Is the energy market structurally flawed?

 
Pylons

So what would be the point of an investigation of the energy industry by the Competition Commission, which is what Tony Cocker, the chief executive of the UK arm of German giant Eon, called for on Tuesday?

Mr Cocker is not a lone voice in the industry. The boss of another foreign-owned big player in our market, Vincent de Rivaz of EDF, has for a couple of years been asking for the same thing - although Mr Cocker has gone a bit further than Mr de Rivaz by writing to the prime minister, the Energy Minister Ed Davey and the energy regulator, Ofgem, to formally request such a probe.

For both Cocker and de Rivaz, the ostensible motive is that such an independent and detailed investigation is a necessary pre-condition of winning back the trust and confidence of customers and the political class - whom they acknowledge have been completely alienated over the past few years by price rises that have wrecked British people's living standards and are rarely understood.

But, for the avoidance of doubt, this is not a cheap public relations stunt. Once an investigation is launched - and I am told that the prime minister is very close to initiating one - a cloud of expensive uncertainty will descend on the industry. (And, by the way, on Wednesday morning Mr Davey's department put out something of a non-committal response.)

Start Quote

Only the Competition Commission has the ability and independence to examine these issues thoroughly”

End Quote John Fingleton

Mr de Rivaz has told me that his company - and by implication his industry - has "nothing to hide", which is why he thinks an inquiry would be a good thing.

But that is only partly relevant. Even if the companies are not colluding to rig prices or deliberately exploiting excessive market power to fatten profits in an unfair way - and they insist they are not - any Competition Commission inquiry would have to examine whether there are structural flaws in the industry which mean that competition does not serve consumers' interests adequately.

That is why such a review is supported by one of the more influential voices on competition in the UK, the former head of the Office of Fair Trading, John Fingleton.

And because such a review would be so serious, the companies would find it more expensive to raise money for investment - their cost of capital would increase - until it became clear whether the Competition Commission would force radical change on the industry, such as breaking up the big six players.

The big question that any Competition Commission probe would have to answer is whether it is good or bad for consumers, and for the British economy, that energy companies are allowed both to generate power and sell it to us.

Select committee Energy bosses were questioned by MPs

Does this vertical integration allow the energy giants to invest for the long term, confident they have a captive market, thus making sure that the UK has ample supplies of relatively cheap energy over the longer term?

This is what Mr de Rivaz would claim, citing the example of France, whose massive investments in nuclear power over decades by vast and integrated EDF has led to French people enjoying cheaper power than the British and some of the cheapest electricity in Europe.

Or does this combination of so-called upstream and downstream activities set up a conflict of interest to the detriment of customers - in that integrated companies have less of an incentive to keep retail prices as low as possible, since higher prices boost the profits of their generators and the value of whatever gas reserves they hold?

There is a related issue of whether the current regulator, Ofgem, is fit for purpose.

Any referral of the industry to the Competition Commission would probably be in a slap in the face for Ofgem, since it has argued that the industry suffers from behavioural rather than structural weakness. And it is trying to secure a better deal for consumers by forcing the big companies to be open and more transparent about their charges and profitability.

Hinkley A and B nuclear power stations The site of EDF's new nuclear plant at Hinkley Point

The concern in government and at Ofgem about a Competition Commission investigation is that it would be a further deterrent to investment in new generating capacity, at a time when the UK is perilously close to seeing the lights go out because so much old plant is being decommissioned.

That said, some argue that the game is up anyway till after the election - in that (with the exception of the recent Hinkley Point C nuclear deal, which will take many years to build and had cross party support) the party conference statement of Ed Miliband that as prime minister he would freeze prices may be leading to an investment hiatus in any case.

What is striking is the dog that hasn't barked: the debate is largely about how competition can be improved. But none of the big parties is arguing that the UK should more closely follow the French model and revert to greater direction and state ownership of the industry.

And perhaps that is why Cocker and de Rivaz favour a Competition Commission probe - to ward off the more serious threat to them of a return to explicit government control.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 13.

