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Success! Ofgem refers energy market for full investigation

Coin on gas flame

In a win for our Fix the Big Six campaign, Ofgem today referred the energy market to the Competition & Markets Authority for a full market investigation. What changes do you want to see in the energy market?

Dermot Nolan, the new chief executive of Ofgem, has referred the energy market to the Competition & Markets Authority (CMA) for a full investigation.

Ofgem expects the CMA to focus on:

  • The relationship between the supply businesses and generation arms of the six largest suppliers.
  • Barriers to entry and expansion for suppliers.
  • The profitability of the Big Six.
  • Whether or not there’s sufficient competition between the large energy suppliers.
  • The trend of suppliers to consistently set higher prices for customers who haven’t switched.
  • Low consumer engagement that contributes to weak competitive pressure in the market.

We’re delighted with the decision – it’s a watershed moment for a broken market that has left millions struggling to cope with spiralling bills.

CMA must leave ‘no stone unturned’

The investigation must leave no stone unturned in establishing the truth behind energy prices. While it takes place, we want to see Ofgem continue its renewed, tougher approach to protecting customers. It was encouraging to see the regulator take strong action against Npower last week, where the supplier was told to sort its billing and complaints issues or risk a ban on all telesales.

In the meantime energy companies shouldn’t sit idly by and wait for the outcome of the inquiry. They need to make urgent changes now to do better by their customers.

We want to see radical reforms, as detailed in our Fix the Big Six campaign, to inject more competition into the market and help rebuild trust by giving people confidence that the price they’re paying is fair.

What do you think of Ofgem’s decision to refer the energy market for a full investigation? What do you think the investigation should cover, and what action do you want to see energy companies take now?

Comments
Profile photo of william
Member

Just over 2 weeks ago, Ofgem wrote to the Big Six energy suppliers to explain to their customers what impact falling wholesale prices will have on bills.

Is it too early to point out I’ve heard nothing from my supplier and I guess many others haven’t either. Which for me is sadly no surprise.

Will ofgem be following up on that letter or is referring them to the CMA just them passing the buck?

Profile photo of malcolm r
Member

This inquiry was proposed in March, but my concern is that it will take 18 months to report, and no doubt another 6-12 months before any proposed changes might happen. With all the existing background, why cannot the CMA get stuck in with a lot more urgency (I don’t suppose the General Election in 12 months is a factor?)
I would like to see transparency in the pricing that the energy companies charge. I want the following items to be shown priced separately on my bill:
– the actual raw energy cost – kWh prices – of gas and electricity shown,
– the distribution charge shown (through wires and pipelines, a charge proportional to usage),
– the policy and regulation costs imposed by the government (fixed costs, not dependent on energy consumption) such as support for low carbon technologies, support for vulnerable customers, improving customer energy efficiency; and consumption-dependent costs such as the carbon tax
– supplier costs – (fixed costs, not dependent on consumption) such as admin, meter reading, smart meter roll-out.
Tariffs should be shown as an energy unit cost – including all elements that are consumption-dependent – and a separate cost for items that are not dependent on your energy consumption. Behind these costs should be, for those interested in understanding their costs, the above breakdown.
Energy costs are not simple, and will become even less so when we get time-dependent unit costs, a feature that smart meters make possible. Making clear how charges are arrived at should allow better control and informed criticism of the suppliers.

Profile photo of wavechange
Member

For me the top priority is to have simple unit pricing so that anyone capable of comparing the price of petrol or the price of groceries can see which energy company is offering the best deal. For this to work, we obviously need to get rid of standing charges. We don’t pay standing charges on petrol or on our groceries. The other reason to get rid of standing charges is to prevent low users subsidising those who use more.

Though the ‘big six’ have been responsible for much of the public distrust of energy companies, we obviously need to look at what the smaller companies are doing as well.

