Memorandum by the Office of Gas and Electricity
1. Ofgem is the regulator of the gas and
electricity industries in Britain. We welcome the announcement
of the Committee's inquiry. Like the Committee, we have noted
the increasing public concern at recent events in the energy supply
markets. Although we have not seen conclusive evidence that the
market is failing, we know that customer confidence is vital in
order for a market to function welland it is clear in this
case that customer confidence has been damaged. On 21 February,
therefore, we launched an investigation which will look at whether
the energy supply markets are working well for all consumersand
not just particular groups such as those who are on the cheapest
online deals. The probe will be carried out under Ofgem's Enterprise
Act powers which will give us access to detailed company information
that is not routinely made available. We expect to report on our
initial findings from the investigation in September.
2. It is useful to consider the energy market
as comprising two elements. In the wholesale markets, electricity
generators and gas shippers sell their energy onto suppliers.
In the retail markets, suppliers then sell this energy
onto business and domestic customers.
At the time of privatisation all customers received their gas
from British Gas and their electricity from the Public Electricity
Supplier for their region. Since the gradual rollout of competition
in the late 1990s, customers have been free to switch to different
3. There are parts of the supply chain in
which competition is very limited. This is true for the energy
networksthe pipes and wires that carry the gas and
electricity. It would be too expensive for every energy supplier
to build its own pipes and wires, so there are monopoly companies
which transport gas and electricity from shippers and generators
In order to protect consumers, the revenues that the network monopolies
can earn and the structure of their charges (ie the proportion
of these revenues they can collect from business and domestic
customers) are regulated by Ofgem in five-yearly price controls.
4. This combination of liberalised markets
and independent regulation has brought significant benefits to
British consumers. Britain's energy market was recently assessed
to be the most competitive in Europe.
The stable regulatory framework has proved attractive to investors,
with £30 billion being invested in the networks since privatisation.
Consumers, in turn, have benefited as costs have been driven down
by companies, a greater range of tariff offerings has been made
available, and service levels and quality of supply have improved.
5. However, there are times when companies
do not play by the rules or customers' confidence in the market
is damaged. In these cases, the regulator must be prepared to
investigate and act where necessary. As recently as February 2008,
we imposed a fine of £41.6 million on National Grid for abusing
its dominance in the gas metering marketthe biggest fine
ever imposed for this kind of competition law breach. Now, in
response to customer concern at recent events in the energy supply
markets, we are conducting a probe to ensure the market is working
well for all customersincluding the vulnerable. We welcome
the insight that the Committee's work will bring.
6. In this memorandum we have addressed
all seven of the questions posed by the Committee and we have
provided background analysis wherever possible. Since our investigation
is at an early stage, there are inevitably some points on which
we are not yet able to offer definitive conclusions. Where this
is the case we have sought to provide advice to the Committee
on the issues it may wish to consider and the information on which
it could draw in reaching its own view. In addition, if Members
or Staff have any further questions, we would be happy to explore
these issues in more detail, either in oral evidence or in a supplementary
Q1. Whether the current market structure encourages
effective competition in the retail markets for gas and electricity
7. We think a range of indicators should
be used to assess the effectiveness of competition in a market.
These include changes in prices relative to costs (and hence margins)
over time; product innovation and improvements in customer service;
customers' responsiveness to suppliers' offerings (measured by
switching rates); the resulting changes in suppliers' market shares;
and the concentration of the market amongst suppliers. The retail
market is increasingly complex with a range of different types
of energy contract offered (fixed and capped rate deals, market
trackers, standard variable price contracts, green tariffs) and
payment methods (direct debit, standard credit and prepayment).
In looking at these indicators it is important to look at them
in each of the various segments of the retail energy market to
assess their competitiveness and also to look at trends in movements
of customers between market segments over time.
Pricing and costs
8. There are six big players active in the
energy retail market in Britain: British Gas Trading (BGT); E.ON
(which until recently traded under the name Powergen); EDF Energy;
Npower; Scottish Power; and Scottish and Southern Energy (SSE).
Together, these six suppliers account for over 99% of the domestic
9. Since the beginning of this year all
six major suppliers have increased their gas and electricity prices.
SSE was the last to increase prices, waiting until the end of
March by which time most customers' energy consumption has begun
to fall. Customers can still make savings by switching supplier,
particularly if they are still with the incumbent gas and electricity
suppliers in their region and if they pay on receipt of their
bill (ie standard credit) or through a prepayment meter (PPM).
Customers who have never switched supplier can make considerable
savings on their annual gas and electricity bills. These combined
savings are, on average across regions, £125 for a PPM customer,
£93 for a standard credit customer and £56 for a direct
debit customer. The following graph shows the best savings available
in each region by payment method, at the time of writing.
POTENTIAL SAVINGS FOR ENERGY CUSTOMERS WHO
HAVE NEVER SWITCHED SUPPLIERAPRIL 2008
10. Further savings are available to customers
who switch their payment method or who move to dual fuel (DF)
ie taking both gas and electricity from the same supplier. In
particular, online tariffs are growing in popularity and are often
the cheapest tariff. The chart below shows, region by region,
the cheapest deal by payment type for an average dual fuel customer.
LOWEST DUAL FUEL (DF) PRICE PER PAYMENT TYPE
BY REGIONAPRIL 2008
11. Despite the regional savings for customers
who have never switched, we have noted that the recent price changes
have resulted in the six major suppliers setting their average
national dual fuel direct debit prices to within £19 of each
other. The following table sets out the range in dual fuel prices
(based on national average annual bills) between suppliers and
shows how this has changed over the last year. While this level
of price convergence could indicate effective competition, we
will consider whether there are other reasons for this as part
of our probe.
DIFFERENCE BETWEEN THE CHEAPEST AND MOST
EXPENSIVE SUPPLIERS OVER THE LAST YEAR BY PAYMENT METHOD
|Price range based on each supplier's average annual dual fuel bill
| Direct Debit||
12. As well as price competition, suppliers are also
innovating to retain and win customers. Innovative products offer
more choice to customers and have proved to be very popular. Last
year we estimated there were some 9 million gas and electricity
accounts on green, fixed price and online deals, accounting for
roughly 20% of all energy accounts.
13. When retail prices were rising, suppliers responded
by introducing price guarantee deals such as fixed price, capped
price and tracker deals. The first price guarantee tariff was
introduced in 2003 and by March 2007 all suppliers not only offered
the products, but the tariffs had evolved as competition increased.
An example of this evolution was the removal of termination charges
to allow customers to switch without penalty. Figure 3 shows the
increasing popularity of price guarantee tariffs over time. As
at March this year around 6 million product accounts (gas and
electricity)or around 13% of the marketwere on price
14. Online tariffs are another growing product area,
often offering additional cost savings to customers. These offer
customers savings for managing their accounts online. We estimate
there are about 2.5 million online accounts with the biggest six
15. Green tariffs have grown in popularity as customer
concern for the environment has risen. This interest has allowed
small suppliers specialising in green energy to enter the market,
and large suppliers have introduced more green products to their
tariff offerings to attract climate conscious customers.
