2 Energy prices
Rising energy prices
4. The price of domestic gas and electricity has
generally increased over the past eight years after around a decade
of falling prices (see figure 1). The big six energy suppliers
have all recently increased their gas and electricity prices by
between 6% and 11% (see table 1). DECC recently estimated that
a UK household dual fuel (electricity and gas) energy bills in
2013 would be around £1,267 (before the Warm Home Discount
(WHD) rebate) based on average levels of energy consumption. DECC
reported that the average prices of gas and electricity paid by
UK households had risen by around 18% and 9% (in real terms),
respectively between 2010 and 2013, and by around 41% and 20%
(in real terms), respectively, between 2007 and 2013. Taking into
account declining levels of energy consumption, average household
dual fuel bills were estimated to have increased by around 13%
in real terms between 2010 and 2012.[6]
Figure 1: Index prices of selected fuel components
of the RPI (indices relative to the all items RPI, January 1987=100)
Source: ONS series DOBY, DOBX, and CHAW
5. Consumers are increasingly concerned about the
price of gas and electricity. Mr Lloyd, Executive Director of
Which? reported polling results into consumers' top financial
concerns. Domestic energy prices were consistently either the
highest or second highest concern. He described results from their
most recent survey which showed that up to 40% of consumers had
used savings or credit to pay for their domestic energy.[7]
This was echoed by Ms Pardoe, Energy and Policy Liaison Officer
of Citizens Advice, who stressed that energy prices were one of
the biggest issues for their bureaux. Last year, for example,
they had a total of 97,000 inquires relating to fuel debt.[8]
6. A key message from Ofgem's Project Discovery -
which looked at what challenges in Britain's energy market could
lead to an increased risk to consumers' energy supplies - found
that consumers bills would rise under all the future scenarios
considered. As a result, Ofgem cautioned that increasing numbers
of consumers would find it difficult to afford adequate levels
of energy to meet their requirements.[9]
Table 1: Big six price rise announcements in 2012-13
E.ON* | Price rise effective from 18 January 2013
Average dual fuel price increase of 8.7%
Average electricity only price increase of 7.7%
Average gas only price increase of 9.4%
|
British Gas** | Average increase of 6% on domestic gas and electricity prices from 16 November 2012.
(Equivalent to approximately £80 a year or £1.50 a week for a dual fuel customer with average consumption.)
|
EDF*** | Increase of standard variable prices for domestic gas and electricity consumers of 10.8% from 7 December 2012.
(Equivalent to an increase of approximately £2.35 per week for a dual fuel customer with average consumption.)
|
ScottishPower**** | Average increase of 7% for domestic gas and electricity prices from 3 December 2012.
(Equivalent to an increase of approximately £2 per week for an average standard dual fuel bill paid for by direct debit.)
|
SSE***** | Increase for an average standard dual fuel bill paid for by monthly direct debit from £1,172 to £1,274 per year. (An increase of £102 per year, or 8.7%). From 15 October 2012.
|
RWE****** | Average increase of 8.8% for gas and 9.1% for electricity from 26 November 2012.
(Equivalent to an average increase of £109 per year or £2.08 per week)
|
Source:
* E.ON UK, Press Release, E.ON writes to customers
to confirm price rise, effective from 18th January 2013 10 December
2012
** British Gas, British Gas pricing announcement,
12 October 2012
*** EDF Energy, Press Release, EDF Energy announces
price change for residential customers, 26 October 2012
**** BBC, Scottish Power to raise gas and electricity
prices, 15 October 2012
***** SSE, Household energy prices from 15 October
2012, 22 August 2012
****** RWE, Npower announces changes to gas and
electricity prices, 12 October 2012
Driving factors behind price rises
7. There are several factors which make up a customer's
energy bill. DECC recently estimated that the wholesale cost of
fuel made up around 47% of an average household energy bill, the
costs of supply - transmission, distribution and metering - around
20%, other supplier operating costs and profit margins around
19%, the costs of energy and climate change policies around 9%,
and VAT 5% (see table 3).[10]
Most of the six largest energy suppliers provided a breakdown
of their bills in their evidence to our inquiry (see table 2).
The numbers were broadly in line with DECC's estimate.