Profile photo of malcolm r
Member

wavechange, I want to pay for the energy I use at the same rate as anyone else on my tariff. So if I use twice as much gas and electricity in kWh as someone else, it is fair to pay twice as much for it. But in energy supply are some costs that do not depend upon your consumption – it costs no more to administer my account, supply and read my meter, as someone using half my consumption. So I do not expect to pay twice as much for it. I expect to pay the same as anyone else for the smart meter roll out, to support vulnerable users, and for supporting low carbon technologies.
So there is a cost based on consumption, and a fixed cost element. It is fair that the total price I pay should reflect the real costs involved. Subsidy has nothing to do with it. Many who use more energy do so not from choice but necessity – the elderly, the sick, large families, those at home all day, those in poorly insulated houses and so on. Many are likely to be in fuel poverty. They should not be penalised by being overcharged for the fixed-cost element, which is what would happen if you have a unit price only tariff.
The “simple tariff” argument, based on the assumption that the majority of us cannot do simple arithmetic, falls apart anyway when you do not have “simple” tariffs – if you have an economy 7 type tariff, if you need to compare dual fuels from different suppliers, and when smart meters introduce several time-of-day tariffs – you will have to compare not one unit cost with another, but several.

Profile photo of wavechange
Member

Malcolm – We don’t pay a standing charge on petrol, as Which? reminded us when it first put the argument for simple unit pricing. If we priced goods in the way you want, we would be paying a separate distribution cost for a jar of coffee. Rather than unnecessarily complicating matters, it is best to include the fixed costs in the price. We can help those in fuel poverty etc. where there is a need, but this does not mean that prices have to be complicated for the rest of us. The other alternative, as has been discussed before, is to pay for the fixed costs through general taxation.

One cost we can do without is smart meters, simply because of the ridiculous cost of the roll-out. If anyone wants one they should pay for it.

Profile photo of malcolm r
Member

wavechange, “Rather than unnecessarily complicating matters”. First, it is not complicated. Second, charging people unfairly – making them contribute more towards “fixed” costs that do not depend upon how much energy you consume – is wrong. Such unfairness would probably form the subject of another Which? conversation. It is penalising many vulnerable people – I don’t think that is right.
The “dumbing down” argument – making it simple even if it is unfair and illogical – does not wash with me.
The petrol analogy is ill-founded. If you want to buy the cheapest fuel you are likely to have to drive a few miles to get it. This will cost you in fuel and wear and tear. To save 2p a litre – say £1 on a fill – you are likely to spend more than that in fuel in just getting to the cheaper station. Who calculates that extra cost and factors it in? You don’t just buy a jar of coffee, you fill a basket or trolley when you shop. Do you price-compare every single item to make sure you have the cheapest total shop? Of course not. So neither of these examples are simple in reality in getting the cheapest deal..
Energy consist of both consumption-dependent and fixed costs. It is fair we should pay that way. If there are people who can’t work out their best deal – as opposed to can’t be bothered – then concentrate on giving them help, not in distorting a system on the dubious basis that the UK is populated by people who lack numeracy.

Profile photo of wavechange
Member

Malcolm – It was Which? that made the analogy with the price of petrol and I very much support what Which? has set out to achieve.

When we are in our dotage we might not be able to compare energy prices, which can vary a lot more than jars of coffee and litres of petrol.

Please let us consider those less fortunate than ourselves.

Profile photo of malcolm r
Member

wavechange, Which? is not always right and has not been particularly explicit in promoting this. Second, “considering those less fortunate than ourselves” is exactly what this is about; ensuring for all of us, including those struggling with their money, that you only pay for what you should. Vulnerable higher energy users should not pay more for their meter reading, bill administration, smart meter roll out, technology support than others more fortunate.

Profile photo of wavechange
Member

I am going to continue to support Which? on this issue, Malcolm.

Complicated energy prices are there to support shareholders and those in the industry. We can and should support the vulnerable. Your approach has low users supporting high users, irrespective of whether they are vulnerable or just profligate.