16. More recent developments in the market have shown
signs that suppliers are beginning to compete in the provision
of services aimed at reducing energy consumption. For example,
one supplier offers cash credits to match the reduction in energy
Changes in suppliers' costs
17.Table 2 below provides an illustrative estimate of the
increase in costs that suppliers face in 2008. Various costs that
suppliers need to recover from domestic customers are increasing,
including network charges and measures to tackle climate change.
However, such has been the increase in wholesale costs, we think
this is the dominant area of higher cost for a number of suppliers,
particularly for gas. In the table, the "energy, supply costs
and margin" is a residual figure, based on an annual bill
minus the known costs to suppliers.
ESTIMATED AVERAGE DOMESTIC ENERGY BILL COMPOSITION
2007-08 to 2008-09
|| 2008-09 || YoY % Change
|| Share of total bill 2008-09
|Energy, supply costs and margin||£404
|Average current bill||£557
18. The Renewables Obligation (included above in environmental
costs) obliges electricity suppliers to source an increasing share
of their power generation from renewable sources. Where a power
supplier is unable to meet their obligation from their own generation
they must buy renewable energy from accredited suppliers or pay
a buyout price to meet the obligation. The share of energy that
suppliers are obliged to source from renewable increases on 1
April 2008 from 7.9% to 9.1%.
19. In response to competition on price and the introduction
of new products, there has been a steady increase in the level
of switching between gas and electricity suppliers, with the level
in 2007 exceeding that seen in 2006. Figure 4 and Table 3 below
show the number of monthly and annual transfers of domestic gas
and electricity customers.
MONTHLY CUSTOMER TRANSFERS IN GAS AND ELECTRICITY
TOTAL ANNUAL TRANSFERS IN GAS AND ELECTRICITY
|Jan to Dec 2004
||Jan to Dec 2005||Jan to Dec 2006
||Jan to Dec 2007|
20. There are approximately 26 million domestic electricity
and 21 million domestic gas customers in Great Britain. Based
on a consumer survey undertaken by Ipsos Mori in early 2007, around
22% and 19% of these electricity and gas customers respectively
switched their supplier in 2006.
21. Datamonitor has estimated that of the 21.5 million
customers taking both gas and electricity, 80% have switched either
their gas or electricity since the market opened to competition.
Taking the market as a whole, and including electricity only customers,
Datamonitor estimates that 70% of households have engaged in the
energy market by switching either their gas or electricity supplier.
22. However, there is evidence that within some groups
of customers, the percentage who have never switched supplier
is higher eg amongst those who pay by standard credit. We will
be doing more work to understand the reasons for this and what
action can be taken as part of the probe.
Cross-sector switching comparison
23. Evidence from Ofcom research in 2006 provides a benchmark
with which to compare switching rates and the ease of switching
in the gas and electricity markets. The first chart in Figure
5 indicates that relative to sectors with similar characteristics
(eg network characteristics and the presence of an incumbent in
the case of telecoms) the number of customers who have switched
is broadly similar. The second chart in Figure 5 indicates that
when compared to the telecoms industry the relative ease of switching
is deemed to be similar.
COMPARISON BETWEEN SECTORS OF THE PERCENTAGE OF SWITCHERS
AND EASE OF SWITCHING
Sources: Accent 2005 for gas and electricity (commissioned
by Ofgem) and Ofcom's Consumer Experience Report 2006 for telecoms
and car insurance. *Datamonitor Report "The true state
of the marketan analysis of dual fuel switching in the
UK energy market" January 2008.
24. Customers are still leaving their incumbent suppliers
and the market shares of the incumbents continue to fall. British
Gas' market share for gas has continued to decline (in December
2007 it was 46%), while the electricity market incumbents have
less than half the customers in 8 of the 14 regions.
25. Nationally, in electricity and gas, SSE has seen
the biggest increase in its share of customers. It has gained
four million extra customers in Britain in the last three years
and has moved to the second biggest supplier behind British Gas.
During this period SSE has consistently been one of the most competitive
suppliers on price and has been rated the highest supplier for
customer service. British Gas has seen the biggest fall in market
share in gas, while E.On has seen the biggest fall in electricity.
NATIONAL MARKET SHARES IN GAS
||Dec 2003||Dec 2004
||Dec 2005||Dec 2006
||Dec 2007||Change in|
Source: Ofgem analysis
NATIONAL MARKET SHARES IN ELECTRICITY
||Dec 2003||Dec 2004
||Dec 2005||Dec 2006
||Dec 2007||Change in|
Source: Ofgem analysis
26. To understand in more detail the change in electricity
market share it is necessary to consider the market shares of
the incumbent electricity suppliers in each of the old Public
Electricity Supply regions. This is because there was originally
a monopoly electricity supplier in each of these 14 regions.
27. In December 2007 the market shares of the electricity
incumbents was below 50% in 8 out of the 14 regions. Figure 6
shows the regional market share of the incumbent electricity supplier
in each region. The incumbent supply group is identified in brackets
alongside the name of the region.
ELECTRICITY REGIONAL MARKET SHARES (DECEMBER 2007)
Source: Ofgem analysis
Retail market concentration
28. In some markets there may be many buyers and sellers.
In others, the market may be concentrated in the hands of a very
small number of participants. In extreme cases there may be only
one seller (a monopolist) or one buyer (a monopsonist). The level
of market concentration can, therefore, provide further clues
as to the nature of competition. Very generally, the more concentrated
the market, the weaker the competitive influence firms are likely
29. The Herfindahl-Hirschman Index (HHI) is one method
of measuring the level of concentration and is part of the conventional
toolkit used by competition authorities as part merger assessments.
The HHI takes account of the differences in market participants'
size and it is calculated by summing the squares of the market
shares of all the firms engaged in the market. The maximum that
an HHI can be is 10,000. The OFT consider that a market with a
HHI score of above 1,000 would be regarded as concentrated and
a score above 1,800 would be regarded as highly concentrated.
That said, care should be taken in interpreting HHI scores. For
instance, in comparing HHIs in different markets, account should
be taken of the different cost structures in operation.
30. Tables 6 and 7 show the HHI in the national gas market
and the average HHI across the 14 regions in electricity respectively.
These tables illustrate that both sets of HHIs have been declining
steadily over the past five years.
MEASURE OF CONCENTRATION (HHI) IN THE GAS MARKETS
||Dec 2003||Dec 2004
||Dec 2005||Dec 2006
MEASURE OF CONCENTRATION (HHI) IN THE ELECTRICITY REGIONAL
||Dec 2003||Dec 2004
||Dec 2005||Dec 2006
|Average across Regions||4,892
Source: Ofgem analysis
Small new entrants
31. As well as the "big six" domestic suppliers,
there are six active small suppliers licensed in the energy market.
In a number of cases, these suppliers offer products in niche
markets. For example, Ecotricity and Good Energy offer "green"
products or tariffs. One newer supplier, First Utility, is offering
a smart meter to its customers, complete with a home display unit,
and Utilita is offering competitive pricing focused at PPM customers.
In the small and medium enterprise (SME) market three new entrants
are Opus, Corona and Bizz Energy.