8. DECC suggested that the main drivers of recent
increases are: wholesale energy costs, estimated to have contributed
at least 60% of the increase in household energy bills between
2010-2012; network costs, supplier operating costs and profit
margins, estimated to have contributed around 25% of the increase;
and the costs of energy and climate change policies, estimated
to have contributed around 15% of the increase.[11]
Energy supply companies argued that the majority of the costs
which had contributed to energy price rises are outside their
control.[12]
Table 2: Big six energy suppliers breakdown of domestic
energy bills
Source: Ev 4, Ev 13, Ev 30, Ev 81, Ev 101, Ev
113
WHOLESALE COST OF FUEL
9. The wholesale cost of gas and electricity was
the largest contributor to customer's bills.[13]
RWE described how for gas, wholesale costs were determined by
global gas prices and for electricity, the wholesale price was
determined by the underlying fuel costs and the 'merit order'
of plant.[14] British
Gas highlighted that because gas-fired power generation currently
makes up roughly a third of UK installed capacity and typically
generates around 40% of UK power. Therefore, rising wholesale
gas prices would also have a significant impact on UK electricity
prices because they set the marginal price for much of the year.[15]
10. There was widespread agreement that wholesale
gas and electricity costs were the main reason behind price rises
in recent years.[16]
The Committee on Climate Change had calculated in their report,
Household energy bills, that increases in the wholesale
cost of gas was the most significant factor behind energy bill
rises from 2004 to 2010, adding around £290 to the average
annual bill.[17]
DECC suggested wholesale costs can be volatile, driven by international
demand and supply which can vary significantly over time.[18]
The Institute of Public Policy Research (IPPR) similarly asserted
that predicting how wholesale energy costs will change in coming
years was an exercise fraught with uncertainty.[19]
DECC, however, believed that wholesale costs were likely to rise
in the short- to medium- term.[20]
11. Ofgem's 2008 Energy Supply Probe - which sought
to understand whether the supply market was working in the interests
of customers - examined how changes in wholesale gas and electricity
prices were passed through to consumers by the large energy suppliers.
It showed there was a lag between changes in wholesale and retail
prices, and explained that this was the result of suppliers' hedging
of their wholesale market exposures.[21]
British Gas explained how it tried to mitigate wholesale energy
price volatility through hedging which benefited consumers:
Energy retailers
provide a valuable service for their customers by forward hedging
much of their wholesale energy purchases, smoothing the impact
of wholesale price volatility for customers and reducing price
shocks.[22]
12. Citizens Advice suggested, however, that there
is a common perception amongst consumers and many commentators
that energy prices, 'rise like a rocket when wholesale prices
rise but sink like a feather when the wholesale prices fall.'[23]
In 2011, Ofgem reported that it had found, 'some evidence that
consumer energy bills respond more rapidly to rising supplier
costs compared with falling costs.'[24]
While Citizens Advice said they recognised that suppliers strongly
refute that claim, they noted that there was insufficient transparency
in the way in which energy prices are set, which factors have
an impact on the final bill a consumer receives, and what proportion
of the bill is accounted for by each of these factors.[25]
COSTS OF SUPPLY - TRANSMISSION AND
DISTRIBUTION
13. SSE described how suppliers had to pay the companies
(system operator) which own the UK's electricity and gas network
for transporting energy along wires, cables and pipes to customers
homes.[26] These network
companies had a natural monopoly.[27]
The amount they charged users of their network was controlled
through a long-term regulatory formula determined by Ofgem. Cornwall
Energy argued that the methodology used by network companies to
determine charges to users was overly complex and the timeframe
by which users were notified of price changes, too short. As a
result, suppliers were unable to confidently assess future costs
in retail offerings to their customers. Cornwall Energy went on
to suggest that this uncertainty probably produced unnecessary
costs to the customer.[28]
Scottish Power stressed, however, that the large cost associated
with this element of bills was a result of significant and necessary
investment undertaken to modernise the network and accommodate
increases in renewables.[29]
E.ON warned that these costs were expected to rise over the coming
years.[30]
COSTS OF ENERGY AND CLIMATE CHANGE
POLICIES
14. Table 3 shows the breakdown of energy and climate
change policy costs in average household bills. Figure 2 shows
DECC estimates for the costs of these polices in 2020 and 2030.
