Energy Prices, Profits and Poverty - Energy and Climate Change Contents

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)


* 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


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]


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]


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).


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


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.


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.


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]


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]


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

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Prepared 29 July 2013