32. There are also other active small suppliers who are
not licensed but have ongoing arrangements with more established
suppliers. These companies may provide specialised social offerings
such as EBICo. EBICo is a not-for-profit energy company that offers
PPM customers the same unit price as customers paying by other
payment methods. This company obtains energy from one of the larger
suppliers, but has separate pricing arrangements.
33. While these suppliers have been gaining customers,
they have less than 0.5% of the market. As part of the probe we
will be looking to understand the reasons why small new entrants
have not been able to enter the market more effectively.
Q2. Whether there is effective competition in the wholesale
markets for gas and electricity
34. In wholesale markets, as in retail markets, a range
of information is used in assessing the nature of competition.
Below we consider evidence on price movements, market shares,
liquidity in the market and also the interaction between the UK
and continental markets.
35. Understanding price developments is key to understanding
whether competition is operating effectively. In particular, we
need to understand whether price levels and changes in prices
are driven by changes in demand or supply (ie cost) conditions
or whether firms are exploiting market power and raising prices
above competitive levels. Below we present evidence on the factors
we view as having contributed to recent increases in wholesale
price levels. The evidence suggests that recent wholesale gas
and electricity price increases appear to be largely driven by
the main cost drivers.
Wholesale energy price increases
36. To understand the determinants of electricity prices,
it is helpful to note that a significant share of GB electricity
generation is gas and coal fired (around 75%) as shown in Figure
7 below, this is important since these sources of generation are
usually the ones called on when an extra unit of electricity is
neededie they are the marginal source of supply. Both these
energy sources are exposed to the international markets and can
consequently be affected by price movements in these markets.
GB ELECTRICITY GENERATION CAPACITY (2007)
Source: National Grid
37. High world oil prices are reflected in gas prices,
particularly since the GB market is now increasingly exposed to
the European markets where oil and gas prices are closely linked
as a result of the market's structure.
The price of all four main energy sources (coal, oil, gas and
electricity) have increased significantly between August 2007
and now. Global Liquefied Natural Gas (LNG) markets were also
much tighter than winter 2006-07 due to unexpected higher global
LNG demand, particularly from Asian markets such as Japan. Charts
8b and 8c show that prices are expected to remain high for next
winter and summer 2009.
Figure 8a UK ENERGY PRICES MAY 2005MARCH
2008 (30 DAY MOVING AVERAGE)
Figure 8b FORWARD CONTRACT PRICE WINTER 2008-09
FOR ELECTRICITY, COAL, OIL (BRENT CRUDE) AND GAS
FORWARD CONTRACT PRICE Summer 2009 FOR ELECTRICITY, COAL,
OIL (BRENT CRUDE) AND GAS
38. In addition to upward pressure from global oil, coal
and gas prices, GB prices have also risen as a result of programmes
introduced by the government to tackle climate change ie Phase
II of the EU Emissions Trading Scheme (ETS) and the renewable
obligation for GB power generation.
39. Phase II of the ETS started in January 2008. As a
result, the price of carbon has increased from virtually zero
before the turn of the year to around 23/t (euros per tonne)
today. Generators will seek to recover the costs of these permits
through the price at which they sell their generation, either
in the wholesale market or to their own supply business. Even
though they receive some of the permits for free they will still
seek to recover the value of the permit, since otherwise it would
be more profitable not to generate and to sell the permit in the
EU ETS market. The impact of this increase in the carbon price
accounts for about an extra £9/MWh (pounds per Megawatt hour)
in wholesale electricity prices. Under the UK's National Allocation
Plan, large electricity generators receive slightly less than
half of their emission allowances free of charge, so the resulting
increase in the price of power represents a windfall gain for
these generators. Based on today's carbon prices, these free emission
allowances represent a windfall of emission allowances of around
£9 billion pre-tax over the five year compliance period.
ETS CARBON PRICE
Possible infrastructure constraints
40. Constraints on gas supply infrastructure can cause
peaks in prices, choking off consumer demand when the market believes
supply capacity constraints are significant. While the UK gas
infrastructure position is significantly better in 2007-08 with
more import and storage capability than in winter 2005-06, some
of the expected capacity is now coming on later than planned.
However, compared to winter 2006/07, last winter was very mild
both here and on the continent which helped to keep GB gas prices
lower than this winter to date.
41. Overall, evidence points to a combination of energy
price increases driven by price increases in global energy markets,
as well as, environmental policy levies. However, it is useful
to consider other indicators commonly used to assess the potential
effectiveness of competition in a market. The next section considers
evidence on market shares in the wholesale gas and electricity
Wholesale gas market shares
42. For market definition purposes here we consider the
relevant gas market to encompass those companies involved in supplying
gas on to the GB National Transmission System (NTS). There are
around 120 companies that were active in supplying gas onto the
NTS in 2007. Due to the large number of companies active in the
gas market we provide an overview of gas supply by broad supply
43. The gas supply shares for the four main gas delivery
sources in calendar year 2007 were: 70% from Beach (a combination
of more mature UK continental shelf (UKCS) and Norwegian fields);
12% Langeled (a pipeline carrying gas from Norwegian fields);
7% Bacton Balgzand Line (the new gas import pipeline from the
Netherlands, known as BBL); and the remainder from LNG, storage
and the gas interconnector (a two way gas pipeline, known as IUK,
connecting the UK with Belgium). Within each of these key sources
of supply a varying number of companies operate.
WHOLESALE GAS MARKET SUPPLY SHARES, BY SUPPLY SOURCE 2007
Source: National Grid
Gas market concentration
44. The level of market concentration can provide clues
as to the nature of competition. Generally, the more concentrated
the market, the weaker the competitive influences are likely to
be. As in the retail markets, the concentration of the gas and
electricity wholesale markets can be considered using estimates
of Herfindahl-Hirschman Indices (HHI).
45. One way of defining the market share for calculating
concentration ratios in the gas supply market would be the share
of gas deliverability in gigawatt hours per day
(GWh/day). On this basis, the overall gas wholesale supply market's
HHI is estimated to be 430, indicating a relatively low concentration.
46. As well as looking at the overall market it is also
useful to look at market concentration with respect to the source
of gas delivery. This is because different gas sources will be
marginal at different times, depending on the level of demand,
as illustrated in Figure 10. When a gas source is marginal it
is possible that operators have relatively more market powerenabling
them to influence prices to a greater extent. While the overall
HHI score indicates that there are a relatively diverse number
of players, some of the UK's individual gas supply sources are
relatively more concentrated.
ESTIMATED MARKET CONCENTRATION BY SUPPLY SOURCE
|Overall wholesale gas market||430
Source: Ofgem analysis
47. UKCS and storage are the sources with the lowest
market concentration, while BBL, LNG and Norway have relatively
48. Figure 11 shows daily gas supply for each supply
source. Gas supply has been ranked by gas demand, so day 1 on
the chart represents the highest gas demand during the period,
and shows the sources used to meet demand.
As demand increases more expensive sources of gas bid into the
market. While we do not know exactly what the costs of each supply
source are, the chart makes conventional assumptions about the
merit order of each source.