Table 3: Breakdown of average household gas, electricity
and energy bill in 2013
Source: DECC, Estimated impacts of energy and
climate policies on energy prices and bills, March 2013
Figure
2: Estimated impact of energy and climate change policies on average
retail gas and electricity prices paid by UK households (including
VAT)
Source: DECC, Estimated impacts of energy and
climate policies on energy prices and bills, March 2013
15. In its recent report, Estimated impacts of
energy and climate change policies on energy prices and bills,
DECC reported that the average gas prices paid by UK households
in 2012/13 were 5% higher due to Government energy efficiency
policies such as the Energy Company Obligation (ECO) (see table
10). They claimed that the estimated impact of policies on household
gas prices was expected to remain broadly unchanged to 2020. The
average electricity price paid by UK households in 2012/13 were
17% higher due to Government energy efficiency policies and the
added cost of supporting renewable energy. In the future, DECC
estimated that the impact of these policies on the electricity
price could increase to 33% in 2020 (in addition to any potential
wholesale price rises).[31]
The Renewable Energy Association agreed with DECC's analysis that
support for renewable energy would comprise a larger proportion
of energy bills in 2020. They were keen to point out, however,
that current support for renewable energy which, it believed,
was frequently blamed in the media for escalating energy bills,
had contributed only 2% of the amount by which bills had increased
over the past two years. It also highlighted that the impact
of these polices on energy prices was predicted to fall in the
longer-term to 2030.[32]
16. DECC emphasised that despite electricity price
rises, the combined effect of policies on energy prices in 2020
was, on average, expected to be offset by the impact of policies
which improved energy efficiency by helping households reduce
energy consumption.[33]
The Secretary of State emphasised:
We look at
our impact of our measures on current bills and we believe that
without our policies, bills would now be higher. Our policies
on things like product efficiency, energy efficiency, have helped
drive overall bills down compared with what they otherwise would
have been. When you then project forward to 2020, that saving
is greater.[34]
Nevertheless, there was significant concern about
the impact these policies could have on customers including the
fuel poor (see paragraph 124).
SUPPLIER OPERATING COSTS AND PROFIT
MARGINS
17. Supplier operating costs and profit margin is
the part of a bill that energy companies control. It can be broken
down into two: supplier operating costs and profit margin (see
chapter three for discussion of energy supplier profits). Some
energy companies were keen to emphasise that they had worked hard
to reduce their operating costs. British Gas said, for example:
We have been
working hard to reduce our operating costs over recent years in
order to protect customers from the full impact of rising prices.
We are on track with our publicly announced programme to remove
a further £300m of operating costs from our business over
2012 and 2013.[35]
Similarly, RWE pointed out that despite inflationary
pressures, they have been extremely successful in reducing their
operating costs in recent years through significant investment
in systems and services.[36]
They drew attention to consolidated segmental statements (see
paragraph 48) which they argued showed that cost cutting initiatives
by large suppliers had resulted in operating costs falling by
c£100m or 3% between 2010 and 2011, with further falls likely
in 2012.[37]
18. In their report, The true cost of energy,
the IPPR showed that Ofgem's estimates of suppliers' operational
costs increased in real terms over time, by £9 per customer
per year from 2007 to 2011. The IPPR suggested that if Ofgem's
estimates were accurate the suppliers would not have delivered
the efficiency savings in the operational costs that should be
expected if competition was working effectively.[38]
Furthermore, it showed that the difference between the most and
least efficient supplier, in terms of operational costs per account,
increased from a 90% differential in 2007 to a 113% differential
in 2010. It concluded that in a competitive market the operational
efficiency of the suppliers should converge over time. It took
this as further evidence that competition was not fully effective
in the market.[39] Which?
said:
While the
cost of retailing energy should be a small component of consumers'
bills, ineffective competition reduces pressure on suppliers to
ensure that their costs are as efficient as possible [...]. This
will remain a source of inefficient costs unless competition in
the retail market becomes more effective.[40]
19. DECC suggested that supply company operating
costs and profit margins may change overtime as direct and indirect
costs change and as market share changes. Government and Ofgem
are taking action to bring about greater competition in the energy
market to put downward pressure on this element of the bill.[41]
20. Energy bills are rising and are likely to
continue to rise in the future. The wholesale price of fuel has
been the largest contributing factor, driven by rising global
gas prices. Several other factors are also contributing to price
rises including the need to invest and finance UK's electricity
and gas network and energy and climate change policies. The extent
to which energy supply companies are actively working to reduce
their operating costs remains unclear.
