SMEs paying £500 million a year too much for energy, says CMA

Will Green is news editor of Supply Management
7 July 2015

Small businesses are collectively paying around half a billion pounds more each year for gas and electricity than would be the case “had competition functioned more effectively”, an analysis of the profitability of UK energy firms has found.

In provisional findings of its inquiry into the energy market, the Competition and Markets Authority (CMA) said that between 2009 and 2013 average prices offered by the “big six” companies were around 14 per cent above the “competitive level” in the SME segment, and 5 per cent above those in the consumer sector.

The CMA said it had assessed the profitability of energy firms by comparing return on capital earned on sales across all customer segments with their cost of capital. It found the big six earned an average return on capital of 28 per cent between 2009 and 2013, compared with a cost of capital of around 10 per cent. “In a well-functioning competitive market we would generally expect to see returns broadly in line with the cost of capital over the long term,” said the report.

The regulator said "profits in excess of the cost of capital" amounted to about £900 million per year, with domestic customers paying around £1.2 billion and SMEs around £500 million a year more “than would have been the case had competition functioned more effectively”.

The report said competition in the wholesale gas and electricity markets “works well”, but a combination of factors including lack of customer switching and the regulatory environment had contributed to “adverse effects on competition”.

The CMA said it had “identified a combination of features of the markets for the retail supply of gas and electricity to SMEs in Great Britain that give rise to an adverse effect on competition through an overarching feature of weak customer response from microbusinesses”.

The competition watchdog said this gave “suppliers a position of unilateral market power concerning their inactive microbusiness customer base which they are able to exploit through their pricing policies”.

The regulator suggested a number of remedies including Ofgem operating an independent price comparison website, energy suppliers being required to provide price lists and measures to improve transparency in the work of energy brokers.

Secretary of state for energy and climate change Amber Rudd said: "Our priority is to keep bills down for hard-working families and businesses across the country. We'll consider the report and respond soon and we won't hesitate to take further action where the market is not delivering a fair deal for consumers – including doing more to support switching, ensure the swift roll-out of smart meters and increase competition in energy markets.”

Ofgem announced in 2014 it would refer the energy market to the CMA, which will produce is final report by the end of the year.

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