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Competition Markets Authority Recommendations for the UK Domestic Supply Market

(24th June 2016)

 

 

The Competition and Markets Authority (CMA) has spent two years investigating the UK retail energy supply market after Ofgem (the market regulator) concluded that “features of the energy market were preventing, restricting or distorting competition”.

Whilst we are happy to see the removal of the four tariff cap introduced in Ofgem’s Retail Market Review (RMR) one Ofgem reform that we are very much opposed to is the reversal of the requirement for price comparison sites to show consumers all deals, not just those that earn them commission.

Clearer Energy will always show all the tariffs available in the market irrespective of whether they generate a small commission payment in line with Ofgem’s confidence code that our technology partner Energylinx is a signatory to.

 


 

Summary of Competition Markets Authority Recommendations for the UK Domestic Supply Market

(10th March 2016)

 

Introduction

Following an internal assessment of the state of the retail energy supply market in the UK published in March 2014 Ofgem took the decision in May 2014 to refer the whole market to the Competition and Market’s Authority (CMA) in an attempt to increase consumer confidence in the industry and address a perception that competition wasn’t working.

Summary Proposals

  • Introduce a temporary price control for the 4 million customers on pre-payment meters (PPM), pending the full rollout of smart meters and wider reform of the market by 2020.

 

  • Clearer Energy’s Response:  It is true there is far less competition in this market with fewer suppliers offering PPM tariffs and far fewer tariffs – particularly fixed term tariffs.  It should be recognised that the operation of prepayment meters is problematic for many suppliers as meter operation and rental costs are higher than standard credit meters.

 

  • See the creation of an Ofgem-controlled database of disengaged customers who have been on a standard variable tariff (SVT) for more than three years, allowing rival suppliers to target their marketing to those customers.

 

  • Clearer Energy’s Response:  On the face of it this will lead to millions of nuisance calls akin to the PPI misspelling scandal.  This recommendation needs to be thought through very carefully to avoid unintended consequences.

 

 

  • Removal of the four-tariff rule imposed under Retail Market Reform.

 

  • Clearer Energy’s Response: The 4 tariff cap when introduced was opposed by Clearer Energy as it clearly limited competition and innovation.  We welcome the proposal to remove it.

 

  • Giving more data, such as customer meter numbers, to price comparison websites (PCWs) and other intermediaries, and allowing them to negotiate exclusive deals with suppliers.

 

  • Clearer Energy’s Response: Collective switching has achieved mixed success.  The TPI sector is not without its challenges in terms of displaying all available tariffs and a lack of transparency around the commission they charge the energy suppliers.

 

  • Measures to help new suppliers compete for PPM customers and reduce barriers such as personal debt issues that make it difficult for such customers to switch.

 

  • Clearer Energy’s Response: PPM customers have been able to switch with as much as £500 of debt owed to the incumbent supplier since May 2015 (the Debt Assignment Protocol).  As discussed above, measures to increase competition in the PPM market are welcome.

 

  • A requirement that the approximately 700,000 households on non-Economy 7 restricted meters are allowed to switch to cheaper single-rate tariffs without requiring a meter replacement.

 

  • Clearer Energy’s Response: This has been a major anti-competitive problem for many years that Ofgem has done virtually nothing to address. The CMA’s proposal is welcome.

 

  • Ensuring the transparency of green subsidies that go on the customer’s bill and assessing their impact beforehand, with a clear rationale for the allocation of funding to different technologies.

 

  • Clearer Energy’s Response: Clearer Energy fully supports the decarbonisation of the electricity generation industry and believes the relatively small additions to consumer bills to support decentralised energy generation pales into insignificance compared to the subsidies provided to other less green forms of electricity generation.  Full transparency of all third party charges (that now make up more than half a consumers bill is welcome and will help to dispel the myth that wholesale commodity price reductions must lead to linear price reductions in consumer bills.

 

  • Reforms to the electricity and gas settlement processes to lower costs to consumers by enabling more accurate measurement of consumption and more efficient supply - and to enable the full benefit of smart meters to be realised.

