/ Home & Energy

Our five tests for the energy investigation

In just a month, the provisional findings of an investigation into the energy market are due to be revealed. We’ve written to the body carrying out the investigation, with five tests we’ll judge its suggested remedies against.

We’ve highlighted the failures of this market for many years and welcomed Ofgem’s decision to refer the market to the Competition and Markets Authority (CMA).

More than 200,000 people have backed our Fair Energy Prices campaign, calling for simpler and fairer energy pricing, and there is a clear expectation that the CMA will intervene to improve consumer outcomes and restore trust.

What the energy investigation must do

We believe that any remedies the CMA suggests must:

  • Increase consumer engagement and introduce reforms such as simple pricing to make the market less complex for consumers
  • Protect consumers who are unable or choose not to engage and as a result languish on poor-value standard variable tariffs
  • Ensure smaller suppliers can genuinely compete with the Big Six suppliers, looking particularly at vertical integration and the effect it has on new entrants
  • Deliver greater transparency over Big Six profitability especially whether there is sufficient competitive pressure to ensure wholesale price cuts are passed on fairly
  • Improve liquidity in the market and ensuring better information is provided on wholesale trading

We expect the CMA to set our clearly its findings and conclusions in response to each of these tests.

Fundamental failings must be exposed

The inquiry represents a rare opportunity for the CMA to put to bed the long debate over the extent to which the energy market is performing competitively, efficiently and in the interests of all consumers.

While it is vital that the CMA takes its time to get the remedies right, the level of public expectation is significant and reforms that address the fundamental failings of the market are needed.

Read our open letter (pdf) to the CMA.

Comments
Profile photo of wavechange
Member

In his letter to the CMA, Richard has written: “The CMA should explain how it proposes to protect vulnerable or disengaged consumers, for example through ‘Price to Beat’ options that we have submitted to the investigation.”

Thank you. I do hope we see some action because I have been very disappointed with the increasing complexity of energy pricing since privatisation.

Profile photo of william
Member

Hmm, I hope some concern will be given to energy supply companies that are also producers, seems a very cosy arrangement to me.

Profile photo of John Ward
Member

I think that’s the “vertical integration” bit, William [point 3]. It is possible that supply companies that are also generators (electricity) or importers (gas) have a competitive advantage over other suppliers as they are able to spread their overheads across a much greater business spectrum. They also have much more inside knowledge of the forward wholesale market and the economics of energy production.

Profile photo of Beryl
Member

Simple pricing is the key to enable consumers to engage and make better decisions before switching provider. We are witnessing a marked change in the big 4 supermarket monopoly since Aldi and Lidl have entered the market,Tesco being the main victim. Ofgems contribution has helped by reducing the number of tariffs available but as long as the Big Six and are in a position to offer cheaper deals, consumers will understandably opt for them. The CMA’s role surely is to first break up the vertical integration advantage over price control in order to allow the smaller energy companies to compete. Unless that happens I don’t envisage any real beneficial changes to the current situation.

For my part, I have just switched to one of the ‘medium’ energy companies recommended by
Which? Switch despite receiving the usual protocol “Sorry you are leaving us” letter offering a slightly cheaper deal to stay but have declined their offer.

Member
Mark B says:
28 April 2015

I’m really pleased Richard Lloyd & Which? are still beating the drum on this issue that’s gone quiet now the sun’s out. I agree with commenters William & John that the Big 6’s Vertical Integration is an outrageous outcome of long term anti-competitive energy market stagnation. Suppliers and Producers should be split apart and made to trade all power & gas through wholesale markets (and no more back door bilateral deals). Only then will Ofgem, DECC, FO & CMA etc… see the true £/MWh & p/therm prices, as will us retail customers! Full transparency is required, as well as equality to the smaller energy suppliers.

NB: Not sure Ed Milliband’s idea was so good now the market prices HAVE fallen a little.

Profile photo of malcolm r
Member

Now my May mag has arrived I’ve read the article “The truth about energy bills”. Whilst there is much I agree with about improving the way energy is bought, once again Which? is being economical with the truth. It is still promoting its “simple pricing” like “petrol pump prices”. What it does not tell you is how this will disadvantage those who unfortunately have to consume more energy than others – those in badly insulated houses, large families with more cooking and washing, the elderly who need more heating, those with health problems. “Simple prices” will ensure that they pay substantially more for costs that should be fixed for each consumer – meter reading, preparing your account, smart meter roll out, subsidies for the vulnerable (probably like them), maintaining their connections. What Which? do not do is show how your energy bill is made up – that less than half is real energy, the rest is transmission costs, connection costs, admin, meter reading, smart meters, green taxes, subsidies for feed in tariffs, and so on – costs that the poor higher users will pay even more for under their proposal.

