With widespread publicity regarding overcharging by energy suppliers and poor customer service, it is somewhat disappointing that the Competition and Markets Authority (CMA) has announced that it has delayed publication of the provisional remedies following its investigation into the energy market until March 2016. Publication had been due at the end of this month. The CMA has stated that the delay is to allow them more time to consider the responses received in relation to its provisional findings which were published in December 2015. Publication of the CMA’s final report, which was previously extended by six months in September 2015, has now been pushed out to June 2016.
The aim of the investigation is to examine the different areas of the market, to identify what is working well and focus on resolving the problems identified. The outcome has long been expected to deliver tough messages to the energy market with the CMA previously proposing a number of measures to promote retail competition.
It is currently being widely publicised that wholesale energy prices are at a five-year low but consumers are not benefitting from the position. The cost of energy on the wholesale market has fallen in the past year, with gas demonstrating a 30% reduction and electricity down by nearly 25% due to lower global commodity prices and a mild winter. Ofgem has stated that suppliers are overcharging consumers and pressure is mounting on the big energy suppliers to pass on these savings.
One of the primary measures that is being examined is a regulated tariff that would set maximum levels that suppliers could charge per unit of energy usage. Currently suppliers charge business users increased rates for usage that falls outside of contracted rates which can be three or four times the standard contract unit rate. Setting a maximum limit would prove popular across the entire market however, recent indications are that the CMA will limit this to vulnerable customers with no plans for further actions to remove suppliers’ ability to set their own margins. This deviates from previous expectations that the default tariff would be removed across the board.
Whilst competition is delivering benefits to increasing numbers of customers, mainly through the growth of smaller suppliers with cheaper fixed-price deals, the confusing way energy is measured and billed can make comparing deals understandably daunting deterring consumers from switching. This has led some energy suppliers believing they do not have to work hard to keep their customers despite such high levels of complaints about customer service. The CMA is considering a move to end indefinite standard tariffs and introducing simplified charging mechanisms, which will effectively force customers to choose a new deal each year and put pressure on energy suppliers to work harder to retain customers.
It is hoped that such measures will not only energise consumers to be more active both in securing the most beneficial supplier and contract, but encourage a greater focus on energy use by addressing the less visible factors which can have just as significant impacts on bills. Technical issues around measurement of consumption and the slow process in introducing changes which could bring widespread benefit also play a part. A notable example of this is the delays seen in the smart meter roll-out that has disadvantaged those that could have access to data that could ultimately drive a reduction in energy use. The CMA is also looking at other technical and regulatory reforms further up the chain that could also benefit competition and the customer.
It is important to note that wholesale costs energy costs represent around 50-60% of the average bill with the rest being made up by non-commodity costs. These costs have increased by up to 20% in recent years. The non-commodity costs that are added on to consumers’ bills are outside of a suppliers’ control and include policy and network that are charged to the energy company then passed through to the bill payer.
A significant proportion of the increase in non-commodity charges are due to investment in the infrastructure and additional charges that have been added to fund the Government’s green incentives. The CMA has voiced its concern about the impact of the high cost of low carbon electricity. Whilst no one is disputing the need to move to cleaner forms of energy, some Government policies are having significant impacts on costs. The Government has made its position clear that the process of bringing clean electricity into the market must be achieved at the lowest possible cost, placing this and security of supply above the sustainable element of the trilemma. An example of this is the Capacity Market borne from the Energy Market Reform. This has resulted in Contracts for Differences (CfD) charges being added to energy bills to fund a programme delivering security of supply which seems to be counter-productive to the drive to reduce consumer bills. In addition, there is much discussion around what will replace the revenue that will be lost from the almost inevitable demise of the Carbon Reduction Commitment (CRC). The outcome of this is expected to focus on recovering the income from a reformed Climate Change Levy which will deliver further increases in bills capturing a wider audience than the current CRC scheme. It seems that strategies are being formulated in parallel to the CMA investigation that are working against its fundamental aim to reduce consumers’ energy costs.
There is also an issue with trust in the energy market. The most effective way of restoring trust is through greater transparency in all areas, be it in the implementation of policy, regulation or other methods of holding energy companies to account. There has been little discussion on whether this will come to fruition at all.
When looked at from a wider standpoint, the delays in publication, the potential announcement of conflicting policies and the rumours suggesting increased watering down of proposed measures seem to suggest that, whilst the energy market investigation was expected to deliver meaningful change, it may prove to be something of a damp squib.