Analysis: No short-term fixes to Britain’s energy angst
By Matt Osborne
Since launching its 2008 energy supply probe, Ofgem has produced a series of 'remedies' aimed at trying to fix what it sees as an uncompetitive retail gas and electricity supply market.
Throughout all this Ofgem has argued that it must overcome the lack of competition in the market that exists because of the Big Six's dominance.
At the heart of this approach is the claim that such dominance is largely down to the Big Six being vertically integrated: owning and controlling both generation assets and retail businesses.
Its latest announcement, requiring these companies to offer their generation volume (up to 30%) to the market via trading platforms as opposed to opaque bilateral negotiation, will provide much needed transparency to the wholesale energy markets.
It will also allow smaller suppliers greater access to such volume, and in theory the scope to compete more effectively.
However, this is not a silver bullet for small suppliers who still face the problem of significant customer inertia, with a large proportion of customers still not actively switching suppliers.
They will have to overcome this perceived lack of customer confidence and trust in smaller, less-known supplier brands.
To be frank, the public's view of the energy companies is far from good – a view fuelled by a series of high profile price rises.
Consumers also feel that while prices are quick to rise when wholesale energy prices rise, they never come down equally as quickly when the market price drops.
Any smaller supplier trying to grab a market share has to battle against this perception, even though it is not one they have necessarily helped create.
Let's also be clear about this. Despite this concerted effort to increase retail competition, it is not really a question of who controls this volume that is at the heart of the UK's energy problems.
Ofgem's outgoing chief executive Alistair Buchanan hit the nail on the head when in his departing speech earlier this year he warned that consumers face higher energy bills as the UK becomes more reliant on energy imports.
He rightly identified the falls in the UK's power production capacity as the real threat to the nation's energy markets. Tightening supply margins of up to ten per cent are likely to lead to more energy imports and price rises.
Renewable energy is able to help meet some of that demand, but the government has yet to create an environment which creates investor confidence.
One look at the cancellation or postponement of UK nuclear projects gives you an indication of the difficulties.
Crucially, Ofgem's latest announcement only will only seek to see more participants in the market chase ever diminishing energy supplies, albeit in a more transparent market environment.
However, there are more effective efforts underway that may provide a more lasting solution to our energy problems.
With the introduction of the energy bill, the government has to a large extent woken up to this clear and present danger.
The bill lays out clear legislative policy and puts in place measures to attract the £110 billion investment which is needed to replace current generating capacity and upgrade the grid by 2020, and to cope with a rising demand for electricity.
This has been further re-affirmed with chancellor George Osborne's Budget making a clear commitment to gas.
Tax breaks and investment incentives for North Sea exploration and development, as well as renewed support to extract shale gas, will eventually help reduce our reliance on imported gas, albeit over the longer term.
This will require a long lead time, but eventually such steps are likely to have far more meaningful results in terms of reducing wholesale gas and power prices. These should in turn lower consumers' energy bills.
In the meantime, as government and industry try to plug this generation gap, consumers will be left with a difficult choice: to use energy more responsibly by reducing their usage where they can or face increasing bills.
Matt Osborne is an energy analyst at Inenco
The opinions in politics.co.uk's Comment and Analysis section are those of the author and are no reflection of the views of the website or its owners.