    With Labour party committed to a carbon free energy sector by 2030 there is only one way prices are going to go.

  • rate this
    0

    Comment number 12.

    Apparently Mr Peston is unaware that the EU is moving to a Single Energy Market by 2014.It's shocking to see such biased political assertion by the BBC that "the British people's living standards have been wrecked" Energy prices in Britain are consistent with the rest of the EU and subject to upward pressure to combat 'Climate Change' the threat of which the BBC never tires of reminding us.

  • rate this
    +4

    Comment number 11.

    Billing structure will be revealed before a Commsn&more&more consumers will become v upset

    For ex, they are being asked to pay 2x/3x times for same thing: Standing Charge, access charge, pt of Green tariffs - all being charged for infrastructure, existing & future. New infrastructure should come from private Co profits & their own borrowing. Existing infrstruct has been paid for, many £x over!

  • rate this
    -3

    Comment number 10.

    I have watched the debate and noted the contributors comments.

    I consider that the problem would go away if we returned to a nationalised electricity grid which is run on a non-profit basis. In that way we should all pay a reasonable price for our energy. But then there's the EU......

  • rate this
    +1

    Comment number 9.

    When a nationalised industry is privatised you always gain in the short term by getting the price of the sale, but ALWAYS lose in the long term.
    The French have EDF but it is their nationalised energy company so it is cheaper in France even though their country is so much larger and their delivery systems longer.

  • rate this
    -3

    Comment number 8.

    Our government is contradicting with itself. HS2, the high speed train, will consume a lot of energy to operate. They are trying to deprive domestic energy consumption to support the new public transport. HS2 serves no function, but a silly toy, which may lead to the bankruptcy of our nation and many sufferings of people.

  • rate this
    +2

    Comment number 7.

    The point of a Commission for UK market is that it would highlight deliberate transfer of wealth from poor/low income people to rich/high earners that started in early 90s & really took off under Tony Blair with the clever confusion of Climate Change added to Global Warming.

    A full Commission will have to receive a lot of evidence with attendant publicity.

  • rate this
    0

    Comment number 6.

    Perhaps the most obvious structural flaw is that we couldn't make up our mind what sort of market we wanted at the time of privatisation: on the one hand we don't have real integration because the generators don't retail and vice versa; on the other, we don't have separation because a single holding company is allowed to own one of each. Perhaps making the chinese walls a bit higher would help?

  • rate this
    +25

    Comment number 5.

    Very Simple just as consumers just avoid the big 6 companies. I use Co-Operative Energy who have raised there prices but by half the amount of everyone else and they give an exact breakdown of what you are paying for. I trust a company that is not run for shareholder profit but for the benefit of it's customers

  • rate this
    +1

    Comment number 4.

    There are 2 energy mkts: worldwide traded energy & one between providers in UK & their customers. This last is the one the UK Govt has immediate control over.

    The billing is flawed in that there are considerable faults that could & should have been sorted out at privatisation but, as usual, Govt did not listen to advice. They could have been reformed by N.Lab but there is a murky picture there.

  • rate this
    0

    Comment number 3.

    The energy companies have already demonstrated what contempt they hold parliament in by sending there go to people to face a grilling on the totally unjustified year on year price rises. We should renationalise all utility and transport companies immediately

  • rate this
    0

    Comment number 2.

    One possible reason the foreign-owned energy companies in particular might be happy to see an independent investigation is that we actually have very cheap energy prices compared to many european countries and they could well see this as a way of either justifying their current pricing models, or possibly illustrating that we are being undercharged in the UK?

  • rate this
    +26

    Comment number 1.

    The pointer in all this, and above everything else, if you believe in coincidence; Dame Angela Knight was the spokesperson for the Banks before the wheels fell off. Now she does the same thing for the energy companies. She is either a good guide to what need sorting or she is paid a lot of money by those who need to hide something rotten.

 

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