Competition and Markets Authority Archives

The case for a market investigation into the supply of energy to businesses

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.

Download the report:

The case for a market investigation reference of the supply of energy to businesses Download

Reforming energy standing charges for prepayment customers

Forced installations of prepayment meters have been widely condemned but the fact that prepayment customers pay significantly more than other energy consumers has attracted far less attention.

Prepay customers pay more simply because their standing charges are so high, now £350 p.a. for gas and electricity combined, which is £50 p.a. more than those who pay by direct debit.

Most prepayment customers are on low incomes so spend less on energy. Their higher standing charges further reduce the amount of energy they can afford, with many self-disconnecting from their energy supply.

The government has announced that it will spend £200 million of tax-payers’ money to take the edge off this for nine months from July but the higher standing charges are the explicit result of a series of policy decisions by the energy regulator Ofgem. Ofgem has consistently favoured the energy companies over the most vulnerable consumers.

Standing charges should be much lower for all consumers, and particularly prepayment customers, because they substantially exceed the costs that should be recovered through them, as Ofgem’s own analysis shows.

High standing charges contributed to the energy crisis by encouraging the entry of firms that were more intent on capturing these payments than on managing their energy costs effectively.

Ofgem’s policy of reducing the unit rate rather than the standing charge has also increased overall demand for energy, exacerbating carbon emissions and reducing the U.K.’s energy security.

Download the report commissioned from Ideal Economics by National Energy Action:

Reforming energy standing charges for prepayment customers Download

The high level of the standing charge in energy bills

The new energy price cap came into effect on 1 April and this was accompanied by some media attention about the shockingly high level of the standing charge in it. The news coverage was sparked by an open letter from Fuel Poverty Action which drew on work by David Osmon, a former senior economist at Ofgem, at Ideal Economics. The letter can be read at: https://docs.google.com/document/d/1R6zGe4K2PTUCnAO6Z6w8lY-4eiJV0YKjg7PsUHbnQJI/edit

The main points are:-

In the new price cap the fixed (‘standing’) charge is around £300 p.a.. For the poorest 10% of households this amounts to a third of their total energy spending.
Ofgem’s policy of raising the standing charge instead of the price per unit of energy is perverse. The higher standing charge disproportionately affects poor households (who use least energy) while the lower unit rate increases total energy consumption, thereby raising carbon emissions and reducing energy security.
The standing charge should be about £60 p.a. according to Ofgem’s own analysis of the costs incurred by suppliers.

The standing charge is already set to rise further absent a change in policy. Not only is Ofgem planning to load further costs onto it but any increases in it will be cumulative: they will cause more households to be in fuel poverty and thereby eligible for the Warm Home Discount, the costs of which are passed back to consumers in… the standing charge! This approach is unsustainable.

Ofgem should instead reduce the standing charge by £200 p.a., which would directly help the lowest paid to heat their homes without the government having to spend any money to achieve this.

In addition, the government should remove VAT on (just) the standing charge and if Ofgem lowered the standing charge the cost to the government of doing this would be greatly reduced.

Some further points relating to the standing charge:-

High standing charges contributed to the energy crisis because some suppliers entered the market more focused on acquiring customers in order to obtain these payments than on managing their energy costs.
The price cap was introduced because many consumers were unable to identify good value tariffs, which was made more difficult by tariffs having standing charges as well as unit rates. Ofgem had previously planned to fix the level of the standing charge to simplify tariffs but gave in to pressure from suppliers not to do this.
Replacing the current price cap with a much simpler cap on just the standing charge would not only protect vulnerable consumers, reduce emissions and improve energy security but also boost competition because consumers would only need to consider unit rates to find the cheapest option. This would lower prices generally.

There is more on these points in the attached article by David Osmon:-

The high level of the standing charge in energy bills Download