The UK energy regulator, Ofgem, has announced a series of radical reforms to force open electricity and gas markets. The proposed reforms, which were open to consultation until 1 June, represent the government’s most significant attempts to encourage competition in the sector.

Ofgem's Proposed Reforms

Ofgem conducted a review that concluded that the interests of consumers were being harmed by certain unfair practices that, due in part to the structure of the market and the behaviors of suppliers, were allowed to flourish. In response to these perceived inequities, Ofgem targeted five areas for reform. They are:

  • Price simplification: Ofgem proposes sweeping away complex and unfair pricing practices. The aim is to allow for direct comparisons between all tariffs in the market.
  • Breaking the power of the “Big Six” UK suppliers over the wholesale electricity market: Ofgem is proposing a new licence condition that would require the Big Six to make available between 10% and 20% of their power generation into the market through a regular Mandatory Auction.
  • Tougher enforcement: Since performance in response to Ofgem's 2008 probe has been "patchy", Ofgem considers that there is scope to strengthen a number of licence conditions. Failure to abide by licence conditions is likely to be backed by enforcement. For example, Ofgem also announced a new investigation into Scottish Power and is exploring whether it needs to bring similar actions in the non-domestic market (where the concerns rest on switching being frustrated). This action is in addition to an ongoing investigation into British Gas, EDF Energy and npower and into how they handle consumers’ complaints. Investigations into misselling by EDF Energy, npower, Scottish Power, and Scottish and Southern Energy are also continuing.
  • Reduce unfair contracting: Ofgem is concerned that a range of remedies it introduced to address contracting practices were adversely affecting micro-business consumers. As a result, it intends to take action to ensure compliance and to consider whether further licence modifications are needed.
  • Improve transparency: Ofgem remains concerned that transparency in the way companies account for the cost of gas and power in their supply businesses remains limited by company-specific policies. Ofgem will therefore appoint independent accountants to improve accounting disclosures.

Comment and Next Steps

The proposed reforms represent a profound market intervention. They are the types of changes that would usually only be imposed after a full Competition Commission reference. Ofgem has come under sustained pressure from consumer groups and government who have called for action. It is clear from the announcement that Ofgem is not going to stand by and will push for wide-reaching reform. If companies frustrate the reforms, Ofgem has made clear that they will face a Competition Commission investigation.

The issues Ofgem identified are not straightforward. Ofgem has effectively laid down the gauntlet to industry to get their house in order or to face a lengthier probe. It remains to be seen whether the proposals will provide the changes in market practices that Ofgem is seeking or whether it will be able to reach a settlement with the companies.

Ofgem had also given industry the duration of the consultation to propose alternative ways forward regarding its proposals to increase liquidity. As set out in a December 2010 open letter to stakeholders, Ofgem is due to publish a further assessment of liquidity in the wholesale power market. Any future decision on these proposals will be accompanied by an impact assessment.