Energy market: No quick fix to hugely complex issue

With the UK's gas and electricity market dominated by the "big six", the claim often made is that the industry is somehow rigged in favour of these companies.

There's never been any evidence of this, but the perception the market doesn't work as well as it should persists.

That's why there have been mounting calls for an exhaustive inquiry, which will now be undertaken by the new Competition and Markets Authority.

Markets need competition, transparency on pricing, and genuine choice for consumers.

So does the domestic energy industry tick all those boxes?

After retail energy was opened up to competition in 1998, about 15 suppliers vied to win customers.

Within five years that number had been reduced to six, which has largely remained the case ever since.

'Worrying'

Prof Catherine Waddams, from the University of East Anglia, is a leading expert on the domestic energy market and has been studying it closely ever since privatisation.

Her conclusion: "There's some competition in this market - there could be more - it's worrying the way profits have gone up in recent years. We really need to understand what isn't working."

The big six - SSE, Scottish Power, Centrica, RWE Npower, E.On and EDF Energy - provide about 98% of all household energy and gas. They also control 74% of electricity generation.

Some critics argue this so-called vertical integration, with power generation and retailing joined together, could discourage new players coming into the market.

So, which industries work better for its customers than energy? Airlines and airports have seen ownership changes and new competitors coming into the market and cutting fares.

John Fingleton, a former boss of the Office of Fair Trading, told the BBC: "The airline business is incredibly competitive. Customers can compare fares easily, they can switch airlines and new players can enter the market.

"Airlines can switch airports and get better deals. With domestic energy, it's very difficult for consumers to compare prices and for new players to get into the market."

Mr Fingleton has for some time been calling for a full-blown inquiry into domestic energy by the competition authorities, just as there was a few years ago for the airport industry.

'Probably flawed'

A key challenge is creating a level playing field for smaller competitors.

One of those biting at the heels of the big six is Ecotricity, based in Stroud, Gloucestershire.

Dale Vince, the company's chief executive, said it is not easy for his company to make inroads into the market

He said: "The switching process is complicated, sometimes unnecessarily so. It's probably flawed from a customer point of view because the big six can make things very difficult."

Mr Vince said the complex systems regulators require energy retailers to have can deter smaller companies.

Those systems required between £2m and £3m of investment, he said, whereas his start-up costs in the 1990s had been only about £10,000.

So what do the big six think about the state of the market?

E.On's director of strategy and regulation, Sara Vaughan, argues that retail customers can see easily what sort of deals they are getting in comparison with other offers.

She said that E.On had a clear internal split between its generation activities and supplying households.

But her company accepted a full independent inquiry was the only way to test whether the market really was working and restore the trust of consumers.

She said: "Trust has to be earned - it lies behind our call for a competition inquiry. We want to show people we are open and we are really prepared to have an organisation come in and look into our business."

SSE has now addressed the vertical integration issue by announcing a legal split between its wholesale and retail activities.

Chief executive Alistair Phillips-Davies told the BBC: "We think it's the next step on the journey to improve transparency and improve separation. If that's what people want, what consumers want, we're very happy to participate in that agenda."

EU-wide problems

But are things any better elsewhere in Europe?

In Belgium, Germany and the Netherlands, competition is seen as more effective than in the UK, partly because their markets are more connected, though in others it's a different story.

The European Commission's top energy regulator, Philip Lowe, said that there was a problem across the EU.

He said: "The UK situation is mirrored elsewhere, and is worse elsewhere, because there are fewer competitors in the market. Some national markets have only one supplier.

"But it's not enough to just have more than one supplier. You actually need the information to make an intelligent choice on switching," he said.

It is hard to find experts who are in favour of the domestic energy market as it now is or ready to claim it is working well.

But there is a clear view that there are no quick fixes available to politicians.

The independent competition inquiry now in train could take a couple of years.

Questions are being asked over whether consumers across Europe get a fair deal. While wholesale energy prices rise, the debate will get noisier.

The investigation could find there are no fundamental problems with the domestic energy market.

But making the market work better could require unplugging the industry's complex structure and rebuilding it.