Communicating reasons for price
rises
GOVERNMENT AND REGULATORY ACTION
21. Ofgem stated that its commitment to tackle poor
transparency of consumer prices and bills was at the heart of
its Retail Market Review (RMR). The RMR is central to its efforts
to protect consumer interests. By reforming the energy market
to make it simpler, clearer and fairer for consumers, it aimed
to encourage and equip consumers to get the best deal for themselves.[42]
Ofgem proposed three key reforms as part of its review:
· Reducing
tariff complexity by limiting
each supplier to offering no more than four core tariffs at any
point in time.
· Providing
customers with better and more relevant information
including tools to help them navigate the market, and relevant
prompts on what engaging in the market might be.
· Providing
greater confidence that an energy supplier will treat their customers
fairly by requiring each supplier to develop
management and business systems and processes to embed the Standards
of Conduct in all aspects of their engagement with their consumers.[43]
22. Ms Harrison, Senior Partner of Ofgem said of
the reforms;
The reform
package will reduce the number of tariffs, so that if companies
are making profits and putting up their prices, that will not
be done on the basis of bamboozling and confusing customers.[44]
In its recent report, Ensuring a better deal for
consumers, DECC built on Ofgem's retail market review work.
The Secretary of State told us that while Ofgem would take forward
the detailed reforms, the Energy Bill will give statutory backing
to those proposals.[45]
Indeed in our Consumer Engagement report we noted the Government's
assertion that licence modifications did not carry the same weight
as legislation. The Rt Hon Gregory Barker, Minister of State for
Energy, suggested that legislation was required to avoid delay
caused by disagreements between suppliers and the regulator.[46]
"Frustration" at the slowness of Ofgem's progress on
RMR was also noted by the Minister.[47]
The Government amended the Energy Bill to enable Government to:
· Cap
the number of tariffs that suppliers may offer;
· Require suppliers
to move customers on poor value dead tariffs to better value tariffs;
· Require suppliers
to inform their customers of the savings they can make by moving
to the cheapest tariff; and
· Introduce a
tariff comparison tool.[48]
23. Consumer Focus[49]
stated that Ofgem had been slow to respond to the need to improve
transparency in the market. They suggested that the Government
could set a deadline to use its powers to concentrate Ofgem and
the industry on the need for progress - and provide reassurance
to consumers that something would change if they did not.[50]
Furthermore, Which? said that it thought the Government and Ofgem's
intervention via their tariff proposals contained a serious risk
of allowing competition to remain weak. They argued that prices
still could not be compared at a glance and that this would constrain
competitive pressure on energy bills.[51]
Ofgem, however, suggested that they had been quick to tackle poor
transparency where they have found problems. They went on to say
that their past actions and future planned actions, which have
yet to be implemented, will take time for customers to realise
the full benefits.[52]
24. Professor Littlechild, Fellow at the Judge Business
School, University of Cambridge was concerned that some of the
proposals put forward by Ofgem and DECC, while well-meaning, 'fail
to look at the implications for energy prices.' He argued that:
[...] those
elements of Ofgem's key proposals that sought to make the market
simpler would restrict energy tariffs and would thereby remove
attractive offers that customers valued, reduce competition, increase
prices and work to the disadvantage of customers without encouraging
them to engage effectively.[53]
Professor Littlechild went on to say that it might
be possible to provide more appropriate information. He suggested,
"critics might [...] argue that the required measures represent
undesirable further steps towards regulatory micro-management
that will be burdensome and costly to suppliers, Ofgem and customers
alike.' He suggested that the proposals raise questions which
are a matter for debate and discussion with customers, suppliers,
consumer bodies and others.[54]
25. We welcome Ofgem's and the Government's proposals
to ensure energy companies to improve the way they communicate
with their customers. In addition to their proposals we recommend
that the regulator compel energy companies to:
a) Standardise the presentation of their
bills to make it easier to understand bills and compare prices
(for example on a price comparison website);
b) Identify the various components which
make up the costs of the bill (i.e. wholesale price of fuel, costs
of supply (i.e. transmission, distribution and metering), the
costs of UK/EU policy (including support for low-carbon/renewables
and energy efficiency schemes) and company margins (i.e. operating
costs and profit);
c) Express price changes in pounds and
pence as well as percentages.
26. We are disappointed at the regulator's slow
progress on requiring energy companies to improve their transparency
and communication with their customers. We hope that Ofgem will
use its existing powers to ensure that its RMR reforms are implemented.
If the requirements proposed under Ofgem's RMR are not in place
by the August 2013 as promised, we recommend that the Government
stand ready to use any statutory powers to compel greater transparency
from energy companies, early in 2014. We believe that this intervention
should deliver the desirable long-term aim of incentivising companies
to provide more competitive products for consumers. It should
not be considered a one-off intervention to reduce energy company
profits.
