Ofgem guilty of 'benign neglect'

05 October 2008

OFGEM is not doing enough to encourage competition in the energy sector according to green energy company Ecotricity who have accused the regulator of stifling innovation and, in turn, limiting consumer choice.

“The Big Six have run rings round OFGEM in the creation of the 'competitive regime' and it's subsequent operation - and have created for themselves a comfortable oligopoly with considerable barriers to entry, and innovation.

Over ten years since deregulation – we should have a thriving independent sector. But OFGEM has achieved no more than it deserves through what can fairly be described as 'benign neglect'.” Dale Vince, MD Ecotricity

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Ecotricity was established in 1995 when the company's first wind turbine was being planned. Not long afterwards, as a result of being unable to secure a fair price for its wind generated electricity from the established electricity boards, the company acquired a supply license and began selling to small business customers. In 2003 Ecotricity expanded its sales operation to incorporate domestic electricity customers.

Now the largest and most successful of the three independent suppliers in the UK, Ecotricity are only too aware of the factors that are suffocating the sector.

1. Cash and credit. Supplying electricity requires the purchase of power, preferably on a forward basis. Lack of available credit (when compared to the Big Six) prevents small suppliers from hedging in advance. There is also the requirement to pay upfront for distribution costs – something large suppliers avoid.
2. Cash flow. An issue that better regulation could ease. Small suppliers have to pay for their energy, distribution costs and other overheads monthly (and promptly). Whereas customers pay monthly or quarterly (about 50/50 ratio) – and not always promptly. When growing a customer base, considerable sums of money are required per customer for the adverse cash flow impact that each one brings. This constraint could be eased if suppliers were not obliged by license to offer quarterly payments, for example.
3. The Market. The UK wholesale market is about as illiquid as you might ever expect to find, and very difficult to operate within as a small purchaser/seller. The non physical players only exacerbate this, though they claim the opposite.
4. Social provisions. The requirement to provide pretty well the same social provisions as the big incumbents is also a major constraint to growth and an area where the Big Six have held sway to their own benefit. Particularly the need to offer quarterly payments, and all forms of payment methods, and the need to meet energy efficiency requirements at 50,000 customers – something ridiculously cumbersome for small suppliers, and which would offer no commercial threat to the Big Six if it did not exist.
   Being able to be a monthly Direct Debit only supplier would be very useful (for example), and enable independents to drive down costs and to compete more effectively in the sector. But current rules do not allow this.
5. 28 day contracts. The inability to have contracts for more than 28 days prevents innovation and long term relationship building. Wind turbines take 10 years to pay back their debts, and require customers as part of the business plan. But customers can only be contracted for 28 days max. Other utilities, for example broadband and fixed or mobile phones – are able to contract for far longer with domestic customers – and because of that offer more innovative and value added products.
6. Objections. The big six have a habit of objecting to transfers for no good reason, British Gas being the worst in our experience. This makes switching supplier much harder – and is blatantly anti competitive.
   Objections to transfers in domestic for debts of £1 are not uncommon, or for bills not paid and not yet due – or just for no good reason. It's all about slowing down the transfer process and hoping the customer will lose the will or the heart to continue. It's a sorry state of affairs, after the effort and expense of 'winning' a customer.
7. Meter services. The idea of competition in this field is mistaken in principle and a joke in practice. These services should be regionally provided as with the distribution service. Large suppliers have far more sway when it comes to getting proper service than small ones do. In Ecotricity's experience it has been a constant struggle to get any kind of decent service, and there appear to be no options, commercial alternatives or routes of escalation – and little or no regulatory interest.