Energy competition in the spotlight

Published on 24 October 2013 1 comments

By Stuart Cook

Ofgem’s energy retail market reforms will distort the market and will not deliver benefits to customers. This was the argument made by Professor Stephen Littlechild at the third Beesley lecture of 2013.

During the lecture, he drew on his long experience as a regulator, as an academic and as an adviser to the energy industry. He began by commenting on the way that retail market policy has evolved over the last decade - reflecting on the modest, early expectations of the retail market; the surprising early success; and the more recent moves by the regulator to intervene in the way the market operates.

Ofgem has imposed a series of radical reforms on the energy retail market. These include restrictions on the number of tariffs that domestic retailers may offer - they can now offer customers only four tariffs. Ofgem hopes this restriction will make it easier for customers to choose between suppliers, encouraging greater competition.

But, rather than benefiting customers, Professor Littlechild argued that Ofgem’s reforms will increase energy bills. Drawing on their analysis of trends in average retail profit margins, he pointed out that retail market reforms have been accompanied by a £7.4 billion increase in supplier profits, the equivalent of an extra £135 on a dual fuel bill. Moreover, the latest reforms will now ban tariffs and discounts which were valued by many customers.

It was also questioned whether greater simplicity was actually preferred by customers. Professor Littlechild drew on recent research into the attitude of rail customers which revealed that the majority would prefer the current system, with lots of tickets and prices, over an alternative with more restricted tariff options.

He concluded by arguing that Ofgem and other sectorial regulators are poorly equipped to regulate a competitive market that has large price rises. In these circumstances, it is hard for regulators to convince the public that the market is operating properly, or to withstand the remorseless pressure to intervene.

He proposed three solutions. First, to refer the energy sector to the new Competition and Markets Authority for an independent and expert assessment. Second, to transfer the regulation of competitive markets from the sectorial regulators to the Office of Fair Trading (OFT) - the OFT could then make referrals to the Competition Commission when there were strong concerns about the market. Third, to extend recent legislation to the energy sector, requiring Ofgem to make a case for regulation.

My response to the lecture focused on the institutional and social factors which have increased scrutiny of the energy markets and encouraged greater intervention. It seems very unlikely the pressure to intervene will diminish in the near future – energy prices will remain on an upward trajectory and public faith in the market will not be restored quickly.

It’s clear that suppliers urgently need to rebuild trust. Being fully transparent and educating the public and decision makers about the causes of recent price rises will go some way to help customers overlook the feeling of being “ripped off”. We can’t overlook the basics too: the ‘moments that matter’ - the occasions when customers make contact with retailers. The way in which these interactions are handled makes a real difference to the way that customers see the industry.

Following the latest round of energy price increases, the energy sector is attracting a tide of criticism. The performance of the energy companies is likely to remain in the spotlight for some time to come.

Stuart Cook:
Contact by email | Tel: +44 (0)20 7804 7167


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Comments (1)

Blair Keen commented:

What people say they prefer and how they actually behave are quite often two very different things.

I'm surprised that Professor Littlechild has been so willing to lean on research into consumers' stated preferences with regard to quantity of ticket price options as evidence to support the retention of multiple tariff options for energy customers.

Anyone with just a few minutes of experience in the field of behavioural economics will know that people behave very differently when presented with multiple options compared to when they are presented with only a few. Intrinsic motivation but also their sense of satisfaction are very different in both cases (Wei Jiang and Gur Huberman, 2003).

This debate should just be about the net cost to consumers. It should also be about enabling consumers to make more informed choices which are better suited to their needs.

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