ESTIMATED GAS SUPPLY BY DEMAND ORDER, OCTOBER 2007 TO
Source: Ofgem analysis, National Grid data. (SRS is mostly
controlled by National Grid for balancing, although some capacity
49. Overall, Figure 11 gives an indication of the number
of days each supply source is at the margin. A concentrated marginal
source may have the ability to influence prices temporarily, bidding
them above a competitive level. Combining the gas load stack with
its components concentration ratios enables us to see which source
is at the margin and the sources concentration.
50. Table 9 below, shows the volume of gas delivered
per day during Winter 2007-08, as a share of the estimated total
volume each gas source can deliver per day (one way of measuring
capacity). The data showing the maximum volume of gas delivered
over the Winter 2007-08 period indicates that, even on these maximum
delivery days, each source is still likely to be capable of delivering
more gas. This provides evidence that it is unlikely that more
concentrated supply sources are able to influence the price of
gas at the margin, since other supply sources still have remaining
supply capacity to compete.
WINTER 2007-08 GAS DELIVERED AS SHARE OF ESTIMATED TOTAL
DELIVERABILITY (A MEASURE OF CAPACITY)
|Ave delivered gas
||Max delivered gas||Min delivered gas
Sources: Ofgem analysis
51. While some of the more concentrated gas sources are
at the margin during periods of peak demand, the following should
be noted: (i) there are very few days during which these sources
are the marginal source supplying peak demand, (ii) the supply
market overall has a relatively low concentration, (iii) total
supply capacity is in excess of peak demand, (iv) the total deliverability
of each source is in excess of maximum gas delivered (each source
has some additional margin which they can supply to the market),
and (v) wholesale energy buyers have the ability to hedge in advance
of the gas delivery day. Hence, on the basis of this evidence,
there are limited signs of one source being able to influence
market price to a significant extent.
52. In addition to examining the competitiveness of the
gas supply market it is also noteworthy that at certain price
levels a demand side response occurs. This can act as an additional
break on potential market power. The demand side response seen
in winter 2005-06 when gas supply capacity was tighter than normal
saw examples of this response.
Wholesale electricity market shares and concentration
53. Similar to the market definition for gas, we define
the wholesale electricity market as those players who supply electricity
to the National Grid. This definition hence overstates the case
for some electricity users since 12.7 gigawatts of generation
is embedded and not supplied to National Grid. This volume of
generating capacity is four times the output of the very large
Drax power station. Figure 12 below shows the market shares of
generators in Great Britain.
GENERATION OUTPUT SHARES, 2007
Source: National Grid
54. As for the gas market, we present HHI measures for
the electricity market. The HHI of the wholesale electricity market
(based on output) is estimated to be around 986, indicating a
relatively low concentration.
55. Looking ahead to the ownership of the generation
capacity anticipated to be entering commission, the concentration
outlook continues to be one of a relatively low HHI. Proposed
new generating capacity is being commissioned by the "big
six" as well as smaller independents. Figure 13 below shows
the forecast HHI and new generation capacity coming on stream
between 2008-09 and 2013-14.
CAPACITY IN MWh (LHS) AND CONCENTRATION OUTLOOK (RHS)
Source: HHI from Ofgem analysis, Capacity from National
56. Evidence suggests the six majors are becoming increasingly
vertically integrated. Vertical integration is often an efficient
response by firms aiming to minimise their transaction costs and
optimise their risk management strategies. For instance, since
the depth of the
day ahead electricity market is limited (due in part to the innate
inflexibility of certain types of generation plant), suppliers
can gain greater control of their potential supply liabilities
by owning generation capacity. In particular where they own flexible
plants, enabling a quick response to prices and demand.
57. However, vertical integration, can, in some instances
raise competitive concerns. In the energy market, a high concentration
of generation capacity in the hands of a small number of electricity
suppliers could preclude other players from gaining competitive
access electricity supply. Figure 14 below shows the estimated
supplygeneration balance across the power market, and we
can see that the main six retail suppliers are able to cover their
own domestic and SME supply liabilities with their own generation.
58. Around 55% of generation capacity is owned by the
six main domestic suppliers (see Figure 12), and the remaining
share would seem sufficiently large and flexible enough for potential
new entrant to contract to supply energy for their customers.
ESTIMATED SUPPLYGENERATION BALANCE BY SUPPLIER
Sources: Generation data: BERR and Elexon. Domestic supply
data: Ofgem data and analysis. I&C: Datamonitor Report "Q4
2006 B2B Market Share Monitor", 18 January 2007.
59. Liquidity refers to the ability to quickly buy or
sell a particular item without causing a significant movement
in the price. A liquid market will feature a large number of buyers
and sellers ready and willing to participate in the market at
all times. Liquid markets are important in ensuring that price
signals to participants are accurate and to allow participants
to adjust contractual positions without materially altering the
prevailing price. Short term exchange liquidity might also lower
barriers to entry for new suppliers.
It is important to note that a high level of liquidity is not
an end in itself, and is merely one indicator of a healthy market
as it makes new entry relatively easy.
60. It is worth noting that there may be a number of
benign explanations for falls in liquidity, for example improvements
in initial contracting, supply-demand balancing and forecasting
may cause liquidity to fall. In addition, more sophisticated products
(eg options) are a substitute for direct trading in physical products.
However, at very low levels of liquidity, confidence in traded
prices can be undermined.
61. There are a wide range of measures of liquidity,
including number of market participants, number of trades, volumes
traded and churn (the number of times a single unit is traded).
62. The majority of total volume traded in the UK is
traded over-the-counter (OTC), with most activity observed close
to real time and close to the delivery of the product, ie volumes
are highest for near term products (day-ahead, week-ahead, month-ahead).
63. The Financial Services Authority (FSA) conducts an
annual survey of energy brokers in the UK to determine total OTC
traded volumes, these are reported below.
ESTIMATED VALUE OF UK GAS MARKET
| ||Volume traded|
|Est value of market|
|Increase on 2005-06||226 (109%)
Source: Financial Services Authority
64. According to the FSA, the total volume of forward
traded gas through electronic or voice brokered services year
from 1 August 2006 to 31 July 2007 was 437 billion therms, an
increase of 109% on the previous year.
65. As with gas, the majority of trades in electricity
take place OTC, so that the share of trades over exchanges (usually
the APX or ICE) is very small as a share of total trades.
66. As in the gas market, parties trading gas in the
UK can utilise a wide range of trading platforms. The FSA annual
survey is reported in the table below.
UK ELECTRICITY OTC TRADING VOLUMES
|Est value of the|
67. The relative lack of depth to the exchange traded
power market relative to the gas market in the UK is likely, in
part, to be a function vertical integration. That is, power suppliers
own a sizable portion of their own generation capacity, when compared
to the UK gas market. In addition, the UK power market is less
well connected in infrastructure terms than some European power
markets. For instance, Germany and France are well connected,
allowing greater scope for trading power across borders.
