How will the Competitions and Markets Authority investigation impact business energy customers?
Firstly, despite the impression to the contrary the CMA probe isn’t universal or exhaustive where the full UK energy market is concerned.
CMA Exclusions
It’s useful to understand just what it is that is excluded from the investigation as much as what is included. Those elements excluded are:
- Networks
- Wholesale gas
- Gas storage
- Gas and electricity interconnector regimes
- Industrial and commercial (I&C) customers
This has struck some observers as strange especially given the interconnectedness of each of these elements on the energy market and the end user price.
However the fact is that the focus is very much on the electricity market and domestic customers with a lesser focus on the gas market and small businesses.
We will go into each area in more detail:
- Micro business,
- I&C and
- Third Party Intermediaries (TPIs)
However below are our CMA probe outcome expectations:
- Ofgem will be over-ruled and rollover contracts will be outlawed
- Published tariffs will not be mandated
- The interests of all businesses will be considered in their final conclusion ensuring a balanced response and a clear distinction with the domestic market
We also hope that the CMA will:
- Recognize the positive force that TPIs provide in the market
- Bring Ofgem’s confused definitions into line with other government departments
- Ensure that there is a minimum standard across the business energy market
- Extend any TPI regulation to cover all sales interaction including those handled by the energy suppliers themselves.
Micro Businesses
Ofgem have asked the CMA to look into competition in the micro business sector with particular focus on what parallels there are to domestic customers.
Ofgem have a view that micro business customers are tantamount to domestic customers running businesses. This, in our opinion is folly.
Ofgem’s definition of a micro business is one that:
- Consumes 293,000kWh or less of gas a year
- Or consumes 100,000 kWh or less of electricity a year,
- Or has fewer than ten employees (or their full-time equivalent)
- And has an annual turnover or annual balance sheet total not exceeding €2m.
Given that definition covers anything from a business paying £1,000 per year for electricity and gas usage to one paying £24,000 per year, £12,000 per fuel, this is a very large range covering businesses of just about all but the biggest.
Ofgem however have used statistics from the Federation of Small Businesses (FSB) who claim that more than half of their 200,000 members spend less than £3,000 per year on energy to justify their domestic-like belief.
Given according to Department of Business Innovation and Skill (BIS) statistics that there are at least 4.89m small and medium sized enterprises in the UK this represents a maximum sample size of 4% from the FSB.
This measurement is on the basis of an SME being a business with less than 250 employees, the official UK government definition of a small or medium sized business.
When matching the BIS definition to the Ofgem definition of a micro business as having less than 10 employees the overall number of affected businesses falls marginally to 4.67m and the FSB sample size increased to 4.3%.
As a result we believe that it is reasonable to conclude that the FSB and Ofgem’s opinion on the vulnerability of small business in the energy market is somewhat overplayed.
Ofgem say:
“Our research has shown that some micro businesses face similar barriers to engaging in the market as domestic customers”.
Indeed the FSB, a organization who are particularly vocal on behalf of its 200,000 members has called for further protections for micro businesses such as published tariffs.
Such demands have been deeply questioned by most observers as unworkable and not in the best interest of customers as tariff publication will simply raise the price bar as suppliers rush to insulate themselves from exposure to erroneous public price setting, a situation all too familiar in the much maligned domestic market.
Already micro businesses benefit from a requirement for clear contract terms and termination windows however much has been done outside of Ofgem and the CMA, most notably by the SME Energy Working Group convened by Number 10 Downing Street which brought about the ending of rollover contracts amongst the Big 6.
However Ofgem, who were represented in that meeting but provided scant contribution alongside the FSB’s more vocal but less worldly input continue to push for business energy to be pushed towards the domestic model – the very model that has prompted the CMA investigation in the first place!
Understandably we think this is completely wrong.
Indeed Ofgem, rather than embracing and supporting the achievements of the SME Energy Working Group have said:
“While this may offer micro-businesses a higher level of protection, it could also impact negatively on competition”.
This is an odd position for the regulator to take.
The Working Group left it to Ofgem to put together a consultation on a mandatory outlawing of rollovers for all business energy suppliers and not just the Big 6.
However much to the dismay of independent observers, Ofgem have announced they have no intention of doing any such thing and instead are happy for premium priced, locked in rollovers of 12 months or more to be a feature of the business energy market.
This was a surprising conclusion for the regulator to reach.
It is against this backdrop then that Ofgem’s inclusion of the micro business energy market in the CMA probe is a confused one.
Happily however in this instance, the Big 6 energy suppliers supply nearly 90% of the business electricity market and 2/3 of the business gas market so at least the impact of Ofgem’s poor decision making is limited somewhat.
Reverting back to the CMA probe itself, much has been achieved voluntarily with suppliers already in the business energy market, such as:
- Clear contract terms
- Printing contract end dates and termination dates on invoices
- Consistent and clear termination periods, and
- A Big 6 ban on rollovers
As a result there remain limited possibilities that can be achieved by the CMA. Assuming there isn’t a leftfield conclusion, and given the make up of the CMA panel a sensible conclusion is expected, we confidently expect that the CMA will:
- Over-rule Ofgem on rollover contracts and they will be outlawed for all suppliers
- Refuse to mandate published tariffs given the likely upward pressure they would place on prices
- Consider the interests of the full variety of customer profiles and any conclusions will outweigh the wants of needs of a single, limited constituency but vocal organisation
We also hope that the CMA will:
- Recognize the positive force that TPIs provide in the business energy market for stimulating competition, driving innovation and signposting customers
- Bring Ofgem’s confused definitions and policies into line with other government departments such as BIS
I&C Customers
Ofgem claim they have found “little evidence of significant issues for large business consumers” and as such I&C business energy customers were not included in the terms of reference of the market investigation.
