The average energy bill is £1,420 – but are these prices fair?

This is an excellent report and makes a compelling case for a full reference to the Competition Commission by the Secretary of State for Energy and Climate Change of Britain’s electricity and gas supply businesses. The problems in these markets, as you clearly highlight, are structural, yet, to date, the Government and Ofgem are relying on behavioural remedies which continuously prove to be ineffective. The Government’s Energy Bill proposes to layer further institional and procedural complexity on this underlying policy and regulatory dysfunction to secure climate change objectives. This will impose an additional, excessive and unnecessary cost burden on final consumers, taxpayers and the economy. And the proposed changes will be applied unilaterally in ways that conflict with and go beyond existing EU legislation.

I expect you realise that there is no possibility that the Government will consent to a reference to the Competition Commission. Previous calls for such a reference have been dismissed or ignored. It is necessary to expand the campaign to the EU level, because much of what is happening in Britain is a result of policy, regulatory and structural deficiencies in the efforts to complete the internal EU markets in electricity and gas.

In 2007 DG COMP conducted an energy sector inquiry which led to the Third Energy Package in 2009 – which has not yet been fully transposed in to national law in all Member States. The continuing Great Recession has overwhelmed the well-laid plans in the Third Energy Package and the accompanying 20:20:20 climate change objectives. They have also been overwhelmed by continuing Russian geo-political manoeuvring and the huge expansion of shale gas production in the US. The EU’s Big 7 – EdF, GdF/Suez, RWE, Eon, Vattenfall, Iberdrola and ENEL – continue to dominate the markets – even if they have been bruised by the abrupt phase out of nuclear in Germany, the increasing penetration of renewables and coal displacing gas in generation. The EU ETS is malfunctioning, despite the recent application of a sticking-plaster, and EU wholesale gas prices are much, much higher than they need be – even if DG COMP is finally investigating Gazprom’s gas contracting practices in eastern Europe.

There is a pressing requirement for a new DG COMP energy sector inquiry. Perhaps Which should align with consumer associations in other EU Member States to lobby the Commission, the Council and the Parliament to demand that DG COMP conduct such an inquiry. The Treaty for the Functioning of the EU has given the EU new competence is the energy area – even though Member States are free to decide their own fuel mix. There is little point advocating changes solely in Britain. This is a British and an EU problem.

If Which doesn’t follow-up on this report and pursue the case, who will?

As a brief adendum to the previous comment, the European Council meeting in May endorsed the Commission’s proposal to present an “analysis of the composition and drivers of energy prices and costs in Member States before the end of 2013”:
http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/137197.pdf

This presumably will be conducted by DG ENER. On previous form DG ENER will conclude that what is required to remedy any problems it might uncover is a more zealous implementation of the Third Energy Package and the associated instruments and targets. This is totally inadequate. Embedding institutional and procedural arrangements that are part of the problem is no remedy. Nothing less than a full DG COMP energy sector inquiry is sufficient.

As an example of how dysfunction on the Continent impacts in Britain one can see how the UK NBP spot gas market functions. Ofgem, in company with the Belgian and Dutch energy regulators, inquired about observations that flows on the Bacton-Zeebrugge and Bacton-Belgzand interconnectors were often lower than price differentials and market conditions would indicate as being efficient – and that flows were often against price differentials (gas flowing from the market with a high price to one with a lower price). It broadly concluded that high commodity charges at the entry to Britain’s gas transmission system deterred imports from the Comtinent and encouraged exports to the Continent.

This may well have an impact, but of much greater importance – and which Ofgem and all the ‘stakeholders’ would never concede – is the fact that the UK NBP sets the reference price for other gas hubs in North Western Europe and certain market players have an interest in keeping prices high at the UK NBP. Many of these players are locked in to oil price-linked, long-term, take-or-pay contracts. Keeping the UK NBP price close to the prices in these contracts will keep these contracts ‘in the money’.

This is but one example of how the abuse of market power by many market participants is imposing excessive costs on final consumers.