Select Committee on Business and Enterprise Eleventh Report

1  Introduction

1. The Business and Enterprise Committee announced its inquiry into the UK's energy markets on 5 February 2008 amidst mounting public concern over gas and electricity prices. Four of the so-called 'Big 6'—Npower, Centrica, EDF Energy and Scottish Power—had, in the space of a few weeks, announced price increases for their domestic customers of between 8% and 15% for electricity, and 13% and 17% for gas. E.ON UK followed shortly after. Only Scottish and Southern Energy (SSE) held off from raising its prices during the winter, though it eventually did so on 1 April. All the companies cited rising input costs, particularly for gas, as the primary cause of their price increases. Wholesale gas prices have continued to rise throughout 2008. In evidence to us the 'Big 6' energy companies suggested this was likely to lead to further price increases for households in the future.[1] Recent reports suggest domestic prices could rise further by as much as 40%.[2] Domestic customers are not the only ones suffering from rising prices. Since early 2007, industrial consumers have also been experiencing rapidly increasing energy costs, as a result of a doubling in the wholesale gas price. The evidence we have heard during this inquiry can lead to only one conclusion—that whatever short-term fluctuations occur, and whatever regulatory action is taken in the UK to improve the functioning of the energy markets, as the Minister of State for Energy, Malcolm Wicks, recently stated: "the era of cheap energy is surely over".[3]

2. The Energy Intensive Users' Group (EIUG) told us that in Spring 2008 year-ahead UK gas prices had risen to 5% above levels in Europe, while those for electricity were around 30% higher than in France and Germany.[4] INEOS ChlorVinyls told us it saw "a major problem of competitiveness emerging".[5] Last time gas prices rose so significantly, in winter 2004/05, many large-scale energy users in the UK went out of business, particularly in the glass and paper manufacturing sectors.[6] There is a severe danger the same will happen again in 2008.

3. The aim of our inquiry was to look at all aspects of the energy supply chain, from upstream gas production to domestic supply, to assess whether the markets were operating competitively and in the best interests of both domestic and industrial consumers. We also wanted to consider the impact of rising prices on the fuel poor (those who spend more than 10% of their incomes on heating and electricity), and the likelihood of the Government fulfilling its pledge to eradicate fuel poverty for vulnerable households by 2010. We emphasise that our concern is to maintain a public policy environment in which UK energy prices to domestic, commercial and industrial users are as low as possible, but also one in which the other crucial objectives of energy policy—environmental sustainability and security of supply—are delivered. Specifically, we are aware of the urgent need to bring forward investment in new electricity generating capacity, transmission systems and gas storage. Our inquiry has not looked at concerns relating to the standard of service customers receive from their energy suppliers. However, we received a considerable amount of correspondence on this issue, and we note that Trading Standards services across the country deal with administrative mistakes made by energy companies.[7] We trust that Energywatch and Ofgem will continue to monitor firms' performance in this area.

Ofgem's inquiry

4. On 21 February Ofgem launched its own inquiry, looking specifically at the energy supply markets for households and small businesses. We were surprised by this announcement, given that it came little more than five weeks after Ofgem's Chief Executive, Alistair Buchanan, had met the Chancellor of the Exchequer, and stated that "Britain's competitive market in energy is working".[8]

5. Mr Buchanan told us Ofgem's inquiry was a response not only to public concern over energy prices, but also to the apparent synchronisation of the energy companies' price increases earlier this year, both in terms of timing and magnitude.[9] Ofgem is conducting its inquiry using powers under the Enterprise Act, which gives it access to detailed company information that is not usually publicly available. It intends to publish its initial findings in September 2008. The probe was greeted with some scepticism by our witnesses. Allan Asher, Chief Executive of Energywatch, told us: "I do not think a 'quickie' by Ofgem while people are doing their day jobs is going to get very far".[10]

6. Wholesale gas prices have increased throughout 2008. As a result, we expect gas and electricity bills for domestic consumers to rise significantly in the near future, over and above the increases already announced this year, with serious consequences for millions of households, and especially the fuel poor. Industrial consumers now face prices above European levels. If these price differentials are sustained, they will affect the competitiveness of the UK economy, and put many thousands of jobs in manufacturing at risk.

7. We welcome Ofgem's inquiry into the energy markets. Our written and oral evidence has highlighted serious problems in the functioning of a number of aspects of the markets for gas and electricity. We are particularly concerned by the perception that Ofgem has already predicted the outcome of its inquiry, by stating at the outset that it has seen "no clear evidence that the market is failing".[11] We hope this perception is proven wrong, and intend to scrutinise the regulator's findings thoroughly.

8. Once Ofgem announced its probe, we decided to conduct our inquiry quickly to feed into and inform its work. Accordingly, at this stage we have not concluded whether the problems with the energy markets we have identified can best be tackled through direct action by Ofgem, or through further investigation by the Competition Commission itself. Considering this in depth would have extended the length of our inquiry and so prevented its conclusion before that of the regulator. We received a significant amount of contradictory evidence, particularly in relation to the functioning of the wholesale markets for both gas and electricity, which was a cause of deep concern to the Committee, and emphasises the magnitude and importance of Ofgem's task. We will examine their analysis when it is available and we will look with particular care at their recommendations for further action.

9. We appreciate that Ofgem will have some difficult decisions to make. In doing so, it must take account of the Government's overarching priorities for energy policy as set out in its 2007 Energy White Paper, which are to cut carbon emissions and maintain security of supply.[12] The market structure must deliver these, while also providing competitive prices for consumers. In addition, Ofgem will need to weigh two factors carefully—the effect regulatory uncertainty may have on firms' investment decisions at a time of general consensus that such decisions are needed urgently if electricity supplies are to remain reliable and adequate beyond the middle of the next decade; and the desirability of a thorough investigation into the market that might improve its long-term competitiveness.

10. We received a large volume of written evidence, for which we are grateful. We also took oral evidence from the consumer watchdog, Energywatch; representatives of industrial consumers—the Energy Intensive Users' Group, the Major Energy Users' Council and the Chemical Industries Association; the large independent electricity generators—British Energy, Drax Power, and International Power; the regulator—Ofgem; oil and gas producers—BP, Shell and ExxonMobil; small energy retailers—Welsh Power, BizzEnergy and Electricity4Business; the 'Big 6' energy companies—Centrica, EDF Energy, E.ON UK, Npower, Scottish and Southern Energy, and Scottish Power; and finally the European Commission. Oral evidence from the Minister for Energy, Malcolm Wicks MP, in January 2008, has also informed our conclusions. We would like to express our thanks to all those who contributed to our evidence-gathering.

1   Qq 744 (Centrica), 746 (Scottish and Southern Energy) and 829 (E.ON UK) Back

2   BBC News Online, Energy bills could go up 40%, 18 June 2008 Back

3   Speech by Malcolm Wicks, 14 June 2008 Back

4   Ev 249, para 8 (Energy Intensive Users' Group) Back

5   Q 283 (Chemical Industries Association/INEOS ChlorVinyls) Back

6   Q 286 (Energy Intensive Users' Group) Back

7   Ev 509 (Trading Standards Institute) Back

8   Ofgem Press Release, Market is sound-Ofgem assures Chancellor, 16 January 2008 Back

9   Q 535 (Ofgem) Back

10   Q 272 (Energywatch) Back

11   Ofgem Press Release, Op. Cit.; Ev 537 (University of Greenwich) and Ev 386 (GMB) Back

12   HM Government, Meeting the energy challenge, March 2007 Back

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