The Competition and Markets Authority has researched the energy market until June 2016 and have come up with some interesting findings. The report suggests that the domestic energy market has been facing extreme price rises over the decade. There are many reasons for this and it has checked in on all of them. It emphasizes on the reasons as well as their remedies so that Brits get an easy and affordable inflow of electricity and gas.
As per the reports of 31st January 2016, there is a huge customer base of domestic gas and electricity users in the UK. According to figures, there are nearly 28 million domestic electricity customers and 23 million domestic gas customers. Moreover, the dual fuel customer base equals to 20 million, electricity only customer base equals 8 million and there are 3 million single fuel gas customers too.
Talking about the energy providing resources, the Big Six energy companies still have a monopoly over the domestic energy market. British Gas, EDF Energy, E.ON UK, npower, Scottish Power and SSE supplies just under 90% of the total domestic energy required in the UK. They also produce 70% of the total energy required overall. Giving them tough competition, are the more reliable and affordable energy firms like Ovo Energy, First Utility and Co-operative energy who have also made a firm place in the energy market.
As electricity and gas are basic necessities, more than the supplier, the price becomes a determining factor. Records suggest that between the periods of 2011 and mid-2015, around 70% of the customers of the Big Six paid 11% higher prices on electricity and 15% higher prices on their gas usage while choosing the standard variable tariff.
As per the report, there is an increasing concern over price rises and service deterioration that has happened in a decade. It puts a threat on the affordability of energy. Also, the goal of the report is to suggest remedies to create affordable energy solutions while still ensuring security of supply, improving affordability and reducing emissions. For this the CMA has suggested the following domestic retail remedies:
To create a framework for effective competition
Engaging customers so that they get maximum benefit of the competition
Protecting customers who are less able to engage the benefits of the competition
Framework for effective competition should be created to encourage healthy competition between the suppliers. This is the best measure to reduce prices and increase the quality of service. The remedies suggested by the CMA to create a framework involves the following:
To promote competition between energy suppliers by allowing them to offer wide range of tariffs including those for certain groups of customers. This will be interesting as the customers have more options and would easily get engaged.
UK energy customers will also benefit with low prices provided, the Price Comparison Websites (PCWs) are allowed to negotiate with domestic energy suppliers for better discounts which can be funded through their commission.
The next step is to engage customers so as to leverage the competition. The CMA suggested five broad categories of remedies to engage energy customers. The remedies are:
Ofgem should ensure that the customers get information that prompts them to engage. The information can directly float through Ofgem or can be provided by the energy supplier themselves.
Another remedy is the database remedy which gives good results by creating a database of disengaged customers. They should be prompted to engage in the retail energy markets.
One more method is to involve third party intermediaries (TPIs) by increasing their incentives so that they promote better customer engagement.
Ofgem should take a liberal route for addressing adverse supplier behaviour especially for comparability of their tariffs. It should apply principle rather than rules so as to avoid any confusion and make it simple for the customers.
Lastly, all suppliers should offer their single rate tariff to all domestic energy customers. This should be allowed on any kind of restricted meter without making switching conditional on a restricted meter being replaced and to provide additional information to customers on restricted meters.
Finally, protect the customers who are less able to leverage the benefits of the competition. This is more related to microbusiness customers who could not leverage the benefits of competition.
The best way to let microbusinesses enjoy the benefits of competitive energy market would be to introduce a price cap on prepayment meters. However, this may not be the most feasible solution as the cost of introducing the price cap would be large when compared to the benefits incurred.
The CMA has suggested a few retail remedies to improve the working of the domestic energy market. These suggestions are based on the statistics until January 2016. They are suggested to make 2016 a better energy year than 2015.