Profile photo of malcolm r
Member

wavechange, I am not trying to change your mind on this – we have different points of view and that is what conversations are about. I am, however, concerned that this sort of conversation should explore issues properly, and not just focus on, for example, an emotive argument.
I have put forward the argument that there are fixed costs, and consumption-related costs. It is up to others to decide whether it is fair that we should all pay our correct share towards them.
“Vulnerable people” are present at the low, medium and high user ends so will not be automatic losers or winners. The “simple” tariff might make it easier for some to choose, but if their bill goes up because of it, where is the gain there!
For example, if you incorporate all the fixed costs as part of the unit charges – to give the “simple” tariff proposed by some – a low energy user is likely to save £85 a year, a high user will spend another £109 a year. A low user might be a couple both earning, out all day, modern well insulated house. A high user might be an elderly couple on a pension, in all day, needing more warmth, more cooking and washing, maybe in an older poorly insulated house. Why should this vulnerable couple on a low income have to pay an extra £109 just to keep tariffs “simple”.
Make sure that when we do consider those less fortunate, we do it in a way that doesn’t cost them money.

Profile photo of dave newcastle
Member

As I have said before in a related conversation, it is not right that you need access to a computer to sort out the cheapest energy deal. Therefore pricing per kwh is the way forwards. Get rid of the current complex pricing system that is only in the interests of the energy companies.

Profile photo of snowball
Member

Malcolm, your argument based on the “poor old couple” does not stack up. These are exactly the people who are unfairly paying over the odds for their fuel. Those who are forced to economise on their fuel consumption in order to make ends meet are severely disadvantaged by standing charges. The high earning couple with 3 kids and a big house are quite happy paying the same standing charge as the low income consumer and then using loads of fuel at a relatively low unit rate, subsidised by the standing charge applied equally to all consumers.
The real reason why the energy suppliers need the standing charge is that without standing charges, it would become immediately clear which supplier was offering the cheapest deal: just like the big signs outside the filling stations….

Profile photo of malcolm r
Member

Donald, both comments revolve around the same point – energy need is not income-dependent. To keep warm, many needy people must spend a much larger proportion of their income on energy than others. Higher users might be well off or they might be poor.
An unfair charging system that does not take proper account of actual costs is indiscriminate in its effect. Distorting the charge purely to satisfy a “simplistic” lobby will not help those who deserve help. Nor will a “simple” charge work in practise to make comparisons any easier.
There are fixed costs in your energy bill, some regulatory and others administration. I suggest that first, the “policy and regulatory” ones, including smart meters, should be removed and paid for out of taxation. On a medium user’s bill these will be around £100. Second, the admin charge should be approved by the regulator. One way then to help the needy might be to pay the remaining fixed cost element – the admin charge – to this group, together with a Winter Fuel Payment. I would only give this payment to those in need – not to everyone over 62 as now.

Profile photo of snowball
Member

Malcolm, by your logic (as wavechange already said), filling stations and supermarkets should also apply standing charges. You can add to that list, restaurants, airlines, buses, trains – the list is endless. All these businesses have fixed costs which are not directly related to the volume of business transacted by any single customer.
Any business knows the level of its fixed costs and it has to recover these by spreading the fixed costs across its known total sales volume. There is absolutely no reason why the energy suppliers could not do likewise.
Regards, D

Profile photo of malcolm r
Member

Because the businesses that you mention cannot apply charges in the same way as others – energy, telephone, water as examples – does not make them right and the others wrong. There is no logic in that. A major difference is that you contract to buy all of your energy from one chosen supplier. That allows in principle the real costs to be paid. The examples you mention do not get your exclusive custom – you are free to buy food, petrol and whatever from any outlet you want at any time. It does not alter the fact that each energy customer costs the supplier the same as any other for certain items, still with the majority of the bill depending upon consumption. Charging on that basis is a fair way that your examples cannot do.
I don’t agree with cross-subsidy. That is what “simple” unit prices would do, quite indiscriminately -the poor and needy would not be targetted simply because they are not all low energy users; a lot of better-off would benefit as well. Not the way to solve a problem, I would have thought.

Profile photo of malcolm r
Member

Dave, Newcastle, “it is not right that you need access to a computer to sort out the cheapest energy deal”. As far as I can see the switching services all offer a phone facility as well as internet.

Profile photo of william
Member

Yesterday on Sky News they interviewed the boss of Centrica ( you can find it if you google “sky news king centrica” ) You should watch the video rather than take my biased view on it below.

