How competitive is the UK energy market?

19th Oct 2012

David Cameron's suggestion at Wednesday's Prime Minister's Questions that energy companies will "have to give the lowest tariff to their customers" has caused a great deal of confusion. It comes ahead of the Government's proposed Energy Bill for which details will be released next month.

According to the PM, the problem with the status quo is that too many people are tied into pricier energy tariffs:

David Cameron: "The point is, in practice this market is not operating for everyone. A small minority of people are actually switching deals."

Ann Robinson, Director of Consumer Policy at uSwitch: "I think the really important thing is to try and get this market working properly. We've actually seen the numbers of people shopping around drop to 15 per cent or lower."

So how well grounded are these claims in fact?

How many UK customers are switching energy supplier?

It's been claimed several times over the years that the 'big six' energy companies (British Gas, E.On, EDF, npower, Scottish Power and SSE) together account for almost the entire energy market. This much is evident from Ofgen's own analysis of the market in the past.

However the number of people who switch energy suppliers is also key indicator used by Ofgem to assess the competetiveness of the UK energy market. This means there shouldn't be too many 'sticky' consumers (people who don't switch) in the market or else this will stifle competition.

As the independent energy regulator Ofgem states in its initial proposals for its retail market review:

"The presence of sticky consumers in the energy markets decreases the level of competition among suppliers. We believe that the fewer sticky consumers there are the more that competition among suppliers to offer lower prices and/or better services will be enhanced."

So how many of us are 'sticky'? The Department for Energy and Climate Change (DECC) publishes statistics on energy market 'transfers' which give monthly figures on the number of customers who switch electricity or gas supplier (measured by counting electricity meters).

Energy UK - an organisation representing energy companies, quotes from these figures in its own guide to the energy market:

"Roughly 100,000 people switch energy supplier each week (more than five million per year), and annual energy switching rates in Britain are the highest of any large energy market in the world."

These are correct - for the most recent month for which there is data, around 286,000 customers switched electricity supply and 202,000 switched gas supply, out of around 28 million total UK electricity customers and 22 million gas customers.

But these figures aren't very useful because they don't tell us how many of these customers are unique. It's possible in theory that only a handful of customers could actually be switching supplier but have done so several times each.

To find out the who is and isn't switching deals on a consumer-by-consumer basis, we'd need to consult survey data.

Polling group Ipsos MORI conduct regular tracking surveys on consumer engagement with the energy market. Their most recent, for 2011, found that in 2010 15% of gas customers and 17% of electricity customers reported switching supplier. This is the likely source of Ann Robinson's statistics mentioned on yesterday's Today Programme.

So we can say that the rate of switching in the UK is likely to be around 15-17% of gas and electricity customers respectively.

Research prepared by the International Energy Association (IEA) tells us how this compared to other competetive energy markets in 2006/7:

morganstanley

Excluding Victoria (a province of Australia) the UK is shown here as having the highest switching rate among the markets featured.

Unfortunately, this data isn't particularly reliable, as the methods used to measure this rate in several countries is different to that of the UK - for instance, measuring customer numbers rather than the number of electricity meters. The IEA also concedes that some countries may even count switching customers twice (once for leaving a company, once for taking up the services of another), while other countries wouldn't count this way.

But how many have ever switched supplier?

While around one in six of us apparently switched supplier in 2010, this doesn't necessarily mean that the market enjoys a 'healthy' turnover of customers between suppliers. Again, theoretically the same one in six people could be switching on a yearly basis while everyone else languishes on the more costly tariffs.

Looking back to the Ipsos MORI study, it also found that 59% of UK customers say they have never switched gas supplier and 60% have never switched electricity supplier.

But this is disputed by British Gas:

"Between 71% and 79% of customers have switched (depending on the supplier). We do not accept Ofgem's analysis that 60% of customers have never switched energy supplier, and believe this is underestimated by some 30 to 40 percentage points, given that our share of the gas market alone has fallen from 100% to 43% since the introduction of competition."

So which is the right figure?

British Gas certainly has a point - though they don't state this in as many words - that asking people to recall if they have changed energy supplier is not always going to produce an accurate response, given that some people may forget or won't have always been responsible for the household energy bills. Hence, 60% could easily overestimate the number of people who've never switched.

But is the 71-79% offered by British Gas any better? The figure comes from a survey as well, published by Morgan Stanley last year. As the graph below shows, this is based on calculating what proportion of the 'big six' energy companies' original customers remain to the present day, based on the survey results.

Jo image

Morgan Stanley declined to provide us with the source data behind this, however from what we can tell the findings only tell us how many of the companies' original customers stayed or switched, and don't say anything about new customers who have entered the market since competition was first introduced more than a decade ago.

So while Ofgem's estimate that 60% of energy consumers have never switched could well be an overestimate it still seems to be the best available indicator for gauging how many people at the moment have never switched supplier.

Conclusion

It's beyond doubt that the 'big six' companies together have a commanding share of the market, however a key indicator of competition within is how many people are switching companies and how regularly they do so.

Ofgem's data compiled - itself based on an Ipsos MORI survey - indicates that around 15-17% of people switch supplier every year, a figure slightly down on a few years ago.

Energy companies argue this shows the UK has a more competitive market than most if not all major international comparators. However, we're yet to see convincing figures on this which aren't marred by gaping differences in methodology.

Ofgem also claim that as many as 60% of us have never changed our supplier, although British Gas say it's more like 21-29%. The reality is that Ofgem's figure is likely to be the more useful for answering how many customers in the market today have ever switched, but we have to be aware that people won't necessarily report this accurately.