When Labour leader Ed Miliband made a promise in September 2013 to freeze household fuel bills for 20 months if he were to win next year’s election, he instantly made energy supply and pricing one of the central election topics in the UK.  Prime Minister David Cameron’s immediate response was to cut green levies paid through household bills and order Ofgem, the electricity and gas regulator, the Office of Fair Trading (OFT) and the Competition and Markets Authority (CMA) to assess the state of the energy market.

The results of this assessment were published in the State of the Market Assessment report on 27 March 2014.  At the same time, Ofgem proposed that the CMA should investigate the market to “once and for all clear the air” and determine whether “there are further barriers to effective competition”.

The report criticises the effectiveness of competition in the energy market and finds “possible tacit co-ordination” on the size and timing of price rises. The UK energy market is composed of six vertically-integrated companies – SSE, Scottish Power, Centrica, npower, E.ON and EDF Energy (known as the “Big 6”) – that generate power and sell it to customers, and who together account for 95% of the market.

The market assessment concluded that:

  • Prices and profits are increasing – UK energy prices rose 24% from 2009 to 2013 and energy supplier profits rose from £233 million in 2009 to £1.1 billion in 2012.
  • Market shares of all players are very high.
  • Switching rates of customers are very low.
  • Customer trust is low – 43% of the British customers do not trust energy suppliers to be open and transparent about pricing.
  • Segmentation of the market is quite high – suppliers still serve customers in their former incumbent region despite liberalisation).

While Ofgem believes that inefficiencies of the suppliers due to the low level of competition may be contributing to the maintenance of high prices, industry representatives tell a different story.  They claim that tariffs have increased due to rising wholesale energy costs, network charges and high government-imposed environmental levies, and add that competition on the market is active and well-functioning.

The CMA now has until July to decide whether to conduct the market investigation or not.  Its main focus will be to assess whether vertical integration of the large suppliers might lead to a low level of competition on the market and,  if so, whether these companies should be broken up. The potential review will be the newly-established CMA’s first big test following the official assumption of its powers on April 1, 2014.

Initial reaction to the assessment has been mostly positive, stating that a formal market review could restore consumer confidence and remove some of the alleged politicised resentment against the energy industry as a whole.  However, against the backdrop of possible demands to break up the Big 6 there are significant concerns that this will put the brakes on badly-needed investment in UK power generation and next generation infrastructure.

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Photo of Simon Amies Simon Amies

Simon Amies is a partner in Covington’s London corporate practice group whose practice focuses on mergers and acquisitions, capital markets, private equity and venture capital, joint ventures, and general corporate matters.  Mr. Amies’ experience includes working on a broad variety of transactions, including…

Simon Amies is a partner in Covington’s London corporate practice group whose practice focuses on mergers and acquisitions, capital markets, private equity and venture capital, joint ventures, and general corporate matters.  Mr. Amies’ experience includes working on a broad variety of transactions, including cross-border acquisitions and disposals involving both public and private companies, IPOs and securities offerings on the main and AIM markets of the LSE and other international markets, private equity and venture capital investments, and joint ventures and strategic transactions in emerging markets.