68. The increased diversity of gas supply sources goes
towards strengthening competition in the wholesale market as well
as ensuring security of supply. Over the last few years the market
has delivered several new import infrastructure projects, including
the Langeled pipeline, the BBL interconnector, expanded capacity
of the IUK interconnector and LNG import facilities at Teeside,
Isle of Grain and Milford Haven. In addition to this a number
of new storage facilities have also been constructed by market
participants and others are in various stages of the planning
process. These have the potential to double the GB storage capacity;
if these projects gain planning permission the extra storage capacity
will assist the market in managing peak winter demand as North
Sea production continues to decline. Figure 15 shows the outlook
for LNG infrastructure capacity between 2007-08 and 2012-13.
NEW LNG INFRASTRUCTURE
Source: Ofgem estimates. National Grid data
69. We would expect a properly functioning market to
send price signals to investors encouraging them to build the
generation capacity to meet required future demand. Below we assess
some of the evidence on market signals for investment.
70. A standard industry measure of profitability in electricity
generation is to consider the "spark and dark" spreads.
These provide an indication of the expected return from investment
in new generating capacity over the short term. There is much
debate about the levels required to encourage new investment in
generation capacity, particularly in the context of current pressure
on new plant capital costs. Some of these capital costs may be
attributed to current high commodity prices. Forward spreads for
winter 2008-09 can be found below in Table 12. Different efficiency
factors can be used to calculate spreads, and it is noteworthy
that new gas plants are able to achieve efficiency rates of around
58%, where 49% to 54% might be more normal for existing plants.
WINTER 2008-09 FORWARD SPREADS (13/3/2008)
|Winter 2008-09 (£/MWh)
|Clean Spark (+O&M +Transportation)
|Clean Dark (+O&M +Transportation)||16.21
Source: Ofgem analysis, Bloomberg data. Efficiency factors
(heat rate) taken to be: Spark 54% and Dark 37%.
71. Long lead times for building plant, combined with
large fixed costs and long payback periods mean that market uncertainty
can lead to higher discount factors and risk coefficients being
used in making investment decisions. A variety of factors can
affect these investment payback calculations, not least of which
is confidence in the market.
72. Rates of proposed investment in new generation capacity
provide some evidence that the wholesale market is encouraging
the private investment needed to meet future UK energy demand.
For each of the years in Figure 16 below, the first bar shows
the amount of generation capacity which is already in existence
or under construction; the second bar adds to this the generation
capacity not yet built but which has consent under section 32
or section 36 of the Electricity Act 1989; and the third bar adds
in all possible capacity from generation that has a connection
agreement with National Grid.
NEW GENERATION CAPACITY OUTLOOK
Source: Ofgem analysis. National Grid data.
73. The extent of investment in new generation capacity
we have seen over the last 10 years, as well as planned capacity,
suggest the market is functioning well and encouraging investment.
74. GBEuropean energy market interaction has increased
significantly over the last few years, and short term prices on
the GB, Zeebrugge (Belgium), and TTF (the Netherlands) markets
are becoming increasingly correlated. That said European market
liberalisation is crucial to increase price transparency and increase
European and GB market efficiency. We cover the GB markets interaction
with European markets in response to question 5, below.
Q3. The implications of growing consolidation in the energy
75. A discussion of the impact that consolidation may
have had on energy market competition is covered in response to
questions 1 (on the retail market) and 2 (on the wholesale market).
Ofgem's market probe will examine the nature of competition in
the gas and electricity retail markets.
Q4. The relationship between the wholesale and retail markets
for electricity and gas
76. The volatility in energy prices means that the cost
of the gas and electricity is the largest and most difficult component
of energy supply cost to estimate. While network and environmental
cost will be subject to the same influences for all suppliers,
a supplier's actual energy costs depend on its own forward purchasing
strategyhow much gas and electricity it has bought to cover
customer requirements at different times. In the more volatile
gas market we have witnessed, with wholesale gas prices rising
by around 40% to 60% over the last year (depending on the time
period measured), forward purchasing strategies are likely to
be an important determinant of cost.
77. A key decision a supplier makes in energy procurement
is what proportion of the energy should be bought ahead (hedged)
on the forward markets. If they don't buy all of their customer's
energy requirements in advance they must buy them at day ahead
or spot prices. Hedging reduces suppliers' exposure to the volatility
of day ahead and spot prices. But it also leaves suppliers in
a less flexible position, and more reliant on their forecasts
for their customer numbers and their customer demand being accurate.
The balance between hedging and buying at spot can impact heavily
on the wholesale costs faced by a supplier.
78. Britain has faced increased exposure to global markets
(from increased supplies being sourced through new infrastructure
connections with Norway and the Netherlands) at a time when wholesale
energy prices have increased significantly. The rise in energy
prices means that the spread of different wholesale energy prices
faced by a supplier also increases. Some suppliers are, therefore
likely to be more effective at buying low cost than others.
79. Figure 17 shows the correlation between the average
annual dual fuel standard credit tariff (the red line) and the
wholesale day-ahead energy price for an average domestic consumer's
(the green line). Wholesale energy costs are only one part of
the costs faced by suppliers, but do represent around 70% of the
total cost in the average 2007 domestic customer bill.
WHOLESALE AND RETAIL ENERGY PRICES, CONSTANT Q1 2008 PRICES
Source: Ofgem analysis, Heren and TheEnergyshop.com data
80. Wholesale prices rose between q2 2005 and q1 2006
and subsequently fell between q1 2006 and q2 2006. However, retail
prices did not fall to the same extent as wholesale prices between
q1 2006 and q2 2007. It is possible that this relationship results
from a combination of factors affecting suppliers. These factors
might include: (i) increases in environmental costs, (ii) increases
in charges to maintain the network, and (iii) heightened price
uncertainty in the European and global energy markets going forwardsuch
uncertainty could be manifesting itself in an aversion, on the
part of retail suppliers, to pass through price falls in the short
term, because the risk of short term prices increasing again might
be deemed to be high.
Q5. The interaction between the GB and European energy
81. The interaction between GB and European markets has
increased significantly in the last few of years. The declining
production of the UK continental shelf, the advent of new supply
infrastructure from Norwegian fields, and a new import pipeline
from the Netherlands
mean that the UK is becoming increasingly exposed to European
82. In this section, we examine the behaviour of GB gas
and electricity prices and infrastructure connections with Europe,
as well as providing an overview of the European energy market.
Gas: price differentials and infrastructure flows
83. GB gas supply infrastructure with the continent consists
of two major interconnectors, BBL
(flowing from the Netherlands to GB) and IUK
(flowing in both directions, to and from Belgium to GB). In addition
to this there are a number of pipelines supplying gas from UK
and Norwegian gas fields.
84. Figure 18 shows the correlation between day ahead
gas prices in Britain, Zeebrugge in Belgium and the Title Transfer
Facility (TTF), a gas trading hub based in the Netherlands. It
is clear that apart from a relatively short period around January
2006, there is a strong price correlation. This is likely to be
due in part to the commissioning of the BBL pipeline in late 2006.
