Intervening further in the energy market would be giving up on competition
Today the energy market is more competitive than ever before.
The sector is almost unrecognisable from that of two years ago. Since 2014, we have seen an exponential growth in the number of suppliers, doubling from 24 to 50 today. These new entrants, each with their own business model and ethos, are increasing choice.
And consumers are voting with their feet. Nearly five million customers changed supplier last year and, importantly, twice that number made a change with their existing supplier.
And the numbers continue to grow with 1.3million customers already switching this year. Collectively smaller and mid-tier suppliers now have a market share approaching 20%, more than some of the larger suppliers individually.
Every year 16% of consumers switch energy supplier, more than in many other sectors, including mobile phones (14%), broadband (9%) and current accounts (3%). And it is not just those ‘savvy switchers’ benefiting from making a change either, with new research showing a third of those switching last year did so for the first-time.
These positive developments ought not be underestimated or dismissed lightly by the Government or consumer groups.
This environment means it is in suppliers’ interest to keep prices competitive, to innovate and offer good customer service as they fight to keep and attract new customers, and get consumers onto the best tariff for them.
Yet despite this, the Government has repeatedly said they are “prepared to act” where markets are not working for consumers.
If 50 suppliers in the market, ever increasing switching levels and improving engagement and customer service are not signs of a competitive market in action, then I have to ask, what is?
The Government today is faced with a choice - to safeguard competition which has increased switching and engagement and brought countless new suppliers into the market or to undo all the progress of the last few years.
Only last year, the Government’s own competition regulator decided against introducing a wider price cap, instead opting for a cap for prepayment customers – which came into force last week.
Intervening further would in effect be giving up on competition – and giving up at a time when we need engaged consumers and competition more than ever.
My worry is that even very well intentioned intervention will undermine the transformation of the sector. And, more worryingly, lead to unintended consequences. We have seen this happen too many times already in the energy market.
We need competition to drive innovation and the emergence of new companies, technologies and business models. Free markets deliver innovation in a way that highly regulated markets simply cannot.
We must allow the remedies from the recent market investigation to be implemented, as consumer champion Which? have also argued.
This is not to shy away from action - quite the opposite. The industry is committed to working with the Government and regulator to deliver the CMA’s remedy package in full and action is already being taken.
The industry is participating in new trials, engaging with loyal customers and leading new initiatives like targeted switching campaigns which have resulted in 880,000 customers moving off standard tariffs between March 2015 and March 2016.
Last year Energy UK also launched an initiative on behalf of the industry to drive greater consumer engagement. The Energy Switch Guarantee, which now covers well over 70% of the market, provides extra reassurance for consumers that the switching process is simple, speedy and safe.
It’s critical that energy suppliers engage their customers. Many are working hard to do so – not only to enable consumers to access the right tariff for them, but also to support the adoption of smart metering and to drive demand for energy efficiency measures.
While switching levels and consumer engagement is up, competition drives competitive prices and, as in any competitive market, those who engage stand to benefit the most. And this is the crux, I believe, of the Government’s concerns.
This is why it is also important to ensure there is more effective support and protection in place for the most vulnerable and those in fuel poverty.
But the answer is not to distort the market as a whole and risk households, who do shop around, suddenly finding there are no more cheap deals for them.
The answer must be to ensure that there is targeted support for those most in need.
Energy companies take their commitment to protecting the most vulnerable, including those in fuel poverty, extremely seriously.
The industry invested £320 million on help for vulnerable and low income consumers last year and launched two major initiatives to improve safeguards for those who need it most.
But any efforts to significantly reduce fuel poverty also requires action from Government and other stakeholders including the housebuilding industry as improving the energy efficiency of Britain’s houses will be the only way to address fuel poverty in the long term.
In the short term, and at a time when costs on bills are rightly under scrutiny, we must ensure that support is targeted effectively.
The Government must ensure programmes like the Warm Home Discount are significantly better targeted and support those that are genuinely in need, the fuel poor.
When we ask what a well-functioning retail market looks like, it must be one where competition drives innovation and improvements in customer service. And where consumers engage to get the best deal, but where effective support is in place for the most vulnerable.
This begins with respecting the CMA investigation and allowing the remedies it proposed to be implemented. We know things need to continue to improve, and we are taking action to promote consumer confidence in the sector and drive up levels of engagement.
Intervening further in the energy market risks undermining so many of the positive changes we are seeing in the retail market. That would be bad for competition but more importantly, bad for customers too.