 

  • Clearer Energy’s Response: Reforms to the settlement process are absolutely essential for the full benefit of smart meters to be achieved through time of use (ToU) tariffs.

Falling Oil Prices - Not the Time to be Complacent


(6th January 2015)


If like me you're enjoying not having to spend over £100 each time you fill your car’s petrol tank with fuel it's important to remember these times and the fact they will return.


The danger when fossil fuel prices fall is that companies (and domestic users) can become complacent and not plan for the future by hedging against inevitable increases in what is a volatile global commodity.


Yesterday (5th January) Brent crude fell to $50.05 a barrel from a peak of $130 a barrel less than three years ago.


Prices were even higher in 2008 touching nearly $150 per barrel before falling back on the back of the global recession.


Energy suppliers smooth these sharp fluctuations in wholesale prices by hedging forward but whilst wholesale gas and power prices have fluctuated the cost of gas and electricity bills has increased by 151% since 2004 (Uswitch).


So while we might be enjoying lower oil prices at the pump there is little guarantee these reductions will be felt in lower gas and electricity prices.


According to Ofgem, nearly half (44%) of UK energy bills are wholesale costs. Network costs make up almost a quarter (23%) and the rest includes environmental/social costs (7%), and VAT (5%). Supplier operating costs are another 13% and there's also a pre-tax margin of 8% for suppliers.


Notably however, green levies could nearly double from the current £115 per annum for a typical domestic user to £215 by 2030.


Future Security of Supply and Stable Prices?


In the UK we are at the mercy of the wholesale markets. The percentage of the UK’s fuel sourced domestically has decreased over time, and according to the Department of Energy and Climate Change, was at its lowest-ever level in 2013.


Analysts’ expectations of short to medium term oil prices vary but typical forecasts are that prices will remain at current levels with an expectation that oil prices will rise back to about $80 per barrel towards the latter half of 2015 as global economic growth regains momentum.  Brewin Dolphin calculate the cost of finding and developing oil has risen from $25 a barrel to $33 a barrel and as a rule of thumb the oil price should be three times that cost.


The view at Clearer Energy is that the oil producers in OPEC are playing the long game by not reducing oil production effectively making it uneconomical to invest in further hybrid exploration such as shale oil.  But how long will this last?

 

Take Control of Your Energy Needs

 

There has never been a better time for UK business and consumers to take control of their own energy production.


At Clearer Energy we offer companies a free consultation to assess which renewable technologies are the most suitable for a business specific requirements.  We can arrange funding for your renewable technology through one of our partners and introduce you to an energy supplier that will meet all remaining energy needs at a substantial saving.

 

 

The Balls Back in Play

 

(27th September 2013)

 



The energy industry is once again back in the political spotlight and being used once again as a political football following Ed Milliband’s key note speech at the Labour party conference this week.

 

I can’t help think that the pledge to freeze energy tariffs for 20 months from the date labour get into power is electioneering pure and simple.

 

One would have expected a slightly better thought out policy for an ex Secretary of State for Energy and Climate Change (or may be not given that this post is clearly a part time position nowadays).

 

What worried me even more were the interviews with the patronising Caroline Flint broadcast on BBC Radio 5 live. The total lack of understanding of how the industry works was breathtaking for a shadow minister for energy and climate change.

 

There is no doubting that investment is needed to strengthen infrastructure, roll out smart meters and construct new power generation assets not dependent on fossil fuels. This investment is being sought from the private sector but does Ed Milliband really believe investors are going to choose the energy industry to deploy their funds if the wholesale prices cannot be fixed but retail tariffs have to be – this is economic suicide. Perhaps they might but what price for the additional risk?

 

There have been enough examples of turmoil in other parts of the world in recent years be it war or natural disaster that should have warned Ed Milliband this ill thought out pledge is nonsense.

 

The well rehearsed argument that the market is uncompetitive evidenced by 6 major players owning 98% of the retail market doesn’t stack up for me. Don’t get me wrong I am no fan of the big 6, quite the opposite but the thinly veiled accusation by Caroline Flint that a cartel is fixing prices in smoke filled rooms has been investigated and found not to be proven.

