State of the energy market 2017

Publication date
31st October 2017
Information types
Policy areas

In March 2014, Ofgem referred the energy market to the Competition and Markets Authority (CMA), because we assessed that it was not working as well as it could. This State of the Market Report is Ofgem’s first annual assessment of Great Britain’s energy markets since the CMA concluded its investigation in June 2016.

The report follows on from our previous Wholesale Energy Markets in 2016 and Retail Energy Markets in 2016 monitoring reports. It brings together analysis published by us and others, and includes new analysis that provides further insights on some of the key issues. The report focuses on energy markets and does not assess the state of energy networks.

It has four chapters, which cover the outcomes that Ofgem expects the market to deliver for consumers: lower bills, better social outcomes, lower environmental impacts, and improved reliability and safety.

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

State of the energy market report 2017: At-a-glance summary 

Competition in energy markets

Effective competition is central to ensuring that energy markets work in the interest of current and future consumers. Competition benefits consumers by incentivising firms to be more efficient and find new and better ways of providing the services consumers want at a low price.

In this chapter we look at how well competition is working in the energy markets, focusing in particular on developments since the CMA’s energy market investigation. We consider whether the energy sector displays the structural features and outcomes we would expect to find in a well-functioning market.

We find that: 

  • Competition continues to benefit household consumers who are able and willing to shop around, meaning they can usually get a good deal. But competition isn’t working well for consumers who are less active. 60% of consumers are on a default variable tariff, which can be around £300 more expensive each year than the cheapest fixed-term deals.
  • Retail markets typically work well for larger businesses, but small and microbusinesses pay much more on average. Larger business consumers can often negotiate good deals with suppliers, but smaller ones tend to pay more for their energy, and switch infrequently. Average business electricity prices are around 50% higher for very small firms than for large or very large consumers, while non-domestic gas prices can be twice as high.
  • The CMA remedies, intended to improve competition and outcomes for consumers, are being implemented and are starting to show results. From April 2017, we implemented a cap on prepayment meter (PPM) tariffs. Prices fell by around £60 for a typical dual fuel PPM consumer, though some of the cheapest tariffs are no longer available.

Affordability and vulnerability in the domestic sector

Even if suppliers provide energy at the lowest feasible prices, some consumers may find it hard to manage their bills. This can potentially leave customers with high bills, debts, or under-heated homes. 

In this chapter, we examine the overall cost of energy bills, and identify which customers are struggling to pay them. We then analyse the two components of energy bills: the prices that customers pay per unit of energy, and the amount of energy they consume, including the impact of energy efficiency programmes. 

We find that:

  • In 2016, the average dual fuel bill for a customer of the six largest suppliers was £1,123, 16% lower than its peak in 2013 in real terms. Households with the lowest incomes spend 10% of their expenditure on energy – over three times more than the proportion spent by households with highest incomes.
  • Many consumers still worry about the cost of their energy bills, although the situation is improving. The proportion of energy consumers in debt to their supplier is at its lowest level since we started collecting data in 2006, but some still face very high debts.
  • Households use 20% less energy than 10 years ago, which has helped reduce their bills.
  • The two-tier energy market means that some groups of vulnerable consumers lose out. Nearly half of consumers who are unemployed, or have intermittent, semi- or low-skilled work, have never switched supplier, compared to under a third of other consumers. This means that they are more likely to be on expensive standard variable tariffs, despite being less able to afford them.

Decarbonisation of energy

Reducing environmental damage from generating electricity and using gas to heat homes and businesses is one of Ofgem’s five strategic aims.

The UK is committed to reducing its greenhouse gas emissions by 80% of 1990 levels by 2050, to around 170 megatonnes of carbon dioxide equivalent gases.

In this chapter, we assess the UK’s progress towards reducing emissions overall, how government policies to support clean electricity have helped reduce emissions, and challenges posed by integrating new sources of generation.

We find that:

  • Since the Climate Change Act 2008, over half the reduction in the UK’s greenhouse gas emissions came from cleaner electricity. However, there has been limited progress in reducing emissions from heat and transport.
  • So far, reducing carbon emissions from electricity has relied on carbon prices and financial support. Carbon prices now make coal unprofitable, which has been crucial to its recent decline in the generation mix. Renewables produced 25% of all electricity in 2016, supported by subsidies.
  • New investment in renewable technology is getting substantially cheaper. However, many contracts for support have been issued with limited or no competition, increasing costs to consumers. The need for more low-carbon generation makes it even more important that consumers get the best deal. 

Security of Great Britain’s energy supply

Consumers and businesses must be confident that they can heat and power their homes and commercial premises when needed. This requires the energy system to operate efficiently and to be resilient to demand and supply shocks.

This chapter examines the security of GB electricity and gas supplies by considering whether there is sufficient generating capacity to meet consumer demand and whether the system remains balanced and reliable while operating efficiently.

We find that:

  • Gas supplies are diverse and resilient to disruption. In recent decades, Great Britain has not had a serious gas supply shortage.
  • Secure electricity supplies have been maintained without substantial use of 'out-of-market' measures to balance supply and demand. This continues a period since 2005 where the level of intervention has been significantly below that implied by the government’s 2013 reliability standard. This could suggest that consumers have on average paid more to maintain security of supply than necessary.
  • The Capacity Market should provide adequate capacity, but close monitoring is needed to balance cost and security for consumers. In theory, the Capacity Market should secure supplies at least cost. In practice, the cost to consumers will depend on a number of factors including the quality of forecasting.

If you have any questions or comments about this report, please contact chief.economist@ofgem.gov.uk.