27th March 2014
Comparison site Gocompare is predicting that other energy companies will follow the example of SSE and freeze prices as Ofgem refers the energy market to the powerful competition regulator the Competition and Markets Authority.
In a report establishing the inquiry, called a State of the Market assessment, the regulators found that suppliers consistently penalised those customers which didn’t switch.
Yet while some market commentators say the Ofgem decision will put pressure on energy firms to address pricing issues early, others believe the long term nature of the inquiry could actually let firms off the hook.
Ofgem says it has acted to remove uncertainty from the energy market by proposing a market investigation by the Competition and Markets Authority (CMA). It says the inquiry will “clear the air” and complement Ofgem’s reforms for a simpler, clearer and fairer energy market which is focused on improving clarity around the disclosure of tariffs.
The State of the Market assessment, prepared jointly by another regulator the Office of Fair Trading (OFT) and CMA, the regulators found evidence that consumers have lost faith in the market. This included –
– declining consumer confidence with 43 per cent distrusting energy companies to be open and transparent.
– continuing uncertainty over whether the vertical integration of the large energy companies is in consumers’ interests
– retail profits increasing from £233 million in 2009 to £1.1 billion in 2012, with no clear evidence of suppliers becoming more efficient in reducing their own costs, although further evidence would be required to determine whether firms have had the opportunity to earn excess profits, and
– suppliers consistently setting higher prices for consumers who have not switched.
Dermot Nolan, Ofgem Chief Executive, 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.”
However not all energy providers are impressed.
Dale Vince, founder of energy provider Ecotricity, said: “It’s taken three months to decide they need an 18 month competition inquiry, 20 years after privatisation. At privatisation there were 12 companies with 100% market share between them, today there are 6 companies who’ve got 98% of the market.
“The root of these problems is the way the energy market was privatisated, that’s where the Big Six got their uncompetitive advantage. If the regulator had been doing its job, it wouldn’t have taken 20 years to get to grips with an obvious problem.”
However what may interest consumers more is the view of Comparethemarket which believes that firms will follow SSE’s lead and freeze prices.
James Padmore, head of energy at comparethemarket.com, adds: “Putting energy companies under the spotlight over what could be a two year review period will likely encourage them to get ahead of the game. Expect to see an increasing number of companies announce price freezes – following in the footsteps of SSE – in order to retain customers and win consumer and regulatory trust. The energy price hikes of some companies in an uncompetitive market are clearly evidenced by the money people can save by switching providers – in many cases comfortably around £350 a year. For a family of four this could pay for roughly a year and a half’s broadband.”
Padmore points out that the Ofgem is already proposing reforms which will make switching easier.
Moneysupermarket editor-in-chief Clare Francis says: “The inquiry is likely to last two years and it will be interesting to see how providers behave during that time. We’ve already seen SSE say it will freeze prices until 2016 and I wouldn’t be surprised if we see other energy firms take steps to try and show that they are treating their customers fairly – it’s an adage many people don’t currently believe.”