27. We also repeat the recommendation made in
our Consumer Engagement report that DECC should lead a full and
frank conversation about the contribution that consumers are being
expected to make towards ensuring we have safe, secure and affordable
energy supplies in future. DECC should set out a detailed strategy
and programme for action over the next two years. This should
include how it will engage with the public on these issues in
a meaningful way.
ENERGY COMPANY ACTION
28. Mr Lloyd of Which? suggested that energy companies
needed to have an 'honest conversation [...] about what is genuinely
driving the increase in [customers] bills, what they can do to
manage that, and where the investment that we are all paying for
through our bills is taking us.'[55]
In a speech, the CBI Director for Business Environment, Ms Kelly,
argued that:
[...] industry
and government had a more honest conversation about solutions
to make the market work better for consumers. Energy bills are
going up. Neither side should try and hide the facts. But we should
be clear on the reasons why. It's because global prices are increasing.
It's because we need to invest to keep the lights on. And it's
because policy costs are rising to facilitate investment in a
balanced energy mix [...].[56]
Energy companies emphasised that they were doing
a number of things to try and improve their communication and
trust with their customers:
· E.ON
had developed a 'Reset programme' which had led it to simplify
the presentation of its tariffs using a new online tool. It also
encouraged customers to check that they were on the best deal
for their circumstances. E.ON reported that since launching its
customer communication and advertising campaign towards the end
of last year, over 300,000 customers had switched to one of its
new products.[57]
· SSE
had reduced the number of tariffs from over 60 to three core products.
It had also published a breakdown of costs on consumer bills.
It also reported that it had introduced a Sales Guarantee offering
all customers and an Annual Energy Review to ensure they were
on the right products.[58]
· British
Gas had introduced a single unit rate
and fixed standing charge tariff structure to improve customer
understanding and helped compare British Gas tariffs with other
suppliers. It had developed an online tool, showing the costs,
benefits and fees associated with each tariff. It was introducing
on its bills a personalised, proactive six-monthly comparison
of what a customer was paying and what they would save by switching
to other tariffs. It had also written to all its customers checking
they were on the most appropriate tariff and it has reviewed customers'
bills and annual statements to make them easier to understand.
This included using a light bulb to show graphically a breakdown
of costs on the energy bill (see figure 3).[59]
Figure 3: British Gas light bulb showing average
British Gas dual fuel bill in 2011
Source: Ev 81
· EDF
Energy had simplified its
tariff structure. (It was keen to point out it did this before
Ofgem's announcement to reform the retail market). It also offered
a Blue+ Promise product which informed customers if they would
save more than £1 a week with any competitor's product. It
also published in graphic format a breakdown of a typical consumer's
bill on its website.[60]
· Scottish
Power had its own 'trust and transparency
agenda', underpinned by its 'World of Difference' commitments,
in which it had focused on providing customers with choice, clarity
and control over its energy purchases, including through improved
tariff information and tariff choices.[61]
· RWE's
CEO, Mr Massara explained in oral evidence that it was launching
an Energy Explained series which would aim to explain to the public
how their bill is made up and how those different segments are
likely to be impacted.[62]
29. Despite serious shortfalls in the way energy
companies communicate with their customers, we are pleased to
see that they have started to make some progress on improving
how they communicate with their customers. It is clear that some
are doing better than others. We commend those companies, including
British Gas and EDF Energy, who are developing innovative new
ways of communicating complex information to their customers.
We are concerned, however, that their efforts are still falling
far short of what is required to increase transparency and improve
consumer trust. It is clear that meaningful improvements are unlikely
to be achieved without regulatory intervention.
A FAILURE TO COMMUNICATE
30. DECC reported that Ofgem's research had found
that the public's view of the energy market was 'overwhelmingly
negative'.[63] Citizens
Advice suggested there was insufficient transparency in the way
energy prices were set, which factors had an impact on the final
bill a consumer received and what proportion of the bill was accounted
for by each of these factors. Consumer Focus suggested that while
suppliers were improving their communication of underlying cost
drivers affecting their businesses, there was still room for improvement.[64]
They outlined three key issues:
· The
use of percentage figures without appropriate context.
