Energy regulator Ofgem today (27 March) referred the sector to the UK’s new Competition and Market Authority (CMA) after finding evidence of “possible tacit coordination” between the country’s biggest brands over pricing. Although tacit coordination is not a breach competition law, it reduces competition and “worsens outcomes” for consumers, the regulator adds.
Ofgem found the sector’s retail profits jumped from £223m in 2009 to £1.1bn in 2012, with no clear signs of companies reducing their own costs. The rising prices have sapped customer confidence in energy companies, according to Ofgem, which revealed nearly half (43 per cent) of homeowners are willing to engage with the market to get a better deal.
The CMA will investigate several initiatives to make the market “clearer” for customers, including the introduction of smart meters and by encouraging smaller players to enter the market.
Dermot Nolan, chief executive of Ofgem, says the CMA has “powers” needed to address any “structural barriers” preventing the sector from being transparent. Ofgem has come under fire from politicians and consumers for not doing more in recent years to curb annual price rises, which came to head last year when Labour pledged to replace the regulator should it win the 2015 general election.
Nolan adds: “Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices.”
Richard Lloyd, executive director at the consumer group Which?, said a “full scale” competition review was a “hugely important step towards restoring consumer trust”.
Video: Briitsh Gas response to Ofgem’s ‘State of the Market’ announcement
The big six, which supply around 95 per cent of all energy in the UK, launched a preemptive strike earlier this week ahead of Ofgem’s referral. Through Energy UK, the industry trade body, the brands claimed competition is stronger than it has been for a decade. Around 18 brands are supplying energy nationwide, the highest number since 2005.
SSE revealed yesterday (26 March) that it was freezing prices for almost 26 months as part of what it claimed will be a wider “positive agenda” for customers. Industry observers predict others will follow as they look to cast their brands in a more positive light through customer promises.
Challenger brand Ovo, however, says price freezes and increased marketing investment is not the tonic to changing customer perceptions of the industry.
Charlie Smith, marketing director at Ovo, told Marketing Week: ”A price freeze is not the panacea to the energy market’s ills. It’s not [the answer] because we’ve seen [wholesale] prices go down consistently over the past six months to their lowest point. Wholesale costs are at the lowest point they’ve been in a year.
“From a marketing point of view, the competition review means brands should be at their very best and be very open and be very transparent. It’s not about throwing loads of money at advertising or marketing necessarily. SSE’s price freeze is interesting but the bottom line is it’s still £180 more expensive more than Ovo. Marketing’s about recognising that customers understand where they can get value today, not the promises of a better tomorrow that may never happen.”
Jane Westgarth, senior market analyst Mintel, says there will be a “big push” from the sector’s dominant brands to trust and transparency amid the CMA’s review. Discounts and packages to reward loyal customers alongside increased marketing around customer services and added value services are likely to follow, she adds.