The Government’s retail energy market reform will increase energy bills

April 3, 2013

Last week Ofgem issued a statutory consultation on its final proposals for energy retail market reform.  Formally a decision on whether to implement reforms will be taken in May, following consultation.  But given the joint press release from the ‘independent’ regulator Ofgem and Ministers last month, where Ed Davey said “we have taken additional powers through the Energy Bill to ensure this will happen even if Ofgem’s reforms are delayed or frustrated”, there seems little doubt about the outcome.

The Government/Ofgem reforms will essentially restrict energy companies to offering no more than four tariffs per fuel type (electricity and gas).  For example, a company could have one fixed price tariff, one variable rate, one ‘green’ tariff, and one other (perhaps with a discount for loyalty, for online purchase or for paperless bills).

That sounds sensible doesn’t it – putting an end to the confusing range of offers customers currently have to pick through?

Unfortunately, the proposal is so restrictive of tariffs that it makes much the same mistake as David Cameron’s promise in Prime Minister’s questions last October.  Cameron said “we will be legislating so that energy companies have to give the lowest tariff to their customers.”  If the incumbent energy companies are forced to put all customers on the cheapest tariff, naturally the cheapest tariffs will quickly disappear.  It will be more profitable for the large energy companies not to compete.

I can put the arguments no better than Professor Stephen Littlechild, the first GB electricity regulator:

“…the proposals will increase energy … bills, rather than reduce them… The… will either prohibit, or lead to the withdrawal of, some of the …lowest price offers in the market… The proposed limit on the number of tariffs… would prevent innovation, because it would be too risky for a supplier to give up an existing profitable tariff in order to introduce a new one… The rules on tariff simplification … would encourage coordinated effects by suppliers and lead to narrower price differentials… The … would lead to less customer interest in switching between suppliers. (Ofgem’s own research shows that the availability of savings opportunities outweighs simplicity of information as a determinant of customer switching.)  All these factors leading to a reduction in competitive pressure would lead to further increases in prices and retail profits.”

A recent Policy Exchange roundtable (a summary of which has just been published) discussed many of the difficulties with the Ofgem and Government approach.

Most of those present agreed that the Government’s reforms would be unlikely to help the target group of customers who are both inactive and vulnerable. Some suggested that it would instead be better to target help for vulnerable customers to access better prices that are already available in the market.  Collective switching could provide a key approach, particularly if combined with encouraging local authorities, housing associations and others to help vulnerable customers switch, access lower tariffs and energy efficiency measures.

There was also broad agreement that we need a better understanding of what a healthily competitive energy retail market looks like.  There is considerable disagreement about whether the retail energy market now is broken, as many politicians claim, or in fact quite healthy.  If we can’t agree on what the indicators are for a competitive market now, how will we distinguish in future whether the government reforms have in fact been successful, have been insufficient or – most likely – made matters worse?  If we can’t, we risk ever more politically driven regulatory interventions with little understanding of their impacts.

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