Then and now: the energy market since the start of the CMA investigation

The industry has been on a roller-coaster ride over the past two years whilst it has been awaiting the findings from the Competition and Markets Authority’s (CMA) ongoing probe into the energy market.

After lots of anticipation, and two delays, the CMA has today published its proposals and will confirm its final decisions in June 2016 – exactly two years since the probe began. The investigation aimed to increase competition in the market, address poor customer service and a lack of consumer trust, and to encourage engagement and switching.

The initial proposals, laid out by the CMA in July 2015, included a transitional safeguard price cap to remedy rapid price increases to consumers in recent years, sharing of data between suppliers so that companies can compete for new customers and measures to address barriers to switching.

Today, as the CMA sets out its plans to reform the energy market, Utility Week looks at whether the market is already on the road to becoming more engaging and competitive for consumers.

Then…

• Lack of competition:

In 2014 market share was dominated by the big six suppliers, with the independents only making up 7.5 per cent collectively and consumers had a choice between 17 suppliers.

Figures from the Department of Energy and Climate Change (Decc) show that 3.2 per cent of customers switched electricity supplier in Q4 of 2014, and the same percentage for gas switches.

• Prices:

Average domestic bill prices were higher in 2014 than in 2015 and higher than they are now. Decc statistics say in 2014 the average electricity bill cost £592 per year and the average gas bill cost consumers around £752.

Wholesale prices fell dramatically in 2014 and by the end of 2015 gas wholesale prices were down a significant 53 per cent, whilst electricity was down 34 per cent.

The coalition government was putting pressure on the suppliers to cut their bills, whilst Labour made threats that it would freeze gas prices for 20 months if they won the election. 

• Billing issues and customer service:

In 2014 energy companies were hit with fines from Ofgem for poor customer service, misleading marketing, and to billing. Ofgem data shows that a majority of the sums demanded from suppliers were in the form of consumer redress packages. In the same year as the beginning of the CMA investigation total payments to Ofgem, including redress payments, totaled nearly £36 million. These figures hit record highs for five years in 2015 of around £71.5 million. Notably, in December 2015, Npower was ordered to pay £26 million in customer redress for “failing to treat them fairly”, according to Ofgem. This was the highest fine on an energy company ever imposed by Ofgem, which slammed the supplier for failing to handle complaints effectively and incorrectly billing customers.

• Lack of consumer engagement:

A failure of the major energy suppliers to significantly cut their prices, coupled with long-standing and ongoing issues around billing and poor customer service, led to increasing customer disengagement.

There was also a high level of consumer distrust with the major suppliers, and this is reflected in the low level of switching, which was only 3 per cent over 2014-15.

Now…

• The rising independents:

Independents have seen a substantial growth and the number of new entrants in the market is at an all-time high. By the end of 2015 independent suppliers’ share of the market grew by 50 per cent, up to 13.4 per cent. A report by the Scottish Government suggested that in the last 12 months, nine new suppliers have become operational bringing the number of suppliers in the market up to 35.

The amount of suppliers has more than doubled in the past four years and will go some way in ticking off one of the main aims of the CMA’s investigation – increased competition.

• Switching:

As the number of competitors has increased, so has the level of switching. The rate at which households switch their electricity supply away from the big six has increased since November 2015 and since then independent suppliers have taken a third of all switches – the highest level in more than a year. Switching increased by 15 per cent in 2015 compared to 2014 and by June 2015, 1.5 million customers had switched electricity supplier, according to Energy UK.

Collectively by January 2016 independent suppliers held a 15.5 per cent share of the dual fuel market – four percentage points higher than last year and leaving the big six now holding their lowest share of the household market in 10 years, according to a report by Cornwall Energy.

• Price cuts:

The major six suppliers made headlines with cuts to their gas tariffs following calls from the industry to reflect falling wholesale prices in customer bills. Wholesale gas prices fell by around 27 per cent in 2015 whilst electricity was at its lowest since 2012. The big six dragged their heels but eventually cut prices for gas by around 5 per cent at the start of the year, though electricity prices remained static – opening the market to criticism that the cuts are too little and too late.

Independents such as Good Energy and Ecotricity made slightly bigger cuts of around 7 per cent. The average gas bill now stands at around £747 for a dual fuel customer but this is likely to change once all the price cuts have come into effect by April.

• Customer service:

Utilities won a rare public opinion victory in January as research from the Institute of Customer Service (ICS) found they were the most improved sector, gaining 1.9 points year-on-year.

In a Which? customer satisfaction survey for 2016, independent suppliers occupy the first 16 places with the top scorers at around 80 per cent. Npower remains at the bottom of the table but has made improvements bringing its customer satisfaction score up to 41 per cent, from 31 per cent the previous year.

SSE has also been praised by campaign groups and switching sites for its redesigned bill which aims to make the notoriously complex energy bill, clearer for consumers and calls from industry players for other suppliers to follow its lead are getting louder.

It would appear the industry has pre-empted at least some of the CMA’s findings and set itself on the right track. Smart meters will undoubtedly help utilities along due to access to smart data, reduced costs of acquisition and easier billing. Plus, with prices decreasing, clearer bills and more consumers switching, the engagement and competition the CMA is seeking could be closer than it thinks.