GB, ZEE AND TTF DAY AHEAD PRICES
85. On examination of Figure 19 (showing IUK exports
from GB to Belgium and BBL flows from the Netherlands to GB) there
is some evidence that IUK flows respond to price differentials
between GB and Belgium. Broadly, where the Belgian price is higher,
flows to Belgium increase, and where the GB price is higher, flows
switch to GB. This is consistent with the reasonable price correlation
observed (particularly from January 2007 onwards) between GB,
Belgium and the Netherlands in Figure 18.
86. BBL is a one way pipeline between the Netherlands
and GB, and is generally used by UK suppliers for sourcing gas
under longer term contract. Since, flows are only one way it is
not possible for the BBL pipeline to respond in the same way as
the IUK interconnector, although some price driven behaviour may
be observedfor instance a drop off of flows between September
and October 2007.
IUK AND BBL FLOWS AND PRICES
IUK EXPORTS FROM
Sources: Bloomberg, National Grid.
87. It is noteworthy, however, that the depth of the
short term markets in the Netherlands and Belgium is very limited
in comparison with the GB market. The vast majority of European
gas is traded on long term (oil indexed) contracts. Consequently,
only a small share of European supply is sourced from the Belgian
and Dutch markets, meaning the large GB wholesale market heavily
influences day-ahead Belgian and Dutch prices. The prices European
energy suppliers actually face are relatively opaque.
88. In relation to flows from Norwegian gas fields, we
initially observe a reduction in flows to the UK in winter 2007
compared to the previous winter, while at the same time flows
to the continent increased. Although GB gas supplies have been
adequate this winter, this fall may initially seem of concern.
89. One possible explanation for this drop in early winter
is that the GB market is receiving this gas via BBL instead. It
is clear from Figure 20 below that GB received around 10-15 million
cubic metres (mcm) per day more through BBL this winter (November
and December 2007) than last winter. It is also clear that the
significant fall off in Norwegian flows to GB in the last week
of October 2007 coincides closely with the ramp up of BBL (approx
25 mcm/day). In addition to Norwegian gas the BBL pipeline can
be used to source flows from and through Germany and Belgium.
90. Another explanation for the drop off in flow to GB
in October/November could be a combination of production outages
at Norwegian fields, (eg Njord, Kviteebjorn, Ormen Lange) and
continental buyers exercising flexible terms in their contracts
to increase their supplies. For instance, figure 20 shows a year
on year fall in flows to GB and an increase in flows to Germany,
France and Belgium from October/November onwards.
NORWEGIAN, IUK AND BBL IMPORTS
Source: Bloomberg, National Grid
AVERAGE MONTHLY PIPELINE UTILISATION
Source: Ofgem analysis. NPD, Fluxys, GRTgaz, and National
UK-European gas liquidity
91. Trading in the UK gas market is significantly higher
when compared to European markets in recent years, the open market
for wholesale gas in GB is the most mature energy market in Europe,
both in terms of traded volume and value. Greater market liquidity
is generally thought to increase market efficiency, and as such
is generally accepted as a feature of a well functioning market.
As shown in Table 10, the volume trade on the GB gas market has
increased rapidly, year-on-year (YoY) between 2005/06 and 2006-07
the volume of trade rose 109%, and the value of trade on market
increased by 24%.
92. Figure 22 showing GB and European gas trading statistics
from the FSA illustrate that the volume of gas traded on the open
market in GB is significantly greater than that traded on the
European open market.
GB-EUROPEAN ANNUAL GAS TRADING VOLUMES (OVER-THE-COUNTER)
Lack of liberalisation and transparency in euro market
93. The lack of effective gas market liberalisation on
the continent means that the GB market is unlikely to get the
full benefits of gas producers and suppliers seeking out the most
attractive destination for their gas and supplying gas to GB at
times when our market has relatively high prices. Related to this
point is the fact that European gas markets are far less transparent
than the GB market. This can make it difficult for market participants
to assess where Norwegian flows are going and to track movements
in customer demand on a daily basis. This uncertainty is likely
to add to the daily and within day volatility of GB spot prices,
increasing prices and the risk premium that customers need to
pay to fix prices.
Euro gas contracts oil indexed
94. A feature of the less liberalised continental gas
market is that contract gas prices are generally linked to oil
prices through pricing formulas meaning that contract gas prices
adjust to oil prices with a lag. Oil prices have increased over
the last year to over $100/barrel. This means that European buyers
can take the opportunity to arbitrage their long term contract
gas price against the spot gas price using the flexibility they
have to vary the volumes they take under contract. It also means
that European gas prices rise to higher levels than gas supply
and demand fundamentals might suggest they should, which in turn
means that GB prices have to be higher to attract marginal gas
supplies for domestic consumption.
95. European long term contract prices move with changes
in the oil prices with a lag of around six to nine months. Therefore,
we expect the high sustained oil price to continue to be a factor
behind high UK and European gas prices looking forward.
96. The GB electricity market is heavily influenced by
international coal and gas prices, as shown in Figure 6, 38% and
37% respectively, of GB power generation is fuelled from these
fuel sources. In addition to a 2 gigawatt interconnector with
France, the remainder
of GB generation is from nuclear, oil, and renewable sources.
GB-France power price correlation
97. Figure 23 below shows the correlation between GB
and French electricity prices. Detailed Ofgem and National Grid
analysis suggest there is strong evidence that the interconnector
is functioning well, and responding as expected to price differentials.
98. Taking into account the limited 2GW capacity, the
GB and French power prices show a strong correlation. More recently
the spike in prices in December 2007 saw French power reach above
GB prices peak at around £93.
GB AND FRENCH ELECTRICITY PRICES
99. Overall, GB and French prices show a correlation,
which has increased more recently as gas infrastructure and supply
sources have become more interlinked.
Q6. The effectiveness of regulatory oversight of
the energy market
100. Strong independent regulation has a key part to
play in maintaining a well-functioning market. Companies want
to know that the investment climate will remain stable and that
they will not face unacceptable burdensotherwise they may
invest their money elsewhere. Customers want to know that if their
supplier does not play by the rules, firm action will be taken
and consumers will be protected. It is important to consider whether
these challenges are being met.
101. Let us consider the customer perspective first.
Markets are never perfect. Sometimes customers are treated unfairly
and sometimes companies behave in an anti-competitive way. We
have a range of powers at our disposal to deal with this activity
and these can be considered across four main areas: our ongoing
monitoring of the markets; the informal influence we can exercise
through encouraging best practice and "naming and shaming"
companies; the rules we place on suppliers in their licences;
and the formal powers we can exercise under the Gas and Electricity
Acts and competition law.
102. Monitoring the market: We conduct surveillance into
the retail and the wholesale energy markets, analysing prices,
supply, demand and market activity, plus more specialised analysis
of individual areas eg quantitative analysis of the relationship
between wholesale and retail prices. This constant market monitoring
can bring problems to light and lead to action under our powers
103. Naming and shaming: In 2007 we "named and shamed"
two suppliersEDF Energy and Scottish Powerwho had
not passed through falling wholesale prices to their customers.
Within days they had announced retail price cuts for their customers.
In June 2007, we singled out Npower and British Gas for their
prepayment meter (PPM) tariffs relative to other suppliers urging
customers on these tariffs to consider switching away. In February
2008, we named and shamed Npower for not doing as much as other
suppliers to help customers in debt.
