Launched in 2014 and concluding two years later, the Competition and Markets Authority’s (CMA) investigation into the UK’s energy market was called for to ensure that competition within the market was still working as effectively as possible, and that both domestic and business energy consumers alike were receiving the best possible energy prices.
The investigation was deemed necessary due to an overriding and deep-rooted mistrust of energy suppliers, as presented by the UK’s energy watchdog Ofgem. According to the regulator, this mistrust was caused by the rising profits of energy companies and ever-increasing prices for consumers. For example, in the months leading up to the investigation’s launch in 2014, it was widely reported that during the previous decade, retail energy prices for domestic electricity had increased by 75 per cent despite the cost of wholesale electricity remaining broadly the same.
CMA energy market investigation
These concerns regarding large profit margins and a lack of competition within the energy industry led to the CMA suggesting over 30 ‘remedies’ as part of the overall findings of the CMA energy market investigation, all designed to make the UK’s energy sector fairer, benefiting both domestic and business consumers.
In this guide, we summarise all you need to know about the CMA and the outcome of its energy market investigation, and we help to cut through the jargon to provide you with only the most relevant aspects of the CMA’s final report.
What is the CMA?
The CMA, or Competition and Markets Authority, is an independently run department of the UK government which is responsible for promoting fair and healthy competition for the benefit and protection of consumers and businesses.
As well as monitoring the behaviour of businesses and organisations in a wide range of different sectors and industries, the CMA undertakes regular in-depth investigations and audits into different markets where it suspects unfair competition, collusion, price-fixing or any other illegal or unjust activity may be taking place to the detriment of consumers.
What do the CMA do?
Set up in 2014 with the intention of better scrutinising and rationalising competition policy in the UK, the CMA is the country’s largest independent competition regulator. It combines the competition elements of the Office of Fair Trading (OFT) and the UK’s Competition Commission with the aim of completing the following tasks:
- Investigating industry mergers and acquisitions which could restrict competition
- Investigating potential instances where UK and, up until recently, EU anti-competitive laws and agreements have been broken, or abuses of dominant positions have occurred
- Carrying out market studies and data analysis of instances where competition and consumer problems have or are likely to occur
- Bringing criminal proceedings against those companies and individuals that commit cartel offences
- Working with sector regulators and watchdogs (such as Ofgem) to help them to use their competition powers to bring about stronger regulatory references and appeal processes
- Enforcing consumer protection legislation to help to remove unfair and anti-competitive actions and market conditions that make it harder for consumers and businesses to exercise choice.
What did the energy market investigation reveal?
In June 2016, the CMA published its energy market investigation findings, reporting on the state of the UK energy market as it viewed it. It concluded that the industry was not operating as it should, highlighting that in total, domestic energy customers were paying an average of £1.4bn a year more to the so-called ‘Big 6’ energy companies (British Gas, Eon, EDF, nPower, Scottish Power and SSE) than they would in a truly competitive market. Overall, the key problems outlined in the CMA’s report fell under three main categories:
- Low levels of customer engagement – a lack of engagement, even apathy, on behalf of consumers was partly responsible for the high prices charged by suppliers. This is to say, because the energy suppliers could get away with charging high prices relatively unchallenged, they did.It was suggested that this was the same story for businesses. The perceived hassle of switching providers, alongside hidden rollover costs and confusion when deciphering bills, were given as potential reasons why 40 per cent of SME owners have never switched suppliers. The CMA suggested this inaction allowed the suppliers to charge higher prices and act uncompetitively.
- Supplier behaviour – perhaps unsurprisingly, the report found that the Big Six energy companies had benefited from ‘unilateral market power over their respective inactive customer base’ between 2004 and 2014. This power, the report suggested, had been used to exploit customers through uncompetitve pricing policies. However, although this reflected negatively on the six suppliers that dominate the market, the CMA did not present any evidence of tacit collusion between suppliers. It concluded that price-fixing for domestic or business customers had not consciously taken place.
- Regulatory framework – issues highlighted in the report pointed to problems within the actual regulatory framework that is used to scrutinise the energy industry. It was suggested that these problems affected both wholesale and retail prices, restricted policy changes and harmed the energy market as a whole.The fact that the codes which regulate the energy sector were written up and managed by the industry participants themselves was considered particularly problematic – an issue dating back to the privatisation of the gas and electricity markets in the 1980s and 90s. The report also claimed that Ofgem had an ‘insufficient ability’ to influence decision making when it came to regulatory policy, meaning the suppliers themselves were essentially self-regulating the industry – largely to the detriment of consumers. The toothless nature of Ofgem was highlighted as one of the key reasons for a complete lack of consumer trust in the energy sector.
What did the energy market investigation suggest?
Following on from the findings outlined in the CMA energy market investigation report, 30 remedies were put forward. The implementation of these remedies was designed to put a stop to the under-regulated, free-for-all nature of the energy market and make the industry operate in the best interests of its consumers. The key remedies that were suggested included:
- The improvement of the regulatory framework, giving Ofgem more powers to regulate effectively, to avoid the problems identified from reoccurring.
- The mass rollout of smart meters to all domestic customers, followed by a similar process for business customers, to ensure costs are universally more accurate.
- Empowering Ofgem to establish an ongoing programme to help engage customer input and interaction with suppliers by making more information readily available. This relates to the cheapest tariff options and best energy suppliers to suit the needs of both domestic and business customers.
- The creation of a mass database which can identify those customers who have been on the same energy plans for three years or more. This information will then be made available to Ofgem, rival suppliers and third-party intermediaries to promote engagement and raise awareness of lower-priced deals and tariffs.
- For microbusinesses (SMEs with few staff, a modest turnover or who use little energy, relatively speaking), the report ruled that energy prices should be disclosed by their current suppliers prior to any automatic renewal processes taking place. This is intended to allow SMEs to decide for themselves if they would like to switch providers before being locked into a new, potentially unfavourable, contract.
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