Ofgem explains why the energy market is not working

Power station The UK needs £200bn of investment to upgrade its energy infrastructure

The conclusions of our review are not just disappointing, they are damning.

Competition is being stifled by a combination of tariff complexity, poor customer service, lack of transparency and the stranglehold the "big six" energy firms have on the electricity market.

Only a radical response will suffice.

Inaction or inertia will not be tolerated. The energy firms are on notice; play fair with consumers or explain yourselves to the Competition Commission.

So what do we actually want?

The key is competition for retail customers and essentially that means competition on price.

The same pipes and wires run to consumers' homes which ever supplier they pick. The only ways to differentiate is on price and service, with price a long way ahead on consumers' wish-list.

OK, so work out how much you pay for every unit of gas or electricity, look at the prices on offer and pick the best and switch. What's so hard about that?

Quite a bit.

Customers' bills are a minefield of complexity. Some companies have a standing charge and a flat rate for every unit.

Others use two-tier pricing - no standing charge but one rate for the first set percentage of units and a (lower) rate for subsequent use.

Different companies have different prices for tier one and for tier two. They have different trigger points for the change between tiers.

And then there are prices which vary according to the time of day.

Oh, and by the way, you have more than 300 tariffs to analyse, compare and choose from.

Simpler tariffs

Little wonder that more than half of consumers have never switched, fewer are switching than a few years ago and, even among those who do switch, some aren't certain they got a better deal.

Our answer is to sweep away the complexity. What we want to see is a single standard tariff for each of the main payment methods; standard credit, direct debit and prepayment meters.

It would allow consumers to directly compare around three quarters of the deals on offer on the basis of a single figure, the unit price.

We are also planning to break the grip of the big six on the electricity market - plans which sit well with the government's own review of the wholesale electricity market.

The big six own almost three quarters of Britain's power generation. This gives them enormous clout in the electricity retail market - not only are they the major players in that market, they are also the leading players in the power market which supplies it.

The combination of their influence over generation and their strength in the electricity retail market makes it very hard for new players, large or small, to mount a challenge.

Open market

We propose the big six should be forced to offer up to 20% of the power they generate through regular public auctions. The more competition at auction the keener and more transparent the prices.

Companies, large and small, would feel confident about moving into the market, knowing power would be available at a competitive price.

We are not against companies making a reasonable return. We know we need £200bn of investment and that will have to be funded by the companies, their shareholders and lenders.

But consumers will be the ones who foot the final bill. They must be given, and feel they are being given, a fair deal.

But if the market is in such a parlous state, why not simply take the companies straight to the Competition Commission?

At first glance the answer may appear perverse. We want to push through reform with all possible speed. The Competition Commission offers its own brand of authority, rigour, expertise and thoroughness.

That takes time.

If we have to go to the Commission - and if we have to, we will - it could be three to four years before any remedies can come into effect.

If we can persuade the big six to either embrace the measures we are putting forward or, in some areas, put forward their own ideas to deliver the results we want, reform will be on a much faster track.

Two Ofgem reviews into the UK energy retail market in less than three years. You might take that a sign we are unhappy with the way the market is working or, in some cases, not working.

You would be right.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated.

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