One of the questions he was asked was about ofgem writing to energy companies about the wholesale price ( at the 1:56 mark). While he blatantly didn’t answer the question what he did say, apart from being a load of cow droppings, was very clearly what the problem is. To para phrase its basically consumer fault for not only wanting cheap prices but predictability in those prices. And to great service to the country they forward buy. And that switching isn’t quick enough.

Well being able to switch quicker from one rip-off supplier to another won’t help. And is it our fault they can never forward buy to the consumers advantage. Maybe there should be a cap on the retail prices charged at something like wholesale price + x% and if their buyers get it wrong they end up footing the bill and not us.

Member
Dick Down says:
27 June 2014

Whilst cost & service are critical consumer factors, I think the bigger issue looming is security of supply. Will the lights go out?? The old CEGB used to operate on a maxim of 20% installed spare capacity at peak times to cope with the inevitable station outages. Long gone are those days. What obligations can be placed on the generators to ensure they build new plant to replace those plants due for closure and give us the standby capacity and fuel storage we need?
The drive for green energy needs an honest debate. Offshore wind is an area needing more reporting. Forget costs for the moment, what is the life cycle energy balance? (i.e the energy taken to build, inc distribution and equivalent standby non wind power stations to cope with times of no wind, and ongoing maintenance compared to the energy produced in their lifetime at around, I believe, 30% utilisation.)

Member
John R says:
27 June 2014

It is important that any investigation looks at holding company profits. For example if Centrica deliberately overcharges British Gas, British Gas looks as if it is making reasonable charges to customers but the excess profit still goes to the holding company.

Member
jfc norfolk says:
28 June 2014

TO INVESTIGATE. THE INTER DEALING AND PRICING BETWEEN BIG SIX’S PERCHASING DEPARTMENTS ( FROM FUEL PRODUCERS ) TO THEIR OWN RETAIL CUSTOMERS, IE TO ESTABLISH THE PRICE PAID TO PRODUCERS AND THE PROFIT WHICH COULD BE HIDDEN OR MANIPULATED BY THE TIME IT GETS TO MARKET EG US !!!

Profile photo of malcolm r
Member

Some of the costs included (but hidden) in my bill are effectively taxes – “Government energy policy and regulation costs” – the carbon tax, funding smart meter roll-out, supporting low carbon technologies, maintaining security of supply, improving customer energy efficiency, supporting vulnerable customers. But my whole bill is also taxed at 5% (vat). So I am paying tax on a tax? Surely this is not right (or am I wrong?).
However, we should not pay any tax on an essential commodity – vat should be scrapped on energy bills. We don’t pay vat, as far as I am aware, on other principal essentials such as food, rent, mortgage, public transport so why tax us to keep warm?

Member
Charlie says:
2 July 2014

I must say that it seems really odd that the Government is forcing prices up by their misguided green policy. The building of windmills that provide little or no energy just when it is needed so that conventional power stations must be kept on standby and operating inefficiently. Add to this the cost of the infrastructure to link the farms to the grid and you have a complete waste of money.

As a scientist, my first question is – is there any evidence for man-made catastrophic climate change? The answer is no. A slight rise in temperature in the second half of the last century is within natural variation and is more or less the same rise that occurred over the first half of that century and certainly is not in the same league as the largest recorded in the CET records. And is chicken feed when compared to the changes that occur when we dipped into and out of the ice ages. The earth has experienced 18 in the last 2.5 million years – with 5 in the last 500,000 years. Effectively, the bulk of the UK has been covered in ice for around 85% of the time and 15% of the time in the intervening warm periods. Our current interglacial has now been in existence for 13,000 years –so get your winter woollies ready.

The science shows us that the last two interglacials were warmer than the current one (bones of rhinos, lions etc have been found in London interglacial muds from these periods) and the levels of CO2 have been much greater in the past. In fact, over the last 500 million years, the CO2 concentration has fallen from over 5,000 ppm to the current level of 400 ppm – so how can the so called climate scientists say that if it rises a little, the earth will go into a downward spiral. Total nonsense.

Australia, Canada, China and Russia have blown a raspberry to the IPCC – why do we in Britain still spend vast sums of money trying to reduce CO2 emissions when our output is dwarfed by China’s coal fired generation – now followed by Germany.

