Leading article: It is time for a change in the balance of power

The energy market needs to be made to work in consumers' interests

Privatisation of the energy sector 20 years ago was intended to deliver great benefits to consumers. Out would go the monolithic nationalised industry and in would come a vibrant collection of competing independent providers. Competition would hold down prices and drive improvements in customer service.

That was the theory. But it has not worked out like that in practice. The number of suppliers has fallen from more than 20 in the late 1990s to six dominant conglomerates today. Customer service is frequently poor. And, worst of all, there is compelling evidence that suppliers are overcharging their customers.

When the wholesale price of energy began to shoot up two years ago, the large suppliers immediately raised their retail prices to match. But when those same wholesale prices fell steeply last autumn, retail prices remained at their lofty levels. All of a sudden the energy companies discovered complex reasons why retail prices could not follow the direction of wholesale ones.

This scam is so transparent and egregious that it justifies a drastic response. That is why this newspaper is today demanding that all suppliers deliver an instant 10 per cent reduction in energy bills. This would bring bills down to the level that independent experts estimate they would be if the market had been functioning properly.

But this needs to be the beginning of reform, not the end. Much more robust regulation of the sector is needed. The existing regulator, Ofgem, is frankly, not up to the job. It has persistently turned a blind eye to the abuses of the firms it is supposed to be overseeing declaring, despite all the evidence to the contrary, that the energy market is working well for consumers.

And even when Ofgem does try to exert its authority, it is ignored. As well as refusing to pass on savings in the wholesale energy price, there is evidence that suppliers are penalising customers who pay their bills by cheque and cash every quarter, rather than by monthly direct debit. The average difference between a quarterly and monthly bill has grown by 10 per cent since April according to the independent watchdog Consumer Focus.

In response, last month Ofgem issued new rules to prevent energy suppliers charging customers more than the real cost of processing the various payment methods. But the large firms promptly let it be known that this rule change would have no impact on their pricing policies. In other words, it would be business as usual. This is an industry that does not even attempt to disguise its contempt for its regulator.

This urgently needs to change. The regulator needs the power to ensure that average retail prices broadly track fluctuations in wholesale energy prices. And stricter penalties are needed for firms which gouge their customers. The licence of any firm caught engaging in dodgy practices needs to be instantly revoked. And a concerted push is also needed to increase competition, if necessary by placing strict limits on the permitted market share of single firms.

It is important that we get this right – and soon. Energy prices will need to rise over the medium term as we absorb the costs of making the transition to low-carbon energy sources. That will be a hard political sell. The existence of a profiteering energy sector will make it harder still. Responsible politicians of all parties need to make regulatory reform of this malfunctioning market a priority.