10 July 2015

CMA publishes provisional findings of energy market investigation

On 7 July 2015 the UK Competition and Markets Authority (the CMA) published the provisional findings of its investigation into the British energy market. Since Ofgem made its referral in June 2014, the CMA has conducted a comprehensive and fully independent review of the power industry to identify features of the market which may prevent, restrict or distort competition. In its provisional findings, the CMA has highlighted a range of problems which it believes have an adverse effect on competition, including poor regulation and consumer apathy.

As part of its investigation, the CMA gathered submissions from energy suppliers and other interested parties and conducted a survey of over 7,000 consumers. The CMA found that, despite the rise in yearly energy bills, which currently sit at £1,200 for the average household, over 34% of respondents had never considered switching provider. The CMA concludes that this lack of consumer engagement has resulted in over 70% of consumers paying an average of £160 per year more by failing to switch from a standard variable tariff to a cheaper fixed rate alternative. 

The report cites failings of regulation as a further hindrance to competition. The ‘four-tariff rule’, an intervention designed to increase competition by simplifying prices, has been found to have had the reverse effect by limiting discounting and hampering innovation. According to Roger Witcomb, Chairman of the CMA’s energy market investigation, regulatory interventions have not always benefitted competition and customers.

The CMA has also published a notice of possible remedies which sets out a range of measures that could help to address some of these concerns, including the reform of the ‘four-tariff rule’. The CMA suggests that a clearer division between the roles of the Department of Energy & Climate Change and Ofgem, complimented by more efficient, effective and targeted policies would enhance transparency in the energy sector and increase trust. Technology has a role to play too and the CMA believes that the use of smart meters will increase consumer engagement. More controversially, the CMA is considering whether a transitional price cap on the most expensive tariffs, will be necessary in the short term in order to protect consumers. The CMA flags that such a measure would differ significantly from a price control. It is proposed that it would impose an upper limit on the price suppliers could charge to customers on default tariffs.

The report also identifies some of the positive aspects in the energy market and concludes that competition is working well in the wholesale gas and electricity market, despite the presence of vertically integrated firms. Equally, the CMA recognises that the government’s approach to investment in generation capacity and renewables, which is focussed on the principles of competition, helps offset the high cost of low carbon energy.

Over the coming months the CMA will hold further discussions and consult with interested parties on the full provisional findings report (which will shortly be published). The CMA then aims to publish a final report by the end of the year. The CMA has invited interested parties to make written submissions in response to its provisional findings and notice of possible remedies by 31 July 2015.

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