Ofgem breaks down barriers so competition can work better for energy consumers

Publication date
26th February 2014
Information types
Policy areas
  • The six largest suppliers and the largest generators must trade fairly with independent suppliers, or face financial penalties
  • The six largest suppliers must post the prices at which they will trade wholesale power up to two years in advance
  • A range of measures will make the annual statements of the large companies’ more robust, useful and accessible

From 31 March new rules come into force meaning the six largest suppliers and the largest independent generators will have to trade fairly with independent suppliers in the wholesale market, or face financial penalties. The six largest suppliers will also have to publish the price at which they will trade wholesale power up to two years in advance. These prices must be published daily in two one-hour windows, giving independent suppliers and generators the opportunity and products they need to trade and compete effectively.

Ofgem CEO Andrew Wright said: “Our rules for a simpler, clearer, fairer energy market are coming into force, meaning that it is getting easier for consumers to pick out the best deals. Now we are also breaking down barriers to competition for new entrant suppliers. These reforms give independent suppliers, generators and new entrants to the market, both the visibility of prices and opportunities to trade that they need to compete with the largest energy suppliers. Almost two million customers are with independent suppliers, and we expect these reforms to help these suppliers and any new entrants to grow.

“We also want to ensure that information on revenues, costs and profits of the largest energy suppliers is as clear as possible for consumers. No other European regulator has gone as far as Ofgem in making this information accessible for consumers. Now we are taking further steps to ensure that it is published more quickly, and that it gives a robust, useful and accessible picture of company profits. Both of these reforms will help ensure competition bears down as effectively as possible on prices.”

Secretary of State for Energy and Climate Change Edward Davey said: "This is a significant and welcome toughening up of competition in electricity markets. By making these wholesale prices more transparent, it will help reveal how the Big Six energy companies are trading, and make it easier for new competition to challenge their business model.

"We've been working to make energy markets work better so that consumers get a better deal, and getting a clearer picture of how energy companies are spending their customers' money is an absolutely vital step. Changing the rules for how energy is sold to suppliers is a big step forward in creating a fairer, more competitive energy market in the UK.”

Since 2009 the largest energy suppliers have had to produce annual statements showing the costs, revenues and profits for their generation and supply businesses. Ofgem will review the method used for reporting the price of electricity sold by the largest suppliers’ generation businesses to their supply businesses in their annual statements, to consider whether this is being done appropriately. Scottish Power and Centrica have provided more details of their trading activities in their latest statements; we expect other companies to do likewise, and will consider whether new rules are necessary to ensure this detail is included in future.

Ofgem has told suppliers to bring forward publication of future statements by two months and  to ensure those statements are fully and independently audited, starting from their 2014 statements. Together these reforms will allow more detailed and timely scrutiny of suppliers’ activities.

-Ends-

Notes to editors:

1. Ofgem’s new trading rules mean that the six largest suppliers and two largest independent generators:

  • cannot refuse any reasonable requests by independent suppliers to buy electricity, or treat these as low priority
  • will have deadlines for acknowledging these requests and responding to them
  • must ensure that they sell electricity to independent suppliers at the market rate
  • must offer a full range of products in forward markets, which help independent suppliers hedge their costs
  • must set up credit arrangements for trading that are reasonable and clear

2. Changes to companies annual segmental statements

Ofgem has improved the segmental statements of the six largest suppliers year-on-year and is committed to further improving transparency where possible. The latest changes aim to ensure that companies’ statements are more:

Robust:

  • Through auditor scrutiny of companies’ annual statements for 2013, and full audits from 2014
  • Through an in-depth review of the methods suppliers use to reflect revenues, costs and profits for their generation and supply businesses in their statements, to confirm that this is being done appropriately.

Useful:

  • Through requiring companies to provide annual statements more quickly starting from their 2014 statements
  • Through more insight into companies’ trading activities in their 2013 annual statements, and considering the need for new rules to ensure this detail is included in future years
  • Through requiring companies to include Return on Capital Employed (ROCE) figures, starting from their 2014 statements.

Accessible:

  • Through more details of their costs in their annual statements from the 2013 statements.

You can read more about the changes in our open letter actions to improve the transparency of energy company profits.

3. Return on Capital Employed (ROCE)

Large suppliers make higher margins in the generation side of their businesses than in the retail side as they have to invest significant amounts of capital in building new power stations. However looking at the margin alone in generation doesn’t account for the fact the companies have had to make this investment. Their actual returns may be lower, as they have to pay the costs of this investment. Using ROCE is a more appropriate and meaningful measure of profitability in the generation business as it takes into account the capital employed.

4. Ofgem is the Office of the Gas and Electricity Markets, which supports the Gas and Electricity Markets Authority, the regulator of the gas and electricity industries in Great Britain. The Authority's functions are set out mainly in the Gas Act 1986, the Electricity Act 1989, the Competition Act 1998 and the Utilities Act 2000. In this note, the functions of the Authority under all the relevant Acts are, for simplicity, described as the functions of Ofgem.

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