Both major political parties are responsible for these escalating energy prices and are now trying to pass the buck.

Profile photo of malcolm r
Member

Charlie, I couldn’t agree more with your sentiments. We British seem to have to join every campaign going, whether it is green energy, policing the world at great expense, giving aid to wealthy and corrupt countries, and applying EU legislation to the letter – all to our economic disadvantage. Yet we seem to waste one resource that surrounds us – tidal power.

Profile photo of wavechange
Member

I share Charlie’s doubts about man-made climate change. What is not in doubt is the way that we are depleting our readily accessible reserves of fossil fuels, which will be needed by future generations to make plastics, pharmaceuticals and many of the other necessities of modern life.

I agree with Malcolm that we need to look at other forms of renewable energy and – above all – urgently look at ways of cutting down waste of energy and use of our natural resources.

Member
247 Home Rescue says:
3 July 2014

“As a scientist, my first question is – is there any evidence for man-made catastrophic climate change? The answer is no.”

Are you sure?

Member
Charlie says:
4 July 2014

247 Home Rescue – if you have evidence, please review the science for me.

Member
Charlie says:
7 July 2014

It is a great pity that 247 Home Rescue (or anyone else) did not take up my offer of providing the scientific proof that humans were causing catastrophic global warming. I wonder why? Could it be that when they tried to assemble the proof, they, like many others, realize that there is none.

The small rise temperature that occurred in the second part of last century has been dwarfed by many much larger rises (and falls) in the past and the current CO2 levels of 400 ppm again have been dwarfed by much, much larger levels in the past, for example, in the Cambian period the average CO2 concentration was 5,800 ppm, peaking at 7000 ppm.

This slight rise in temperature in the 20th century, a recovery from the 17th century Little Ice Age, occurred over a period of around 25 years and that has now been nearly matched by the length of the pause ie temperature records show that no increase has occurred now for more than 17 years – yet CO2 has been released in ever greater quantities with the developing nations now releasing more than the developed nations. China will continue to build coal-fired generating plants at a great rate whilst urging us to moth-ball ours – I wonder why? And, by the way, so is Germany.

So why are we bankrupting ourselves, and placing so many people into energy poverty, by chasing the entirely unobtainable notions that (1) Britain can make any difference to world-wide CO2 release and (2) that even if it could, it would have detectable effect on climate.

Wind turbines are a rip off. I’ll quote from Booker in this week’s Sunday Telegraph when he talked about the cost of just one turbine in the Mendip Hills. “The answer, we can see on the Ofgem website, is that it can generate for its owner an income of nearly £24,000 a year …… But only around £6,500 of that is the value of the electricity it feeds into the grid. The remaining £17,500 is what we pay in ‘feed-in tariff’ subsidies, through our bills”

We know from the papers that large landowners are each being paid hundreds of thousands of pounds in these subsidies.

What however many people may not realise is that due to the failure to build new power stations and because perfectly good coal-fired power stations are to be decommissioned (even though they are being built in the rest of the world) is that the government is prepared to spend even more money on another scheme. Again I’ll quote Booker from July 2013.

“Last week, when my colleague Richard North and I revealed the Government’s “secret weapon” in the battle to provide back-up for when the wind isn’t turning the tens of thousands of useless wind turbines it hopes to see built, we had no idea what a huge story this is turning out to be. Under its STOR (Short Term Operating Reserve) scheme, the National Grid has been signing up, at vast expense, thousands of diesel-driven stand-by generators to provide instantly available power to “balance the grid” when the wind isn’t blowing. But so huge are the sums the grid is offering to make this power available that hundreds of canny investors have seen that this is one of the great money-making rackets of our time. In old industrial sites, quarries and supermarket premises all over the country they are piling in to install dedicated “generator parks”, capable of producing up to 100 megawatts (MW), in return for “availability payments” of up to £47,000 a year for each MW of their capacity. They then receive additional payment for the amount of electricity they actually feed to the grid, giving them an equivalent of £600 for each MW hour supplied – 12 times the going market rate. Before long STOR alone will be adding five per cent, or £1 billion a year, to our electricity bills. Yet no one involved wants to talk about it. This is a scam so colossal that it makes the owners of those useless wind farms, who get subsidies of 100 or 150 per cent, seem miserably underpaid.”

