Energy: Is there enough competition in the market?

A pensioner with his gas fire on Rising energy prices have become a big political issue, but is the market really broken?

Britain's energy market is said to be dominated by the Big Six gas and electricity suppliers. For The Editors, a programme that sets out to ask challenging questions, I set out to find out whether there was enough competition between them.

The claim you hear most often about the energy market is it's somehow rigged in favour of the big energy companies.

There's never been any evidence of this, but the perception the market doesn't work as well as it should persists.

Find out more

Hugh Pym in Europe

BBC News: The Editors features the BBC's on-air specialists asking questions that reveal deeper truths about their areas of expertise. Watch it at 23:20 GMT on Monday 25 November on BBC One (except in Wales or Northern Ireland) or later on iPlayer.

Markets need competition, transparency on pricing and genuine choice for consumers.

So does the domestic energy industry tick all those boxes?

After retail energy was opened up to competition in 1998, about 15 suppliers vied to win customers.

Within five years that number had been reduced to six, which has largely remained the case ever since.

Prof Catherine Waddams, from the University of East Anglia, is a leading expert on the domestic energy market and has been studying it closely ever since privatisation.

She told me: "There's some competition in this market - there could be more - it's worrying the way profits have gone up in recent years. We really need to understand what isn't working."

The Big Six suppliers provide about 98% of all household energy and gas. They also control 74% of electricity generation.

Some critics argue this so-called vertical integration, with power generation and retailing joined together, could discourage new players coming into the market.

Professor Catherine Waddams Prof Catherine Waddams is worried about rising profits

So which industries work better for its customers than energy? Airlines and airports have seen ownership changes and new competitors coming in and cutting fares.

John Fingleton, a former boss of the Office of Fair Trading, told me: "The airline business is incredibly competitive. Customers can compare fares easily, they can switch airlines and new players can enter the market.

"Airlines can switch airports and get better deals. With domestic energy, it's very difficult for consumers to compare prices and for new players to get into the market."

Mr Fingleton wants a full-blown inquiry into domestic energy by the Competition Commission, just as there was a few years ago for the airport industry.

A key challenge is creating a level playing field for smaller competitors.

One of those biting at the heels of the Big Six is Ecotricity, based in Stroud, Gloucestershire.

Dale Vince, owner of Ecotricity and Forest Green Rovers football club Dale Vince says it is not easy for his company to make inroads into the market

The founder, Dale Vince, told me signing up customers was not easy.

He said: "The switching process is complicated, sometimes unnecessarily so. It's probably flawed from a customer point of view because the Big Six can make things very difficult."

Mr Vince said the complex systems regulators require energy retailers to have can deter smaller companies.

Those systems required between £2m and £3m of investment, he said, whereas his start-up costs in the 1990s had been only about £10,000.

I was shown around Eon's gas-fired generation plant at Enfield in north London by director of strategy and regulation Sara Vaughan, who said retail customers could see easily what sort of deals they were getting in comparison with other offers.

She said Eon had a clear internal split between its generation activities and supplying households.

But her company accepted a full independent inquiry was the only way to test whether the market really was working and restore the trust of consumers.

She said: "Trust has to be earned - it lies behind our call for a Competition Commission inquiry. We want to show people we are open and we are really prepared to have an organisation come in and look into our business."

Philip Lowe Philip Lowe, of the European Commission, says lack of competition is a problem across the EU

But are things any better elsewhere in Europe?

In Belgium, Germany and the Netherlands, competition is seen as more effective than in the UK, partly because their markets are more connected, though in others it's a different story.

In Brussels the European Commission's top energy regulator, Philip Lowe, told me there was a problem across the EU.

He said: "The UK situation is mirrored elsewhere and is worse elsewhere because there are fewer competitors in the market.

"Some national markets have only one supplier.

"But it's not enough to just have more than one supplier.

"You actually need the information to make an intelligent choice on switching."