My argument is simply that when Which? explore a topic they should give us all the relevant facts, a balanced and objective argument. I want to see both sides of the problem so that I can make my own mind up. I don’t want Which? telling me only the parts that support their argument and thus influencing how I should think their way.

My view on tariffs is to scrap the fixed price ones (more and more have no exit penalties so they serve no useful purpose) and use a standard tariff where the unit charge tracks true wholesale gas and electricity costs – more uncertainty than fixed contracts, but at least related to real cost.

The same problem is seen in the fuel consumption conversation – only part of the story presumably to make better headlines.

Some, in other conversations, would brand this approach as “dishonest”. I do hope Which? is not going to continue down this route.

Profile photo of wavechange
Member

Energy charges are major problem for many people. See for example: http://www.telegraph.co.uk/news/earth/energy/10895229/Soaring-energy-bills-push-record-number-of-families-into-fuel-poverty.html

To be more emotive: http://www.independent.co.uk/money/spend-save/simon-read-how-many-must-die-before-they-act-on-fuel-poverty-9745532.html

It should be noted that there are more winter deaths among those who can afford to live in warm homes, but in a civilised society, it is not right that anyone should have to choose between eating and heating.

One of the long standing problems with energy costs is standing charges. These mean that those who cannot afford to heat their homes properly are paying significantly more for energy than higher users of energy. The poor are subsidising everyone from the average family to company directors receiving salaries of millions of pounds a year. You don’t need to look hard to see how profligate some people are with energy. I wonder if they give a thought to those less fortunate than themselves. Perhaps their only experience of living in a cold home has been when the boiler breaks down.

Proponents of standing charges say that they cover fixed charges but it is not difficult to see that these charges are averaged and do not reflect the actual cost of supplying energy to any home. It would be fairer to include fix charges in a simple unit price, which obviously has the advantage of making it easier for everyone to compare prices from different suppliers. I believe we should consider funding the fixed costs of supplying energy and water to homes from taxation, because these are essential services.

Of course there are problems, such as people living in older property that is poorly insulated or large houses, perhaps individuals and couples still living in what was once a family home, and those who have medical conditions and need to keep warm. If there is a genuine need for extra heating, benefits are available. We target support for the disabled to those who are disabled, rather than helping everyone.

Profile photo of malcolm r
Member

The intention with my post above was to ask Which? to present a balanced case including all the relevant facts so that it’s readers can make a considered judgement. As an independent consumer organisation I expect it to present information impartially and objectively. I do not want one side only emphasised that might be designed to grab headlines and try to influence consumers in a particular wasy. Energy costs are not as straightforward as some are led to believe. There is no point in promoting one unfair system to replace another.

Incidentally, I don’t know where the notion comes from that because people have to spend more of there limited income on energy, for good reasons (forget “profligacy”) they will automatically receive benefits. Not the way it is.

Profile photo of wavechange
Member

I support a balanced approach too, Malcolm. Maybe that could include saying more about those who are really struggling with energy bills, and frightened to turn on their heating. They are unlikely to contribute to this debate.

Using more energy where there is a genuine need is not profligate – I am thinking of energy wasted. The disabled do not automatically receive benefits in most cases. They have to apply for them.

Profile photo of malcolm r
Member

Perhaps Which? should instigate an investigation into ways to help people who are genuinely needy and struggle to meet their everyday bills – perhaps by explaining the benefits system and how to obtain appropriate help. The state is their to provide that support. Certainly these conversations have said plenty about those who are needy – I certainly am on the side of those who deserve benfits and other help.

Profile photo of Beryl
Member

I have read and re-read the Which? Magazine Report re The Truth About Energy Bills and agree that simplifying comparable prices does exactly what it says on the tin. A maximum 171 different permutations to choose from can only add confusion and perplexity for the median consumer.

With a general election due to take place in 7 days, I don’t consider Which? Conversation an appropriate place or time to discuss in depth details of the countries benefits system, or indeed any reference to the social injustices of any of the competing political parties.

Profile photo of terfar
Member

The problem with the cost of energy is the industry is so complex. By the time the consumer consumes a kW of energy, it has gone through a complex passage of (raw mineral/gas) extraction, refining, generation, delivery and administration. Adding to that is prices are in US$ until it is purchased by the generation companies. So it has a dollar value when extracted, this value changes with the market price and dollar exchange rate during transit to the refineries.

It eventually reaches the generation companies who sell the end product to the highest bidder (usually on the forward market). The power is then carried over the national grid to the end users.

At every stage there are big buck profits to be made, so it is hardly surprising that it costs us so much.

Maybe the whole process needs rethinking with the consumer in mind.

Profile photo of malcolm r
Member