Because consumer familiarity with the components making up their
bill is low, attributing a percentage figure to changing components
within it, without reference to their overall cost could create,
rather than remove, confusion. Juliet Davenport, CEO of Good Energy
said that she did not see any problem with explaining in pounds
and pence and percentages because, 'some people appreciate one
way, some people appreciate another.'[65]
· Simultaneously
blaming and taking credit for Government schemes.
When Consumer Focus looked at the recent round of price rises,
they noted two common themes: suppliers attributing much of the
blame for price rises on the cost of Government schemes; and pointing
out that the supplier was making great strides to help consumers
by offering them free or subsidised insulation. It is not always
made clear, it suggested, that the latter is paid for by the former.
Citizens Advice argued that this leaves consumers angry and confused
and that uncertainty around these issues further erodes consumer
trust.[66]
· Inclusion
or exclusion of VAT from figures used for international comparison.
Suppliers frequently point to the prices paid by consumers in
the UK compared with those paid elsewhere in the EU to suggest
that these strongly indicate that the UK had a competitive market.
Consumer Focus observed that the UK applies an unusually low VAT
rate to energy. This means that the UK's position in international
league tables can vary considerably depending on whether you choose
to use tax-inclusive or tax-exclusive figures.[67]
31. Poor communication on the part of energy companies
had resulted in what Mr Lloyd of Which? described as a deep mistrust
of the energy suppliers.[68]
Citizens Advice recommended that, 'in order for suppliers to regain
the trust of consumers, transparency and clarity around pricing
was essential.' There was a key role for Government, the regulator
and suppliers in ensuring a more open, reasoned public debate
around price rises. This should move beyond political point scoring
in the media between suppliers, Government and Ofgem which it
believed had characterised price rises in the past.[69]
32. To some extent the failings highlighted by consumer
groups were acknowledged by energy companies. Mr Massara, CEO
of RWE admitted:
I do not think
the [energy] suppliers have necessarily got it right in explaining
to customers what is happening to their bills, how their bills
are made up, and indeed how their bills are likely to be made
up.[70]
33. Similarly, British Gas accepted that, 'the energy
industry has not always done as much as it could to improve consumer
trust, and that tariffs in particular have been both complicated,
and delivered in a framework that has not always been transparent
or easy to navigate.[71]
They went on to declare that, 'more needs to be done to [...]
better explain the components of their energy bills and the upward
pressures on prices.'[72]
Alistair Philips-Davies, CEO of SSE also recognised that, 'bills
are a little complex and confusing for people generally [...]
and we should seek to simplify the bills for people.'[73]
RWE agreed that customers would benefit from enhanced information
including some communication standardization (e.g. common terms
and the annual statement).[74]
34. Ofgem emphasised the importance of transparency
in driving effective competition. It suggested that transparency
facilitated market functioning in a number of ways. Transparent
and simple consumer prices and bills, it argued, enabled consumers
to engage with the market. This would drive companies to compete
more vigorously to retain customers and win new ones.[75]
35. We are disappointed that energy supply companies
have not gone to greater lengths to explain to their customers
the reasons behind energy price rises. It should come as no surprise
to energy companies that poor communication on their part
has resulted in deep mistrust from their customers. We welcome
the industry's acknowledgement that it has failed to act and needs
to simplify and improve bills including explaining the individual
components of a bill and the reasons for the upward pressure on
prices.
