British gas and electricity market regulator OFGEM has published its first
annual State of the Energy Market report https://www.ofgem.gov.uk/publications-and-updates/state-energy-market-2017 which gives a detailed assessment
of how well the energy market is working for consumers in terms of
competition, affordability, decarbonisation, and security of supply.
In short, OFGEM says that energy markets are transforming to provide clean,
secure, affordable energy and meet changing patterns of consumption.
Following its two year investigation of the energy market, the Competition
and Markets Authority recommended OFGEM produce a wide-ranging assessment
of energy markets to improve transparency and inform policy-making. The
‘State of the Market’ report is the regulator’s response to the recommendation.
OFGEM’s report focuses on four areas to understand how well the market is
working in the interests of consumers:
Competition
Affordability
Decarbonisation
Security of supply
Dermot Nolan, OFGEM chief executive, said: “The pace and scale of change is
unlike anything ever seen before in this sector. Energy is an essential
service and so we want to ensure that the markets work in the interest of
all consumers.
“Transparency is crucial in informing debate and policy development in the
energy sector. This annual report shines a light for the public, experts
and stakeholders on where the market is, and where it isn’t, working for
consumers.”
Dermot Nolan
Highlights from the report:
Q. Is competition working? A. Up to a point…
Since 2012, new suppliers have intensified competition in the retail
sector, shrinking the Big Six largest energy suppliers’ share of the market
from nearly all customers to just over 80% of consumers.
It’s a huge change. With greater choice out there, and if you’re a
switched-on consumer able to seek out good deals, competition will help you
reduce the cost of your energy.
Competition in the wholesale gas and electricity markets is working
reasonably well, with no company able to exploit a dominant position.
Following a long-term fall, wholesale prices, which reflect global prices,
are just beginning to creep up or stabilise.
However, if competition was working really well, we’d expect to see the
benefits felt by all consumers.That’s not the case at the moment.
More than half of consumers (58%) have never switched supplier or have
switched only once. 60% of consumers are on variable ‘default’ tariffs,
which can be aound £300 more expensive each year than the cheapest
fixed-term deals.
Some progress is being made; the number of customers on poor value tariffs
has fallen over two years, as millions switched away from SVTs or had their
prices protected by the pre-payment meter safeguard tariff. However, it’s
not happening far or fast enough.
So we’re trialling radical new measures to get more disengaged people
switching. Meanwhile, we’re working with the government to cap the bills of
those on the worst value tariffs.
Q. Are bills affordable? A. Not enough
Whilst bills have dropped since their peak in 2013, they are still higher
in real terms than they were 10 years ago.
So, whilst the proportion of households in fuel poverty has remained stable
since 2003, they are in greater need because their bills are higher. And,
fuel poverty is increasingly affecting children and young people.
It’s a paradox that those who can afford their bills are more likely to get
good deals anyway.
Meanwhile, those on the lowest incomes tell us they’re least likely to have
switched supplier.
This disparity is unacceptable. We’re taking action to protect the prices
paid by one million vulnerable customers this winter, with potentially two
million more in future.
Q. Are we getting greener? A. Yes – but more progress is needed in
transport and heating
Our energy mix is changing to become cleaner and greener.
In 2016, the UK emitted 58% of the greenhouse gasses it did in 1990. Over
the past decade, over half these reductions have come from cleaner
electricity. Each unit is now 64% cleaner than in 1990.
Low-carbon polices which cost £7.4 billion – equivalent to around £90 for
the typical household – have driven the reduction in emissions. The CMA
found that a lack of competition in awarding contracts has driven up cost.
This is changing, however. Generators now have to compete to get subsidies,
which is bringing down costs, for example driving down costs for offshore
wind schemes.
New wind turbines in 2022 will cost half the amount new turbines cost in 2017.
However, we’re making much slower progress on bringing down emissions in
buildings heating and transport.
So, whilst the UK is on course to achieve emissions reductions targets to
2022, beyond that it looks more uncertain.
To meet our future targets, we need more investment and policies in place
in the long term to improve carbon capture and storage, drive forward low
emissions transport and more low-carbon heating of buildings heating, and
increase renewable electricity generation.
Q. Will the lights stay on? A. Yes, but…
Britain has kept energy supplies secure without substantial intervention to
balance supply and demand.
Keeping the lights on requires the energy system to be working well,
reliably, and to be resilient to demand and supply shocks.
Our gas supplies are diverse with 38% from our own fields and 42% from
Norway – limiting our exposure to shocks. Our gas infrastructure can
deliver 600m cubic metres per day, and if this wasn’t enough for whatever
reason, National Grid can take emergency measures to maintain demand and
supply.
…In future, the new Capacity Market should secure supplies at least cost
to consumers. This will substantially depend on the quality of forecasting.
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