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Energy firms make £500m in excess profits from small business customers, concludes watchdog

Published: 16:08 EST, 11 July 2015 | Updated: 16:08 EST, 11 July 2015

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Energy companies are making about £500million in excess profits from their small business customers because of a lack of competition, the Competition & Markets Authority has claimed.

The CMA’s provisional report into the energy market said the Big Six energy companies, which account for the majority of consumers both domestic and commercial, were charging prices around 14 per cent above what the CMA judged would the proper competitive level for small firms if the market was working efficiently.

This was far worse than in the domestic market where households have been overpaying about five per cent, said the CMA.

Energy clients: Most commercial customers are on fixed term contracts while only a minority of domestic consumers are on such deals

‘This equates to SME customers paying around £500million more on an annual basis than would have been the case had competition functioned more effectively,’ it said.

‘For SMEs, the evidence suggests that average prices have been substantially above the levels we would expect to see in a well functioning competitive market.’

The Big Six are British Gas, RWE Npower, E.On, Scottish Power, SSE, and EDF Energy.

The regulator said these energy firms made profits it judged to be ‘in excess’ of what they might if the market functioned more effectively of about £900million a year.

The review also found that energy firms’ profit margins were ‘significantly higher than those on sales to domestic customers’. Profit margins on sales of gas were 10.1 per cent while on electricity they stood at 7.9 per cent.

However, the CMA noted that there are more suppliers in the commercial market than just the Big Six, though they are still important players. Most commercial customers are on fixed term contracts while only a minority of domestic consumers are on such deals.

In the domestic arena, customers on variable contracts tend to pay more for energy than those on fixed contracts and a key theme of the CMA report was the need for energy companies to engage with customers more closely so that they could make informed choices about which price tariff they chose.

The CMA’s conclusion about one of the more controversial aspects of energy provision to the small business sector, rollover tariffs, were striking. These are tariffs that customers would pay if they took no action at the end of a fixed term contract compared with so-called retention tariffs, which are the prices which customers who have actively negotiated with their energy suppliers pay.

‘Rollover tariffs were 29 to 36 per cent higher than retention tariffs for electricity and 25 to 28 per cent higher for gas,’ it said. The difference before a business entered into its first contract with an energy company, typically when a firm has moved into new premises, were even more striking with prices up to 116 per cent higher for gas and 82 per cent higher for electricity than fixed contracts in such cases.

However, the CMA notes that the major suppliers including the Big Six and Opus Energy have gradually withdrawn auto-rollovers under pressure from the Government and the regulator Ofgem. A series of scandals where small businesses were hugely overcharged led to a deluge of bad publicity associated with auto-rollovers and the intermediary firms which sold energy contracts to small businesses.

The CMA concluded that all customers were being overcharged by £8.5billion in the five years to 2013. However, the Big Six energy companies escaped serious censure in the report nor is there any prospect of an industry break-up after the CMA found no evidence of market abuse or tacit co-ordination over price moves.

It found that the Big Six had earned a 28 per cent return on capital over the four years to 2013 in their supply businesses compared with a cost of capital of ten per cent.