Competition authority confirms business energy reforms

Business groups have welcomed the announcement of reforms to the energy market, following an investigation by the UK’s competition watchdog.

Consumers Disengaged

On 24 June the Competition and Markets Authority (CMA) published the final report of its investigation into the energy industry. The investigation was launched two years ago, after the sector’s regulator, Ofgem, expressed concern that competition was not functioning as should be the case. Since then, the CMA has gathered both oral and written evidence from a wide range of stakeholders. It had been due to report its final findings by the end of last year, but said an extra six months was necessary to assimilate all of the evidence submitted.

The analysis underpinning the authority’s remedies suggested that there remained high levels of consumer disengagement in the microbusiness energy market. It said that, in 2013, approaching half (45%) of these firms were on their suppliers’ “default tariffs”, and could overall be paying over £220mn/ year more than they would in a fully competitive market.

Key Remedies

The CMA confirmed a number of remedies would be implemented in order to address this concern, and that these remedies would focus on improving price transparency in the market.

Suppliers will now be required to publish all the prices they offer to microbusinesses so that firms can better understand whether they are receiving a good deal. At present, most tariffs for microbusinesses are not published as they are negotiated directly between customers and suppliers.

Energy companies will also be prevented from inserting termination fees and no-exit clauses into roll-over contract periods. This has, in the past, made switching away from these contracts expensive and unnecessarily complicated, the CMA said. With the announced reforms, microbusinesses will no longer be penalised if they want to switch to a better deal when the initial contract period has lapsed, and they will received greater notice periods about when their contracts are coming to an end.

The CMA also confirmed the establishment of a new system for “prompting” disengaged customers to look for better deals. Microbusinesses that have been on their suppliers’ “default” tariffs for more than three years will be entered into a database accessible by other suppliers, who will then be able to write to the firms to tell them how much they could save by switching. The CMA explained that this new system would be subject to close controls: microbusinesses would be able to opt out, and suppliers would only be able to contact them by post – not by phone, text, or email.

The CMA will set out further details of the implementation schedule for these measures over the next few months. Implementation itself will then be taken forward by the government and Ofgem.

Responding to the announcements, the Federation of Small Businesses said: “Today’s CMA decision is a big win for FSB and for small businesses up and down the country. Transparency and fairness should be at the heart of a functioning energy market for small firms.”

National chairman Mike Cherry added: “Energy tariffs, published in a clear and comparable way, will make it much easier for small firms to secure a decent energy deal and empower them to make decisions that are right for them. Removing unfair terms and conditions from auto-rollovers will also ensure business owners are not caught off-guard when their contract expires.”

The business community has responded very positively to the CMA’s plans for more price transparency, and the reforms in this area should help to promote a more competitive market. But, as in the household sector, there are some concerns about the implications of the new marketing database, around which tight privacy safeguards will need to be placed.