Energy market investigation by CMA calls for tariff caps to prevent overcharging
An energy market investigation by the UK competition authority has criticised power companies for charging customers "too much for their energy bills" and proposed several measures to prevent this, including capping some tariffs.
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The Competition and Markets Authority has called for changes to the way the Big Six energy firms operate, including measures to cut bills, improve switching between providers and tighten competition.
Ofgem had originally asked the CMA to investigate the energy market because of its concerns that "competition in the market is not working for all consumers".
The measures set out in the report are provisional ideas and a further period of consultation will be held before final proposals are published, but broker Investec said the content of the report would be a relief for the Big 6 as the CMA has not found evidence of price fixing nor identified sufficient reasons to consider a forced vertical break-up of the sector.
But Numis analysts noted that the proposals could reduce energy bills by £50 per annum, with a consequent pressure on the energy suppliers' margins.
With electricity prices having risen by around 75% and gas prices by around 125% in the last decade, the CMA said households were being overcharged, with the practice of rolling customers at the end of a contract onto a 'default tariff' the biggest reason for higher bills than necessary.
The competition regulator said those who took both electricity and gas from a single provider could probably save £160 a year on average by switching but for "disengaged" customers who do not switch, its view was that it was necessary to prevent energy suppliers from rolling them on to relatively highly priced default or evergreen tariffs.
"Instead these customers would move on to a safeguard tariff...[whose] maximum price level for default tariffs would be set by either the CMA or Ofgem."
But the CMA also proposed that energy companies be freed from the current restriction of only offering four tariffs, saying that allowing domestic suppliers to offer customers as many tariffs as they wished would provide an incentive to tailor tariffs to the needs and preferences of different customers and increase competition.
Also, as well as calling for speedier introduction of smart meters, there was a proposal for the industry's regulator Ofgem to provide a new price comparison website for domestic and microbusiness customers, as already happens in other markets, notably Australia, where the energy market regulator operates a comparison website called EnergyMadeeasy.
Changes to the format of energy bills to make them clearer to customers is also needed, with "disengaged" customers on higher-prices default tariffs given clearer warnings messages on their bills and even sent mobile phone text prompts to prompt them to seek better tariffs with their current supplier or a competitor.
The CMA also called for a "clearer, independent role" for Ofgem, but said its regulatory interventions designed to simplify prices are not having the desired effect of increasing switching.
Investec's Harold Hutchinson suggested that implications for investors were minimal.
"The findings vindicate the Big 6 against some of the harsher charges levelled against them pre-elections and . We believe the CMA focus on the retail/small-business markets will put pressure on achieved supply margins, but equally encourage the Big 6 towards greater efficiency. We do not envisage a massive change in the current industry structure and dynamic, with the Big 6 remaining dominant, an aspirational middle-tier gaining some ground, and a ‘tail’ of other suppliers driving innovation in the market."