Ofgem orders inquiry into energy market competition

The energy regulator Ofgem has confirmed it will conduct an inquiry into competition within the energy market. The announcement comes just days after consumers and businesses called for “radical changes” to the sector.

Ofgem said it had taken action to “remove uncertainty” for the energy market by proposing an investigation by the Competition and Markets Authority (CMA), which will aim to ensure there are no further barriers to effective competition.

The decision to have an inquiry was driven by declining consumer confidence – with 43% of consumers saying they distrust energy companies –and increasing retail profits. Ofgem said retail profits increased from £233m in 2009 to £1.1 billion in 2012, with no clear evidence of suppliers becoming more efficient in reducing their own costs.

Secretary for energy and climate change Ed Davey described the review as “tough action”.

He added that it was needed because “this is just too important for people to rely on guesses about how to fix the energy markets. If we get it wrong, consumers will pay the price.”

Earlier this week, a report commissioned by the trade body Energy UK argued that the energy market was changing and competition was improving. The market share held by the ‘big six’ utility providers dipped below 95% taking it to the lowest level in 15 years in the quarter to the end of January.

The Ofgem announcement was described as “long overdue” by Clare Francis, editor-in-chief at MoneySuperMarket. She added, “One of the problems highlighted by Ofgem is the fact that so few people switch energy provider.

“As a result, millions of people are paying more than they need for gas and electricity, while lining the pockets of big energy firms. It’s not a lack of choice that’s the problem, but a lack of engagement.”

The number of energy customers switching suppliers reached a three-year high in December after the ‘big six’ providers all increased their prices.

Good Energy and Ecotricity, both of which are renewable energy firms, have welcomed the news. Juliet Davenport chief executive and founder of Good Energy said the inquiry provided an opportunity to ensure that the market was competitive and benefitting customers.

Meanwhile Dale Vince, founder of Ecotricty, commented, “It’s taken three months to decide they need an 18-month competition inquiry, 20 years after privatisation. The root of these problems is the way the energy marker was privatised, that’s where the big six got their uncompetitive advantage.”

Further reading:

British Gas boss faces calls to forego bonus

Competition in energy market is improving, says trade body

Consumers and businesses call for ‘radical changes’ in the energy market

Energy customers switching supplier at three-year high, says trade body

Ofgem: energy firms’ profits from customers up 77%