 

The big 6 move in unison because they have similar hedging strategies, buy energy based on wholesale prices and are subject to the same distribution and transmission prices and green levies.

 

On the subject of green levies it was on Ed Milliband’s watch that the ridiculously generous FiT tariffs fixed for 25 years were introduced. The subsequent necessary revision brought domestic solar installations to a standstill. Another initiative that was not thought through properly and has actually contributed to higher power bills.

 

I am all in favour of new entrants trying to shake up the market but again, how does freezing retail tariffs encourage a new entrant, the process is risky enough without a cap on prices.

 

Every time the political elite decide to score cheap points, be it David Cameron at PMQs or Milliband at the Labour Party conference it creates uncertainty. Investors do not like uncertainty.

 

Given the comment since Ed Milliband’s speech not just from the big 6 who I suspect are over egging the threat of lights going out but those without such a vested interest I think he has scored an own goal. The British public are not that gullible and will see this policy for what it is, a bribe.

Ofgem’s proposals for reforms to improve liquidity - Breaking the strangle hold of the big 6 suppliers

 

(13th June 2013)





Any attempts made by Ofgem to improve market liquidity have to be welcomed.   It has taken quite some time to see tangible movements in this area given it has been an issue for the small independent suppliers since I began looking at the market in 2006 and it was highlighted by Ofgem’s Energy Supply Probe - Initial Findings Report published in October 2008.

Liquidity in the day ahead market has improved tremendously and short lines of unsecured credit are being offered by the big six to the smaller players.

Ofgem’s proposal to create greater liquidity in longer term products, up to 2 years ahead is again welcomed but I question whether there is a particular shortage of available products right now?

Ofgem’s press release seemed to suggest that the big 6 were changing the price that smaller suppliers can purchase energy on long term contracts once agreed.

This is not the case – a basic forward contract locks the price of the commodity for future delivery and these contracts are widely available already but they come at a cost to the small independent that might not have the strongest balance sheet and therefore need to lodge cash with the broker or exchange to cover mark to market movements.

 



The definition of trading “fairly”

So the issue for the small independents is the level of collateral required to enter into longer term forward contracts and the challenge for the big 6 and large generators is that they have a fiduciary duty to their shareholders which must include managing their financial risk.

Providing unsecured lines of credit to relatively new and much smaller competitors, many of which are only here today because the wholesale markets have been relatively benign for the last couple of years carries a significant risk.

 



A Good Step Forward 

Although I am not a fan of increasing regulatory intervention by Ofgem, it has provided plenty of time for the industry to find a solution to the liquidity conundrum and this announcement is a welcome step in the right direction.

 

If the issue of credit can be overcome a proliferation of new longer term products has to be good for price even if it just helps to improve transparency and therefore confidence in an industry badly in need of a makeover.

 

It should also improve the robustness of forward prices, thus helping the market
to provide the CfD reference price which in turn could encourage investment in
baseload renewable generation.

Will Collective Switching Tackle Fuel Poverty?

 

(22nd April 2013)

 

Collective switching has suddenly become the new black, it’s all the rage with over 90 schemes now in place, helped in part by £5m of government money.

Collective switching is where an organisation corrals’ a group of consumers to act collectively when seeking a new energy supplier, the theory being there are strength in numbers to bargain for a better deal from an energy provider.

 

In theory this sounds like a sensible solution to challenge the perception of greedy energy companies ripping off the great British public. In practice is it really giving customers a better deal and how do these schemes genuinely help those in society least able to pay for their energy consumption?

 

The first scheme was run by Which?, “the big switch”. In the end only one supplier actually took part in the auction process, the new supplier Coop Energy who limited the number of customers that could switch to 25,000. It was good for them as it gave them immediate volume to generate a contribution to start up costs and free publicity, it was good for Which? as they reputedly made a cool £1m from the process and arguably 25,000 customers benefited from a cheaper tariff, however they were hardly switched to the cheapest tariff as nobody else took part in the process!