Ofgem views I&C electricity customers as typically having:
- One or more half-hourly electricity meters and
- Multiple sites.
Furthermore Ofgem believe that an I&C customer:
- Receives bespoke contracts and prices and
- a range of products from fully fixed prices to more flexible contracts (where forecast volume can be purchased from the wholesale market and distribution, transmission and environmental charges are fully passed through to the customer).
- Have their own staff for energy procurement and/or
- Use third party intermediaries to manage their energy contract.
This is an interesting set of distinctions.
Many customers without Half Hourly meters receive bespoke priced contracts or have their own staff for procurement. Whereas some Half Hourly customers have no such dedicated support and are unversed in the workings of the market regardless of what type of meter is installed in their premise.
As a result, because of Ofgem’s artificial and loose definition and terminology it is highly likely that uncertain boundaries will be a feature of any CMA findings. As a result some businesses could face needless bureaucracy whilst others could be deemed to be more knowledgeable and to not need additional support yet these could be the very people needing it most.
This is an unfortunate consequence of Ofgem’s desire to pigeonhole and categorise businesses into simple generic groupings.
We have long called for an end to artificial definitions and pseudo ‘protections’ and for Ofgem instead to focus on a minimum standard of expectation for all businesses whatever shape, size or expertise.
In doing this we believe this is placing the business in the position of being able define their own interaction with the market safe in the knowledge that there is a minimum level of service they can expect.
Based on their ‘definition’ Ofgem say that:
- 39% of half-hourly metered electricity by volume and
- 92% of daily-metered gas by volume was supplied by non Big 6 energy suppliers
They see this as a sign that the I&C market is working. Yet in a quantitive survey from 2013, Ofgem themselves found that:
- 19% of ‘large’ businesses had never switched supplier
- 41% of micro businesses had never switched supplier
- 32% of ‘large’ businesses checked their energy usage monthly
- 12% of micro businesses checked their energy usage monthly
It strikes us that Ofgem’s confidence that sufficient large businesses are engaged in the market ‘unlike’ micro businesses and that plenty of large business are “on top of their energy” on a monthly basis compared to micro business just doesn’t ring true.
Neither of the deltas between the two business types for each measure is significantly large enough to drive this confidence from Ofgem to exclude I&C customers from the probe.
We strongly feel that if the business energy market is to be reviewed it must be done so in its totality and not in the arbitrary way that Ofgem have operated to date.
In terms of outcomes we suspect that the CMA, if able to break free of Ofgem’s defined strictures will recognize the regular overlap between micro business, SME and I&C and whilst not focusing largely on the latter areas will ensure that there is a standardized approach across the business energy market in terms of a philosophic approach. After all minimum standards benefit all, that’s why they’re there.
Will that lead to lower prices, published tariffs and happy, touchy feely suppliers? No.
Will it lead to a functioning supply market? We hope so given that is largely what we have today in business energy albeit with some unresolved issues – not least Ofgem’s latest oversight – automatic rollover contracts.
Third Party Intermediaries (TPIs)
Ofgem have a problem with TPIs, they don’t understand them.
They don’t understand what they do, they don’t understand why they are in the market and they do not have the commercial insight to understand organisations from a non-regulatory perspective.
As a result Ofgem have struggled with the concept of TPIs and have, and continue to, place TPIs in a bad light in need of urgent reform.
We think this is unfair and that a level of proportionality should be brought to Ofgem’s thinking.
For Ofgem their major focus to date has been to find a suitable definition for TPIs, this has, in our opinion been a waste of time and wholly unnecessary.
That said it has led Ofgem to understand the TPI market better and they now recognize the important role they play in stimulating competition.
Ofgem would like to get involved in directly regulating TPIs and their sales activities. We have no issues with this, as long as Ofgem recognizes that all parties involved in the procurement and selling of business energy contracts should be covered by such regulation. Sadly Ofgem do not share our view. We struggle to understand why.
With regards outcomes we would hope the CMA sees the folly of a restricted regulation of business energy sales activity and recommends the extension of any TPI regulation to cover all sales interaction including those handled by the energy suppliers themselves.
Conclusion
Overall then, the CMA probe is a domestic focused one.
Indeed the only relevance that business energy plays is from the perspective of Ofgem and the FSBs desire to create a new segment of businesses who are pseudo domestic.
We firmly believe that the CMA panel will see this as a flawed intention and that instead they will look to build upon the reforms delivered to date and extend the ban on rollover contracts to all suppliers and put in place a minimum standard of service expectation for all business customers, regardless of categorization.
What we do know however is that the CMA investigation is not going to deliver a new world of low prices and abundant sources of supply; all we can hope for is a rational overview and considered improvement to the business energy market.
To find out more about the CMA review and how it may affect your business call us on 0800 051 5770, we’d love to hear from you.