IPPR try to fix ‘busted’ energy market

Customer satisfaction with our energy companies is at an all time low. An IPPR report recommends a range of measures to improve competition.

Between January and March, a record 10,638 people complained to the Ombudsman about the Big Six gas and electricity firms, three times the number in the same period last year. The companies also received a staggering 5.5 million complaints last year. Npower had the most at 1.3 million, followed by EDF Energy and British Gas, with 1.2 million each, E.ON (over 900,000), SSE (almost 500,000) and ScottishPower (300,000).

Richard Lloyd, executive director of consumers’ organisation Which?, said: “The fact that consumer complaints continue to rise is further proof that the energy market is broken.”

While complaints rise, so do our energy bills. The average domestic gas and electricity bill has more than doubled since 2005, from £600 to over £1,200. The Debt Advisory Centre Scotland says more than 660,000 Scots used credit to pay their gas and electricity bills in February, three times the number six months ago. Hardly surprising that in a recent survey only 50% of consumers trust the largest firms.

Market solutions like switching are far from straightforward, with Ofgem fining British Gas £5.6 million for blocking business customers from switching to other suppliers.

Fines at this level are unlikely to have much effect when profits are rising on the back of increased prices. ScottishPower increased profits from selling energy to consumers and businesses by 2% last year. It made £184.4m from selling power last year, up £3.9m, from the preceding year. The growth in profits followed a 7% hike in domestic energy prices from December 2012. This added £104 to the average annual dual fuel bill for customers on flexible tariffs. They then put prices up by an average 8.6% in December 2013 citing increased energy delivery charges and costs to support compulsory social and environmental schemes.

These and other company prices should have been cut by £50 due to savings from the reduction in green levies. However, four of the Big Six power firms have failed to pass on the full saving. E.ON, EDF, npower and Scottish Power have offered 3.7million of their customers just £12 off. British Gas and SSE gave their customers the full saving. Caroline Flint MP, Labour’s energy spokesman, said: “The companies were meant to cut everyone’s bills in return for changes to green levies. Instead, they have been allowed to pocket the savings and millions won’t see the benefit. Yet again David Cameron has let the energy companies off the hook.”

So can the market be made to work better?

The IPPR report ‘The True Cost of Energy’ argues that while a lot of attention has been devoted to the cost of the government’s environmental policies as well as the impact of rises in the wholesale cost of gas, little attention has been paid to the potential costs of a flawed competitive market. In their mid-range scenario, £70 is saved from the average annual bill. Across all consumers this would create a saving of around £1.9 billion.This level of savings in 2020 would cover the costs to consumers of the electricity market reform, the carbon price floor, the feed-in tariff (FIT), the warm home discount and most of the renewables obligation combined.

The report makes a number of recommendations. On the current market review (RMR) they say that Ofgem must act with greater urgency to improve market conditions. This should be the last chance for the current market structure. If the RMR fails to significantly improve levels of competition, government should intervene and investigate alternative regulatory approaches.

On tariff reform they recommend that Ofgem should abandon its proposals to introduce a two-tier tariff system and include the costs of energy efficiency obligations in a standing charge for standard tariffs. There should be an absolute limit on the number of tariffs suppliers can have in operation at any one time. They are also critical of reforms to improve liquidity in the wholesale power market in such a way as to make entry of new suppliers easier.

Linked to tariff reform is tariff cost reflectivity and Scottish Power has been under investigation for over a year on this. Loss-leading tariffs should be included in the RMR and licensing requirements should apply to all tariffs, including fixed-term tariffs and those with introductory discounts. Adequate systems should be in place to monitor the suppliers’ operational costs and the costs of metering. The report is also critical of Ofgem’s published estimates of suppliers’ costs. They should expand regular publication of costs to include its estimate for each specific cost component and details of how this has been computed.

Customer dissatisfaction with energy bills are rising at the same rate as price increases and arguably even faster than company profits! The IPPR recommendations would certainly improve the operation of the market. However, it is doubtful that Ofgem is up to the task of what in any case may simply be tinkering with a busted market solution.

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