Modernising Britain’s energy market

Ofgem has released its strategy to deliver a more competitive and fairer energy market for British consumers.
Published: Thu 11 Aug 2016

Britain’s energy market has long functioned under what some have considered questionable business practices, such as higher pricing for prepay customers and the switching, billing and other customer related issues for which suppliers seemingly frequently pay up when caught out. [Engerati-E.ON UK's Smart Meter 'Fine' Unpacked]

With growing concerns about the state of the energy market, including what had been a period of rapid growth in retail energy prices, in 2014 the regulator Ofgem referred the issue to the Competition & Market Authority (CMA). In turn, the CMA responded after a 2-year investigation in June of this year, finding that while several aspects of the market were working well, there were also “substantial problems” requiring “significant intervention”. In particular, the CMA found on the demand side of retail energy markets a lack of engagement, with two-thirds of households disengaged and paying over the odds for their energy compared to those who had switched tariff. On the supply side of both wholesale and retail energy markets, a combination of regulations and technical constraints were restricting competition, and the broader regulatory framework was hindering the development of policies and regulations that would be in the interests of customers.

To address these problems, the CMA set out a package of more than 30 remedies, to which Ofgem has now responded with an implementation strategy. A more detailed implementation plan is planned for later in the Autumn.

“The CMA’s final report is a watershed moment for industry and consumers and points the way to a fairer and more competitive future,” comments Ofgem chief executive Dermot Nolan. “I call on energy companies and consumer groups to seize this opportunity.”

Ofgem’s implementation strategy

Ofgem has clustered the CMA’s recommendations around five objectives:

• Regulation for effective competition

• Prompting greater consumer engagement

• Protecting and empowering those on non-standard (i.e. prepay) meters

• Building industry systems and governance for the future

• A robust and independent regulator.

Among the actions are that those on prepayment meters, who are among the most vulnerable and least likely to switch, will be protected by an interim price cap which will save them around £75 a year from next April.

Ofgem says it will work closely with suppliers to help disengaged customers, who remain on expensive standard variable tariffs, to shop around and save money. In particular more effective prompts will be trialled on customers’ bills to encourage them to compare tariffs. Next year Ofgem will pilot a database service, which will allow suppliers to offer disengaged customers better value deals. Protecting the privacy and security of consumers’ data remains a priority.

Ofgem has also initiated a separate consultation on the CMA’s proposals to remove parts of its Retail Market Reforms so consumers can enjoy a wider choice of innovative good value deals. Ofgem has also consulted on its approach to the CMA’s recommendation to remove the requirement on price comparison websites to display all the tariffs on the market.

A competitive, fairer energy market

Fairness and competition in the energy market – the aims of Ofgem’s implementation plan – are not mutually exclusive in the sense that the greater the competition, the more likely are players to resort to business practices, intentionally or otherwise, that may be deemed as ‘unfair’ – unless the market is tightly regulated.

The challenge is that the regulation should not be so tight as to stifle innovation and the ability of suppliers to cultivate individual identities.

Given that the CMA’s remedies and their impacts will take time to implement and make themselves felt, Ofgem is to be acknowledged for maintaining the momentum of the CMA’s findings with its rapid response and its stated intention to act quickly and effectively in implementation.

Industry response has so far been largely positive with widespread support for the proposals but some feeling they don’t go far enough, specifically in helping people to shop around and access the best deals. Ultimately, however, it is up to the industry, and particularly the suppliers, to deliver. Key also is the switching process itself, which Ofgem says is currently under reform. The numbers switching have declined since 2010 and the aim is to achieve next day switching by 2019. [Engerati-Good Customer Service To Blame for Poor Switching Numbers in the UK? and ‘Power To Switch’ – Will It Overcome UK Market Stagnation?]

Ofgem and other industry players such as consumer bodies have a role to play in engaging consumers. For example Ofgem plans to continue the ‘Be An Energy Shopper’ marketing campaign this autumn to encourage consumers to shop around. But it is the suppliers who must be at the heart of customer engagement with innovative and competitive offerings which will build the trust and long term loyalty that will secure their business into the future. [Engerati-Reducing Churn by Engaging More with the Customer]

Further reading

CMA: Modernising the Energy Market

Ofgem: CMA Remedy Implementation Strategy