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The Current Energy Market Reforms in Great Britain

Published Wednesday, March 15, 2017

This briefing paper covers the current energy market reforms in Great Britain. Increasing energy costs and the position of the ‘big six’ suppliers has meant that competition in the energy market has been high on the political agenda in recent years. A major review of the marketplace concluded in 2016 with a report from the Competition and Markets Authority. Recommendations from this report are now being implemented whilst the Government has indicated further reforms are being considered. The energy market in Northern Ireland is separate and is not included here. The focus of the paper is on major reforms and events; it does not provide full coverage of the Competition and Markets Authority (‘CMA’)’s Energy Market Investigation. Members and their staff can get in touch with the Library if they require further briefing on this.

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The British domestic energy market has seen a number of reforms in the past two decades, from the opening-up of the markets in 1980’s-1990’s to the latest interventions following the Competition and Markets Authority’s Energy Market Investigation.

Successive probes and reviews of the British energy market have led select committees, Ofgem (the gas and electricity market regulator) and stakeholders to conclude that competition in this market was not “working effectively” for consumers. No evidence of “active collusion” was ever found but Ofgem ended their Retail Market Review in 2013 with a series of measures aimed at providing more clarity to consumers regarding tariffs.

In 2013, Ed Miliband announced that Labour would cap energy prices for 20 months if it won the general election. In 2014, with increased political and public interest in the energy market, Ofgem worked with the Office of Fair Trading and the CMA on a State of the Market Assessment.

Shortly after the report was published, Ofgem made an investigation reference to the CMA. It became the CMA energy market investigation. The CMA published its first set of provisional decisions on remedies on 7 July 2015 and planned to publish its final report in December 2015. Due to the volume of evidence and comments on its original findings and provisional remedies, the CMA extended the inquiry to the statutory deadline of 26 June 2016. It published its final report on 24 June 2016.

The CMA’s key findings for Domestic Consumers were:

  • Around 70% of the domestic customers of the six largest energy firms are still on an expensive ‘default’ standard variable tariff (SVT)
  • These customers could potentially save over £300 by switching to a cheaper deal
  • Customers could have been paying about £1.4 billion a year more than they would in a fully competitive market.
  • The principal remedies proposed by the CMA to address these challenges are:
  • Ordering suppliers to give Ofgem details of all customers who have been on their default tariff for more than 3 years, which will be put on a secure database under Ofgem control to allow rival suppliers to contact customers.
  • Introducing a temporary safeguard price control to protect customers on prepayment meters, whose options are more limited, which would reduce their bills by a total of £300 million a year.
  • Enabling price comparison websites (PCWs) to play a more active role in helping customers find the best offers for them and give access to meter data which will enable customers to search instantly for deals.Reactions to the CMA’s findings were mixed but the Government is committed to take forward the recommendations. The Department for Business, Energy and Industrial Strategy (BEIS) announced on 14 December 2016 that Ofgem was also publishing “an energy supplier league table to increase transparency on the numbers of people on expensive standard variable tariffs.”
  • Unusually for an investigation by the CMA, there was one dissenting member of the investigating panel for one part of the proposed domestic market remedies.

Ofgem also recently launched a Supplier Cost Index. Drawing on publically-available information, it estimates ongoing trends in the main elements of cost that a supplier incurs in supplying a typical domestic customer with gas and electricity. The aim of this index is to increase transparency in the energy market and help consumers understand what is behind trends in prices.

The number of energy suppliers has grown in the last six years, from 14 to 48 as of March 2017, as the so-called ‘big six’ - Centrica plc (British Gas), EDF Energy, E.ON, SSE, Scottish Power and Npower – have seen their share of the market decline.

However, it is still viewed that the market could be more competitive, and support consumers in accessing lower prices. For example, the CMA has found that between 2004 and 2014 average annual domestic gas prices rose by around 125% in real terms over the period, and domestic electricity prices by around 75%.

Moreover, and despite Ofgem’s warning about increasing prices, five of the ‘big six’ have announced since December 2016 that they were increasing their energy prices. This led the Members of Parliament John Penrose, Caroline Flint, Patricia Gibson, Caroline Lucas and Mr Roger Godsiff to apply to the Backbench Business Committee for a parliamentary debate on energy prices. The debate will take place on 16 March 2017.

 

Commons Briefing papers CBP-7759

Authors: Jeanne Delebarre; David Hough

Topics: Competition, Consumers, Energy, Utilities

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