104. Placing obligations in suppliers' licences: In our
2007 supply licence review we lifted certain conditions which
were either redundant or no longer required given other protections,
to help promote new entry and the development of new tariffs and
services. For vulnerable customers however we strengthened the
range of protections. For example, we have extended a ban on gas
suppliers from disconnecting older customers over the winter to
electricity suppliers. New obligations now require the timely
recalibration of prepayment meters after a price change, following
earlier intervention by Ofgem and guidelines to bring three suppliers
into line. We have maintained requirements in the licence on suppliers
to provide a full range of payment options to suit customers'
needs. We have broadened the requirements on suppliers to provide
information to customers on the dangers of carbon monoxide poisoning
and the benefits of fitting carbon monoxide alarms. This is in
addition to the existing requirement to provide free gas safety
checks for pensioners in receipt of certain benefits.
105. Using powers under energy and competition legislation:
Ofgem has a range of powers under the Gas and Electricity Acts
and under the Competition and Enterprise Acts. We have used these
to good effect to help make the market work better for customers.
We have in the past taken action against suppliers for mis-selling
and for blocking customer transfers, including the imposition
of a £2 million fine. More recently we have used the Competition
Act to tackle anti-competitive behaviour by National Grid in the
gas metering market which has harmed competition and consumers.
Our investigation resulted, in February 2008, in the imposition
of a £41.6 million finethe biggest ever fine for this
type of competition law breach. The Enterprise Act gives us powers
to refer the market to the Competition Commission, and to gather
detailed financial information from the companies we regulate.
It also gives the Office of Fair Trading (OFT) the power to prosecute
individuals who engage in cartels. We have drawn on some of these
powers in the past, during the wide-ranging wholesale market probe
in 2004-05, and we are currently making use of them again as part
of our investigation into the energy supply markets.
106. Although we have not seen conclusive evidence that
the market is failing, we know that customer confidence is vital
in order for a market to function welland it is clear in
this case that customer confidence has been damaged. Our investigation
into the energy supply markets, announced on 21 February, will
look at whether the market is working well for all consumersand
not just particular groups such as those who are on the cheapest
107. We expect to publish our initial findings before
the end of September. If we conclude that further action is required,
this could take several forms. For example, we could refer the
market to the Competition Commission for another investigation
or we could take more immediate action under our existing powers
eg investigating and imposing penalties on companies that have
broken competition law; changing the licences under which all
companies in the energy market have to operate; recommending legislative
changes to the government; or campaigning to promote customer
awareness and participation in the market.
108. If anyone has any evidence of anti-competitive behaviour,
we urge them to bring it to us. We will not hesitate to use our
powers to investigate and, if necessary, impose penalties on any
energy company that has been found to have broken competition
109. From the companies' perspective, Britain's stable
regulatory regime has proved attractive to investors. Between
privatisation and 2006 over £80 billion has been invested
in new oil and gas production from the North Sea; over £30
billion in the gas and electricity networks; and £14 billion
in new electricity generation stations and in refurbishing coal
fired stations to create a more diverse generating mix. This is
clearly good for energy companiesand it is good for consumers
too. Britain's domestic gas supplies are declining faster than
expected and we have ambitious targets for renewable energy. In
order to secure our energy supplies and protect the environment,
therefore, unprecedented levels of investment are required. In
addition, where new players enter the market, competition increases
and customers benefit from greater choice.
110. We must therefore maintain a stable regulatory regime
which gives investors confidence and removes unnecessary administrative
burdens, whilst being prepared to boost consumer protection where
it is necessary and proportionate. In the energy supply markets,
Ofgem is working to tackle barriers to entry and give more choice
to customers. In 2007 we cut the energy supply licence from 160
pages to 60 pages, removing barriers to entry like the "28
day rule" which many saw as preventing suppliers from offering
long term energy services such as the installation of household
electricity generation or measures to improve energy efficiency.
We also amended the rules to make it easier for suppliers to install
smart meters which have the potential to help cut emissions and
improve the accuracy of customer bills. All these steps help to
encourage investment in the market.
111. Overall we believe that our work is helping to support
the operation of the market whilst providing customer protection
Q7. Progress in reducing fuel poverty and the appropriate
policy instruments for doing so
112. A household is considered to be in fuel poverty
when it spends more than 10% of its income on gas and electricity.
Three main factors are responsible: high energy prices, low incomes
and poor housing.
113. The number of customers living in fuel poverty declined
steadily between 1996 and 2003, with little movement in overall
figures in 2004. These reductions resulted from a combination
of improvements to income (such as the new pension credit arrangements),
improved energy efficiency (primarily through the Energy Efficiency
Commitment and Government funded fuel poverty schemes such as
the Warm Front and its counterparts in Scotland and Wales) and
reductions in energy prices. The Government estimates that nearly
three quarters of the reduction in fuel poverty numbers in England
between 1996 and 2005 was as a result of improvements to incomes,
20% was due to improving energy efficiency and only 5% was due
to falling fuel prices.
In Scotland, half of the reduction in fuel poverty between 1996
and 2002 was attributed to rising incomes, 35% to falling fuel
prices and 15% to improvements in energy efficiency.
114. However, the number of households in fuel poverty
has risen in the last three years as a result of electricity and
gas price increases. Current estimates suggest that there were
over 4 million households in fuel poverty in the UK in 2006.
Ofgem is committed to doing all it can to ensure prices are no
higher than they need to be. However, prices are unlikely to return
to the lower levels of the 1990s because of rising global energy
demand and higher commodity prices. An enduring and sustainable
solution to fuel poverty will, therefore, need to focus on the
issues of housing and incomes which are principally for Government
115. Significant strides have been made to improve the
energy efficiency of housing and to install cost effective heating
systems through the Decent Homes standard, the Warm Front programme
and the Energy Efficiency Commitment. However, Warm Front is focussed
on private sector housing. Social housing, on the other hand,
is covered by the Decent Homes Standard and this provides for
lower standards of thermal comfort.
116. We encourage Government to take a "find and
fix" approach, to ensure that when someone is identified
as being in fuel poverty a comprehensive solution is provided
to help lift them out. Joined-up action across Government is therefore
essential. For example, we would encourage data sharing between
the Department for Work and Pensions, the EAGA Partnership and
energy suppliers to improve the targeting of the help available.
In addition, consideration could be given to extending Warm Front
so that customers are also referred to their supplier for tariff
advice or to go onto their social tariff, where applicable.
117. In addition, Government should stay focussed on
the vital role of the tax and benefit system in raising incomes.
Benefit entitlement checks can help ensure vulnerable customers
are getting their fair share of the millions of pounds of unclaimed
benefits. Government could also review the Winter Fuel Payment
and refocus the payments on those who need them the most. Furthermore,
additional funding for fuel poverty programmes could be made available
by recycling revenues from environmental schemes. For example,
Ofgem identified a windfall to electricity generators of up to
£9 billion of permits which are allocated for free under
Phase II of the European Emissions Trading Scheme (EU ETS) from
2008 to 2012. This windfall could be used to help customers in
fuel poverty. If Government were to auction allowances for the
following phase of EU ETS, some of the revenue generated from
this could also be used to fund further measures to help tackle
fuel poverty and environmental improvementsas recommended
by Ofgem in our submission to the Government's 2006 Energy Review.
