energy bills Archives - Ideal Economics

An article in The Standard about how the lack of competition in the supply of energy increases the energy bills of businesses and not for profit organisations and how this could be fixed

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.

The case for a market investigation by the CMA of the supply of energy to businesses and other non-domestic customers

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.

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.

Download the report:

The case for a market investigation reference of the supply of energy to non-domestic consumers (October 2025)Download

Submission to Ofgem’s Call for Input on Standing Charges

Summary

When Ofgem introduced the price cap on default tariffs in 2019 it inexplicably lowered only the unit rate. The standing charge was left at the prevailing market rate even though the level of these tariffs was known to be excessive. (That had been the central finding of the CMA’s Energy Market Investigation, which led to the price cap.)

Thus the dual fuel standing charge was initially set at £169 p.a. (excl. VAT) for direct debit customers and £200 p.a. for those paying by standard credit. Using Ofgem’s analysis of suppliers’ costs the costs that should be recovered through the standing charge (those that relate to serving customers rather than supplying energy) are estimated to be lower than this: about £55 p.a. per (non-prepayment) customer.

Since then the standing charge permitted under the cap has risen sharply and excessive standing charges have:-

Harmed low income households. These consume less energy than high income households so the standing charge forms a larger proportion of what they pay and means that overall they pay the highest price per unit of energy.
Increased carbon emissions and reduced the U.K.’s energy security. Higher standing charges entail lower unit rates in the price cap which lead to increased energy consumption.
Contributed to the collapse of suppliers. Standing charges in excess of costs are likely to have encouraged the entry and expansion of suppliers that were more intent on capturing these payments than on managing their energy costs effectively. Many of the failed suppliers were caught out when wholesale energy costs increased because they had amassed customers very quickly by offering deals that didn’t cover their costs and hadn’t bought enough energy in advance.
Made it more difficult for consumers to compare tariffs and identify those offering good value. This was identified by the CMA as a key issue adversely affecting competition and leading to high tariffs although it has not recently been an issue for domestic consumers protected by the price cap. However, it remains a very significant issue for non-domestic consumers whose standing charges are less transparent and more variable.

2. and 3. are leading to yet higher standing charges (a vicious circle) because:-

Approx. £5bn p.a. of the costs of installing and maintaining the electricity network are now recouped from suppliers through fixed rather than volumetric charges following Ofgem’s Targeted Charging Review (TCR).
The costs of the Supplier of Last Resort (SoLR) process are also added to the standing charge for electricity.

NB These decisions weren’t made (as they should have been) on the basis of the economically efficient recovery of costs, which would have led to them being added to the unit rate instead. Rather, they were seemingly at the behest of the Energy Minister who wanted there to be no “free riders” (apparently referring to people with solar panels who consume less so would contribute less to these costs if this was done through the unit rate).

The costs incurred by suppliers that are appropriately recovered through the standing charge are now likely to be of the order of £74 p.a. and the TCR and SoLR add another £76 p.a. to the cost of serving a customer. However, the current level of (non-PPM) standing charges is vastly more still, around £300 p.a. (excl. VAT) (£288 p.a. for direct debit and £330 p.a. for standard credit customers). Thus suppliers are currently making about £150 p.a. profit from every customer before they even supply any energy (effectively ‘free money’).

Standing charges should be capped at about £74 p.a. (with TCR and SoLR costs switched to the unit rate). This would address a number of issues simultaneously. As well as enabling low income households to heat their homes etc it would reduce carbon emissions; improve energy security (reducing the amount of investment needed in the network and generation); reduce the risk of future supplier failures; and simplify bills, thereby helping consumers to compare (and constrain) suppliers’ tariffs.

Capping the standing charge for non-domestic customers, too, would produce similar benefits.

In addition:-

There have been calls for the government to withdraw VAT from energy bills on the basis that energy is a necessity. In fact not all energy consumption is necessary but access to a supply of it undoubtedly is. If the standing charge was capped tightly this would significantly reduce the cost to the government of eliminating VAT on the standing charge so it would be more likely to happen.
Ofgem is proposing to lower prepayment meter (PPM) standing charges (currently £350 p.a. excl. VAT) to nearer the direct debit level (although not apparently equal to it). In fact the price cap for PPM customers with smart meters was previously set at the direct debit level (for both the standing charge and the unit rate) but for some reason this protection was removed in 2020. There is a strong case for the price cap for PPM customers with smart meters to be reduced to below the direct debit level on the basis that they cost less to serve as they can’t incur debt. This would help vulnerable consumers to control their debt and eliminate much of the resistance to both PPMs and smart meters.

In its recent consultation paper Ofgem finally acknowledged that low income households would benefit from lower standing charges but it seemed still to be focused mainly on the exceptions to this rule. These should be addressed by specific measures targeted at those individuals who are unable to avoid high energy consumption (for example because they need to use medical equipment) rather than forcing all low income households to pay more.

Submission-of-Ideal-Economics-to-Ofgems-Call-for-Input-on-Standing-Charges-January-2024 Download