IPPR says annual efficiency savings of 2.5% in UK energy market could cut £1.9bn from consumers’ bills in 2020
The “big six” stranglehold on the UK energy market means consumers are likely to pay almost £2bn too much on household fuel by the end of the decade because of failures to improve efficiency, warns a report.
The Institute for Public Policy Research (IPPR) argues that tougher regulation is needed by the industry watchdog, Ofgem, to improve competition and ensure pricing is fairer for consumers. This follows Ofgem findings that in 2010 the least efficient energy company spent more than twice as much on its operations per customer as the most efficient.
“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 benefiting from lower bills as a result, as we would expect if competition was working,” said Will Straw, IPPR’s associate director.
The IPPR report, The True Cost of Energy, shows that annual efficiency savings of 2.5% in the UK’s energy market 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, it argues.
Adam Scorer, director of policy and external affairs at Consumer Focus, said the report raised a number of important questions about how competitive the energy market was and whether consumers lost out as a result.
“There are many improvements which can be made to this market, but a good start would be to ensure that smaller suppliers can compete with the big six on a level playing field. Customers also need to know that suppliers are really competing for their business by passing on efficiencies and wholesale cuts, as well as ensuring customer service is first rate.”
British Gas, RWE npower and other large power firms have faced political and public criticism, with rising energy bills pushing more and more households into “fuel poverty”.
The regulator has introduced a raft of initiatives demanding that companies provide more transparency over pricing and reduce the number of tariffs they offer to reduce scope for confusion.
The energy companies argue that their profit margins are extremely low and they are the victims of soaring prices of wholesale gas that is needed directly for homes or to generate electricity in their power stations.
The big six also argue that they are being blamed for the government’s failure to come up with a coherent energy policy that secures supplies while driving down carbon levels.
Ofgem’s evidence gives no indication that the dominant power companies have achieved efficiency savings and passed these savings on to consumers through lower bills, as would be expected in a competitive market, the IPPR argues.
The thinktank also accuses the big six energy companies of 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.”
Ofgem has proposed to reform the industry, including plans 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 in 2008 but its most recent package of reforms failed to improve conditions. Across 16 indicators, 12 showed no improvement or deteriorated, three slightly improved and one improved.
IPPR says Ofgem needs to address overcharging and loss leading by ensuring energy companies offer tariffs that are reflective of their costs. This includes providing an immediate update on the investigation into whether Scottish Power has breached its licensing requirements.