Britain's energy markets are changing – and not before time. To maintain affordable electricity and gas bills, keep the lights on and go green, the coalition began reforming them on day one. This hasn't been easy. UK wholesale gas prices have risen 120% since 2009. Labour's energy investment record was lamentable. Not all parts of the Conservative party back green energy.
The problem with Labour's legacy is clear: it created the energy big six. Ed Miliband rails against energy companies and says the market isn't working. But wasn't he Britain's first secretary of state for energy and climate change in 2008? Labour attempted reform, primarily by abolishing the post-privatisation electricity pool in 2001. This led to supply and generating companies merging – creating today's vertically integrated big six.
So the coalition inherited a market with too few competitors, a confusing plethora of tariffs and consumer trust damaged by doorstep misselling. The wholesale market was dominated by the big six, where they either supplied themselves or opted for over-the-counter deals, with no transparency.
We began with deregulation. This stimulated a doubling of smaller firms. The big six now face 15 competitors: Miliband himself has switched to one, and in a few months around 1.5 million customers will no longer get energy from the six. Interestingly, it's these small competitors who most oppose Labour's energy price freeze. Why? Because it favours the big six. If raw energy costs rise during a freeze, vertically integrated firms with deep pockets can withstand a profits squeeze that could bankrupt smaller, retail-only firms.
But deregulation and new competitors were never going to be enough. We needed to make it easier for consumers to switch. That requires making the market easier to understand and speeding up the switching process. This year there will be fewer tariffs and simpler bills, following a review by Ofgem – the regulator Labour set up and now wants to abolish. Switching times must be quicker: my ambition is to halve them before the next election, with a clear plan to cut them to 24 hours.
Second, we need to improve trust, so I've pushed collective switching to help the fuel poor. We've piloted 31 collective switches, saving on average £131 in the first year and creating the knowhow to help councils give more power to people. Our forthcoming community energy strategy will demonstrate a robust future for collective switching.
Third, we've introduced an annual competition assessment to ensure markets work for consumers. I've appointed Clive Maxwell, the chief executive of the Office for Fair Trading, to head a new consumer division in my department.
Yet it wasn't just retail energy markets that were underperforming in 2010. The vertically integrated big six raised concerns about the wholesale market. Ofgem examined this and I amended the law to back up its reforms.
The "day ahead" wholesale electricity market has been transformed. A year ago, just 6% of electricity was being traded. Now it's 42%. Labour's expensive alternative – of reintroducing the pool – suggests it hasn't noticed.
But we must do more. Ofgem is forcing the big six to publish prices at which they must then buy and sell electricity. Stimulating competition this way will be more effective in increasing transparency and cutting prices than Labour's complete unpicking of vertical integration, which might push prices up. The UK is also pushing for Europe's single energy market to be completed this year, which will bring a new approach to interconnectors, making this a reality.
Britain's energy markets were a mess in 2010. And Labour's populist plans just aren't tough enough to challenge the big six it created. The evidence is mounting that the coalition's reforms are.
View all comments >