 

The problem with these schemes is that the collective switching organisations are taking a slice of the pie, just like the traditional switching sites do. The government money might well help some organisations to limit their switching fee or abandon altogether I question their motives for entering this space, ultimately they are looking for a return and unless the free money from government keeps flowing the consumer will pay or the schemes will disappear as quickly as they arrived.

 

Tackling Fuel Poverty

Registered Social Landlords (RSL) have been inundated by these schemes but do they really offer the best deal for those least likely to be able to pay their bills.

As a supplier you really don’t want this customer grouping. You have no mechanism to claw back any bad debt exposure and these customers tend not to be high users of power and gas in any case and therefore are probably not going to be the most profitable.

 

Other Concerns

Stimulating the switching market is not a bad thing, especially if it encourages those that have never switched before but one needs to be careful that switching is not happening for switching sake. I liken the phenomenon to that of footballers and their agents who don’t make any money if their player stays at the same club. The agent thrives on transfers but can lead to question marks over whether the transfer benefitted the player.

 

Reputational Risk?

So switching once could be a positive move, but where is the long term value and protection for the consumer against their tariff being hiked a year later?

There is a real risk for RSL’s that back a collective switching service of opening themselves up to complaints from their tenants who quickly realise there were better deals out there and are now embroiled in the UK’s broken switching process. Collective switching does nothing to tackle the challenges with the switching process which can be overcome with the right know how but could very likely damage the relationship the RSL has with its tenants and make it more unlikely the tenants will want to take their advice in the future even when a genuine attempt to tackle fuel poverty is available to them.

 

Conclusion

Fundamentally collective switching schemes are never going to be big enough to have real clout with suppliers and not going to tackle fuel poverty.

I do see these schemes ticking boxes for RSL’s and social enterprise funders that perhaps don’t want to do the leg work to really investigate the options available to them to address fuel poverty.

Getting Competition into the Market (29th March 2013)

So the much anticipated Energy bill was published in November 2012 shortly after Ofgem published their Retail Market Review (RMR) proposals at the end of October with the aim of making the market simpler, clearer and fairer.

 

Simpler

  • by banning confusing multi-tier tariffs
  • by placing a cap on the number tariffs suppliers can offer

 

Clearer

  • making suppliers tell customers the cheapest deal they offer for them

 

And Fairer

  • through the introduction of new standards, backed by the power to levy fines, to make sure suppliers treat their customers fairly

 

Ed Davey energy and climate change secretary said in February that the government “stands firmly behind” Ofgem’s Retail Market Review proposals, and that the government was determined to do everything it could to help consumers achieve a better deal in the energy market.

There has been much discussion and uncertainty about exactly how the market will be impacted by the changes that are coming, for me particularly the proposals to limit each supplier to 4 tariffs per fuel, per meter and per payment type plus one collective switching tariff.

 

Missing the Point?

 

Ultimately what is the government and Ofgem reacting to? Outrage in the media at the spiralling costs to provide our homes with power and gas.

 

Unfortunately the inexorable rise in retail energy prices can only continue as the government levy increasingly punitive renewable energy taxes on consumers, distribution and transmission networks require investment and the underlying commodity prices are driven up by increasing volatility in the wholesale markets with increased reliance on imported gas, the perfect example being in the last two weeks where the woeful lack of gas storage in the UK has once again been exposed.

 

I can’t help but think there should be greater focus on the 13 Consumer Focus accredited switching sites.

 

Many suppliers utilise switching sites as their main source of new customer registrations, and pay these sites handsomely for the privilege, up to £35 per supply. The consumer could be forgiven for believing that when a site displays the Consumer Focus logo that site will be providing them with a list of ALL the tariffs on offer but this is not always the case.

 

A worrying trend has been allowed to creep into this market that allows switching sites to ensure that the tariffs from those energy suppliers that they have a commercial agreement with come up first in the results - much in the same way that search engines push 'sponsored links' before providing individuals with the site they're actually looking for.

