The Cost Of Energy pt.2May 14, 2012 Tweet
If you managed to catch our last blog you’ll be aware of the IPPR report entitled ‘The True Cost of Energy’ which blames the ever-rising energy costs on a lack of competition in the British energy market.
For true competition in the energy market we need to see 2 things. Firstly, households and businesses actively looking for the best deal and switching accordingly, and secondly, active suppliers who fight to keep their costs and prices low in order to protect their customer base and attract new customers.
The IPPR argues that for too long policy has focused on making consumers more active, and has underplayed the role of the suppliers. In the report it sets out some recommendations for how best to improve the market. It primarily addresses Ofgem as they are already going through a period of major reform (Retail Market Review) and are therefore in the perfect position to adopt the policies and start making a difference.
Learning from Previous Mistakes
The RMR is Ofgems second attempt at increasing competition. Their first, the Energy Supply Probe, was released in 2008. Since then Ofgem’s own findings suggest that competition has got worse and therefore the IPPR asks Ofgem not to repeat this mistake. To ensure this doesn’t happen they suggest creating measurable and time dependent goals and objectives, which, if not met, mean the government would intervene to investigate alternative forms of regulation.
At the moment suppliers offer lots of different tariffs dependent on a number of different conditions. Ofgem, in the RMR, wants to simplify tariffs, creating a two-tier system where suppliers can offer one standard tariff for each payment method, although imposing no limit on the number of fixed term tariffs. They also want to create a standard charge that includes the cost of energy efficiency obligations.
The IPPR, however, disagrees with this as it believes it will create a more complex system, and will stop suppliers being innovative with ways of pricing. Furthermore, the standardised cost is described as regressive. Instead, they suggest imposing an absolute limit on how many tariffs a supplier is able to offer. They believe this will help smaller suppliers as they can start to offer niche tariffs not offered by the big 6.
Wholesale Power Market Liquidity
Currently, most small suppliers believe their biggest issue in entering the market is its illiquidity and in the RMR Ofgem addresses this, setting out measures to help smaller suppliers. The IPPR, whilst recognising that this is a vital step in increasing competition in the market, reminds Ofgem of the importance of balancing this with creating a market that is able to invest significantly in low carbon generation technology.
Tariff Cost Reflectivity
Four years ago Ofgem found that some customers were being charged different prices for using the same amount of energy and that this was not representative of suppliers costs so they set up a licensing requirement for suppliers stipulating that tariffs must be cost reflective.
In March 2011 a formal investigation into Scottish Power was launched to investigate claims of them being in breach of this requirement, a year later there is still no update on this. IPPR’s further investigations found that many suppliers are offering tariffs that do not appear to be cost reflective.
They even found evidence of loss leading pricing- overcharging some ‘sticky’ customers to make up for heavily discounted rates for new customers. This generally affects the most vulnerable in society and the small businesses to which a couple of hundred pounds can make all the difference. IPPR asks Ofgem to immediately update the Scottish Power case and extend the scope of the RMR to investigate loss leading tariffs.
Broader Lessons for Energy Policy
Policymakers must actively support and encourage a broader energy market including businesses such as energy services, renewable generation and smart grids and metering. Also, when designing policy they must consult with a wider range of stakeholders, going beyond the Big 6 to ensure policy that enhances competition, not just the stake of major suppliers in the market.