
compliance with the obligation. In addition, under MIFID, a Systematic
Internaliser is a firm that may execute orders from its clients
against its own book. Such players are required to meet the requirements
for trading transparency.
The bilateral deals between the big six players
and also between the various divisions of the big six players
are having a major impact on the lack of trading liquidity. The
lack of liquidity and transparency is deterring new entrants into
the market which is compounding the impact of market concentration.
Vertical integration in-itself may not be a bad attribute of the
market. Indeed, vertical integration might be encouraged, but
only if it is coupled with transparency and liquidity. The alternative
is the break-up of vertical integration companies as a means to
force transparency and liquidity into the market.
Enhancements to the competitive environment
in the power market would have a major impact on customer protection.
We believe that the interests of the customers are best served
by transparent and fair competition between suppliers backed up
by the supply licence conditions to ensure that suppliers meet
their reasonable social obligations.
It has been a long-standing goal that there
should be light-touch regulation in the power market and that
the accepted view was that regulation was a poor substitute for
robust competition. Light-touch regulation can only follow when
there is confidence that the competitive market is working. The
lack of transparency undermines the confidence in the workings
of the market amongst the customers, the industry players, the
regulator and the government.
APPENDIX 2
STATISTICS
The following tables use market data to provide
evidence that current markets:
— do not bring forward the products
required to service long-term supply contracts (see table 1);
— when appropriate wholesale products
are available, they are only liquid close to delivery ie a very
short-term perspective (see table 2); and
— do not provide sufficient depth of
liquidity to facilitate a normal wholesale market environment
(see table 3).
TOTAL NUMBER OF TRADES OCCURRING IN EACH
YEAR FOR ANNUAL PRODUCTS
| Count | 2004
| 2005 | 2006
| 2007 | |
| Base 1 Yr | 1,369 |
513 | 1,279 |
1,691 | |
| Base 2 Yr | 199 |
26 | 321 |
325 | These figures shown that peak products for periods longer than a year simply
|
| Base 3 Yr | 16 |
0 | 31 | 0
| do not exist, and that even baseload products of longer than a year are rare.
|
| Peak 1 Yr | 77 |
20 | 48 | 31
| The tools to back out a customer contract of longer than a year on the day it
|
| Peak 2 Yr | 2 | 0
| 1 | 0 |
is signed therefore do not exist. |
| Peak 3 Yr | 0 | 0
| 0 | 0 |
|
| |
| | |
Necessary products do not exist |
| LS44 1 Yr | 62 |
15 | 44 | 30
| |
| LS44 2 Yr | 2 | 0
| 1 | 0 |
|
| LS44 3 Yr | 0 | 0
| 0 | 0 |
|
| |
| | |
|
| MWh | Total Volume
Traded
| Total System
Demand |
% |
(Total traded volume calculated as a sum of all baseload and peak trades reported for a given season)
|
S04 | 158,163,408
| 142,816,565 | 111
| |
| S05 | 157,960,920
| 157,760,747 | 100
| |
| S06 | 88,452,624
| 157,207,037 | 56
| |
| S07 | 147,806,256
| 152,095,637 | 97
| The number of times each individual unit required is traded has been decreasing steadily over the
|
| |
| | past few years, although has enjoyed a slight upswing on the recent couple of seasons. During the low
|
| W04 | 275,739,360
| 177,108,878 | 156
| point in 2006 it was not possible to trade sufficient volume to cover the demands of the national customer
|
| W05 | 205,233,600
| 191,580,945 | 107
| base. Even at the high point of trading in Winter 2004 the average unit of demand was only traded 1 and
|
| W06 | 138,756,072
| 183,080,678 | 76
| a half times which is much lower than the figure expected of a liquid market.
|
| W07 | 232,180,104
| 184,735,447 | 126
| |
|
| | |
|
CUMULATIVE PROPORTION OF TOTAL TRADE COUNT OF SEASONAL
BASELOAD TRADE AS
| % | S06 | W06
| S07 | W07 |
|
| M-50 | | |
| % | (Here M-x indicates the period x months before deliver)
|
| M-49 | | |
| 0% | See also Graph "Trade Proportions"
|
| M-48 | | |
| 0% | |
| M-47 | | |
| 0% | |
| M-46 | | |
| 0% | From this table it can be seen that 75-80% of trades in a seasonabl product occur in the 12 months prior to delivery, with as much as 30%
|
| M-45 | | |
| 0% | of the total trades that occur not taking place until the three month period prior to delivery. So even where a product does exist within the
|
| M-44 | | |
0% | 0% | market the window where it is available is frequently short and not open for regular backing out of customer contracts.
