Oral statement to Parliament

Competition in the energy markets

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Statement by Edward Davey on the first Annual Assessment of Competition in the energy markets.

The Rt Hon Edward Davey

[Check against delivery]

With your permission Mr Speaker, I would like to make a statement on competition in the energy markets.

Today, Ofgem, the Office of Fair Trading and the Competition and Markets Authority have published the first Annual Assessment of Competition in the energy markets, and I have made copies available to the House.

Efficient, open markets made up of diverse businesses competing for trade are the best way to ensure that consumers get the best deal on price and service.

Strong and independent regulation of competition helps consumers too, because constant political interference for short-term gain can add to long-term risk and costs.

Mr Speaker, when this Coalition Government took power, we inherited energy markets that were not working in the best interests of the people of Britain.

The supplier base had shrunk from 15 majors in 2000 to just six in 2010 - Labour’s ‘Big 6’.

Many people found it difficult to switch.

The profusion of over 350 complex tariffs and complicated bills, for example, made it difficult for people to work out how to get on the right tariff for their circumstances.

The wholesale market was also dominated by the Big 6 where they either supplied themselves or opted for over the counter deals, with no transparency.

So this Coalition Government, working with the regulator Ofgem, has set about the long task of improving the energy markets, to make them work for consumers.

We have opened up the markets to new suppliers and generators.

Labour’s Big 6 now face 18 new retail competitors whose market share has more than doubled since 2010.

The best buy energy tables are now dominated by the independent suppliers.

Tariffs are simpler, bill formats clearer, and the process for switching suppliers is being speeded up.

According to the latest statistics, compiled by Electralink and Energy UK, almost 3.5 million people switched electricity suppliers last year.

And independent suppliers gained over 700,000 new customers – about 20% of switchers.

In January and February this year, almost 500,000 people switched suppliers, with independents gaining over 200,000 new customers – over 40% of switchers.

The wholesale markets are also being opened up with liquidity in the day ahead market transformed.

And the forward markets are set to follow suit under OFGEM’s Market Maker reforms to be introduced from next week.

So the energy markets have improved since 2010.

Yet despite all these reforms, the Government is determined to do more.

And that’s why in October last year, we announced that Ofgem, working closely with the Office of Fair Trading and the Competition and Markets Authority, would undertake annual reviews of the state of competition in the energy markets.

This first annual assessment and its recommendations back our decision to turn to the independent competition authorities.

This expert review has found five areas in Britain’s energy markets of real concern which need further investigation.

First, a low level of trust and lack of engagement in the energy market by consumers which are not compatible with healthy competition.

Second, evidence that the markets retain the geographical pattern which existed before privatisation and can mean higher prices for customers who don’t switch from their home supplier.

Third, evidence of possible tacit co-ordination between energy companies that includes a strong alignment of pricing announcements in timing and extent.

Fourth, barriers to entry and expansion for new companies that make it difficult for them to challenge the Big 6.

And finally, evidence that the Big 6 have seen increasing profits that don’t appear to reflect increasing efficiency, which is indicative of a possible lack of competition.

While the assessment notes there has been real progress in improving competition in recent years – especially in the growth of the number of independent suppliers - the Big 6 are still dominant, with a 95% share of the domestic energy supply market

In the electricity markets, the Big 6 operate a model of vertical integration that is not transparent, with forward markets that are not currently liquid, as I have argued from this Despatch Box.

While Ofgem’s new Market Maker reforms may assist this, the assessment rightly wants to dig deeper.

Yet as the assessment today shows, it may be that vertical integration is in the consumer’s best interests and can ultimately save people money.

The assessment cautions against rushing to judgement and rushing to solutions as some have sought to do.

But it is not just the electricity markets we need to address.

On average, people spend £150 more per year on their gas bills than they do on their electricity.

The gas market does not have a vertically integrated structure.

Britain’s gas wholesale market is one of the most liquid in Europe, with large volumes of gas bought and sold openly between suppliers and producers.

But the assessment shares my concern that parts of the gas market, particularly the domestic gas supply market, may not be delivering for consumers.

The latest analysis suggests profit margins for gas supply are around three times higher that of electricity, with some companies making 5 times the profit supplying gas compared to the profit margin on electricity.

Mr Speaker, in light of this assessment, Ofgem is now proposing a tough but sensible course of action – a full Market Investigation Reference.

This would be undertaken by the new Competition and Markets Authority which has the robust powers required to investigate the market and take the action that is needed to strengthen competition.

As the Competition Minister responsible for the decision to create this new powerful competition body, I am particularly pleased that Ofgem are proposing to make energy markets their first major task.

A Market Investigation Reference is a course of action that should not be lightly undertaken, particularly at a time when the energy market is going through radical changes to introduce new low carbon generation while ensuring security of supply.

But tackling these issues through the independent competition authorities provides companies and investors with the confidence that this process will be evidence-based, fair and just, and free from political interference.

Ofgem have today published the legally required consultation on their proposed Market Investigation Reference which will run until 23 May and will make a final decision on referral by the summer.

If a reference is made, the Competition and Markets Authority must complete its work within 18 months, which means we can expect their report and recommendations before the end of 2015.

While the competition authorities take forward this work, the Government will continue to support families, individuals and businesses and will be bringing forward policy packages throughout the year to put consumers in control of their energy bills, help the fuel poor and further support competition.

This will include:

Halving switching times; Customers off dead tariffs; The first Fuel Poverty Strategy in over a decade; Smart Meters being installed; Help for those on pre-payment meters; Boosting the Green Deal; Criminalising market manipulation; And boosting independent suppliers.

Mr Speaker, this is a course of action that consumer and business groups such as the Federation of Small Businesses, Which?, Consumer Futures and the Citizen’s Advice have been calling for.

Energy companies such as Npower, EoN and EDF have also argued that a Market Investigation Reference would be the best way to restore consumer trust and decide what changes are needed on the basis of the evidence.

On the basis of the evidence provided by the regulators published today, this is the right course of action to take now.

This is not a quick fix, but it is the right way to restore people’s trust that the energy markets are working for their benefit.

It is the right way to create long-term certainty for investment.

The Government strongly supports this process.

I urge the whole House now to join us in that.

Published 27 March 2014