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 a lack of competition in the supply of energy to SMEs meant their bills were 18% too high.
The main reason was that business customers faced barriers to accessing and assessing the information they needed to switch to a different energy supplier or tariff. Suppliers tend to negotiate prices individually rather than making their best offers widely known and in any case the variable structure of tariffs makes it difficult to compare them.
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 referring this market back to the CMA for a fresh investigation if it had reasonable grounds to suspect that competition wasn’t effective.
Remarkably, however, Ofgem’s market review didn’t directly consider any of the features of the market that the CMA had found adversely affected competition and it focused on the effect on customer service, rather than prices.
Nevertheless the review 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”. Despite that, however, it has made no mention of referring the market to the CMA.
A market investigation is the only way to address the entrenched competition problems here. The CMA has wide ranging powers to obtain the information needed to get to the bottom of the issues affecting competition and to impose the necessary remedies. Because this market has been investigated previously, a market investigation should conclude significantly more quickly than the time limit of 18 months and the CMA would be expected to ensure its remedies were effective this time.
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.
- Mandating Ofgem to publish regular guidance on the competitive price of a unit of energy, which would guide business customers in their negotiations with suppliers.
- 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.
It’s not only Ofgem that can refer this market to the CMA. Government ministers can do that too, and the CMA can launch market investigations itself.
Kate Nicholls, Chair of UKHospitality, which represents the country’s restaurants, hotels and pubs, said, “there is nothing more detrimental to business investment in the U.K. than having to pay an excessive amount for energy”.
“Excessive energy costs are stunting businesses’ profitability and forcing them to scale back their activity. A fresh market investigation would deliver a significant boost to economic growth at virtually zero cost to the government”, added the author of this proposal, David Osmon.
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