The energy market is completely broken as far as many businesses are concerned. They are paying significantly more for their energy than they should be; they struggle to access information about available tariffs and in certain sectors (such as pubs) suppliers refuse to serve independent outlets and small chains.
In its Energy Market Investigation in 2016 the Competition and Markets Authority (CMA) found that competition in the retail supply of gas and electricity to SMEs wasn’t effective. Businesses’ energy bills were found to be 18% too high, causing detriment to them estimated at £500 million p.a..
In March 2023 the Chief Executive of the energy regulator Ofgem made a commitment to the then Chancellor of the Exchequer, Jeremy Hunt, that Ofgem would consider making a market investigation reference (MIR) to the CMA (i.e. for it to conduct a fresh market investigation) if it had reasonable grounds to suspect that competition in the non-domestic (i.e. non-residential) energy market wasn’t effective.
In July 2023 Ofgem concluded a review of the market which showed beyond any doubt that competition is not effective. Ofgem described “customers struggling to contract with energy suppliers, poor customer service, and larger price hikes than seem necessary”. However, it has made no mention of an MIR.
Remarkably, Ofgem’s market review had focused on the effect on customer service, rather than prices. Ofgem didn’t even seem to be aware of the CMA’s 2016 investigation. Its review ignored key features of the market that the CMA had found adversely affected competition, notably the barriers to customers accessing and assessing the information needed to switch to a different supplier or tariff.
A market investigation is the only way to address the entrenched competition problems in this market. Market investigations are thorough and the CMA has wide ranging powers to obtain information and impose remedies. Because this market has been investigated previously, a market investigation should produce effective remedies this time and conclude significantly more quickly than the time limit of 18 months.
The criteria for an MIR are undoubtedly met because of: the “reasonable grounds for suspecting” that competition is not effective; the scale of the problem and the reasonable chance that appropriate remedies will be available. Potential remedies include:-
- A cap on (just) the standing charge in energy tariffs, which the CMA didn’t consider last time. This would drive competition by making it much easier for customers to compare tariffs – they would only need to know the unit rate to do that.
- Eliminating any obstacles to smart meters being installed and converted to pre-payment mode (as they can be for domestic customers). This would address the problem that many customers (those perceived as riskier, such as independent pubs) struggle to secure any energy contracts at all and face demands from suppliers for security deposits and up-front payments as well as higher ongoing payments.
An MIR could be made by either Ofgem, the CMA itself or Ed Miliband (as the minister responsible for reducing energy bills).
“Excessive energy costs are stunting businesses’ profitability and investment. A fresh market investigation would deliver a significant boost to economic growth at virtually zero cost to the government”, says the author of this proposal, David Osmon.
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