A Business Owners Guide to the CMA Energy Market Investigation
At Love Energy Savings we are committed to ensuring you are fully clued up on everything that is going on in the energy industry so that you can make an informed decision about your energy tariff choices.
After two years of waiting, the CMA investigation into energy prices, as commissioned by Ofgem, has finally been published and we are cutting out all the jargon, summarising what you need to know about the consultation’s outcome.
What is the CMA investigation all about?
Way back in June 2014, Ofgem announced that they had sanctioned a full energy market investigation in order to ensure there was effective competition within the sector, to help re-build consumer trust and to re-assure investors.
Two years later and the report has been released with recommendations for reform.
Why was it commissioned?
The investigation was launched to ensure that competition within the market was working as effectively as possible resulting in the lowest energy prices possible for consumers, better customer service and innovation.
Initial analysis of the market showed that there was a deep-rooted mistrust of energy suppliers due to rising profits and stagnant energy prices. It seemed evident that the consumer was not obtaining the best deal. For example, between 2004 and 2014, retail energy prices for domestic electricity rose by 75%, according to the report, despite wholesale generation costs remaining broadly the same.
Commenting on Ofgem’s decision to launch the investigation, Dermot Nolan, Ofgem Chief Executive said: “A CMA investigation offers an important opportunity to clear the air. This will help rebuild consumer trust and confidence in the energy market as well as provide the certainty investors have called for.”
What was the outcome?
So two years and £5 million later, what does the report have to say about the state of the UK energy market?
According to some industry professionals, it hasn’t gone far enough. Not-for-profit energy supplier, Ebico were the ones responsible for leaking the amount of money it cost to run the investigation and their chief executive, Phil Levermore had this to say: “The CMA investigation has been a complete waste of time and public money” he continued, “the cost to energy suppliers themselves will run into the millions as well, and consumers will ultimately bear the brunt of this in their energy bills.”
This is a particularly critical response, with the majority of backlash focused mainly on the fact that the final report was not saying anything which hadn’t been proposed back in March 2016 when the provisional remedies were first announced.
For more industry leader comment and opinion you can read our blog post "What does the new CMA report mean for you and your energy bills?" here.
This being said, it does not negate the positive effect the findings and proposed remedies may have on the energy market.
The problems identified fell under three broad categories;
1. Low customer engagement
2. Regulatory and technical constraints
3. Regulatory framework
1. Low customer engagement
It was found that a lack of engagement on behalf of consumers was partly to blame for the high prices charged by suppliers for SVT’s.
In layman’s terms this basically means that, because suppliers can get away with charging higher prices, they will do.
70% of the ‘Big Six’ domestic customers are currently pay a SVT which are far more expensive than the competitive acquisition tariff’s that suppliers also offer to entice new customers. In the report, it states that several suppliers argued a lack of switching clearly shows that the money the customer could save is not “sufficiently important” to encourage the consumer to shop around. This was quickly dismissed by the CMA who go on to say that they “do not find these arguments convincing”, instead suggesting it is the perceived hassle of switching, lack of understanding surrounding bills and traditional meters and the lack of “trigger points for engagement” due to the fact that energy is supplied regardless of whether the customer is in a contract or not.
While these observations are based on the behaviours of domestic consumers, we at Love Energy Savings know that it is the same story for businesses. The perceived hassle of switching, the difficulty of deciphering bills and the hidden rollover costs are all issues experienced by the 40% of SME owners who have never switched suppliers.
While domestic consumers could have made annual average savings of £330, on average, in 2015 (according to the CMA findings), our data shows that our business customers overpaid by an average of £1,225, that’s almost four times more!
The CMA report did include microbusiness customers in its review, noting that in 2013, 45% of microbusinesses were on default tariffs. According to the analysis this was due to a “lack of transparency concerning the tariffs available to them.”
At Love Energy Savings, we believe that our customers deserve to have full visibility of all the options available to them, so they can make informed decisions when it comes to switching suppliers.
Our market leading comparison engine does just this, quickly comparing 150 tariffs from 18 different suppliers, showing you available tariff prices in real-time. This is a market first, and one which we hope will encourage business owners to be more switch savvy.
2. Regulatory and technical constraints
From a supply-side standpoint, there are also numerous problems that need addressing as they are currently having a harmful effect on customers.
Interestingly, none of the issues identified in this section of the report were highlighted by Ofgem during the initial stages of the investigation, but they have now been shown to be having a “fundamentally harmful effect on customers”, increasing prices and restricting choices.
Most of the issues identified only apply to domestic energy consumers, or relate to the new CfDs introduced by the DECC to encourage low carbon generation. However, for microbusinesses, the conclusions drawn about Ofgem’s RMR reforms are relevant and will hopefully lead to change.
The ‘simpler choices’ component of the reforms actually restrict the number of tariffs suppliers can currently offer which led to the withdrawal of certain tariffs which would have benefitted low volume users. It also reduced competition between Price Comparison Websites, who work on the customers’ behalf.
3. Regulatory framework
Issues identified within the regulatory framework affect both wholesale and retail prices, restricting policy changes and harming the energy market as a whole.
The main problem is that the codes which regulate the sector are set by the industry participants themselves. When the sector was privatised, there were initially two codes which largely related to technical matters, there are now 11, which translate into 10,000 pages of rules affecting a broad range of commercial and policy areas.
The CMA report claimed that Ofgem have an “insufficient ability” to influence decision making, meaning that it is the suppliers themselves who regulate the industry, and their interests are not necessarily aligned with the customers.
The CMA also identified that there was a lack of formality in the relationship between the DECC and Ofgem, meaning that key policies were not always implemented in the most effective manner.
The report concluded that it is the weakness of Ofgem’s powers which have contributed to a lack of trust in the sector. It is the “insufficient transparency over the impact of policies and regulations on energy prices and bills” which dis-engages consumers, as they believe their rights will not be protected.
As a result of the investigation, 30 remedies were suggested including;
1. Improvement of the governance of the regulatory framework to avoid the problems identified from re-occurring
2. Smart meters to be rolled out across all domestic consumers by 2020 (a remedy which will hopefully also be applied to business customers in due course)
3. The removal of the ‘simpler choices’ component of the RMR regulations, to be replaced by a principle-based approach, aiding comparability of tariffs
4. Ofgem to establish an ongoing programme to help engage customers through the provision of information relating to the cheapest tariff options available
5. Creation of a database which identifies those customers who have been on a SVT for three years or more. This information will then be made available to rival suppliers, Ofgem and certain third party intermediaries enhancing their ability to promote engagement and raise awareness of lower priced options
6. For microbusinesses in particular, the CMA have asked for prices to be disclosed by suppliers and the prohibition of restrictive clauses that lock-in customers
What does the future hold?
The report itself was primarily focused on domestic and micro-business consumers so it is unlikely that larger businesses will see any changes as a direct result of the investigation any time soon. However, that is not to say that no change will be seen.
What this report has done, is show that customers need to be more aware of the options available to them if they are to avoid paying over the odds for their energy.
That’s where Love Energy Savings can help. Our experienced energy consultants have many years of experience helping businesses save over £79 million on their energy bills since 2007.
We negotiate better deals with suppliers on your behalf, taking all the hassle out of switching.
To discuss your options, call one of our consultants today on 0800 9888 375 or simply compare prices online here.
To read the full CMA Energy Market Investigation click here