Energy consumers could have lost out by £2 billion per year

4 March 2014

Research findings contributed to a change in Ofgem policy that ended an energy competition clause that was potentially costing households up to £2 billion a year. This month sees the publication of the first annual competition review into the energy sector.

In September 2009 Ofgem, the regulator of UK electricity and gas markets, imposed a non-discrimination clause on energy retailers, preventing them from charging different prices in different regions. Since privatisation, energy suppliers - who traditionally cover one region ('in-area') - have been able to compete in other regions ('out-of-area'). Ofgem was worried it would not be fair if providers offered cheaper prices out-of-area than in-area.

ESRC-funded academics at the Centre for Competition Policy (CCP) at the University of East Anglia believed this move was likely to reduce competition and cause prices to rise rather than fall. This would hurt all consumers, including those who were vulnerable.

Since Ofgem had implemented the clause for three years in the first instance, this gave an opportunity for the CCP to carry out research and lodge official submissions ahead of the next review.

Professors Morten Hviid and Catherine Waddams carried out theoretical research showing how non-discrimination reduces the intensity of competition in standard tariffs between suppliers. Since the potential gains to consumers fall as a result, this reduces the incentives for households to switch.

They argued it was more likely that suppliers would close the gap by increasing out-of area prices rather than reducing them in-area. CCP has since carried out empirical research showing that was what had indeed happened: after the clauses were introduced, new entrants priced closer to the existing supplier - meaning they were not competing as hard to gain customers.

Using the research, Professor Stephen Littlechild, a former electricity regulator, then estimated that the consequent reduction in competitive pressure raised prices by about 6 per cent, costing the average household £400 over six years. He and the CCP researchers made submissions to Ofgem urging them not to renew this measure and it came to an end in 2012. The potential cost to consumers was £2 billion per year according to the researchers.

Impact

  • In 2008 and 2009 CCP made three submissions to Ofgem as part of their consultation on non-discrimination clauses. Their arguments were taken up by other influential commentators.
  • In 2010 and 2012 Ofgem invited CCP to provide consultancy advice on its latest review of the retail market.
  • In 2012 CCP and Professor Littlechild made submissions to Ofgem, based on evidence from CCP research, urging them not to renew the non-discrimination clauses. Ofgem announced it would allow the non-discrimination clauses to lapse.

Further information:

ESRC Press Office

University of East Anglia

Notes to editors

  1. The Economic and Social Research Council (ESRC) is the UK's largest organisation for funding research on economic and social issues. It supports independent, high quality research which has an impact on business, the public sector and the third sector. The ESRC's total budget for 2013/14 is £212 million. At any one time the ESRC supports over 4,000 researchers and postgraduate students in academic institutions and independent research institutes.
  2. The University of East Anglia (UEA) has played a significant role in advancing human understanding and graduated more than 100,000 students. It has attracted to Norwich Research Park some of Britain's key research institutes and a major University Hospital, and made a powerful cultural, social and economic impact on the region.