Energy system needs fundamental reform, not just Ofgem tinkering

Ofgem got out of their pram yesterday to complain about Labour and Which? criticisms of their 'fundamental reforms' to the energy market. They said:

“For the Labour Party and Which? to dismiss Ofgem’s fundamental reforms is to misunderstand the barriers to competition that we have identified and are tackling.  In fact Ofgem’s reforms go further than Labour’s proposals for increasing liquidity, which they refer to as a pool. Labour’s proposals only relate to the short-term market, where the big six are already auctioning large volumes of power after pressure."

“This is just one part of Ofgem’s sweeping and comprehensive reforms to the energy market to make sure competition bears down as hard as possible on prices. Consumers are already seeing the benefit of our reforms to make the market simpler, clearer and fairer. Ofgem is also currently reviewing the market with the CMA and OFT to see if more needs to be done to protect consumers.”

The problem for Ofgem is that their reforms are far from 'fundamental' and far too late after years of dithering. A quick glance at energy stories in the media over the last couple of weeks illustrates the problem all too clearly.

For example, the Engineering Employers Federation chief executive Terry Scuoler has said: "Rising energy costs represent a major threat to growth and could damage efforts to support and sustain long-term recovery. The UK cannot afford to pile even more unilateral costs on the manufacturing sector which is key to developing the UK's longer-term growth and stability. Many manufacturers now feel they are being severely penalised by high energy costs, some of which are being unilaterally imposed and are not shared by competitor nations."

For domestic consumers Which? reported this week that faulty clocks on electricity meters means up to 3.9 million customers are paying too much for their energy.

British Gas have been whinging about Labour's planned price freeze,  but the company still made an average profit of £37.60 from its 15.2m customers. And the Chief Executive still took home a £5m pay cheque. British Gas increased its tariffs by an average of 9.2% in November as part of a round of winter bill rises across the "big six" energy companies.

There have been 5.5 million complaints against the "big six" – EDF, Centrica, E.ON, npower, Scottish Power and SSE – last year. More than 800,000 customers are believed to have switched away from "big six" suppliers in just over a year.

Even Energy secretary Ed Davey has asked Ofgem to consider investigating British Gas to see whether it is abusing its market power and therefore inflating profit margins. The result could be that the company, and other elements of the gas market are broken up to reduce the abuse of market power.

Even when you try and switch supplier, as I have been trying to do this week, it is far too easy for the current supplier to block it and delay.

I could go on, but you get the picture. Caroline Flint, the shadow energy secretary, in a retort to British Gas said: "It is not acceptable for companies to threaten that the lights will go out because they don't want greater transparency, competition and accountability. When markets aren't working government has a responsibility to step in. Labour's plans to reset the energy market will follow the price freeze in 2017 and help restore public confidence. The reality is that what investors care about is long term certainty."

Actually, we need much more than tinkering with market mechanisms. We need to address ownership - introducing more community and local authority ownership of energy generation as is much more common on the continent. I set this out in more detail in the Red Book on Scotland energy chapter and I would also point readers to Andy Cumber's excellent book, 'Reclaiming Public Ownership'. 

Another approach is to look at a different business model from the current Big Six approach. This would be focused on delivering those services to consumers as efficiently as possible, and profits would come from providing consumers with a level of service while using fewer units of energy.

In the face of low-customer churn, high profits and a small number of players, the energy market clearly requires redesign, far ahead of Ofgem tinkering. The only question is whether the political parties have the courage to take it on. So far only Labour is at least starting the journey.