Are energy consumers being ripped off?

BBC business editor Robert Peston on the state of competition

Anyone who has recently tried to switch energy supplier knows how difficult it is to compare what is on offer, even though there are only six big players offering gas and electricity.

There's the rate you pay for the first chunk of power you use and then the rate for everything else. Some tariffs are quoted with VAT included, some without.

There are the discounts offered for different payment methods. There are deals for managing bills online or for having certain kinds of meter. And then there's the option of fixing prices for a period.

It can be bewildering enough comparing what a single company is offering. Very few of us have the time or intellectual capacity to assess the 300 odd different packages on offer (up from 180 in 2008) from the sextet - British Gas, EDF Energy, E.ON, RWE Npower, Scottish Power and SSE - who supply more than 99% of British customers.

Although you can delegate the analysis to one of the online price-comparison websites, not everyone is comfortable doing that (and indeed there are still large numbers of people without access to the internet). That said, there has never been (to my knowledge) unambiguous evidence that these de facto brokers steer consumers in the wrong direction.

So Ofgem has concluded that pricing practices are "complex and unfair".

But what is the detriment to all of us from that complexity?

Well it could mean that the intensity of competition between energy suppliers isn't what it should be, so that prices in general are higher than would be the case if more of us shopped around.

And there is some support for that conclusion from the data. Ofgem has found that this autumn, for the first time, retail prices were probably raised by the big six faster when wholesale prices went up than they have typically been cut after falls in the wholesale market.

Or to put it another way, at a time when the economy has been pretty weak, the energy companies found it easier to widen their profit margins than is necessarily consistent with a competitive market.

Second, Ofgem produces a striking chart of what has been happening to the profit margin for suppliers since 2004. And this clearly shows a dramatic improvement in the profitability of the retail energy market over the past couple of years, during which there has been this striking increase in the number and complexity of tariffs.

So there are two sources of harm that Ofgem may have identified: first that gas and electricity prices may be higher than they should be; second that individual consumers, especially poorer ones with no online access or those with literacy and numeracy problems, are at an unfair disadvantage.

Its proposed reforms are that the power companies should be forced to auction energy to smaller suppliers, to stimulate competition. And that there should be a radical standardisation and simplification of tariffs for standard energy deals (so-called evergreen products that aren't time limited).

But here's what I find slightly odd. Why haven't any of the energy companies turned themselves into the equivalent of an Easyjet or Ryanair? Why have none of them offered a limited range of low-cost packages that massively undercut their rivals? There must be something in the intrinsic risks of trying to be the no-frills, lowest cost supplier that is a major deterrent.

Also, it is probably worth pointing out that Ofgem's finding that between 40% and 60% of energy customers are "sticky", that these tend to stay with their suppliers rather than shopping around, may be evidence of inertia for that regulator - but it looks like a bubbling, thriving market with lots of bargain hunting and switching compared to another market that is important to us, the retail banking market.

If, for example, future proposals from the Banking Commission set up by the government were to encourage up to 50% of bank customers to switch banks, that would transform competitive conditions in retail banking.

A couple of final points.

First, you can expect the energy companies to complain that any squeeze in their margins will erode their ability to make the investments necessary to deliver security of energy supply - and low-carbon supply to boot - that is a priority for the coming decade.

Second, it is striking that no one credible seems to be arguing the caveat emptor point any longer, that if consumers are too thick to notice when energy suppliers are bamboozling them than they deserve to be ripped off. In that sense, in energy at least, there has apparently been a triumph of the nanny state.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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