‘No signs of collusion’ in UK electricity and gas markets

adminBusiness Electricity, Business Gas

A report published by the Business and Enterprise Select Committee has ruled out price fixing, but insists there are other real problems in the UK’s energy markets.

Since the double digit price rises at the start of the year there has been much speculation over how the ‘Big Six’ energy suppliers set their prices.

The ‘Big Six’ suppliers are British Gas, Npower, Scottish & Southern Energy, EDF Energy, ScottishPower and E.ON Energy. They were accused at the start of the year of colluding to keep prices the same across the market, when the other 5 suppliers quickly followed Npower’s lead of raising prices in early January.

This kind of across-the-board price rise is not uncommon in the industry, as all suppliers purchase their energy from the same group of electricity and gas generating companies, however, it seems as though they are gradually becoming closer in terms of the percentage rise and the dates the rises are announced and put into effect.

The report, published on Monday, comes after EDF Energy became the first supplier to announce large price rises this summer. Scottish & Southern Energy and Centrica, owners of British Gas have also made clear their intentions to raise prices in the coming weeks, blaming soaring wholesale costs as the main driver.

The inquiry addressed the issue of similar prices and price changes in simple terms, stating that it is simply too easy for each of the largest suppliers to predict what the others are going to do.

No clean bill of health

Peter Luff, Chairman of the committee made it clear that the report has not given the markets the all-clear: “Just because we have found no evidence of collusion does not mean we have given the big six energy companies a clean bill of health – far from it,” The report states that “the UK’s energy markets are not functioning as efficiently as they should”. “Industrial consumers now face prices above European levels… If these price differentials are sustained, they will affect the competitiveness of the UK economy.” the report added.

Other concerns include the lack of investment in gas storage, as the UK becomes more dependent on imported gas – only 13 days’ worth of gas can be stored compared with 99 days in Germany and 122 days in France. Mr Luff said this represented a “pathetically inadequate level of gas storage” that left Britain’s energy market inherently unstable. About 40 per cent of the gas used in Britain will be imported this year, up from 27 per cent in 2007. That proportion is expected to rise to 75 per cent by 2015.

Fuel poverty

Even Ofgem, the Energy regulator was criticised for not acting with enough urgency in some areas. The government estimates that 2.5 million households are in fuel poverty – defined as when more than 10% of household income is spent on fuel bills – but watchdog Energywatch says the figure is more than four million. The committee said “We believe that the time is right for a root and branch review of government policy on fuel poverty”, indicating key areas to be improved:

  • Social tariffs need to be more easily available to those who need them, and become less confusing and inconsistent.
  • The criteria for social tariffs should be explicitly defined, as well as the customers who qualify.
  • Energy efficiency needs to be improved in homes to help reduce bills.

Market control

The report also noted that the possible takeover of British Energy, the UK’s nuclear generator by EDF would put further upward pressure on prices as EDF would then be the largest producer of electricity in the UK. Mr Luff called for Ofgem and the Competition Commission to “look very carefully” at the proposed takeover, citing lack of transparency and liquidity in the forward gas market as major concerns. “I’m not against the sale of British Energy per se but you just can’t sacrifice further competition like that without the creation of robust safeguards” Mr Luff said.