The lack of competition in the supply of energy to businesses causes their bills to be significantly higher than they should be. UKHospitality, which represents the country’s restaurants, hotels and pubs, is now stepping up its demand for a market investigation of this by the Competition and Markets Authority (the CMA). But it has escaped attention until now that these excessive energy bills also afflict all other types of non-residential customers – local sports clubs, churches, schools and so on. Rectifying this would not only increase economic growth but also provide a boost to public life generally.
The London Evening Standard has published an article on this by David Osmon of Ideal Economics:
https://www.standard.co.uk/business/businesses-energy-bills-ofgem-cmsa-investigation-b1261731.html
The article is reproduced in full here:
The government is passing up a golden opportunity to reduce businesses’ energy bills at almost no expense to the taxpayer. This would provide a much needed boost to economic growth, with lower energy costs for firms feeding through to lower prices for end consumers. The government’s inaction is even more puzzling when you consider the same measure would also slash the energy bills of all other types of non-domestic energy customers, from local sports clubs to churches and schools.
It is well understood that most businesses are being charged too much by their energy suppliers. 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.
With complaints from businesses continuing, in 2023 the chief executive of the energy regulator, Ofgem, promised 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.
Ofgem duly conducted a market review later that year but strangely it didn’t directly consider any of the features of the market that the CMA had identified as adversely affecting competition. In fact it didn’t even set out to consider the effect on prices, only on customer service, yet it still came to the conclusion that prices were too high and that the market was not functioning properly. Despite that, Ofgem didn’t even mention referring the market to the CMA, let alone do so.
The CMA is the only body with the powers to obtain the information needed to get to the bottom of the issues affecting competition in this market and to impose the remedies necessary to resolve them. But 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.
In January this year the government removed the Chair of the CMA, Marcus Bokkerink, from his post, apparently because he wasn’t sufficiently growth oriented. It also gave the CMA a formal strategic steer to prioritise interventions that contribute to investment and growth and to focus on markets that particularly impact UK-based consumers and businesses.
With this in mind UKHospitality, which represents the country’s restaurants, hotels and pubs, wrote to the CMA in February to request a meeting to explore a fresh market investigation. But in May, having met with Ofgem (although not UKHospitality), the CMA said it had decided against re-investigating this market.
It said it wanted to allow time for measures that Ofgem had put in place following its market review to have an effect. But these address barely any of the issues affecting competition and it’s clear they will have almost no effect on competition or prices.
UKHospitality is now stepping up its call for a fresh market investigation and has written again to the chief executive of the CMA, Sarah Cardell, to make the case for this.
The fact that the CMA has looked at this market before means that a market investigation could almost certainly be concluded within a year and the CMA would be expected to ensure its remedies were effective this time. There are a number of potential solutions that it didn’t consider previously. These include capping the daily standing charge, which would simplify bills and tariffs, and mandating Ofgem to publish guidance on the competitive price of a unit of energy, which would guide business customers in their negotiations with suppliers.
As Kate Nicholls, Chair of UKHospitality, said, “there is nothing more detrimental to business investment in the UK than having to pay an excessive amount for energy”. Hospitality businesses have also been struggling with increases in national insurance contributions and the national minimum wage but all types of firms, from shops to manufacturers, would benefit from the lower energy prices that would result from improved competition.
The government’s recent statement that it will pay £420 million to reduce the energy bills of 500 large companies by 18% follows the Industrial Strategy announced in June, when it committed to paying £2 billion to reduce energy costs for a group of large manufacturers by “up to 25%”. A CMA investigation would cost a miniscule fraction of these amounts and achieve a similar scale of price reduction, but with greater overall effects. For example, whereas the Industrial Strategy lowers electricity prices for 7,000 manufacturers for a period of four years, starting in two years’ time, a market investigation would lower both gas and electricity prices for all types of businesses (including the other 130,000 manufacturers) permanently, starting in one year.
That comparison actually understates the benefits that would follow a market investigation. It has gone unnoticed until now that it’s not just the energy bills of the private sector that are inflated by the lack of competition but also those of not-for-profit organisations in both the third sector, such as churches, charities and community groups, and the public sector, like schools and GPs’ surgeries. As the government funds many of these bodies it, too, is losing out to the energy companies and a CMA market investigation would actually save it money.
Rectifying the lack of competition in the supply of energy would lead firms to increase their output and result in lower prices for their products. This would bolster demand and, by reducing inflation, simultaneously help to bring about cuts in interest rates. But more than that, it would provide a shot in the arm to public life in this country generally.