In the article above these responses, Ms Creagh states “The investigation (by the CMA) must leave no stone unturned in establishing the truth behind energy prices”

Will it?

And will Which carry out an independent investigation into the total cost that the government’s belief in catastrophic global warming is adding (and will increasingly add in the coming years) to our ballooning energy bills.

Profile photo of malcolm r
Member

A significant part of the energy bill is made up of distribution charges (not shown separately, but should be). The distribution companies – (owning and maintaining the gas pipes, transmission lines and associated equipment) are monopolies; as such they are regulated by Ofgem. The return on their investment is one area regulated, by way of a “baseline” return, of 6% or so; this is a pretty good return when you are not threatened by competition. However, there are also rewards and penalties imposed by Ofgem for better efficiency, or for failures (I’m guessing e.g. power cuts, cut duration for example). All the distribution companies were rewarded, and the best were actually getting a return of up to between 11 and 14%. We are all paying for this extremely generous reward system.
I would suggest Ofgem have got the baseline too high initially, and do not set the penalties and rewards correctly – there is no excuse for such high rewards. This should be part of the CMA investigation.

Profile photo of topher
Member

You might like this French idea.

EDF – Electricity de France bill their customers every two months (I expect there are other tariffs). The amounts are based on estimates, but once a year (I think) they read the meter. If they have overestimated, the refund is at once credited to the customer. In France the direct debit system works in both directions with equal speed. So the French customer does not have to keep track of the debit or credit status of his account and ask for a refund when it is positive. To me this seems a totally fair system. Why can’t we have this too?

May I ask Which as a ‘Super Consumer’ to get this incorporated. If you like this idea, vote for it, and it might help persuade Which pick it up.

Profile photo of malcolm r
Member

topher, some energy companies in the UK offer a quarterly direct debit on all their tariffs where you supply meter readings and they charge you for the energy actually used. If you don’t want a monthly DD (that is designed to spread your energy cost equally over 12 months) then this seems a good option.

Profile photo of topher
Member

Good point. I will ask Co-operative energy if they do that.

Profile photo of Alex Toplis
Member

Hi Topher,

Thanks for sharing your idea. We have had this debate about the Big Six taking up Ofgem’s challenge which you may be interested in.

https://conversation.which.co.uk/energy-home/energy-supplier-big-six-closed-account-owed-money/

Member
Malcolm Edwards says:
19 August 2014

Have just had a harrowing 15 months of getting a “sort of correct” energy bill from npower. The most frustrating thing during this time was being unable to find old tariff data enabling me to calculate my bill. There have been many tariff changes recently and nowhere on Internet could I find old tariff data. Of course npower sent letters informing me of any changes but I was only told the specific tariff I had been given. My dispute was that I had been given a more expensive tariff without being consulted. Thus I needed different old tariff data to work out what I should be paying.

I think it is very important that Ofgem make the energy companies publicly store backdated tariffs going back at least 18 months.

Profile photo of malcolm r
Member

I don’t know why Ofgem is using its time on stuff like this. I would have thought it had better things to get on with. Perhaps the cuts could remove the people who have nothing better to do?

https://www.ofgem.gov.uk/publications-and-updates/get-financially-fit-and-save-over-%c2%a32000-2015?utm_medium=email&utm_source&utm_campaign=5207550_Daily-Alert_07-01-2015&utm_content=$LINK_KEYWORD$&dm_i=1QCB,33M66,F31FFV,B4BT4,1

Profile photo of william
Member

@malcolm, It’ll be because until they start putting pressure on energy companies to reduce bills in line with falling wholesale prices, they have nothing else to do.

Profile photo of Beryl
Member

I would agree Malcolm – all very pointless. I would interpret this as more deflection than direction – pending the anticipated CMA Report. With petrol prices due to be reduced again to £1 a litre, people are beginning to look for answers as to why the impasse in the energy market.