In my conversations with experts I heard no argument in favour of the domestic energy market or any claim it was working well.

But there was a clear view there were no quick fixes available to politicians.

There is growing pressure for a robust competition inquiry, though this could take a couple of years.

Questions are being asked over whether consumers across Europe get a fair deal. While wholesale energy prices rise, the debate will get noisier.

But making the market work better could require unplugging the industry's complex structure and rebuilding it.

Hugh Pym explains how the Big Six work and asks if the energy market is competitive

BBC News: The Editors features the BBC's on-air specialists asking questions that reveal deeper truths about their areas of expertise. Watch it at 23:20 GMT on Monday 25 November on BBC One (except in Wales or Northern Ireland) or later on on the BBC iPlayer.

More on This Story

More Business stories

RSS

BBC Business Live

  1.  
    MARKET REACTION 07:33: BBC Radio 4

    Anne Richards, chief investment officer at Aberdeen Asset Management tells Today: "A very close vote would have been a difficult one for markets." She adds: "I think we have had a reconnection between the political establishment, business and the electorate. And it would be good to see that momentum maintained going into the general election."

     
  2.  
    07:29: HEADLINES
     
  3.  
    ALIBABA SHARE SALE 07:29:
    Alibaba

    Away from Scotland's vote, shares in Alibaba start trading in New York later today. It has raised $21.8bn (£13.2bn) in one of the biggest ever stock market debuts. It is likely to use the money to expand in the US where it has a very low profile. A survey by Reuters showed that 88% of Americans had never heard of China's biggest internet firm.

     
  4.  
    RBS STATEMENT 07:21: Kamal Ahmed BBC Business editor

    Royal Bank of Scotland has given a statement to the BBC's business editor, Kamal Ahmed, it says: "The announcement we made about moving our registered head office to England was part of a contingency plan to ensure certainty and stability for our customers, staff and shareholders should there be a 'Yes' vote. That contingency plan is no longer required. Following the result it is business as usual for all our customers across the UK and RBS."

     
  5.  
    REFERENDUM REACTION 07:14: BBC Radio 4

    Patrick MacDonald former boss of John Menzies, tells the Today programme the debate over Scottish independence has changed the country forever. "Things will never be the same again," he says. There is now "a need to reform our 300 year old constitution" and the country also needs to work at reconciliation to "make sure businesses stay in Scotland".

     
  6.  
    RBS 07:08: BBC Radio 4

    A little more from Mike Amey on the referendum result. He tells Today: " I suspect there's a very large sigh of relief at RBS [over the result] They don't have to worry about where they were going to be based and how they were going to conduct their future business."

     
  7.  
    MARKET REACTION 07:07: BBC Radio 4

    Mike Amey, managing director and portfolio manage at bond trader PIMCO tells Today he expects the markets to open higher as a result of the Scottish referendum result. "It will be back to the data for our traders and what the Bank of England will do [on interest rates]."

     
  8.  
    MARKET REACTION 06:49: Radio 5 live

    Adam Parsons is in the City at the offices of stockbrokers IG with their chief market strategist, Brenda Kelly. She says the opening of the FTSE 100 might be quite as dramatic as some expect. That's because markets have been predicting this outcome over the last few days. However, she says, it could "break through 6930" which would be a record high.

     
  9.  
    06:42: Via Email Linda Yueh Chief business correspondent

    There are other uncertainties now for Scotland after this vote. But, for markets at least, the big uncertainty that could have lingered for a year and half over the currency and the economy is lessened and sentiment is positive as a result.

     
  10.  
    06:33: Louise Cooper, CooperCity market blog

    "So it's up up and away this morning, the question is how far does it [the pound] go before reality sets back in and other political fears begin to dominate: The rows in Westminster over devolution max which has been promised. The General Election and the UK referendum on EU membership. Party conferences season resumes next week so there will be plenty of headlines to be written about the next set of political risks."

