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Energy regulator's ultimatum gives 'big six' firms two months to reform or face a full-scale competition commission inquiry
Energy companies have been given "one last chance" to stop customers from being ripped off or face a full-scale Competition Commission inquiry.
Ofgem, the energy regulator, said it had found evidence that the 'big six' suppliers – EDF, British Gas, E.ON, RWE npower, Scottish and Southern and Scottish Power – increase customers' bills more quickly when wholesale energy costs go up than they cut them when costs fall.
Alistair Buchanan, chief executive of Ofgem, has also ordered the power companies to simplify the bewildering array of 350 different tariffs available. He said there was still not enough competition in the market. He was speaking as Ofgem announced the results of a four-month investigation into the energy market.
Buchanan said he was giving the industry just two months to fall into line before deciding whether to recommend a full-scale two-year competition investigation. He said the companies would be "on the canvas" after Ofgem had delivered a "left hook" with its new set of demands.
But industry executives said they thought the likelihood of a full investigation was now remote and dismissed his comments as rhetoric.
The main new demand is for energy companies to auction on the open market about 15% of the power they generate, to make it easier for small independent suppliers to compete. The big six enjoy a virtual monopoly as they are all vertically integrated – they have their own power stations to supply their customers. Small suppliers struggle to purchase electricity on the open market.
However, at least two of the big six have already proposed making these changes. Energy experts said the changes would not radically boost competition because only companies with large balance sheets can take the risk of energy prices slumping.
Ofgem also said it would require companies to reduce the complexity of tariffs on offer which make it hard for customers to compare prices and switch supplier. The number of tariffs for customers to choose from has increased by more than 70% since 2008 to almost 350. More deals are likely in the future under the government's Green Deal energy efficiency programme.
Under Ofgem's proposals, companies will only be able to offer a single tariff for each payment method for customers who are not bound by fixed contracts.
Ofgem has also proposed making clearer the requirements it introduced after its last market investigation in 2008 to increase transparency. Since then, companies have had to publish a breakdown of their energy costs and their retail margins every year – but they use different accounting methods. They also have to provide annual energy statements to customers showing how much electricity and gas they use, although many consumers find them confusing.
The regulator also launched an investigation into Scottish Power and why dual fuel customers paying by cheque are charged much more than those on direct debit.
Ofgem's investigation is the 18th inquiry into the energy market by politicians and regulators. With energy companies increasing bills last winter to near-record highs, Ofgem came under pressure again to investigate whether companies were making excessive profits. The industry has been lobbying politicians and the media, warning that if there were a Competition Commission referral, they would delay spending billions of pounds on nuclear power and wind farms until the outcome was clear.
Energy minister Charles Hendry appeared to back the industry last month when he said the big six could be scared off from investing in the UK.
The government is also considering whether to withdraw the regulator's consumer powers. It will announce its decision within weeks of the conclusion of the two-month deadline.
Buchanan denied he had come under political pressure but admitted there was "creative tension" between the government and the regulator: "The government will have its views on certain things. But we will have our own view and will express it."
Dieter Helm, an economist specialising in energy regulation and a former government adviser, criticised the Ofgem demands as little more than a "sticking plaster".
He said: "I would have thought there was a prima facie case for investigation. They should say 'fair enough let's bring in a third party'. A more substantial investigation would be sensible and clear the air. This continuous set of interventions is hardly helpful from a company point of view."
He claimed Ofgem wanted to avoid a Competition Commission referral because it would examine the regulator's role in setting up the current system. "It looks like they were desperate to avoid going to the Competition Commission. It's more sticking plaster. It would call into question Ofgem's past judgment."