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CMA’s case for energy market reform

Provisional findings of Competition and Markets Authority’s year-long investigation into the energy market
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In a summary of its provisional findings, the Competition and Markets Authority (CMA) has highlighted a range of problems that hinder competition in the energy market.

Issues include shortcomings in regulation, widespread consumer disengagement and concerns over whether change could be delivered across the market.

Disengaged consumers

The average household currently spends about £1,200 on energy each year. This means that, for the poorest 10% of households, energy bills now account for about 10% of total expenditure.

But widespread consumer disengagement is stopping the market from functioning properly. An extensive survey of 7,000 people in Great Britain found that over 34% of respondents had never considering switching provider.

‘For the poorest 10%, energy bills make up nearly a tenth of their total spending. So as well as helping customers become more active we want to consider carefully whether some sort of protection is warranted whilst other changes take effect. We wouldn’t introduce such a move lightly and would need to consider its effect on competition but it is something we feel is right to look at closely.’

Roger Witcomb, Chairman of the energy market investigation

The report has found that dual fuel customers could save an average of £160 a year by switching to a cheaper deal. About 70% of customers are currently on the ‘default’ standard variable tariff (SVT), despite the presence of generally cheaper fixed-rate deals.

Higher charges

Lack of awareness of what deals are available, confusing and inaccurate bills and the real and perceived difficulties of changing suppliers all deter switching – and the higher price levels reflect that suppliers can charge higher prices to these disengaged customers.

Regulatory interventions designed to simplify prices, such as the ‘four-tariff rule’, aren’t having the desired effect of increasing engagement – yet they have succeeded in limiting discounting and reducing competition.

Instead, the CMA is proposing that the regulatory approach to the retail market should be based on clear principles that allow the benefits of competition to be realised.

Millions are paying too much

The CMA also believes measures such as smart metres should be encouraged to increase engagement, and that disengaged consumers should be targeted and prompted to shop around.

‘There are millions of customers paying too much for their energy bills – but they don’t have to.

‘Whilst competition is delivering benefits to increasing numbers of customers, mainly through the growth of smaller suppliers with cheaper fixed-price deals, the majority of us are still on more expensive default tariffs.

‘Many customers do not shop around to see if there’s a better deal out there – let alone switch. The confusing way energy is measured and billed can make comparing deals understandably daunting.

‘The result is that some energy suppliers know they don’t have to work hard to keep these customers. It’s notable that there are such high levels of complaints about customer service.’

Roger Witcomb, Chairman of the energy market investigation

The CMA will also consider whether safeguards such as a transitional price cap on the most expensive tariffs are needed to protect customers until other measures have helped to create a more competitive market.

Costs and transparency

Electricity prices have risen by around 75% and gas prices by around 125% in the last 10 years. Future energy prices will be heavily influenced by decisions being made about investment in generation capacity and renewables, and the additional costs for bills can be considerable when a competitive process is not used.

The CMA report also points to a lack of transparency that is hampering trust in the sector. Wider availability of financial information, and more effective communication of the impact of decisions on bills, alongside a clear and transparent demarcation of responsibilities between the Department of Energy & Climate Change (DECC) and Ofgem – and a clearer, independent role for Ofgem – would assist in making sure that policy is efficient, effective and targeted at the right areas.

The full report

Ofgem announced its decision to refer the energy market in June 2014. The CMA has been carrying out its independent investigation to see if there are any features of this market which prevent, restrict or distort competition and, if so, what action might be taken to remedy them.

The full provisional findings report, along with 36 appendices, will be published later this week. The CMA will now consult and hold detailed discussions with all interested parties on the findings and possible remedies as it moves to publish its final report by the end of the year.

More information about the investigation can be found here.

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