UK energy-supplier competition harmed by price-cap renewal, E.On warns regulator

2 August 2019 3:32pm

31 July 2019, by Simon Zekaria

E.On has warned the UK's antitrust regulator that a price-cap mechanism for customers who pay upfront for their energy is harming competition among the country’s suppliers.

The German energy group's comments were published as the Competition and Markets Authority today said energy regulator Ofgem should continue the cap beyond 2020, even as the CMA accepted changes to the program that will see bills rise.

In its response to that provisional decision, E.On said the price cap overall has led to a “stagnation of competition” and doesn't reflect the costs to suppliers to serve prepayment customers.

It also rejected the competition watchdog's argument that a delay in the rollout of smart meters in the UK has affected pricing dynamics, claiming the CMA has failed to recognize the true factors behind a lack of competitiveness in the market.

Other energy suppliers have generally welcomed the CMA's provisional decision for changing the price cap, even as the restrictions are maintained.

The energy market has been in focus for the regulator as it seeks to widen its powers in consumer-law enforcement.

Price-cap progress

Energy-market regulation and competitiveness in the sector are key touchpoints for policy officials in government, as well as enforcers, amid criticisms of high prices paid by consumers and profit gains by energy suppliers.

In 2016, after concluding a probe into the energy market, the CMA said UK retail gas and electricity markets weren't working well for customers, and it recommended restrictions be imposed on prices and tariffs for customers using prepayment meters.

The competition watchdog said the price cap would help vulnerable customers who don’t find it easy to switch suppliers and get the best deal.

Following those findings, the UK government legislated to require the energy regulator, Ofgem, to impose a limit on the price a supplier can charge for customers on prepayment meters, as well as on default tariffs. That price-cap mechanism, aimed at saving consumers hundreds of millions of pounds, is scheduled to close at the end of 2020.

The CMA reviewed the cap this year. Last month, it provisionally recommended that Ofgem extend the program, due to a delay in the rollout of smart meters.

It also agreed to a revision by Ofcom to the way the cap is calculated, in recognition of changes in the energy market and of concerns that supplier costs in the prepayment market have been underestimated. These findings were confirmed today by the CMA in its final decision.

Today, to accommodate the changed calculations, the CMA said there will be an increase to the price cap of about 1 pound a week.

It also said today that the rollout of smart meters — which are designed to replace prepaid meters and provide more-accurate energy-use data — is two years behind schedule. That longer-than-expected rollout has had a significant impact on market dynamics, it said.

Rejected arguments

But E.On rejected the CMA's arguments. Overall, the energy supplier said, the price cap overall has resulted in a “stagnation of competition” and fails to reflect the costs for suppliers in serving prepayment customers.

The “root causes” of anticompetitiveness in the market need to be understood, said E.On, with suppliers currently disincentivized to invest and operate in the prepayment market.

Casting doubt on the CMA's proposition that the mechanism would help consumers get the best deal, it said "prices have generally bunched around the level of the cap.” It also noted that “multiple studies have shown that switching levels decline significantly where savings are insignificant.”

E.On said the CMA had failed to analyze correctly the delay in the smart-meter rollout when citing this as a reason to extend price restrictions.

“We do not believe the smart meter rollout will have a great deal of significance in terms of improving competition,” it said.

In contrast to E.On’s views, the CMA’s provisional decision has received wide backing from energy companies, including from Centrica and EDF.

The CMA said that setting the cap at an artificially low level may lead to suppliers cutting costs and lowering service standards, which would reduce competition and consumer choice.

Centrica said it “strongly agrees” with the CMA’s conclusion that the current cap is not effective.

Intervention

The CMA has turned its focus to the energy market in its efforts to extend its powers further into consumer-law enforcement. The protection of vulnerable consumers is a key part of its remit to step up its effort in this area.

In February, Martin Coleman, a non-executive director at the CMA, said the watchdog's investigation into the energy market has led to a wider debate over the right remedy for anticompetitive effects — be it through change in market behavior or direct price intervention.

Coleman said the CMA had considered whether to impose a “wide” price cap on the UK energy market, with the “exception of the most vulnerable customers who were on prepayment meters.”

However, in the end, the CMA decided otherwise. It realized that attempting to “control outcomes” for the substantial majority of customers would — even for a transitional period — “risk undermining the competitive process” and likely “resulting in worse outcomes” for consumers, Coleman said.

ABA 2019