Archive for March, 2014

Ofgem this week announced, to no great surprise, that it was referring the energy market to the Competition and Markets Authority (CMA) to investigate whether reforms could make competition in the sector more effective.

The 18 month assessment will investigate a market characterised by…

  • the big 6 suppliers maintaining market share as customer switching has fallen over recent years
  • consumer trust also continuing to fall, with 43% of customers saying they don’t trust suppliers, up 4% from the previous year
  • incumbent suppliers charging higher prices to ‘sticky’ customers who don’t shop around
  • possible tacit pricing coordination eg through alignment of pricing announcements, indicating a lack of competition
  • big 6 suppliers characterised by vertical integration – they generate energy, sell it to themselves and then consumers – which results in a lack of price transparency and possible barriers to new entrants
  • increasing supplier profits over the last four years, with no indication of efficiency improvements driving those profits

 What next?

Probably the biggest issue that the investigation will assess is whether vertical integration is in the best interest of consumers, or whether the generation and supply of energy should be separated (a move SSE is already initiating, along with a domestic supply price freeze to 2016). If separation is mandated it will lead to the biggest shake-up in the sector since privatisation.

Impact on business customers

While the competition investigation is mainly focused on the domestic and small business market, the uncertainty created by the investigation will have consequences for larger business users:

  • the Major Energy Users Council (MEUC) is warning its members to expect price volatility next winter, along with greater potential for supply disruption
  • Centrica (owner of British Gas) has stated that the uncertainty will extend by two years the timescale for new gas-fired generation, creating potential supply shortages as coal-fired generation closes before replacement generation is in place
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This week’s budget continued George Osborne’s recent record of introducing measures to reduce the impact of rising energy costs on UK industry.

The main beneficiaries (again) are large manufacturers, steel makers, chemical plants, paper mills and other heavy energy users, who will gain from a four year extension to a previously announced EU Emissions Trading Scheme and Carbon Price Floor compensation scheme. These measures are designed to compensate energy intensive companies for government policy (and costs) aimed at supporting low carbon and renewal investment up to 2020.

The rest of British business should see a 3% reduction in their bills by 2020, while consumers should see a 2% (£15!) reduction in 2020.

Future energy uncertainty

The compensation relies mainly on freezing the Carbon Floor Price from 2016-17 to 2020, yet this could threaten investment in renewable and other low carbon generation that is desperately needed. The short-term benefits, therefore, could be outweighed by longer-term delays in establishing a secure and sustainable generation base in the UK.

The Chancellor also reaffirmed his commitment to cutting energy costs by investing in nuclear power, renewables and shale gas, along with promoting energy efficiency.

It has to be said, however, that he seems far keener on the prospect of a shale gas revolution, which by no means guarantees lower prices, than pushing energy efficiency as the best and easiest way to lower bills.

Ofgem’s long-awaited proposals to regulate energy brokers/consultants came a step closer recently with the release of a draft code of practice, which would require :

  • brokers and consultants to be completely transparent about their fees, the contracts they offer and which suppliers they represent.
  • energy suppliers to only work with brokers who have signed up to the new code

The aim is to protect businesses from misselling and drive up standards in the industry. The strongest enforcement element is the requirement for suppliers to only work with accredited brokers/consultants, which ensures that suppliers and brokers are accountable for delivering a high quality of service.

Since November last year Ofgem has had the power to act against brokers who market their services in a misleading way, but the proposed code would increase the protection for businesses.

What does this mean for you?

With the code not due for implementation until later in the year, there are a few important questions to ask that can help ensure you receive a quality, transparent service:

  • Does the broker cover the entire supplier market, or represent only 1-2 suppliers?
  • How do they get paid? No energy broking service is truly free, so ensure you know whether a commission or fee is included in your contract price – and ensure that the fee is the same regardless of supplier

Reputable consultants and brokers already abide by a code of conduct from either the Association of Cost Management Consultants or Utilities Intermediaries Association.

What does this mean for your broker?

It seems likely that the planned code of conduct and supplier accreditation system will see a reduction in the estimated 1,000 brokers and consultants in the UK.

Suppliers may only accredit brokers who can bring them significant energy volumes in order to maintain quality and minimise administration costs; ensuring that 1,000+brokers are adhering to the code could be expensive, particularly if many only place small energy volumes.

The sector may therefore see a period of consolidation, so it’s worth checking now whether your broker is aware of the draft code of conduct and how they plan to comply.