Ofgem has confirmed it's referring the energy market for a full competition investigation – the first probe of its kind.

The energy watchdog has referred the big six providers – British Gas, EDF, E.on, Npower, Scottish Power and Scottish and Southern Energy (SSE) – to the Competition and Markets Authority (CMA). (Join our Cheap Energy Club to see if you can cut costs by switching.)

The move comes three months after an initial investigation discovered "possible tacit co-ordination" on the size and timing of price rises (see the Big six energy firms face competition probe MSE News story).

At the time, Ofgem also highlighted there was increasing distrust of energy suppliers and rising profits, with no clear evidence of suppliers reducing their own costs.

It says an investigation is needed to ensure competition works effectively for customers and to help the market become simpler, clearer and fairer for all.

The CMA has powers which Ofgem doesn't have to address issues in the market.

MoneySavingExpert.com energy analyst, Archna Luthra, says: "This has been a long time coming – we've been shouting for some time that the energy market has been broken for far too long.

"But the regulator must also consider the impact of its policy change on competition. Many of the it's policies introduced previously, such as a reduced number of tariffs and a ban on switching cashback, have resulted in fewer people switching.

"Ultimately though, an investigation that blows the lid on poor practices and puts consumers first is welcome."  

What will the CMA investigate?

The CMA says it will investigate to see if there are any features in the market which prevent, restrict or distort competition, and if so, what action needs to be taken to resolve these issues.

It will begin its investigation immediately and must publish a final report by December 2015.

Ofgem says it expects the CMA to probe the following:

  • The relationship between the supply businesses and generation arms of the six largest suppliers. This is when a firm both supplies and generates energy, meaning it can buy energy from itself at a lower price.
  • Barriers to entry and expansion for suppliers.
  • The profitability of the six largest suppliers.
  • Whether or not there is sufficient competition between the large energy suppliers.
  • The trend of suppliers consistently setting higher prices for consumers who have not switched.
  • Low numbers switching, which doesn't create a competitive enough market.

What did Ofgem's initial assessment find?

This is what Ofgem 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: "Now is the right time to refer the energy market to the CMA for the benefit of consumers. There is near-unanimous support for a referral and the CMA investigation offers an important opportunity to clear the air.

"This will help rebuild consumer trust and confidence in the energy market as well as provide the certainty investors have called for.

"The energy market is also going to change rapidly over the next few years with the rollout of smart meters, the Government's electricity market reforms, and closer integration with European energy markets.

"A CMA investigation should ensure there are no barriers to stop effective competition bearing down on prices and delivering the benefits of these changes to consumers."

What do the big six say?

All the big six firms told MoneySavingExpert.com that they welcomed today's announcement of an investigation.

Npower chief executive Paul Massara says: "Today’s announcement is the first step in a journey that will go a long way to reinstall trust into the industry and ensure that the realities of the energy market are made public.

"British consumers deserve a full, comprehensive, vigorous and politically unbiased investigation, as only then will everyone involved be able to rebuild confidence in energy in the UK."

EDF Energy chief executive Vincent de Rivaz says: "We will approach the investigation with an open mind, and will not be defensive.

"I do not expect the investigation alone to rebuild trust; that remains our responsibility. We will continue to take action to help customers, giving them greater simplicity, better service and competitive and fair prices."