State of competition in the energy market

Press release

We have today acted to remove uncertainty from the energy market by proposing a market investigation by the Competition and Markets Authority (CMA). A market investigation will once and for all clear the air and allow the CMA to ensure that there are no further barriers to effective competition. An investigation would reassure consumers and complement our reforms for a simpler, clearer and fairer energy market.

Today’s State of the Market Assessment, prepared jointly with the Office of Fair Trading and the CMA, confirms our previous analysis of why competition is not working as well as it could. As well as reinforcing concerns about barriers to entry for independent suppliers and persistent high market shares of the largest energy companies, the report includes further evidence and shows:

  • declining consumer confidence with 43 per cent distrusting energy companies to be open and transparent. This may deter consumers from engaging in the market and prevent them from getting a better deal for their energy
  • continuing uncertainty over whether the vertical integration of the large energy companies is in consumers’ interests
  • retail profits increasing from £233 million in 2009 to £1.1 billion in 2012, with no clear evidence of suppliers becoming more efficient in reducing their own costs, although further evidence would be required to determine whether firms have had the opportunity to earn excess profits, and
  • suppliers consistently setting higher prices for consumers who have not switched.

Given these problems we believe a referral to the CMA is timely and necessary because:

  • CMA’s more extensive powers can address any long-term structural barriers to competition
  • A market investigation would conclusively determine whether vertical integration is in consumers’ interests or whether there should be more separation between the largest companies’ supply businesses and generation arms.
  • Our reforms for a simpler, clearer, and fairer market have created a safer space for consumers to shop around for a better energy deal while a CMA investigation takes place.
  • Major change is coming with the roll-out of smart meters. A CMA investigation will ensure that there are no further barriers that prevent consumers from making the most of the transformation smart meters will bring to the energy market.

We have also issued a letter setting out that we will substantially increase the level of penalties we impose. This decision has been taken to ensure regulatory compliance is given sufficient focus within businesses and to deliver strong deterrence. This change will come into effect where evidence of rule breaking comes to our attention on or after 1 June.

To make the energy market clearer for consumers, we have additionally published a new commentary on recent and possible future cost trends for energy suppliers. The commentary also estimates suppliers’ pre-tax margins for supplying gas, electricity and dual fuel.

Find out more in our press release