Competition in energy markets is at risk if independent suppliers are forced to freeze their tariffs for 20 months, according to new research.
A study by independent energy markets consultancy Cornwall Energy--The Detrimental Impact of a Price Freeze on Energy Supply Competition--highlights the transformational impact that independent suppliers have had in business energy markets in recent years, and their recent progress in improving choice for households, where they have now taken an all-time high 5% of accounts from the Big Six.
But it warns that this progress could be jeopardised if, from 2015-2017, suppliers are unable to pass through to their customers the increasing cost of charges that are beyond their control.
The report forecasts that, in order to manage these increased costs, suppliers could need to increase household bills by over £60 as a minimum in advance of the freeze period, adding around 5% to the typical dual fuel bill. However, suppliers might also be compelled to factor in risk premiums to hedge against unexpected volatility in costs, which could result in an overall bill increase of £80/ household. This would increase the typical dual fuel bill by approximately 6%.
Cornwall Energy argues that, if a price freeze were implemented, a series of mitigations ought to be considered to ensure independent suppliers are not squeezed from the market. Consumers will be worse off, if the exit of independent suppliers leads to the market becoming less competitive. The mitigations should include targeting any freeze on customers who have not switched in recent years, exempting those on a fixed tariffs or negotiated contract terms or who have chosen to take "green" or other specialist offerings.
But it further calls for a focus on existing reforms, including speeding up switching, following through on Ofgem's proposals to improve wholesale competition and making sure its Retail Market Reform package is successful.
Cornwall Energy managing director Nigel Cornwall said: "Independent energy suppliers have brought considerable benefits to businesses, and are now doing the same for households. While political concerns about the state of the market are understandable given rising bills, we believe that a blanket price freeze would turn "friendly fire" on the smaller players whose competitiveness is doing ever more to keep bills down and improve service to customers."
Notes to editors
Cornwall Energy is an independent energy markets consultancy. We provide information and consultancy on energy market, policy and regulation to nearly 200 energy companies and others interested in the British energy markets.
We have received no funding to produce this report, and all of the research that informs it has been undertaken by Cornwall Energy.
Minyan Zhu of the Centre for Competition Policy at the University of East Anglia presented her paper on Pricing in the UK Retail Energy Market, 2005 - 2013. A version of her report is available here.
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