In an Open Letter to OFGEM, the UK regulator, the Minister said that the Big Six need to adopt a new business model. He said: “The most effective way to reduce consumer bills is to improve the energy efficiency of our homes. This is also one of the most effective ways to reduce our carbon emissions.
“However one of the longstanding concerns about the current energy supply market is that the current Big Six energy suppliers still see their role as selling gas and electricity – rather than having a different business model where the value proposition is to save households energy.
“This has been seen most recently where the Big Six have been slow to embrace the Green Deal, and, in a number of cases, the Energy Company Obligation.
“As part of Electricity Market Reform we are seeking to promote Electricity Demand Reduction (EDR) and this year will be launching a number of EDR pilots as part of these efforts. I am particularly keen therefore that the market is encouraged to develop in such a way as to promote energy efficiency.”
In his letter, Davey also asks Andrew Wright, Chief Execugtive, OFGEM to consider ways to improve UK grid connections and appears to suggest that that Government would be happy if OFGEM were to report that a full market investigation is needed into British Gas. He told OFGEM:
“It is vital that your work is clearly independent and I want to reiterate that I want you to feel that you can recommend any one of a range of things ranging from no action to a full market investigation reference.”
Davey estimates that if margins in gas were similar to electricity, the average saving per household could be up to £40 a year.
Tables accompanying the Minister’s letter show that Centrica, which owns British Gas, saw profit margins of 11.2% for its gas business in 2012 and a 41% share of the gas market.
SSE also has a high profit margin of 11.4% but a much smaller market share; therefore this was not seen as such a problem. Rival EDF made a 4.1% loss on gas in 2012.
The analysis compares this with the profit margins of supermarkets which typically range from 3.5% to 5%.
said: “These figures are not new and have been in the public domain some time. The large energy companies already provide the regulator with a full breakdown of their business costs and operating margins. Ofgem, along with the Office of Fair Trading and the Competition and Markets Authority, is currently carrying out a competition assessment and the findings are due next month.
“There are now more than 15 companies which supply households and people can easily switch – almost one million people switched in the last two months of 2013 alone. Most business customers are with independent gas suppliers.”
In its statement, British Gas said: “There is an ongoing independent market assessment being conducted by the Office of Fair Trading, Ofgem and the Competition & Markets Authority.”
The Government has also asked the regulator to report on the possible consumer benefits of improving grid interconnectivity.
Analysis consistently shows that Great Britain is relatively poorly interconnected to other power markets at 5% of capacity compared to a more optimal percentage of around 10%.
Recent National Grid estimates have indicated that improved electricity interconnection could save up to £1billion pa or around £11 per household.
Davey added: “As we introduce increasing intermittency in our generation mix the need for increased interconnection will be greater and will enhance competition in the wholesale electricity market.
“At the end of last year DECC published its interconnection strategy but we would be keen if your work were to indicate what benefits there might be for competition and for consumers from further steps towards completion of a Single European Energy market of which interconnection could play an important part. I also would like you to examine whether there would be any merit in further gas pipeline interconnection with Europe. “