Ensuring a competitive retail
market
36. Which? argued that competition driven by engaged
and informed consumers was often the most effective mechanism
to drive efficient prices.[76]
Professor Littlechild of the University of Cambridge suggested
that the benefits of reducing complexity and increasing information
may be overstated. He argued that customers are more likely to
switch the greater the gains to be made.[77]
Mr Lloyd of Which? expressed his view that there was a growing
distrust from consumers about whether they were paying a fair
price:
I think what
we have seen over the years, where we have relied on a liberalised
competitive retail market, is growing distrust on the part of
consumers about whether the price they are paying is fair, a great
difficulty in navigating their way around the market and identifying
the best deals, and nowhere to look to, to compare authoritatively
whether the price they are paying for gas and electricity is a
decent one.[78]
The Secretary of State advocated increasing competition
asserting, "we absolutely have to make sure that the energy
companies feel the heat of competition."[79]
A concern remains, however, as to whether the retail energy market
is truly competitive.[80]
MARKET COMPETITIVENESS
37. We examined competition in the domestic market
in some detail in our report on Consumer Engagement.[81]
In evidence to this inquiry Which? argued that with only 5-10%
of customers actively engaged in the retail market there
was little incentive for suppliers or generators to be efficient
and offer the lowest prices and, therefore, offer consumers the
best deal.[82] The IPPR
believed that competition was not fully functioning in the supply
market: its report, The true cost of energy, said that
this was demonstrated by energy supply companies slowness to reduce
their operational costs (see paragraph 18) and to over-charge
their 'sticky' customers.[83]
Others suggested that the fact that no new entrant into the retail
market had secured significant market share demonstrated that
there were significant barriers for new entrants.[84]
38. RWE reported that 'there was no evidence (as
opposed to rhetoric) of problems on the supply side.'[85]
British Gas also argued that, 'effective competition is the best
way of ensuring that customers get a "fair deal", and
we believe the UK fundamentally delivers for customers.'[86]
Mr Cocker, CEO of E.ON said:
We are in
a competitive market and in terms of the price that we offer to
our customers we have to be competitive. What we try to do is
to make sure we offer fair, competitive prices to our customers
and simple products.[87]
The Secretary of State also suggested that the UK
was seeing more competition, not less. This was based on smaller
companies entering the supply market and the development of collective
switching of which he was an advocate.[88]
Professor Littlechild of the University of Cambridge said he thought
this, 'deserves further consideration.' He suggested that one
of the most promising avenue of inquiry is DECC's related question
whether, 'there is benefit in seeking to establish a co-ordinated
network of voluntary organisations and community groups that work
proactively with trained energy advisers to support vulnerable
consumers to engage in the energy market'. This, Professor Littlechild
argued, 'would focus directly on the core concern [to encourage
and equip consumers to engage effectively in the market], and
would address it by extending the benefits of the market to a
wider range of consumers.'[89]
MEASURING COMPETITIVENESS
39. E.ON commented that as part of the retail market
reform, Ofgem needed to have a 'vision of the market' in the latter
part of this decade. According to E.ON this vision should reflect
Ofgem's view of what competition and customer choice should look
like, the potential for innovation, and Ofgem's role in the market.
It argued that Ofgem should be confident in its ability to manage
principles-based regulation, whilst avoiding the restriction and
risk of detailed regulation, to ensure customers got a fair deal
in the market.[90]
40. In our Consumer Engagement with Energy Markets
report we examined what metrics would help determine whether the
supply market was competitive and concluded that there were several
different ways of measuring whether the supply market was competitive
including:
· The
percentage of consumers who had never switched;
· The quality
and outcome of switches;
· The number
of suppliers in the market;
· The market
share held by the largest energy companies;
· Supplier operating
costs;
· The level of
efficiency savings made by large suppliers; and
· The level of
self-selling of electricity by vertically integrated companies.[91]
We recommend that Ofgem also include 'profit margin'
and 'rate of return on capital' (because excessive profit margins
are a symptom of poorly functioning markets) in the above list
of metrics which would help determine whether the supply market
was competitive.
41. We had previously recommended that:
When Ofgem
implements its final RMR measures, it should publish its targets
for improvements in the market as a result of these measures and
the criteria it will use to judge the success of the measures.
Going forward, Ofgem should also publish an annual assessment
of the effect those measures are having on competition and consumer
engagement.
The Government responded stating;
The government agrees that it is important that
Ofgem sets out the indicators it will use to measure the effectiveness
of its RMR proposals. We agree that indicators should seek to
measure whether the market is working better for consumers and
whether competition and liquidity are increasing.[92]
We were unsatisfied with Ofgem's original response
and asked them to write to us again clarifying their response.
They said: With respect to recommendation 2, the Committee asked
that Ofgem consider publishing its targets for improvement in
the market as a result of the RMR reforms. We have given this
area consideration and, in the RMR October 2012 consultation,
we published a range of market indicators which could potentially
be used for monitoring of the domestic RMR package, if it was
implemented. Following the publication of our final RMR proposals,
we are conducting further analysis in order to understand how
we may measure the direct impact of the proposals on the market.
This work will continue to be considered in more detail over the
next few months. We are also committed to undertaking a
comprehensive review of our proposed package of retail measures
no later than 2017 if they come into effect before the end of
2013. Ofgem may carry out a review earlier if there is evidence
to suggest it is necessary.
