- Publication date
- 9th September 2015
- Information types
- Policy areas
This report is our annual update on the retail energy markets in Great Britain (GB). It shows the main trends in the retail markets for gas and electricity over the last year, including how the markets contribute to the outcomes we want for consumers, as outlined in our corporate strategy.
The report draws on our ongoing monitoring activities. It is part of a wider package of monitoring publications, including an annual report looking at recent developments in the wholesale markets, a report on trends in liquidity in the wholesale electricity market, and online energy market indicators, which we will regularly update throughout the year.
The report is not an assessment of how well competition is working in the retail markets, given the ongoing investigation of the Competition and Markets Authority (CMA), nor is it our response to the CMA’s provisional findings. Nevertheless, we consider that the analysis in this report supports the CMA’s findings.
You can view a summary of the report and download it in full below.
Retail report 2015: At-a-glance summary
Retail market overview
The retail markets are where energy suppliers compete to sell gas and electricity to end users: procuring consumers’ energy, setting the prices they pay and managing customer service.
In this report, we outline key developments in the supply-side of the retail markets, including market shares and profit and cost information from the six large suppliers’ annual financial statements.
We then consider key developments on the demand-side of the retail markets, including our analysis of the impact of the Retail Market Review (RMR) measures on consumer engagement since their introduction in 2013 / 2014.
Finally, we look at how the retail markets have contributed to four of the consumer outcomes we outline in our corporate strategy: lower bills, better quality of service, benefits for society as a whole, and reduced environmental damage.
Market structure and profits
Levels of entry observed in recent years in both the domestic and non-domestic segments are high by historical standards, and there has been significant expansion among independent suppliers. This is particularly noteworthy in the domestic markets, where independent suppliers now supply 10% of all gas and electricity customers. Nevertheless, the former incumbent electricity suppliers continue to supply a relatively large share of domestic and smaller non-domestic customers in their legacy areas: compared to their market shares in other regions, and compared to other suppliers. Similarly, the former incumbent gas supplier continues to supply more than twice as many domestic gas customers as its nearest rival. Suppliers other than the former gas and electricity incumbents have acquired much greater market shares among larger non-domestic gas customers.
Despite falling market shares and low consumption because of mild weather, the six large suppliers’ annual financial statements show that their average domestic margins remain high by historical standards, and have increased year-on-year: rising from 3.9% in 2013 to 4.5% in 2014. In contrast, the average non-domestic margin of the six large suppliers has declined since 2010, and fell slightly year-on-year from 2.5% in 2013 to 2.4% in 2014. Note that this average margin pools together non-domestic customers of different sizes: as the CMA has identified, there may be considerable differences in the profitability of smaller and larger business customers.
Costs per MWh continued to rise in 2014, and the six large suppliers’ per-customer domestic operating costs also increased. Historically, we have observed both operating and wholesale costs vary significantly across the suppliers, and this remains the case.
The overall level of domestic consumer engagement in 2015 is similar to that observed in 2014, with no significant change since the RMR measures were introduced. However, there are early signs that the RMR measures may have had some positive impact on consumers’ understanding of and trust in the energy market. For example, there have been some small but significant improvements in how clear consumers say they find routine communications, and an increase from 48% to 67% in the proportion of consumers seeking out information to make comparisons. With only one year’s data available, it is too early to tell whether any of these positive developments represent longer run trends: this will be a focus of future evaluation.
While there has been a small increase in the proportion of consumers reporting they find it easier to compare tariffs than a year ago, in general the RMR “simpler” tariffs rules do not appear to have had a significant impact on consumer engagement in the market. Suppliers have also reported the rules are restricting their ability to innovate. The CMA has provisionally found that the RMR “simpler” tariff rules may have had an adverse effect on competition. We will support the CMA as they consider whether aspects of the simpler tariffs rules should be amended or removed.
Smaller non-domestic consumers are affected by many of the same barriers to engagement as domestic consumers. One particular problem has been around these consumers’ understanding of their contract terms, so in 2014 we introduced new rules in this area as part of the RMR reforms. There is some evidence of an improvement in smaller businesses’ engagement with their contracts and awareness of contract details in 2014. Nevertheless, it is likely that nearly half of all micro-businesses remain on default contracts, and as with the domestic market, many smaller non-domestic meter points have never switched supplier.
Energy bills depend on the price of gas and electricity and the amount of energy that a consumer uses. Although average prices increased, falls in domestic consumption in 2014 (primarily as a result of mild weather) resulted in a reduction in average household bills compared to 2013.
The amount that a domestic consumer pays for their energy will depend on the type of tariff they are on. Over two-thirds of consumers remain on Standard Variable Tariffs (SVTs) despite the fact that these tariffs have tended to be consistently more expensive than fixed tariffs. The gap has grown as a number of suppliers (particularly the independents) introduced cheaper fixed rates in 2014 and early 2015.
