The UK Energy Market Investigation: A Desperate Search for Evidence of a Lack of Competition?

Abstract

The UK government progressively privatised the British gas and electricity industry between 1986 and 1996. By 2002 the British energy regulator Ofgem, had first made all customers eligible to choose their supplier and finally lifted price controls for all customer types, driven by the belief that competition would reduce prices. As Ofgem explained at the time: “competition is now well established, effectively protecting customers’ interests, and continuing to develop well.”

In the last six years, however, Ofgem has started to doubt its own prior assertions and launched a number of detailed investigations into the sector. These comprise the 2008 Energy Supply Probe, the 2010 Retail Market Review but also the recent joint efforts together with the Office for Fair Trading (OFT) and the Competition and Markets Authority (CMA) in preparing the ground for an energy market investigation. While UK market investigations have a reputation for being primarily motivated by political concerns and therefore often serve the role of pressure valve, the current debate in the UK is exceptional for its lack of faith in competitive processes. Announcements of new energy tariff policies by the Prime Minister and promises by the leader of the opposition to introduce a two year price freeze if he comes to power are only the tip of the iceberg. On 27 March 2014, Ofgem launched a consultation on referring the market to the CMA for an independent and full-scale market investigation which would take at least 18 months and will not only bind resources at the CMA but cost the energy sector millions of Euros.

The evidence of competition problems in the sector is in stark contrast to these developments, something that was not changed by Ofgem’s proposal for a full-scale investigation. Indeed, the concerns presented are at best a list of theoretical possibilities as the limited empirical evidence mentioned in support of Ofgem’s concerns is consistent with both the presence of competition and its absence.

Keywords: energy, market investigation, sector inquiry, CMA, Big Six

JEL Classification: K21, K23, L40, L50, L95