Energy firms face competition probe


File photo dated 22/10/13 of an Ofgem sign as the regulator has disclosed that it plans to refer the energy market for a full competition investigation.PRESS ASSOCIATION Photo. Issue date: Thursday March 27, 2014. See PA story CITY Energy. Photo credit should read: Yui Mok/PA Wire

Britain's Big Six energy suppliers are to face a full-scale competition investigation after regulator Ofgem said profits in the sector quadrupled to more than £1 billion in three years.

Ofgem said a probe by the Competition and Markets Authority would "consider once and for all whether there are further barriers to effective competition".

"Profit increases and recent price rises have intensified public distrust of suppliers and highlight the need for a market investigation to clear the air," it said.

Ofgem has launched a consultation on its proposals which it must complete before making a final decision on referring the sector to the CMA.

It comes in the wake of intense political pressure over rising household bills amid a continuing squeeze on real-term wage rises.

The investigation would be the first full-scale competition probe into the energy market and would see the UK's biggest suppliers come under an unprecedented level of scrutiny, with the threat of being broken up.

Ofgem said it had already introduced a series of reforms which come fully into force from next month but had proposed a full CMA probe to reassure consumers and back up its attempts to achieve a "simpler, clearer and fairer energy market".

It comes a day after Big Six supplier SSE announced it was slashing profits to pledge a price freeze on bills until January 2016, putting pressure on rivals to do the same.

Today's Ofgem announcement concludes an assessment carried out with the Office of Fair Trading and the CMA.

It confirms previous concerns about barriers preventing smaller suppliers entering the market, and the large market shares held by the bigger companies.

The report found that retail profits - from supplying gas and electricity to homes and businesses - increased from £233 million in 2009 to £1.1 billion in 2012.

Ofgem said there was "no clear evidence of suppliers becoming more efficient in reducing their own costs" and further evidence would be required "to determine whether firms have had the opportunity to earn excess profits".

It also said declining consumer confidence - with 43% not trusting energy companies to be open and transparent - could deter people from "engaging with the market" and getting a better deal on tariffs.

There was also concern over whether "vertical integration" - energy firms having both energy production and household supply divisions - was in consumers' interests.

Ofgem said a market investigation would determine conclusively whether these ought to be separated.

SSE yesterday appeared to forestall the announcement when it announced it would introduce a legal separation between its retail and wholesale arms within a year.

In addition to the CMA referral, Ofgem said it was increasing the level of penalties for rule breaches.

Chief executive Dermot Nolan said: "Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices.

"The CMA has powers, not available to Ofgem, to address any structural barriers that would undermine competition. Now consumers are protected by our simpler, clearer and fairer reforms, we think a market investigation is in their long-term interests.

"I want to make sure that consumers are put at the heart of this market, so we will continue to take action to help consumers.

"This includes from today putting the industry on notice that any new serious breach of the rules which comes to light will be likely to attract a higher penalty from Ofgem.

"I am determined that energy companies use our reforms to transform their relationship with consumers."

Mr Nolan said consumers had been "troubled" by energy bills in recent months and an investigation was the "right thing" to address the concerns.

He told BBC Radio 4's Today programme: "We have found competition is not working as well for consumers as it should be."

Mr Nolan addressed concerns that the move could cause uncertainty at a time when investment was needed to keep the lights on by saying there was already "considerable uncertainty" and the new process would bring clarity.

"This will be an independent process, it'll be a clear process, it'll be a transparent process. Investors will know how it has worked, will be sure of the fact that their concerns will be listened to and will get a clear and decisive outcome at the end."

Energy Secretary Ed Davey said: "This is tough action based on a detailed independent expert assessment of the state of competition in Britain's energy markets - leading to the first ever market reference for the energy markets.

"This is just too important for people to rely on guesses about how to fix the energy markets. If we get it wrong, consumers will pay the price."

Shadow energy secretary Caroline Flint said: "Yesterday's price freeze from SSE showed that a price freeze is possible. Today's confirmation that the energy market is broken shows that it's needed for all customers."

The energy market has been at the centre of the political debate for the last six months after Labour pledged to force suppliers to freeze bills.

Citizens Advice chief executive Gillian Guy said: "Households have been bearing the brunt of a failing energy market for too long.

"We've been calling for a competition inquiry since 2007. It's important this long-awaited investigation gets to the root cause of rising prices and results in a competitive and transparent market that works for all consumers.

"Prices are up 33% since 2010, seven times the increase in annual earnings."

British Gas owner Centrica welcomed an independent review "free from political interference", but said competition in the market was already "intense" and rejected the suggestion there might have been "tacit co-ordination" with rivals.

Chief executive Sam Laidlaw also voiced fears that a lengthy probe could damage confidence at a time when investment is needed.

It said retail energy prices were among the lowest in Europe while the number of suppliers and level of switching was growing.

Centrica also said "vertical integration" of its supply and production arms was in the interests of customers "promoting security of supply and helping protect customers from volatile price movements".

Mr Laidlaw said: "Anything that clears the air and helps rebuild trust in the industry must be a good thing.

"Britain's energy market is highly competitive and we believe that a full independent review by a respected regulatory authority would demonstrate precisely that.

"Competition is working, providing choice for consumers and some of the lowest prices in Europe

"We hope that a lengthy review process will not damage confidence in the market, when over £100 billion of investment in new infrastructure is needed.

"A prolonged period of uncertainty could damage investment at a time when Britain's energy security is being seriously challenged."

Mr Davey will make an oral statement to the House of Commons about the review, the Department of Energy and Climate Change said.

Mr Nolan told BBC Breakfast: "I would describe what is going on as not in the best interests of consumers, I would say competition has not been working well for them.

"I have a feeling this has possibly worsened over the last few years and as a result we are proposing a full reference to the Competition and Markets Authority which we believe will deliver an outcome that is ultimately the best possible outcome for consumers."

He said profits had risen over the last few years and regulators had found firms "may be co-ordinating their behaviour somewhat" and they had discovered weak competition. But he said there was no evidence of a cartel.

"They co-ordinate in the sense that price announcements are around the same time, around the same magnitude. I think this is troubling."

SSE said it believed the energy market was already competitive and that much had been done in recent years to make it more transparent and easier to understand.

It said it had shown its appetite for reform and will argue that a full market probe should be used as a platform to achieve greater stability both for customers and for the investment that the country's energy system needs.

Chief executive Alistair Phillips-Davies said: "Regulators, politicians, customers and SSE all want the same thing: an energy market that not only works for customers, but is also trusted and seen to do so.

"We welcome any efforts to clear the air, and in the meantime SSE will continue with its positive agenda for customers including its price freeze until at least, 2016."

10 simple ways to keep your house warm this winter

10 simple ways to keep your house warm this winter