 

It’s not fair to tar all switching sites with the same brush but in my experience all sites are guilty to some extent of steering the user towards the tariffs that generate them an income and quite often away from the deals offered by the UK's smaller, cheaper energy suppliers, simply because those suppliers aren't keen to pay them for their trouble - that is, unless the consumer is savvy enough to navigate past all sorts of wording designed to 'hide' tariffs that won't make comparison sites any commissions, but might well be best for the consumer in terms of price.

 

It's perfectly reasonable for switching sites to earn commission from energy suppliers in return for bringing them customers to cover the costs of their call centres and maintaining their sites so they display the most up to date pricing information.

 

It is not acceptable for these sites to not clearly explain to their users that they are not providing details on all the deals that are available in the market and in fact deliberately excluding the best deals on the market by virtue of not being able to make any money from them.

 

When I challenged Consumer Focus about the widespread practice of switching sites with the Consumer Focus logo misleading customers there response was:

 

“the intention is that Confidence Code accredited sites will display all available tariffs for the specified region within the results, the relevant section (Requirement 2 (A)) is worded as a best endeavours clause for sites.  The best endeavours wording reflects the outcome of the 2009 consultation process which resulted in the current version of the Confidence Code.

 

This change arose because we know that some suppliers withhold tariff information on occasion, for example where they do not have existing commercial agreements in place. In addition energy suppliers are not signatories to the Code, so Consumer Focus has limited scope for compelling the provision of tariff information in instances where this applies.” 

Consumer Focus’ comment that some suppliers fail to notify switching sites of all tariffs on offer seems like a red herring. If a supplier is looking to win custom by virtue of price it will provide the sites with their tariffs, the problem is the tariffs are not shown at all or the customer as to work out which boxes to tick to make sure they are displayed.

Switching sites have an important role to play in making the much maligned retail energy market more competitive. It was very poor form for Consumer Focus to allow these sites to get away with misleading the public and I welcome the news that Ofgem announced on the 27th March 2013 that it would take over the code of practice that governs independent energy price comparison sites, called the Confidence Code. For these sites to engender confidence of the public they should be duty bound to display all the current tariffs they receive irrespective of whether or not a commercial agreement exists or not and I will be pushing Ofgem to ensure this happens.

The alternative would be to insist that switching sites clearly state on their home pages that only tariffs where they can earn commission will definitely be displayed.

The state of the retail energy supply market

 

(14th November 2012)

 



The retail energy supply market gets plenty of bad press, much of it for good reason, the big 6 consistently rate poorly for service and have rested on their laurels but in recent times it has become a political football.

 

Energy retailers do of course have special social obligations but arguably so do the multiples and I don’t hear the same outrage when Tesco reports record profits, quite the opposite, they are a great British success story. Perhaps that’s the real problem, the majority of the UK’s energy suppliers are foreign owned (not to mention the distribution networks)?

 

Is there are role for the smaller supplier in the UK energy supply market?

 

Applying my checklist the argument is dubious.

 

On the plus side:

  1. energy supply does generate the annuity style revenue stream which at a high level is relatively easy to forecast.
  2. I have worked with and seen some very capable management teams in the sector.

On the downside:

  1. It is becoming increasingly difficult to differentiate the product. If the Retail
    (Energy) Market Reform proposals come to fruition and suppliers are restricted
    to 4 tariffs differentiation is even harder to achieve. Simply purporting to provide the best customer service and cheapest tariff doesn’t really wash. Whilst the smaller players furiously compete to be the supplier that makes the smallest margin and therefore the least money where does the investment come from to invest in the systems and training to ensure best customer service? Something has to give.
  2. Retail energy supply is hardly a growing market. It’s been through a period of consolidation and is now dominated by the big 6 that own 98%+ of the market. The government’s focus is on reducing energy consumption, not increasing it.

On balance one could very easily decide this market should be put into the “too difficult” or “not worth the hassle” box.

Clearer Energy Limited is a company registered in England, no: 07321358 having its registered office on 1st Floor, 2 Woodberry Grove, North Finchley, London N12 0DR

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