Following the Select Committee report on energy prices earlier this year, Ofgem has published the initial findings of its own investigation into the gas and electricity retail supply markets in Great Britain. Although Ofgem agreed with the Select Committee's conclusion that there was not any evidence of the existence of a cartel, the report concludes that – despite having greater levels of competitive activity than almost every other energy market in the world – some customers are not yet receiving the full benefits of competition in these markets.
Ofgem puts part of the blame on perceived deficiencies in the wholesale markets, with a focus on the electricity market. It has announced a number of measures that it expects the industry to take, and proposed a number of remedies on which consultation is now open until 1 December 2008, including steps to improve liquidity urgently in the wholesale electricity market and the potential reintroduction of retail price control.
The report will be of interest to all participants in the GB gas and power markets, not least because it comments on information gleaned from interviews with the "Big 6" energy retailers (NPower, EDF Energy, British Gas, E.On, Scottish Power and Scottish and Southern) in relation to business models, hedging strategies and sales techniques.
The industry is also warned that unless satisfactory measures are taken by (or with the consent of) industry participants, Ofgem will consider making a market investigation reference to the Competition Commission, irrespective of the positive findings noted in the report. The likely scope of such a reference is unclear, in contrast to the conclusions of the Select Committee which said that a reference may be warranted only in relation to the wholesale gas markets and retail electricity supply to small and medium sized business customers.
Participants in the wholesale electricity markets should prepare for some potentially widespread changes as the energy regulator no longer seems content that the trading arrangements put in place in 2001 to replace the Electricity Pool, are in the best interests of the end consumer. It remains to be seen whether measures that ensure greater transparency and liquidity in the bilateral trading markets will be sufficient, or whether a more radical reform proposal will emerge.
The gas supply chain, and wholesale gas trading market, is also likely to come under further scrutiny as a number of issues raised in the Select Committee's report have yet to be reported on in detail by Ofgem, including issues within the LNG and gas storage markets.
Please click here to read more information about Ofgem's report.