If the referral goes ahead, the Competition and Markets Authority's (CMA) investigation will be the first full-scale competition probe into the energy market. It is likely to begin in June and is expected to take around 18 months to complete. There will then be a further six months for any changes to be implemented.
The CMA has powers unavailable to energy regulator Ofgem to address any structural barriers which undermine competition. (Join our Cheap Energy Club to see if you can cut costs by switching.)
The move comes after Ofgem says its three-month investigation into the sector discovered "possible tacit co-ordination" on the size and timing of price rises from British Gas, EDF, E.on, Npower, Scottish Power and Scottish and Southern Energy (SSE).
The big six energy providers account for about 95% of the UK's energy supply market, and there are concerns this is a barrier to smaller suppliers entering the market.
The regulator's investigation also found:
- The big six consistently set higher prices for consumers who have not switched – often the most vulnerable and least engaged customers – while offering cheaper deals to savvy consumers.
- Profits made from supplying gas and electricity have increased from £233 million in 2009 to £1.1 billion in 2012 with no clear evidence of suppliers becoming more efficient in reducing their own costs.
- Profit increases and recent price rises have intensified public distrust of suppliers, while declining consumer confidence – with 43% not trusting energy companies to be open and transparent – could also deter people from "engaging with the market" and getting a better deal on tariffs.
Ofgem chief executive Dermot Nolan says a referral offers the opportunity to "once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices."
Crying out for an investigation
MoneySavingExpert.com energy analyst Archna Luthra says: "Finally Ofgem has admitted there may be some 'tacit co-operation' between the big six suppliers, which is hampering competition.
"Many have been crying out for this investigation for years, so let's hope something meaningful can be done to help people with the crippling energy bills they face.
"However this is a lengthy process, so everyone should urgently check if they can save by switching now – many can save £100s."
You can also read MoneySavingExpert.com creator Martin Lewis' views on today's announcement in his blog: The government's energy changes mean fewer people will switch.
Companies could be broken up
Ofgem has also expressed concern over whether "vertical integration" – where energy firms both produce and supply energy – is in consumers' interests.
It says a market investigation would determine conclusively whether these arms ought to be separated.
SSE said yesterday it would introduce a legal separation between its retail and wholesale arms within a year (see the SSE freezes prices until 2016 MSE News story.)
What do the energy firms say?
British Gas says it welcomes an independent review "free from political interference", but adds that competition in the market is already "intense". It rejects the suggestion there might have been "tacit co-ordination" with rivals.
SSE meanwhile says it believes the energy market is already competitive and that much has been done in recent years to make it more transparent and easier to understand.