Guest Comment: The problem with energy firms

Energy prices are rising, which is fuelling further distrust in the sector. Adam Scorer (right), director of external affairs at lobby group Consumer Focus, explains why he believes the market's not working.

Energy companies have dug themselves into a deep, deep hole. They bump along the bottom of almost every consumer trust survey out there. Estate agents and loan sharks barely get a mention. 

Partly this is down to their poor record on customer services, confusing bills, complex tariffs, slow complaint handling and dubious doorstep selling.

But more than anything, the issue that drags the reputation of the industry through the mire is the consumer perception that prices are unfair.

Recently, the regulator Ofgem has said the industry raises prices faster when wholesale costs are high, than it cuts them when the wholesale costs drops.

Given consumers are often told we have the most competitive market in Europe, if not the world, the big questions are how have we have got to this state of affairs, what can be done about it and who's going to do it?

Consumer Focus, and Energywatch before us, has always maintained the problem with the industry is not best explained by accusations of illegal cartels or shameless profiteering. No-one thinks that the energy CEOs huddle around a park bench and decide what price to charge customers.

Little chance of added competition

We believe the better explanation, if less incendiary, lies in the way the market has evolved.

The big suppliers that are left are all 'vertically integrated' companies that are large electricity generators as well as energy retailers. This means they make good profits when the wholesale price is high or when the price is low.

You can read this as a good thing because it means we have stable and low-risk energy companies with strong balance sheets to invest.

But it has a big downside. It is nigh on impossible for a big new entrant to burst into this market and put the wind up the Big Six.

We have some very good smaller suppliers who offer consumers a different service. What we do not have is the prospect of anyone coming in and making trouble.

If you have no risk of new entrants the Big Six can settle down to a comfortable life of coexistence, so long as no-one breaks pack and starts to compete too aggressively on price. No need to compete hard, no need to collude.

This is why when one company puts prices up it makes sense for the others to do the same – at around the same time and around the same price. Why upset the applecart?

Add a layer of complexity in tariffs and the feeling they are all the same and you have a low-risk business. You'll lose some customers and gain other. But unless you do something stupid you will stay stable.

When Ofgem says suppliers have "exploited structural weaknesses" in the market, this is what they may be talking about.

That is why Consumer Focus has argued from day one that the energy market is a suitable case for treatment by the Competition Commission. It is the body with the skills to review markets where there are structural problems.

The solution

The big problem is the very way the energy market is put together. The big solution is to make the Big Six feel the hot breath of competition on their necks and the big people to do that are probably the Competition Commission.

It may take time, but we have wasted too much time already looking for the sticking plaster when we have needed more dramatic medical interventions.

In the meantime, consumers have been hit by a huge price rise from Scottish Power and it is all but inevitable others will follow. Consumers will be bracing themselves for impact.

Consumer Focus asked the Centre of Sustainable Energy for figures for numbers of people who would be in fuel poverty if all of the Big Six put prices up by the same amount as Scottish Power.

Before price rises, there were about9 million people who could be described as living in fuel poverty, paying over 10% of income on heat and power. If the pattern is repeated, the figure will rise to almost 12 million. It can leave you lost for words.

Views expressed are not necessarily those of MoneySavingExpert.com.