128Factsheetwww.ofgem.gov.uk March 2014

In Britain energy prices are set by competing suppliers. Our role is to ensure that a combination of competition and regulation pushes down costs and prices for consumers at each stage of the energy supply chain.

How we monitor whether the market is working properly for consumers

Your bill is made up of a number of different costs along the supply chain, as shown in the breakdown. These include buying wholesale energy, transporting it on pipes and wires and delivering government environmental and social schemes. They also include costs for metering, billing and marketing energy, as well as their margin.

Competition between suppliers should encourage them to purchase energy efficiently and minimise their own costs and the costs of delivering social and environmental schemes. We monitor each stage of the energy supply chain to check whether the current market arrangements are doing their job. The evidence gathered is used to develop new policies to improve how the market works.

If evidence shows companies have broken the rules, we take strong action. Since April 2010 we have concluded over 20 major investigations which have resulted in companies paying fines and redress totalling more than £80m.

22%Network costs

47%Wholesale costs

7%Environmental and social obligation costs

20%Supplier operating costs and pre-tax margin

5%VAT

Pie chart figures are from March 2014

Factsheet 128 How we monitor whether the market is working properly for consumers

Wholesale gas and electricity markets: where energy companies compete to sell energy to suppliers. Our role includes checking wholesale prices to see whether they accurately reflect supply and demand for energy. We also check that companies are trading fairly and we monitor security of supply.

Pipes and wires: energy is transported on these networks to homes and businesses. We set price controls for these companies through which they are rewarded or penalised based on their efficiency and how they perform for consumers.

The retail market: where suppliers compete to sell energy to consumers. We check whether competition is working for the benefit of consumers and take action when it’s needed. An example of this is our reforms for a simpler, clearer, fairer market. We also require large suppliers to make their profits clearer through yearly financial statements.

Social and Environmental schemes: Ofgem E-Serve delivers a number of government environmental and social programmes, and checks that energy companies are meeting targets for these schemes.

Wholesale gas and electricity markets

Pipes and wires

Social and Environmental schemes

The retail market

Factsheet 128How we monitor whether the market is working properly for consumers

Wholesale gas and electricity marketsThe costs suppliers face for buying wholesale energy are strongly influenced by prices for fossil fuels in international markets. These costs make up almost half of the average household customer bill, so it’s crucial that this part of the energy market works properly. To ensure this, we monitor wholesale market trends in Britain and compare them with trends in Europe and elsewhere.

Market integrity

We look closely at wholesale prices and establish whether they accurately reflect supply and demand for energy. We take evidence and allegations of market abuse seriously, and can investigate and take action against those who breach the rules.

Since June 2013, we have had powers to enforce the EU Regulation on Wholesale Energy Markets Integrity and Transparency (REMIT), which guards against insider trading and market manipulation. REMIT establishes a new framework for Ofgem and regulators in other EU countries to monitor trading in wholesale markets. It also obliges market participants to disclose inside information.

Market access

We keep a check on how much trading of wholesale energy occurs, and we have proposed changes to make it easier for smaller independent suppliers to compete against the six largest suppliers.

The six largest energy suppliers as of Spring 2014 must publish the price at which they will trade wholesale electricity up to two years in advance.

They have to trade at these published prices, which means independent suppliers and generators have far more opportunities to buy and sell power. It also makes wholesale power prices much clearer.

New rules mean the six largest suppliers and the two largest independent generators have to trade fairly with independent suppliers that want to buy wholesale electricity.

We require quarterly reports from the large suppliers and generators. These cover, for example, the total volume of electricity supplied to independent players. We will use these reports to check whether the reforms are improving access to the wholesale power market.

Security of supply

Our work also covers the security of energy supply. We published our Project Discovery report, which predicted

a sharp decline in electricity capacity in the middle of this decade. In response to this the government has developed a capacity market. This will offer financial incentives to generators to help ensure there is enough reliable electricity capacity to meet demand.

We continue to analyse electricity security of supply through our annual Capacity Assessment. And we have also developed our own policies to help security of security. Although GB has never had a serious gas supply shortage and the risk of one happening in future is still low, we have proposed greater incentives for gas suppliers to buy enough gas for their customers when supply is tight and demand is high. We expect to have these changes in place for winter 2015/16.

