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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 493.

    Croney Capitalism. Asset Stripping Business. I would be interested to know how Roy Gardner got his Knighthood. Seems as accomplished as James Crosby. Bad Banking is one thing. Bad Business is just as bad. Just ask anyone at Plymouth Argyll, about it, and they will know what sort of business the likes of Roy Gardner undertake. And they know where it hurts them.

  • rate this
    0

    Comment number 492.

    YES? Once the Monopolies and Mergers Commission went into the pockets of big business, the wheels started to fall-off Capitalism. Like the term 'Vertical' is a new Economic Term, like the term 'Outside Interest' (either Immediate or structured for later) is a new Economic Term.

  • rate this
    +3

    Comment number 491.

    Is the energy market structurally flawed? Of course it is. Capitalism itself is structurally flawed!

  • rate this
    0

    Comment number 490.

    393 steve says
    One monopoly supplier put us all at risk from selfish strike action from unions like Unite.
    Just compare the number of days lost from industrial actions before and after the privatisation of British Rail.
    Monopoly is worse than oligarchy.
    Alan

  • rate this
    +3

    Comment number 489.

    The industry is most definitely flawed because, in a market economy, the country's energy needs should not be in the hands of those who see no further than the bottom of an income statement. Competition is futile when we should be investing for fifty years down the line. It should be run as a public utility with the public interest, rather than the demands of shareholders, as the main priority.

  • rate this
    +1

    Comment number 488.

    Perhaps the Government could get at the truth, if they had a meeting
    with Energy Regulator and ask him why he has sanctioned increases
    in tariffs, way above the rate of inflation for years. Has he a stake in
    the business,? Edward Wilcock

  • rate this
    0

    Comment number 487.

    474.Sally the Rothbardian
    The biggest deterant to any new entrant to the market is short term capitalism. No company is going to invest 300mil in a new power station where the ROI could be greater than a few years, the shareholders wouldn't allow it. The only new entrants are small providers setting up with government renewable subsidies. Remove regulation and the Big 6 will become the Big 1

  • rate this
    +3

    Comment number 486.

    @474. I'm in favour of free markets but not utilities

    Energy is a structural monopoly. The wholesale and retail markets are fundamentally linked. Even if there were 100 retail suppliers and somehow dozens of wholesale sellers, there still would be inflated prices.

    It is an economically critical resource for our country. As such it should be nationalised and made GLOBALLY free from Rent seekers

  • rate this
    0

    Comment number 485.

    482.langstroth
    I take it you must be a tory MP whose never had to pay for a ticket, pretty much everyone I know who commutes moans about the cost, reliablity, customer service and lack of investment. Pretty much exactly the same as the privatised utility companies.

  • rate this
    +1

    Comment number 484.

    @480 Radical_Ideas
    Set up a new public energy company to compete with the privatised fat-cat price-hiking ones - so giving a genuine alternative to switch to and create genuine competition...

    Great idea, wish I'd thought of it :)

    Wouldn't be so bad if the prices and inordinate profit hikes were ploughed back into investment for future efficiency and lower prices but I don't believe they are

  • rate this
    +2

    Comment number 483.

    482.langstroth
    You are kidding right? I pay over £400 per month to travel on a 40min slow train to Liverpool Street, the trains old, frequently too cold/hot, is cancelled/late at the slightest bit of bad weather. BR wasn't any better but at least I wasn't paying £5000 a year for the pleasure.

  • rate this
    -3

    Comment number 482.

    Nationalised railway: underinvested, union dominated, out of date rolling stock. Customer comes last. No incentive to improve.
    Railways today: brand new rolling stock, efficiently run, on time. Customer focus improved. New stations.
    Nationalised power: Dirty coal power stations. Electricity cuts due to strikes, remember those?

    There's many here living in some parallel "1970's were great" universe

  • rate this
    +1

    Comment number 481.

    Without my crystal ball, I would suggest that this fiasco will come back to bite the Tories in the bum and be the turning point for the election. Cameron beware!

  • rate this
    +7

    Comment number 480.

    I would imagine that renationalising the energy market would cost billions in compensation.

    But why not set up a new public energy company to compete and just sell at cost. Hence a price war, naturally favouring the consumer would ensue.

    Other businesses experience this, to grab market share.

    Then the one left standing would be the new government company and not a penny paid in compensation.

  • rate this
    +2

    Comment number 479.

    The privatisation of utilities has failed. It's being propped up so that money is made through huge salaries and fat dividends. Because their main interest is profit, energy companies have no reason to favour green initiatives. They don't want solar power - the easy, safe answer to energy problems - because it diminishes their control over power supply, i.e. the money tree doesn't crop so well.

  • rate this
    +4

    Comment number 478.

    I have to add my tuppence worth to this argument, I am now a single man and live in a 2 bedroomed house that I work hard to keep and I am with SSE and they are charging me over the top even though I have got online meter readings, I know Cammy and his band of merry robbers (the gang of six ) will just keep pillaging the countryside and taking what they want. what we need is to run our own energy

  • rate this
    +1

    Comment number 477.

    You might as well ask about bears and woods, from banking to utilities to railways hands off regulation has failed.Sure we need more competition but on the generation side,the likes of co-op have to buy from the Big 6 which strangely enough will ensure the price paid isn't competitive.Lets get home solar up and running to provide competition rather than paying wealthy land owners for wind turbines

  • rate this
    +2

    Comment number 476.

    Oh. And I forgot to add (see 470) that energy should not be run privately because private companies all need profit for dividends by selling more units or charging more for units to maintain/increase margins, neither of which are desirable if we are to cut usage/waste and keep it affordable for all.

  • rate this
    +3

    Comment number 475.

    My recent Atlantic bill had a new item - removal of the 5% prompt payment deduction, informing me it's due to Govenrment energy sector reforms. Nice, Government bleating on about Energy companies overcharging and government. then instantly axe bonuses for prompt payers. For the first time, without this incentive, I forgot to pay and received a postal reminder. Postage to be added to next bill?

  • rate this
    -3

    Comment number 474.

    The UK power industry is structurally flawed, made so by anti-competitive laws of government.

    Licence and franchise permissions, restrictive property zoning laws, EU and UK environmental laws, labour laws, industrial laws, protectionist foreign investment laws etc, price any new competitors able to undercut the established cartel out of the market. We languish under the ruse of "safety laws."

 

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