Mike Waterson, Professor of Economics at the University of Warwick and an expert on competition policy, on the Competition and Market Authority’s (CMA) report.

Solving the many issues in Britain’s energy markets is not straightforward; if it were, the sector’s regulator, Ofgem, would have solved them by now.

Reading the report, and in particular the remedies considered and rejected, it is clear that the problems have been made worse by pressure on the regulator to respond to policies proposed by politicians on both sides of the political spectrum, or by Decc. In many respects, the market is not competitive and not working well. It particularly disadvantages people on lower incomes. Problems exist at several levels of the market, although much of the focus is on the consumer side.

Choosing your electricity and gas supplier

Choosing your electricity and gas supplier is not particularly interesting, to say the least. It is made much worse by the scant connection between your bill and what you actually consume. Unlike your home phone, where every month your bill reflects your consumption, as a direct debit customer your energy bill is equalised over the year in vague correspondence to what your supplier thinks you might consume. As a prepayment customer, the connection is more direct but your ability to switch suppliers may be severely curtailed. So most people are disengaged with the market, and suppliers know this. As a result, on average prices are significantly higher than they would be in a fully competitive market.

This is not a new phenomenon - research I have done on the market in the early 2000s (Giulietti, Waterson and Wildenbeest, Journal of Industrial Economics, December 2014; Giulietti, Grossi and Waterson, Energy Economics, 2010) found that energy companies make their money on the retail side and have limited incentives, once established, to provide tariffs that encourage switching to them.

What to do?

Smart meters have the potential to make the connection between consumption and bills much more transparent. Much of the hope in the CMA report is pinned on these, particularly for prepayment customers. A trusted price comparison website from Ofgem is also mooted. But it is clear that there is still insufficient evidence on what prompts people to switch supplier. In Texas, it’s a high monthly bill. That mechanism currently doesn’t exist in Britain. Even when you have decided to switch, it’s not clear that consumers make sensible decisions. This is a market where competition should work well, a homogeneous product whose price has a clear impact on consumer budgets.

Regulation is not a long term solution. More work will be needed on finding how to motivate consumers, and also microbusinesses, to choose competitive tariffs.