118. On prices, vulnerable customers can make big savings
if they are in a position to switch supplier or payment method
and if the support available from Government and suppliers is
better targeted. Customers who have never switched supplier can
make big savings by switching. On average, across all regions,
switching savings amount to £125 for a PPM customer, £93
for a standard credit customer and £56 for a direct debit
119. As well as savings available from switching payment
method and supplier, a number of suppliers offer special discounted
tariffs and packages to vulnerable customers that meet certain
criteria (such as those in receipt of government benefits). Ofgem
published two reports in 2007 in order to "shine a light"
on suppliers' social measures, encourage best practice and inform
consumer agencies of the range of assistance available.
120. Ofgem, along with other agencies, works to help
improve consumer awareness of these choices and to help vulnerable
customers access the benefits of the competitive energy market.
For example, Sir John Mogg chairs Ofgem's Social Action Strategy
Review Group and will host an Ofgem Fuel Poverty summit in April.
This Summit will focus on identifying ways to ensure that vulnerable
customers are able to take full advantage of the savings available
by switching supplier. Where switching is difficult or not possible,
we will look at what other help may be available to reduce the
amount customers have to pay for their fuel.
121. We are also working with Citizens Advice to develop
and launch a pilot programme to help educate low income and hard
to reach customers on how to make better choices in the energy
market. If the evaluation of this pilot proves successful, we
are hoping that the Government will consider funding a national
rollout of this programme.
122. As part of Ofgem's energy supply markets probe,
referred to above, we are focussing in particular on whether competition
is benefiting all customers. This includes those who pay by PPM
and Standard Credit, given the concern about the differentials
between these tariffs and Direct Debit. In addition, we will look
at whether there are any immediate actions we can take in this
area to improve consumer awareness of the options available. Furthermore,
we are looking to tackle any barriers that unreasonably prevent
customers switching supplier. This work includes a review of suppliers'
policies on blocking customers who are in debt from switching.
123. Given the challenge of targeting help, we would
recommend that the Government keeps up the "Winter Initiative":
a practical way to improve targeting, using Department of Work
and Pensions (DWP) data, of suppliers' social measures as well
as the energy efficiency help available from the Government under
the Warm Front scheme and the suppliers through the Carbon Emissions
Reduction Target. Ofgem led the first such initiative in winter
2006-07. The Government should also consider how it could facilitate
data sharing between the DWP, HM Revenue and Customs and energy
suppliers to improve the targeting of their social programmes
to assist those who need them most.
124. I hope that this information and analysis is useful
to the Committee. If Members have any further questions, my colleagues
and I would be happy to explore these issues in more detail, either
in oral evidence or in a supplementary memorandum.
1 April 2008
The retail markets are often also referred to as the supply markets. Back
Independent Gas Transporters and Independent Distribution Network
Operators represent a very small exception to this. These operators
sometimes install systems on new housing developments. Back
"Energy market competition in the EU and G7: preliminary
2006 rankings", prepared by Oxera for BERR, October 2007. Back
The savings shown in these tables do not include additional savings
available through online deals or switching to dual fuel. They
sum the savings from moving from the incumbent gas supplier to
the best gas offer, and moving away from the incumbent electricity
supplier to the best electricity offer. Back
The Renewable Obligation increases from 7.9% to 9.1% on 1 April
2008. The RO currently adds around £10 to an electricity
bill per year and is set to rise to around £20 a year by
2015. The Carbon Emission Reduction Target (CERT) replaces the
Energy Efficiency Commitment in April 2008 and it is estimated
that the cost will increase from £18 to £38 for the
average customer bill in 2008. The cost of the European Emissions
Trading Scheme (EU ETS) is estimated at £31 per customer
for 2008 and this is already reflected in the wholesale electricity
cost. Network charges to pay for upgrades to invest in Britain's
pipes and wires increased on average by around £11.37 for
gas and £1.37 for electricity in 2007-08; and in 2008-09
they will rise on average by around £2 in gas and £1
for electricity for a typical domestic customer. Back
The figures show the number of meter points that are transferred
from one supplier to another. Therefore, customers who switch
more than once will be counted more than once in the annual switching
The Ipsos Mori consumer omnibus survey is available from our website
Datamonitor's report is available from www.datamonitor.com. Back
Specifically, it is because gas prices are linked to oil prices
through formulae in long term contracts. Back
For more information on HHIs see paragraph 28. Back
This analysis combines a number of data sources, reflecting Ofgem's
best HHI estimate at the time of writing. Examining each source
of gas delivery on an individual basis can provide a more rounded
Excludes Short Range Storage (SRS) controlled by National Grid. Back
For example, since gas from UKCS is likely to be the cheapest
to supply, this is the first source to satisfy demand. Back
Based on a scenario where all generation which has a connection
agreement with NG gets built. Back
Depth is defined here as the volume of day ahead power can be
bought in the short term markets. Back
For example, Drax is a large flexible coal plant of between 3
and 4 Gigawatts. Furthermore, much of the new renewable, as well
as new conventional, build is not owned by the main six suppliers.
See Figure 11. Back
Since the financial risk of not being able to buy generation to
meeting their supplier obligations could be reduced. Back
As some voice and electronic brokered services are cleared through
exchanges, energy traded on exchanges are excluded from this analysis
to avoid double counting. Back
The spark spread is the difference between the electricity price
and the price of gas used to generate it. The dark spread is the
difference between the electricity price and the price of coal
used to generate it. Clean spreads also take into account the
cost of buying allowances to emit CO2 under the European Emissions
Trading Scheme (EU ETS). Back
O&M stands for Operation and Maintenance. Many GB coal plants
are built near disused GB coal fields and not near to coal sources,
such as ports. These adjustment factors can, therefore, play a
significant role on indicating efficiency. Back
The weighted average of day ahead gas and power prices. Back
The increased volatility of global commodity prices (not least
of which is crude oil rising to $100 barrel) is likely to be a
good indicator of increased uncertainty. Back
The BBL pipeline entered commission in late 2006 and provided
around 7% of UK gas supply in the calendar year 2007. See chart
in Q2-BBL pipeline. Back
Bacton Balgzand Line (BBL) entered commission in Q3 2006. Back
Interconnector UK (IUK). Back
UK peak demand recorded in 2002 was 61.7 GW-source: DTI. Back
French peak thought to be driven by French power station outages
due to strikes. Back
The UK Fuel Poverty Strategy, 5th Annual Progress Report (2007). Back
Scottish Household Condition Survey (2002). Back
Ofgem estimates based on Government's Energy Review Report-July
2006 (projected figures for 2005 and 2006). Back
The Warm Front scheme sets a target SAP rating of 65 for properties
benefiting from remedial works. The Decent Homes Standard requires
a SAP rating of greater than 35. Back