Will the CMA inquiry restore trust in the energy market?

Jun 27, 2014

Ofgem has confirmed the least surprising news in energy since Friends of the Earth confirmed it was against nuclear power. There will be a Competition and Markets Authority (CMA) probe into the energy market. We think it is a good idea. Competition investigations are a crucial part of getting markets working properly. They do not necessarily mean the market is broken, but they will take a clear look at what the problems are and what you can do about it.

One of the wider questions about the CMA inquiry is whether it will help restore ‘trust’ in the energy market. As everyone knows (see recent Edelman Trust Barometer), the energy market, or at least the big suppliers, sit somewhere between Satan and Estate Agents in the trust league. The industry are certainly hoping the CMA inquiry will restore trust:

But will it? Phil Burns, from Frontier Economics, gave a fascinating presentation at a recent Cornwall Energy event that looked at what the sources of mistrust might be. He included:

  • Those [sources of mistrust] that may exist for reasons related to supplier behaviour and market outcomes
  • Those that may exist for reasons other than supplier behaviour, such as network charges, government levies etc.
  • Those that may exist because of the lack of a common narrative – or even inconsistent narratives – across regulators and government departments that fosters misunderstanding

So will the CMA inquiry satisfy those so we can all get back to getting angry at supermarkets or payday lenders or whatever evil capitalist corporation is ripping us off?

It is unlikely the first source will be wholly dealt with by the inquiry. If your source of mistrust of the big suppliers is mis-selling or being treated badly, that is not good for trust. But it is not really a competition question. If you don’t like the energy market simply because it has six big players, that is not necessarily a sign of a lack of competition (although it may be). The mere fact these companies make profits and are privatised is enough to annoy some. They are unlikely to be placated by this inquiry unless it shatters the market into small community-sized not-for-profit pieces owned by local authorities.

The second source is also unlikely to be remedied by the CMA. The main reasons for mistrust falls into this category, as far as I can see; above all annoyance that bills are much higher than they were 10 years ago. A lot of this can be explained by higher international gas prices. A smaller, but significant and growing, chunk can be explained by higher network charges and government levies (which is where the government should be focusing). If the market is broken, in the sense of cartel-esque behaviour, it might be that it will lead to lower bills, but only marginally lower. It will not see prices falling to 2005 levels.

As for the third source of mistrust, there is certainly a lack of common narrative across Ofgem and the Government. I think Ofgem has been poor at defending its independence and getting a clear message out (not helped by politicians heaping extra responsibilities upon it). But I am not convinced you will ever get, or indeed want, a single, clear energy narrative. It is just too political and too messy a topic. That said, a much clearer idea of what a competitive market looks like and support from politicians for that definition would certainly be a good start. This absence of clarity has created the space for politicians to make their own competition assessments, bandying about words like cartel and oligopoly without realising they have specific and serious meanings. This allows them to use these vaguely defined terms as an attack, without always presenting detailed evidence.

So, it is not clear that the CMA inquiry, which will tightly focus on questions of market power and barriers to entry, will deliver that mythical uptick in trust. And it is even less likely if there is not political buy-in. Unless the CMA inquiry has clear political support at its outset for its outcomes and its remedies, it will be ineffective in achieving Westminster and therefore wider public support. At the moment, such political backing seems unlikely. The Labour Party is clear it is going to proceed with its proposed market fixes, such as a price freeze, even as the investigation is under way. Ed Davey has said the CMA inquiry will not prevent him from making interventions where he sees they are necessary. And the Tories are hardly putting their full weight behind it. UKIP’s position on CMA remain unclear. If the Parties do not support it and commit to abiding by its findings, it is unlikely it will help convince the public that the market is working.

This blog post originally appeared on our Greener, Cheaper blog

Author

Guy Newey

Guy Newey
Head of Environment & Energy, 2010-2014 Read Full Bio

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