Consumers could miss out on £1.9bn in cheaper energy bills in 2020

Published on Monday, 30 April 2012 14:46
Posted by Scott Buckler

Without reform to the energy market consumers could miss out on as much as £1.9bn in 2020 in cheaper energy bills, according to a new report published by the think tank IPPR today

The report argues that tougher regulation of the energy market is needed by regulator Ofgem to improve competition and to ensure that pricing is fairer for consumers.

It argues that Ofgem’s own evidence gives no indication that the ‘Big Six’ energy companies have achieved efficiency savings and passed these savings onto consumers through lower bills, as would be expected in a competitive market.

IPPR analysis shows that if annual efficiency savings of just 2.5 per cent were achieved in the UK’s energy market this could deliver £1.9bn in savings for consumers in 2020. As well as easing the squeeze on living standards, this would more than offset the cost of green policies for affected consumers.

The report, which estimates the true costs to energy companies of supplying households with gas and electricity, also finds that:

  •     Costs to suppliers of delivering environmental and social obligations may be £9 per customer per year less than Ofgem estimates
  •     Most of the Big Six energy companies are continuing to overcharge their existing customers to subsidise cheap offers
  •     As a result some families are paying as much as £330 more than their neighbours to use the same amount of energy from the same company

Over 5 million people could be overcharged because tariffs are not cost reflective as required by Ofgem. So-called loss leading tariffs from the Big Six also prevent competition as smaller suppliers cannot compete.

Will Straw, IPPR Associate Director, said:

 “Our research adds to the growing body of evidence that competition is not working in the energy market. We are calling on the Big Six and Ofgem to demonstrate whether efficiency savings are being achieved in the energy market and whether consumers are benefitting from lower bills as a result, as we would expect if competition was working.

“We need more competition among energy companies so that households get a fairer price for their energy. Ofgem’s previous attempts to reform the market have not delivered the changes needed. UK consumers cannot afford further delays in bringing down bills.

“Some of the Big Six are failing to offer consumers tariffs that properly reflect the true cost of energy. Some households are paying £330 more than their neighbours while millions are being overcharged. What’s worse is that poorer and older households are the most at risk of being overcharged. Ofgem must crack down on firms found to be breaching their rules on cost reflectivity.

“Energy prices are a huge burden on UK consumers. Ofgem must act faster, bare its teeth and enforce its policies”.

 Ofgem has proposed new reforms for the market, including important proposals to increase liquidity in the wholesale market to lower the barriers to competition, but it needs to go further to tackle loss leading and improve competition. It first identified problems with competition as far back as 2008 but its last package of reforms failed to improve conditions. Across 16 indicators 12 showed no improvement or deteriorated, three slightly improved and only one improved.

IPPR is calling on Ofgem to raise the bar with its current set of reforms which should be seen as the last chance for the current market structure. IPPR recommends that:

  • Ofgem addresses the problem of overcharging and loss leading by enforcing its own policy that energy companies must offer tariffs that are reflective of their costs.
  • Ofgem should reconsider its proposals for tariff reform and consider restricting suppliers to offering a fixed number of tariffs
  •     Ofgem should consider fully the needs of independent generators in its proposals to improve wholesale market liquidity and consult on the full range of reform options for the market, including a return to a pool


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