05/11/13 – Ofgem Presentation

Speaker: Rachel Fletcher, Ofgem Interim Senior Partner, Markets

The All-Party Parliamentary Group on the Costs of Energy

5 November 2013

The elements which make up the end user’s energy bill are

  • Wholesale costs
  • Network and balancing costs
  • Environmental and social costs
  • Supplier costs
  • Supplier margin
  • VAT

Rachel Fletcher outlined the reasons for the upward pressures on many of these elements of the bill.

Wholesale Costs

These are going up and they are influenced by factors such as the UK being a net importer of gas, global events and their effect on oil prices. The cost of replacing aging plant and the requirement to invest in renewables add to the increase in the wholesale cost of energy.

Environmental costs

The supplier plays a key role in delivering mandated environmental programmes.

Network costs

Whilst price control regulation has kept down the costs to consumers (by 50% in the 15 years since privatisation) the requirement to fund investment and upgrading has increased costs.

Supplier’s costs

Supplier profit margins are increasing.

Ofgem’s retail market review has revealed that there is not enough competitive pressure on suppliers to influence the way costs are passed to the consumer. Ofgem’s proposed remedies to the key problems are as follows:

Consumers are unlikely to change suppliers because of poor levels of engagement from the consumer.

  • Developing a “simpler, clearer, fairer” market to encourage consumer engagement.
  • Limiting suppliers to 4 tariffs per fuel.
  • Standards of conduct and protection for consumers on fixed-term contracts.

Independent suppliers have poor liquidity so are unable to offer credible alternatives to the big 6 suppliers.

  • Proposals for vertically-integrated companies to buy and sell future-dated products and for transparent and fair dealings with small companies.
  • Ofgem are looking at ways to make more from the data included in the segmental accounts suppliers are now required to publish.

Ofgem are further committed to:

  • Establishing the framework assessment for OFT/CMA.
  • Providing the first annual “state of the market” review from spring 2014.
  • Providing a full review of the RMR package by 2017.
  • Increasing consumer engagement and the level of competition for consumers.


Wholesale liquidity market

There were suggested solutions to the problems around liquidity; one assessment concluded that all generators should be required to auction their output.

Ofgem: Stated that the regulator is constantly assessing the market; structural reforms of the market would be considered later, only if the current focus on the provision of products at good prices were not effective. In the meantime, the regulator would continue with this focus.

Do independents get a bad deal from the big 6?

Ofgem: Agreed that that the current issues around price transparency and market liquidity make it difficult for the buyer to feel that they are getting a good price. There is evidence to suggest that independent companies are having difficulty obtaining the needed product.

Is the focus on profits the wrong one if the aim is to achieve substantial cost reductions and potentially detrimental to infrastructure investment? It was pointed out that reducing the supply margin would not produce a significant decrease in bills, whereas focusing on the environmental and social costs would provide better decreases; a 10% reduction in profits would only provide a ½% discount for the consumer.

Ofgem: Agreed that perhaps this was a good point.

APG Vice Chair Lord Debden: Likened the environmental charges to a form of insurance against climate change and that focusing on that alone would be a red herring.

Another speaker made the point that the emphasis on reducing consumer bills could derail the need to pay for infrastructure improvements.

Ofgem: Disagreed with this point, arguing that in an environment of rising prices it was even more important that the markets work properly to produce good prices for consumers.

The significance of the environmental and social levy

There was a suggestion that the increase in supply margin could be explained by the collapse in the churn rate, which coincided with the ban on doorstep selling? Further, the speaker argued that fewer standard tariffs would not increase competition and that issues such as the upcoming changes in the carbon price floor, would have a negative impact with purchases only being made a year ahead.

Ofgem: Disagreed on the first point, arguing that consumer research did not back up such an argument and that doorstep selling based churn did not reward the good providers. The emphasis needed to be on effective consumer engagement in the market.

Ofgem analysis had found that independents were frustrated because they wanted to buy long-dated products. Ofgem stated that companies did appear to be willing to put up the collateral for such purchases

Smart metering

To present a positive image of smart meters would it be possible for the government and regulator to engage with consumers earlier by encouraging some type of foundation programme?

Ofgem: Agreed that this was important, stating that consumers have difficulty engaging in the market now, so a more sophisticated system with even more products could be even more difficult. She re-iterated that it was important to get the foundations right as smart meters enter people’s homes. Smart meters could help consumers by enabling faster switching. There was agreement that technology could become a useful source of data which would encourage transparency.

Lord Debden stated that, based on the work of the Climate Change Committee and contrary to information from some sources, the percentage of the bill claimed by these components will not be 20-30% by 2020.

DONM January 14