News

CMA Interim Report

Issues affecting electricity generators and the energy market as a whole.

Following the publication of the Competition & Markets Authority (CMA) Energy market investigation – summary of provisional findings report on 7 July we thought it worth looking at the details and key concerns that the CMA has highlighted some six months before its final report.

There is no doubt that one of the most striking finding of the CMA’s survey of domestic and SME electricity and gas customers is the lack of understanding of, and engagement with, retail energy markets by up to half of the UK population. Some of the key findings of this survey explain the extent of the problem:

1. 36% of domestic energy customers did not think it was possible or did not know it was possible to change one or more of the following: tariff, payment method and supplier

2. 34% of respondents said that had NEVER considered switching supplier

3. 56% said they had NEVER switched supplier, did not know it was possible or did not know if they had done so

4. 72% said they had NEVER switched tariff with an existing supplier, did not know it was possible, or did not know if they had done so.

There are two key problems highlighted. Firstly, the lack of engagement means that up to half of domestic customers are sitting on Standard Variable Tariffs (SVTs) which are, on average, 10% higher than non-standard tariffs for electricity and 13% higher for gas across the six largest energy firms.

What compounds this problem is that this lack of knowledge and engagement with tariff and supplier switching falls hardest on the poorest in society who are most likely to be paying top SVT-based prices for their energy.

For example, 20% of customers with total household incomes below £18,000 had switched supplier in the last three years, whereas be contrast 35% of households bringing in over £36,000 per year had switched over the same time period.

The fact that 15% of customers (up from 7% in 1996) are now on pre-payment meters, aggravates the problem still further. Consumers on pre-payment meters are given less tariff options and pay more for their energy. Pre-payment meters are generally installed where customers have poor payment histories or bad credit ratings.

But we also know from this report that disengagement and switching levels have actually been falling since 2008 – the year that the recession really kicked in. So why did we stop switching at exactly the point when household incomes were tightening and we ought to have been looking for savings wherever we could find them? You have to read deep into the report to understand all the moving parts contributing to the problem.

But what is clear is that the CMA is convinced that many of the energy market reforms of recent years which were designed to promote better customer engagement have actually had the reverse effect.

Ofgem’s Retail Market Reforms (RMRs) which came through in late 2010 gets singled out for stinging criticism in the report: “Some RMR measures restrict the behaviour of suppliers and constrain the choices of consumers in a way that may have distorted competition and reduced consumer welfare” says the report on page 32.

The reforms which the CMA says are questionable are, firstly, the insistence on a maximum limit of tariffs (to 4 only) that suppliers are able to offer at any point in time, as well as simplification of cash discounts and bans on complex tariffs. What the CMA indicates is that these restrictions actually stifled retail innovations. It reports evidence of some innovative tariffs being withdrawn and various discounts being removed following the RMR’s implementation. Essentially the deals become less abundant and interest in switching naturally fell away as the head-line grabbing deals disappeared.

The Price Comparison’s Websites (PCW) also had their wings clipped in the RMR and this looks to have had a negative impact on market effectiveness, adds the report. The fact that the PCWs were no longer allowed to compete with each other by reducing sales commissions (either directly by passing on cashbacks or indirectly by securing exclusive tariffs from suppliers) stifled the market, says the CMA.

Prohibition of regional price discrimination through SLC 25A in 2009 and the decision by the Big Six to stop door step selling from 2011 are also factors in diminishing switching numbers, finds the report.

The result is that 20-30% of domestic electricity customers have been with their current supplier for more than 10 years. For gas, the range is wider – 10-40% depending on the supplier. Incumbent suppliers of electricity in each region have retained 35-45% of their region’s customers for 10 years plus.
The CMA report goes further to say that the duties and tasks for the DECC and Ofgem need to be reviewed and possibly redefined. Ofgem says that “its competition duty has been progressively down rated relative to other duties in the last 10 years”. The CMA even considered whether Ofgem’s role now “overlaps excessively with DECC’s role, leading to sub-optimal decision-making; and whether the coincidence of DECC’s and Ofgem’s roles risks undermining Ofgem’s independence”.

It concludes that some competition-related changes enforced by Ofgem over recent years may have happened because it was facing pressures from the DECC. If true these are pretty serious allegations.

Whatever the structural problems in the governance of the retail electricity and gas markets it’s clear that right now it is not serving consumers very well. The statistics are disturbing – domestic UK customers have, on average annually overpaid their suppliers by £1.2 billion; whereas hard-pressed SME and micro-business customers (also based on annual averaging over 2009-2013 period) have overpaid £0.5 billion per year. So, if the market had been functioning healthily over the selected five year period, the UK’s consumers and small businesses would have been a lot more engaged with the energy market and a lot better off. The trick for regulator and the Government as a whole is to stimulate consumer engagement successfully without stifling the market in the process.

A limited-time price freeze would surely not have done the trick as it would have killed investment by generators and retail innovation by the Big Six. But are we instead heading for compulsory regulation to force suppliers to move the bulk of disengaged consumers into the best tariff possible for them automatically? We will know this and other recommended reforms when the CMA presents its final report in December.