Competition in energy markets — assessment framework

It is rare to hear someone argue that energy prices are low, or even that they are just right. The usual mantra is that energy prices are too high, that the energy market is dominated by a few large companies and that these companies unfairly skew the market for their own purposes. Although there is no hard evidence of the latter, nevertheless the view persists and there are an increasing number of calls from the government, from commentators and from the industry for a comprehensive review of the energy market.

In the five years following the introduction of competition into retail energy markets in 1999, the number of energy suppliers fell from 15 to six. As a result, a perceived problem with the market is that the ‘big six’ (British Gas, N Power, SSE, Scottish Power, E.ON and EDF) provide almost all household electricity and gas and control almost three quarters of electricity generation in the UK. Many commentators point to vertical integration (where supply and generation are controlled by the same organisations) as a key barrier to new entrants into the energy market. Further issues for consumers are that the process for switching suppliers can be complicated and the lack or type of information provided by large companies can exacerbate this problem.

Since 2008, Ofgem has undertaken two separate reviews of the UK’s gas and electricity retail markets and found in both reviews that features of the market such as high levels of market concentration with no significant ‘competitive fringe’ and a lack of engagement by customers weakened competition between providers…

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