Retail energy markets in 2016

Publication date
3rd August 2016
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 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 recently-concluded investigation of the Competition and Markets Authority (CMA), nor do we aim to replicate its analysis here. The evidence in this report is consistent with the CMA’s findings on the retail energy markets.

You can view a summary of the report below and download it in full at the bottom of this page.

Retail report 2016: 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.

This is our second annual Retail Energy Market report. It draws on a range of market monitoring indicators and consumer research to analyse key retail market trends in 2015-16.

On the supply side it looks at changes to market structure, prices and profits. On the demand side it reviews developments in consumer engagement.

The report also examines how well the retail market is delivering the consumer outcomes in our corporate strategy and identifies themes relevant to the outlook for 2016-17 and beyond. 

Market structure and profits

New suppliers are continuing to enter the market at an increasing rate. Fourteen new licensed suppliers became active in the domestic segment and nine in the non-domestic segment. These new entrants have business models such as not-for-profit, renewable and local supply schemes. The combined market shares of small and medium-sized suppliers in the domestic market also continued to grow, by nearly four percentage points to 14% in March 2016.

In contrast, the six large suppliers have continued to lose market share in both the domestic and non-domestic segments. This has contributed, together with price cuts, to reductions in their revenues between 2014 and 2015.

The large suppliers’ financial statements have shown a marked difference in outturns for gas and electricity. Despite the fall in revenues, aggregate pre-tax profits from the supply of gas increased year-on-year, while for electricity they fell significantly. Averaging across the large suppliers, profit margins on both domestic and non-domestic supply have fallen compared to the previous year, although there were big differences between companies.

Consumer engagement

We have seen domestic switching rates in 2015 rise to 12% for electricity and 13% for gas - an increase of one and two percentage points respectively on 2014. We have also seen sustained rates of customers switching tariff with their existing supplier. Evidence suggests that much of this can be accounted for by already engaged consumers, who tend to be heavily motivated by price and are most likely to take advantage of competitive fixed-term tariffs.

We’ve also seen that consumers’ awareness of, understanding of and trust in the energy market have increased slightly. However, survey data suggests that the overall pattern of domestic consumer engagement in 2016 is largely unchanged relative to 2015 and 2014. More than one in five consumers are very disengaged. They are predominantly on expensive standard variable tariffs, less likely to engage with information and more likely to be in vulnerable situations.

Non-domestic switching rates rose in 2015-16 in electricity and fell slightly in gas compared to 2014-15. Survey data indicates small and microbusinesses have more new contracts with both existing and new suppliers this year. This suggests that consumers are making more active choices at the end of fixed-term contracts. The picture is broadly flat for other aspects of engagement, including understanding contract terms.

Bills

Domestic bills were subject to two opposing forces in 2015. Prices fell, while consumption increased on average as a result of colder weather. The combined effect was a reduction of 2% in the average dual fuel bill for a domestic customer of the large suppliers between 2014 and 2015.

Consumers have not experienced these price reductions uniformly. Significant competition among fixed-term tariffs has continued, with suppliers using different approaches to acquire new customers (including via white labels or collective switches). On the other hand, despite some cuts in early 2015 and 2016, the average standard variable tariff has not fallen as much as the cheapest fixed-term tariffs in the market. The gap between these two groups of tariffs has widened and is currently around £300 per year. Although the proportion of customers on standard variable tariffs has reduced from 69% in March 2015 to 66% in March 2016, this still represents the majority of consumers.

The observed price reductions primarily reflected lower wholesale costs. Suppliers also reported a fall in the costs of government social and environmental programmes. For some suppliers, cost reductions were partly offset by higher operating costs.

Business customers have also seen gas prices come down, again largely driven by falls in wholesale costs. However, electricity prices for all but the smallest business customers have risen, partly as a result of higher charges to suppliers to meet the costs of government programmes intended to reduce the environmental impact of the energy sector.

Quality of service

We expect competition between suppliers to stimulate improvements in quality of service over time, not just put pressure on prices. The picture over the last year was mixed. On the positive side, the total number of complaints by domestic consumers fell, as reported by suppliers, the Energy Ombudsman and Citizens Advice. This was mainly because a few suppliers resolved problems with their billing systems, which brought the number of complaints back to earlier levels. Customers are slightly more satisfied overall with domestic and non-domestic suppliers, with customers of smaller suppliers generally even more satisfied, with a few exceptions.

Less positively, in the context of fewer complaints overall, most suppliers are taking longer to resolve them. Evidence suggests more serious complaints have grown in volume for some medium-sized suppliers. Customers are also more dissatisfied with how suppliers are handling complaints, particularly microbusiness customers. In other areas, including speed and reliability of switching, suppliers have made limited progress.

We introduced new Guaranteed Standards of Performance for suppliers, with effect from January 2016. Results for the first quarter indicate that suppliers breached these standards in 5-6% of cases and most breaches related to missed appointments. We will continue to monitor this indicator of quality of service and update on its development in future reports.

Benefits for society

Consumers in vulnerable situations continue to experience worse outcomes than other consumers. Our analysis focuses on three key groups where there is ongoing evidence of detriment: consumers with prepayment meters (PPMs), consumers in debt with their supplier and electric heating customers on certain types of restricted meters. For various reasons, as highlighted in the CMA’s final report, these customers’ choice of tariffs is still very limited and they face barriers to switching supplier, tariff, payment method and meter. In particular, the best offers in the market, most often fixed-term tariffs, are generally not available to these consumers, and they tend to be on more expensive standard variable tariffs.

Some positive developments should be noted. For example, the number of customer accounts in debt has continued to fall, including the proportion of PPM customers in debt, and switching has become easier for them. Suppliers have started offering a number of innovative and cheaper ‘smart’ prepayment tariffs. Suppliers have also identified and recorded more customers on the Priority Service Register and more people took up these services.

Environmental impact

Over the last decade, consumption and energy intensity have followed a downward trend. Weather-adjusted domestic consumption fell in 2015 relative to 2014, by 0.9% in gas and 1.3% in electricity. 

Retail market arrangements can facilitate consumers’ access to information on their consumption (e.g. through smart meters with in-home displays) and send price signals that promote efficient and sustainable energy use.

Many developments are still in their infancy, but there has been a lot of progress in consumers generating their own energy and offering flexibility to the system. For example, the contribution of (mostly domestic) consumers self-generating electricity under the Feed-in Tariff scheme expanded by 28% in 2015 and reached around 15% of total renewable capacity installed in the UK. At the same time, there are more opportunities for the largest business consumers to offer flexibility services to the market, including balancing services and participation in capacity market auctions.