42. We conclude that the small level of switching
by customers between energy suppliers suggests the retail market
is not as competitive as it could be. There is, however, insufficient
data to determine accurately the actual level of competition in
the retail market. We repeat our recommendation that when Ofgem
implements its final Retail Market Review measures, it should
publish its targets for improvements in the market as a result
of these measures and the criteria it will use to judge the success
of the measures. Going forward, Ofgem should also publish an annual
assessment of the effect those measures are having on competition
and consumer engagement.
6 DECC, Estimated impacts of energy and climate
change policies on energy prices and bills, March 2013 Back
7
Q 41 [Mr Lloyd] Back
8
Q 41 [Ms Pardoe] Back
9
Ev 123 Back
10
DECC, Estimated impacts of energy and climate change policies
on energy prices and bills, March 2013 Back
11
As above Back
12
Ev 4; Ev 13; Ev 30; Ev 81; Ev 101; Ev 113 Back
13
Ev w11, Ev 4, Ev 13, Ev 30, Ev w23, Ev w38, Ev 73, Ev 81, Ev 101,
Ev 123 Back
14
Ev 13 Back
15
Ev 81 Back
16
Ev w11, Ev w38, Ev 73, Ev 81 Back
17
Committee on Climate Change, Household energy bills - impacts
of meeting carbon budgets, December 2011 Back
18
Ev 73 Back
19
Ev w11 Back
20
DECC, Estimated impacts of energy and climate change policies
on energy prices and bills, March 2013 Back
21
Ev 123 Back
22
Ev 81 Back
23
Ev 1 Back
24
Ofgem, Do energy bills respond faster to rising costs than
falling costs?, 21 March 2011 Back
25
Ev 1 Back
26
Ev 4 Back
27
In England and Wales the system operator is National Grid. In
Scotland the system operator is Scottish Power and SSE Back
28
Ev w23 Back
29
Ev 113 Back
30
Ev 30 Back
31
DECC, Estimated impacts of energy and climate change policies
on energy prices and bills, March 2013 Back
32
Ev w38 Back
33
As above Back
34
Q 439 Back
35
Ev 81 Back
36
Ev 13 Back
37
Ev 13 Back
38
Ev w11 Back
39
Ev w11 Back
40
Ev 26 Back
41
Ev 73 Back
42
Ev 123 Back
43
Ofgem, The retail market review - Final domestic proposals:
Consultation on policy effect and draft licence conditions,
27 March 2013 Back
44
Q 399 [Ms Harrison] Back
45
Q 423 Back
46
Oral evidence taken before the Energy and Climate Change Committee
on 30 October 2012, HC (2012-13) 554-ii, Q 288 Back
47
Oral evidence taken before the Energy and Climate Change Committee
on 30 October 2012, HC (2012-13) 554-ii, Q 286 Back
48
Ev 73 Back
49
Consumer Focus has changed its name to Consumer Futures Back
50
Ev 54 Back
51
Ev 26 Back
52
Ev 123 Back
53
Ev w67 Back
54
Ev w67 Back
55
Q 55 Back
56
CBI, Don't fall into 'the blame game' on energy costs - CBI,
4 July 2013 Back
57
Ev 30 Back
58
Ev 4 Back
59
Ev 81 Back
60
Ev 101 Back
61
Ev w6 Back
62
Q 229 Back
63
Ev 73 Back
64
Ev 54 Back
65
Q 205 [Ms Davenport] Back
66
Ev 1 Back
67
Ev 54 Back
68
Q 41 [Mr Lloyd] Back
69
Ev 1 Back
70
Q 228 Back
71
Ev 81 Back
72
As above Back
73
Q 206 Back
74
Ev 13 Back
75
Ev 123 Back
76
Ev 26 Back
77
Ev w67 Back
78
Q 42 Back
79
Q 444 Back
80
Ev w11, Ev 26, Ev 123 Back
81
Energy and Climate Change Committee, Fifth Report of Session 2012-13,
Consumer Engagement with Energy Markets, HC 554-I Back
82
Ev 26 Back
83
Ev w11 Back
84
Ev w46 Back
85
Ev 13 Back
86
Ev 81 Back
87
Q 140 [Mr Cocker] Back
88
Q 436 Back
89
Ev w67 Back
90
Ev 30 Back
91
Energy and Climate Change Committee, Fifth Report of Session 2012-13,
Consumer Engagement with Energy Markets, HC 554-I Back
92
Energy and Climate Change Committee, Fifth Report of Session 2012-13,
Consumer Engagement with Energy Markets: Government and Ofgem
Responses to the Committee's Fifth Report of Session 2012-13,
HC 1036 Back
|