|
| M-43 | | |
0% | 0% | |
| M-42 | | |
0% | 0% | |
| M-41 | | |
0% | 0% | |
| M-41 | | |
0% | 0% | |
| M-40 | | |
0% | 0% | |
| M-39 | | |
0% | 0% | Existing products are not available when the would be useful
|
| M-38 | | 0% |
1% | 0% | |
| M-37 | | 0% |
2% | 0% | |
| M-36 | | 0% |
2% | 0% | |
| M-35 | | 0% |
3% | 0% | |
| M-34 | | 0% |
3% | 0% | |
| M-33 | | 0% |
3% | 0% | |
| M-32 | 0% | 2%
| 3% | 1% | |
| M-31 | 0% | 2%
| 3% | 1% | |
| M-30 | 0% | 3%
| 3% | 1% | |
| M-29 | 2% | 3%
| 3% | 1% | |
| M-28 | 3% | 3%
| 3% | 1% | |
| M-27 | 4% | 4%
| 3% | 1% | |
| M-26 | 8% | 5%
| 3% | 1% | |
| M-25 | 11% | 5%
| 4% | 1% | |
| M-24 | 14% | 6%
| 4% | 2% | |
| M-23 | 15% | 6%
| 4% | 2% | |
| M-22 | 16% | 7%
| 4% | 3% | |
| M-21 | 20% | 8%
| 4% | 4% | |
| M-20 | 22% | 9%
| 4% | 5% | |
| M-19 | 24% | 11%
| 4% | 6% | |
| M-18 | 25% | 14%
| 6% | 8% | |
| M-17 | 27% | 18%
| 7% | 10% | |
| M-16 | 28% | 22%
| 9% | 12% | |
| M-15 | 30% | 22%
| 13% | 14% | |
| M-14 | 31% | 22%
| 15% | 17% | |
| M-13 | 32% | 22%
| 18% | 20% | |
| M-12 | 37% | 30%
| 21% | 23% | |
| M-11 | 43% | 35%
| 24% | 26% | |
| M-10 | 54% | 39%
| 27% | 29% | |
| M-9 | 55% | 46%
| 32% | 38% | |
| M-8 | 55% | 52%
| 36% | 49% | |
| M-7 | 55% | 60%
| 46% | 61% | |
| M-6 | 63% | 66%
| 50% | 66% | |
| M-5 | 72% | 73%
| 57% | 72% | |
| M-4 | 76% | 80%
| 62% | 76% | |
| M-3 | 84% | 90%
| 79% | 86% | |
| M-2 | 93% | 95%
| 90% | 94% | |
| M-1 | 100% | 100%
| 100% | 100% |
|
| | |
| | |
APPENDIX 3
ALTERNATIVE MARKET FOR NEW PLANT
There is now an urgent requirement to commence construction
of a new generation of low carbon power stations to replace the
current coal and ageing nuclear stations retiring between 2015
and 2020. The only two realistic options available to provide
sufficient electricity to meet the nations needs are nuclear or
fossil fuel plant with carbon capture and storage. Both these
solutions are highly capital intensive compared to CCGTs and developers
are understandably looking for government assurance and guarantees
on market prices before risking the capital investment required.
Unfortunately such assurances tend to reinforce the current oligopoly
and make competition from new entrants more difficult.
BizzEnergy is very anxious that no plant shortage develops
as plant shortages will only contribute to higher retail prices.
Our position is simple, we need a market based solution which
kicks start the construction of new plant whilst maintaining liquidity
in the whole sale markets and increasing opportunity for new entrants
in both supply and generation.
Such criteria could be easily met by the introduction of
capacity tickets to be auctioned by NGC for the first 5000MW of
new low carbon plant. Tickets would be open to developers with
sites capable of achieving planning permission and auctions held
regularly in tranches up to the 5000MW limit. It might be fair
to exclude companies from European countries where access to energy
markets remains restricted.
Once commissioned, NGC would trade the output from the new
stations via the exchanges. If the output receipts exceed the
price of the capacity tickets the surplus would go toward reducing
the BSUOS cost. If below the sum of ticket and marginal costs,
BSUOS would be increased to cover the total cost. It is envisaged
these capacity tickets would last between 8 to 12 years to provide
developers with confidence to commence construction.
The requirement to trade all the output from the new stations
(around 30TWh) would improve the liquidity in the wholesales market
and give a clearer indication of future market prices to allow
new low carbon plant to be constructed.
APPENDIX 4
FOR INFORMATION ONLY
THE HHI
Effective competitive markets are predicated on having sufficient
competing actors. The risk of market dominance is a major issue
in most competitive markets. A commonly used index for measuring
market dominance is the Hirschmann-Herfindal Index (HHI). The
market share (%) of each market participant is squared and summed
to produce a score on the index.
— 1,800 and above is a highly concentrated market
and in the USA, a merger leading to a score greater than 2000
would probably be challenged.
— A score of 500 to 1,000 is deemed a highly competitive
industry.
RETAIL POWER
HHI
Ofgem carried out a review of the HHI for the non-domestic
retail market in November 2005. The HHI score in the electricity
market decreased from 1695 in November 2003 to 1575 by the end
of 2004. The implication is that the market was not as competitive
as the regulator may have wished.
Figure 1 charts the changing HHI scores for the domestic
market. The data were taken from an Ofgem report on domestic retail
competition in June 2007. The ultimate source of the data was
the Distribution Network Operators.
Figure 1
HHI NATIONAL MARKET SHARES IN DOMESTIC ELECTRICITY MARKET
Source: Ofgem report
The process of market consolidation has lead to an increase
in the HHI score in electricity as the big players take over more
businesses. The HHI is high and it has been reasonably stable
in the 1,700 to 1,800 range for some time. A reduction in the
value of the index is desirable and any increase would be a significant
cause for concern. Over the period from December 2002, the market
share of the independents outside of "Big Six" retailers
has hovered between 0 and 1.5%. It shows that over a sustained
period of time, the market is not conducive to new entry.
Based on the HHI scores, it seems that the retail market
in electricity supply is too concentrated and new entry into the
market might be desirable.
APPENDIX 5
WHOLESALE VERSUS RETAIL PRICES
Trends in baseload (year ahead) wholesale gas prices and
household price increases since September 2004 are demonstrated
below:
Source: Cornwall Energy Associates
Trends in baseload (year ahead) wholesale electricity prices
and household price increases since September 2004 are demonstrated
below:
10
The HHI has been consistently above this level since 2002. Back
11
Some commentators have challenged the profits made by industry
players as excessive and detrimental to the end-consumer. We do
not believe that making profits in a competitive market is acting
against the interest of the consumer. What we are concerned about
is making profits in a non-transparent way. Back
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