Overall non-domestic consumption per customer also fell in 2014. The trend in non-domestic prices, which are often bespoke and tend to be less transparent, varied depending on the size of the customer: on average, prices per kWh increased for electricity customers and smaller gas customers between 2013 and 2014, and fell for larger gas customers. Very small business customers, most of which are on fixed-term contracts, continue to pay much more for their energy. Positively, there are signs that the proportion of micro-business customers being rolled-over fell in 2014, although it is likely that many remain on default contracts.
Looking forward, the increased use of smart and advanced meters has the potential to place downwards pressure on bills: helping consumers to use less energy by enabling the provision of near real-time information about prices and consumption; improving the information about consumption that other market participants receive and thereby making the system as a whole more efficient; and helping to drive competition. But, as discussed in Chapter 7, for now the roll-out remains at an early stage and the vast majority of customers continue to use traditional meters.
Quality of service
Energy is an essential service. Virtually every household and business in the country depends on energy companies to provide a reliable supply to power and heat their homes and premises. Because of this, it is crucial that suppliers treat consumers fairly and meet certain minimum standards of service.
Our indicators suggest continued cause for concern around suppliers’ performance in the service they deliver to their customers. For example:
- Overall satisfaction with the service received among domestic customers remains well below historic levels. There is no clear relationship between prices and service quality.
- The number of domestic consumers making a complaint continued to increase in 2014, and suppliers have often failed to handle these complaints well (although there are signs of a reduction in complaints numbers in the first half of 2015).
- There is some indicative evidence that satisfaction among smaller businesses may have fallen over the last year.
There have, however, been some positive developments. In particular, following intervention by government and Ofgem, the average time taken to switch suppliers has fallen significantly. Nevertheless, the switching process continues to be unreliable and many customers still perceive switching to be a hassle.
Looking forward, smart meters have significant potential to help suppliers offer a better service (eg by putting an end to estimated billing) and to differentiate their offers to consumers. Later this year, we will launch a programme to design and implement a fast and reliable switching process that is fit for purpose for the future. We also expect to rely more on regulation through general principles and outcomes, which should provide more effective protection for consumers, foster more competition and innovation, and support new entrants. The Standards of Conduct – as discussed in Chapter 3 – are a critical first step towards this.
Benefits for society
Different consumers have different experiences of the retail markets. Three groups of domestic consumers which may be particularly likely to have a negative experience are those that are disengaged, those in debt to their supplier and those with prepayment meters. These groups are all more likely to be in vulnerable situations.
These groups continue to experience worse outcomes than other consumers in 2015. Recent trends in prices have, if anything, exacerbated the difference in the prices paid by the more and less engaged consumers. Prepayment customers continue to have access to fewer tariffs than those using other payment types, and are unlikely to have benefitted from recent reductions in fixed tariffs as a result.
There are some positive developments, however. For example, the proportion of accounts in debt declined in 2014, as well as the number of disconnections for non-payment of debt. In addition, we have seen continued roll out of the Energy Best Deal programme, designed to improve engagement among low income consumers, and so help them to move to cheaper tariffs. Suppliers are also offering a small but growing number of innovative prepayment tariffs, and smart meters have the potential to vastly improve the experience of prepayment customers.
The retail markets impact on the overall environmental damage caused by the energy sector. One reason for this is their role in influencing energy consumption, which will in turn affect levels of emissions. Energy efficiency has improved over the last decade, and recent developments in the retail markets should help this continue.
The retail markets are also playing an increasingly important role in the transition to a low-carbon energy sector. This is partly as a result of rapid technological innovation which is creating new ways for consumers to participate in the market, and helping to encourage suppliers with novel business models to emerge. For example, consumers are generating more renewable electricity themselves: total installed small-scale capacity under the Feed-in Tariff scheme has increased over the last year, especially for the smallest solar installations. A number of domestic suppliers are offering green products, although this is limited to the independent suppliers following the withdrawal of green tariffs by a number of the six large suppliers in 2013 and 2014.
Greater use of smart and advanced meters has the potential to help reduce the environmental damage caused by the energy sector, and in 2012, we initiated a programme of work with the objective of developing the regulatory framework to maximise the benefits of these meters and transform the sector into a more efficient, dynamic and low-carbon market. The next generation of meters should help consumers to better understand their energy use, and help enable demand-side flexibility to play a greater role in the energy system, assisting the integration of intermittent renewable generation. However, we note that overall supplier performance in the roll-out of advanced meters to larger non-domestic businesses has generally been poor, and given this we are scrutinising the progress of the domestic and small business smart meter roll-out closely.