Drive to encourage new suppliers created ‘illusion of competition’

The proliferation of supply companies over recent years created an “illusion of competition”, says Eon, which has also called for any reform of the price cap to avoid forcing suppliers to offer an standard variable-based default tariff.

In its response to the Business, Energy & Industrial Strategy (BEIS) select committee’s ongoing inquiry into the energy prices crisis, the German-owned retailer says that the past few years saw “far too many poorly capitalised and badly managed companies” allowed to enter the energy retail market and grow their customer base by offering “unsustainably low” prices despite warnings that the market was not working well.

The company, whose UK chief executive Michael Lewis is due to be cross examined by the committee on Tuesday, says: “The policy and regulatory framework in place over the last ten years did not therefore create true competition in energy retail, only the illusion of competition as measured by the sheer number of supply companies, which peaked at over 70 in 2018.”

Estimating that the bill for cleaning the recent spate of supplier failures could “easily exceed” £5 billion and add more than £100 to household energy bills, it says: “This huge cost of failure will either be borne by the customers of well managed companies or taxpayers, with investors of failed companies often bearing little or no consequence – particularly under the SoLR regime.”

The response also says any upcoming reform of the price cap should avoid “forcing” suppliers to offer an SVT-based default tariff.

Instead, it calls for suppliers to be allowed to make decisions about the types of default tariffs that best suit their customers.

Similarly, it insists the price cap must avoid mandating a particular hedging strategy, especially when there are appropriate stress tests in place. There are a number of price cap methodologies that could achieve this outcome, such as a relative cap that focusses on a supplier’s own tariffs.

Currently unused supply licences, which free-riders may be able to take advantage of while market flaws are addressed, should be revoked.

In its response tot he committee, Energy UK, expresses concern that there currently appears to be no clear lead on price cap reform.

It says the roles of the government and Ofgem on addressing long-term, structural reform of the cap are “confused”.