We are also proposing that electricity generators and suppliers face stronger incentives to produce or buy enough power to cover the demand of their customers. We expect to make a final policy decision on these measures later this year.

Transporting energy on networksWe regulate the network companies that transport energy and set price controls for these monopoly businesses. These controls set the amount of revenue these companies can earn over an eight-year period.

Setting targets

We set targets for companies over the course of these controls. This means they can be rewarded or penalised based on their efficiency, and how they perform for consumers. For example, we set incentives for regional network companies to reduce the number and duration of power cuts. As a result, since 2001/02, in normal weather, there has been a 32% fall in the number of power cuts and a 33% fall in the length of power cuts. Regional network companies also have to report how much money they pay to consumers when they do not meet the guaranteed standards we set. These standards cover 12 service areas, including connections, voltage quality and restoring supplies after power cuts.

Monitoring performance

Once we’ve set the price controls, we record the performance of the network companies. Following the introduction of our new formula for regulating networks – RIIO (revenue = incentives + innovation + outputs) – we are reviewing how we check on network company performance so that the information can be published in a way that is as accessible and timely as possible. We can also take enforcement action.

For media enquiries contact:

For public enquiries contact:

Chris Lock, Senior External Communications Manager 020 7901 7225 email: chris.lock@ofgem.gov.uk

Consumer Affairs team020 7901 7295 email: consumeraffairs@ofgem.gov.uk

Social and environmental schemesE-Serve is the part of Ofgem that delivers the government’s environmental and social schemes in the energy sector. The schemes Ofgem E-Serve administers are the Renewables Obligation, the Energy Company Obligation, Feed-in Tariffs, the Renewable Heat Incentive and the Warm Homes Discount. The total value of these schemes is approximately £4 billion per year and our costs for administering the schemes are just 0.6% of their total value. We regularly analyse our management of the schemes to ensure there is continual improvement in the way they are administered.

We have an important role in monitoring these schemes. This includes collecting evidence on whether suppliers are delivering them effectively and in line with legislation. We check whether suppliers are meeting their overall targets.

The retail marketConsumer research

We collect a variety of data on the retail market which contributes to our policy making, such as our reforms for a simpler, clearer, fairer market. The reforms started to come into force in summer 2013 and they will all be in place by the end of June 2014.

While developing these reforms, we carried out more than 20 research projects with consumers to find out their attitudes to the energy market. We also carry out regular research to understand the issues consumers face, and we examine information on customer complaints. We’ll use further consumer research to assess whether our retail market reforms are successful.

Protecting vulnerable consumers

We collect and publish information from suppliers on consumers’ bill-payment options, levels of debt and disconnection rates. This information helps us identify where suppliers could improve their policies and practices. As a result suppliers have become quicker at identifying

consumers who are struggling to pay, and offering them repayment schemes that take into account their ability to pay off debts.

Benefiting from smart meters

The government requires suppliers to install smart meters in all homes and smaller businesses by 2020. We will check that suppliers are doing this, and make sure consumers’ interests are protected.

To support the rollout of smart meters, we are leading work to speed up the switching process and to encourage the development of innovative products and services. This includes ‘time-of-use’ tariffs, where the price varies depending on the time of day energy is used. We will make sure consumers are properly protected as the market develops on the back of smart metering.

Annual Competition Assessment

Ofgem has taken the lead in making the profits of the six largest energy suppliers clearer. Since 2009, we have required them to produce annual statements showing the actual revenues, costs and profits of their generation and supply businesses. We also produce regular estimates of supplier revenues and costs through our Supply Market Indicators.

Ofgem uses all this retail market data to inform our analysis of whether competition is working properly. Together with the Office of Fair Trading and the Competition and Markets Authority, we are carrying out the first annual assessment of competition in the energy market. It will be published by the end of March 2014.

As part of future assessments, we will report on the impact of our reforms on the market. This will be based on, among other things, research to find out whether our reforms are helping consumers get more out of the market.

Factsheet 128 How we monitor whether the market is working properly for consumers