Corporate Sustainability Due Diligence Directive (CSDDD or the EU Supply Chai...
The British retail energy market: politicians and re-regulation?
1. The British retail energy
market: politicians and re-
regulation?
Professor Michael Harker
ESRC Centre for Competition Policy and UEA Law School
University of East Anglia
m.harker@uea.ac.uk
2. Privatisation, regulation and
liberalisation
• National gas market
incumbent
• 14 regional electricity
markets
• RPI-X price-caps for
electricity and gas
incumbents only
• Main entrants other
incumbents
• Gradual deregulation
from 2000 to 2002, all
caps removed April 2002
• Significant industry
consolidation – foreign
entry through acquisition
of incumbent firms,
vertical integration
3. Deregulation of retail energy: timeline
Market share of new entrants – gas
Market share of new entrants - electricity
Full national domestic
competition
New regulator OFGEM
Competition Act into
force
DD Price
controls
withdrawn
All price
controls
withdrawn
Source: graph from Ofgem (2007)
SSE-Atlantic
merger
Powergen
(E.ON) – TXU
merger
4. Trends in prices: retail
Index of real domestic energy prices (Q1 1987=100)
Source: quarterly fuel prices, DECC
Pricecontrolslifted
5. Market structure: the ‘Big 6’
Present Incumbent areas (entrant elsewhere)
E.On Eastern, East Midlands, North West
EDF London, Seeboard
SSE Scottish Hydro, Southern, SWEB
npower Midlands, Northern, Yorkshire
Scottish
Power
Manweb, Midlands, Northern
British
Gas
National Gas incumbent (electricity entrant)
8. ‘Sticky’ consumers
• Sticky consumer – remained with the incumbent,
switched to a dual-fuel deal offered by incumbent,
or switched back to incumbent
Ofcom (2008, 2011)
9. Savings foregone
• Significant savings could be made if consumers
switched tariffs (both payment and suppliers)
Switch from Dual fuel Electricity
only
Gas only
Direct debit £160-196 £27-86 £5-36
Standard
credit
£236-323 £59-117 £25-82
Prepayment £237-239 £66-109 £42-66
Average savings over 2010 per customer if moved to the
supplier with lowest direct debit tariff
10. Why are some consumers not
switching?
• Behavioural reasons – status quo bias (Ofcom,
2008)
• Consumers who do switch may choose a more
expensive tariff (Waddams and Wilson)
• Tariff complexity and ‘confusopoly’
• Substantial growth in tariffs: Ofgem c.900 tariffs
(August 2012); DECC estimates 650 ‘dead’ tariffs;
Which claims to have found people on 1,440 tariffs
(March 2013)
11. Who are the ‘sticky’ consumers
• [Graph from ….
Profile of customers who have never switched, weighted against the British population
Source: Ofcom / MORI (2008); Ofcom (2011)
13. The non-discrimination clause
(NDC)
• NDC introduced in 2008 to prevent firms from cross-
subsidising their offers as entrants (electricity
incumbents out-of-area, British Gas in electricity) from
their installed/static consumer base as incumbents
• Firms consistently charging an incumbent mark-up of
10% from the time price controls were lifted
• Primary justification was fairness – a concern that
vulnerable consumers were less likely to have switched
• Harm to competition in the form of a barrier to entry –
new entrants did not have an installed consumer base
to subsidise “teaser rates”
14. The consequences of the non-
discrimination clause
Demand side
• Falling consumer
engagement
• Less incentives to
search and switch
• Switching rates halved
between 2008 and
2013
Supply side
• Softening of
competition – firms
retreat to their
incumbent markets /
less aggressive in out-
of-area markets
(Waddams and Zhu,
2013)
• New entry increased
(higher margins)
15. The PM’s intervention
• Prime Minister’s Questions (17 October 2012):
• Chris Williamson (Derby North) (Lab): At the Prime Minister’s
energy summit last year, he promised faithfully that he would
take action to help people reduce their energy bills. Will he
tell the House and the country: how is it going?
• The Prime Minister: We have encouraged people to switch,
which is one of the best ways to get energy bills down. I can
announce, which I am sure the hon. Gentleman will welcome,
that we will be legislating so that energy companies have to
give the lowest tariff to their customers—something that
Labour did not do in 13 years, even though the Leader of the
Labour party could have done it because he had the job.
16. Ofgem’s ‘fairness agenda’
• A result of Ofgem’s review of the market 2008-
2011:
• Limit to four the number of tariffs offered by
supplier (per payment type) (Dec 13)
• Suppliers tell customers when there is a cheaper
live tariff (March 14)
• Consumers on ‘dead’ tariffs will be switched to a
cheaper variable deal (Oct 13 / June 2015)
17. Legislation: Ministerial back-stop
powers
• Energy Act 2013, s.139: enable the Minister to prescribe
types, and limit numbers, of tariffs; and specify certain types
of consumers to be moved from one tariff to anther
• Sun-set clause (Dec 18);
• Amendments made to the Bill (in Committee stage)
• “The provision will give the Secretary of State the power to
make it compulsory for suppliers to move those who could
save money on to the cheapest, live standard variable-rate
tariffs. This is the meat of what the Prime Minister was
pledging to do. Customers would have the ability to opt out
of the process, if they wish, while the remainder would save
money without having to lift a finger.”
18. Conclusions
• Lifting of price controls – regulation appeared to be
successful in the context of falling / stable prices
• Sharp price increases result in increased attention
from politicians
• Many of the ‘problems’ with the retail energy
market have resulted from consumer inertia
• Real distributional concerns because those who
have not switched (paying the highest prices) are
the least well-off
19. Competing policy goals
• For competition to work you need ‘winners and
losers’
• ‘Reward’ those who search and switch
• NDC has resulted in less switching and higher prices
for all consumers
• Enforced switching by suppliers will reduce
incentives to switch
20. ‘Thin end of the wedge’
• Labour party commitments on energy if it wins the
next election
• “Price freeze” – 20 months following from May
2015
• Restructuring the industry: “breaking-up the Big 6”
• “Ofgem has failed” – should be replaced with a
body with “real teeth”