     
  11.  
    CITY REACTION 06:27:

    The Lord Mayor of the City of London, Fiona Woolf has welcomed the outcome of the Scottish referendum. "The proposed enhanced devolution that Scotland will experience while remaining in the UK will enable its national spirit to thrive while our entwined economies and business communities prosper together," the Lord Mayor said.

     
  12.  
    YES CAMPAIGN CONCEDES 06:23: BBC Radio 4
    Scottish first minister Alex Slamond

    Scotland's first minister Alex Salmond has hailed 1.6 million votes for independence. He concedes that "we now know there is going to be a majority for the "No" campaign". Scotland has, by majority at this stage, voted not to become an independent country," he adds. He expects devolution promises to be honoured with "rapid force".

     
  13.  
    ROYAL BANK OF SCOTLAND Via Email Kamal Ahmed BBC Business editor

    With No confirmed as the winner in the referendum, we can expect the Royal Bank of Scotland to say there is now no need to move domicile to London. The bank had prepared for a "Yes" vote by saying last week that it would move its headquarters from Edinburgh. I wouldn't be surprised if Ross McEwan, the chief executive, re-iterated the bank's commitment to Scotland. I am sure RBS's executives are relieved that the upheaval of independence will now not happen.

     
  14.  
    POUND STRENGTHENS 06:12:

    A decisive win for the No campaign could lead to big spike in the Pound. Jeremy Cook, economist at World First says. The obvious risk to the currency markets was a Yes, and that would have caused a big sell off. Now the markets will go back to concentrating on the fundamentals of the UK economy," he adds.

     
  15.  
    SCOTLAND INVESTMENT 06:01:

    Simon Walker, director general of business group the Institute of Directors has given an interview to the BBC. He says he thinks the government will now give the green light to investment projects that had been previously held up because of the uncertainty caused by the independence referendum. He adds the ending of that uncertainty will be positive for business.

     
  16.  
    POUND STRENGTHENS 05:54:
    pound versus dollar

    This chart shows the pound against the dollar over the last month. You can see it dipped to a low of $1.6071 on 10 September. That was after a poll in the Sunday Times showed a lead for the "No" campaign. It is now trading at $1.65. That's a move of 5 cents which is pretty big over two weeks.

     
  17.  
    MARKET UPDATE 05:47: BBC Radio 4

    Asian markets are up nearly 2% overnight BBC business correspondent Linda Yueh, tells Today. The market indications are that the FTSE 100 will open 0.7% higher. That's not exactly a surge but it is a positive reaction.

     
  18.  
    BANK OF ENGLAND 05:42: BBC Radio 4

    Justin Rowlatt is down at the Bank of England for BBC Radio 4's Today programme: He says the lights are on and staff are busy working inside. Although perhaps not quite as frantically as if Scotland was looking on course to vote Yes in the referendum. Bank governor Mark Carney cut short a meeting to fly home overnight. "He may have had a wasted trip," Justin says.

     
  19.  
    POUND STRENGTHENS 05:36:
    Pound dollar

    This chart shows how the pound has faired against the dollar since the polls closed in Scotland on Thursday evening. As you can see it's strengthened from a low of $1.63 to above $1.65, that's its highest point since the start of the month. In currency market terms it's also a huge move in a short space of time.

     
  20.  
    05:30: Ben Morris Business Reporter

    The pound has bounded higher overnight in reaction to the Scotland vote. More reaction through the morning. Stay with us.

     
  21.  
    05:30: Matthew West Business Reporter

    Morning folks. It looks like - with 26 of 32 local authorities now having declared the result of their ballots- that the No campaign is on course to win the Scottish independence referendum. We'll bring you all the reaction from the financial markets and the business community as it comes in. As always if you want to get in touch you can email us at bizlivepage@bbc.co.uk or tweet us @bbcbusiness.

     

Features

From BBC Capital

Programmes

  • A person taking a photo of fireworks on a smartphoneClick Watch

    A look at the latest gadgets which could make it easier to take the perfect night-time picture

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.