1. Making markets work for consumers Retail Competition in the UK Iain Osborne Director of Consumer Markets, Ofgem

2. Insert strapline Making markets work for consumers Contents  History of liberalisation  State of competition  Prices

3. Insert strapline Making markets work for consumers History of liberalisation 1986Gas privatised, customers free >25,000 therms 1989Electricity privatised 1990Customers free >1MW Pool created 1992Medium gas customers free (2.5k-25k therms) 1994Medium electricity customers free (100kW-1MW) 1998Small non-domestic and domestic gas customers free 1999Small non-domestic and domestic electricity customers free 2001New electricity trading arrangements (end of Pool) 2002Removed domestic price controls (gas and electricity)

4. Insert strapline Making markets work for consumers What the UK did 1  Regulated domestic prices to encourage market entry  Made it very easy for customer to switch –But current systems are expensive and inflexible for suppliers  Protection for vulnerable customers  Suppliers also obliged to deliver energy efficiency

5. Insert strapline Making markets work for consumers What the UK did 2  Pool open to manipulation –Concentration of ownership  Slow to break up vertically integrated British Gas –Delayed development of competition  Prevented concentration in hands of “national champions” –Good for consumers –But much of industry now owned by French/German companies

6. Insert strapline Making markets work for consumers Competition

7. Insert strapline Making markets work for consumers Domestic markets  150,000 customers switch each week (7m per year)  51% of customers have switched one or other fuel, or both  Six big active competitors – but in regional duopolies, typically in each region of UK: –Electricity 60%/25% between ex-regional player and British Gas –Gas 60%/25% between British Gas and ex-regional player  “Competitive but not mature”

8. Insert strapline Making markets work for consumers Market concentration  Energy supply has some characteristics that could facilitate a concerted approach  Ofgem has not found evidence of collusion  Size of entry barriers a key question – will we see market entry?  Would examine further concentration extremely closely

9. Insert strapline Making markets work for consumers Non-domestic markets  July 2003 review found healthy competition –Concentration at acceptable levels –Prices track costs  Some challenges –Transfer process –Objections rules (now changed) –Little willingness to pay for service

10. Insert strapline Making markets work for consumers Prices

11. Insert strapline Making markets work for consumers Price trends  Domestic prices up  Non-domestic prices sharply up this year

12. Insert strapline Making markets work for consumers Domestic prices Real terms (Aug 2004 prices); Source: Ofgem

13. Insert strapline Making markets work for consumers Non-domestic price rises 0% 10% 20% 30% 40% 50% Small commercialMedium commercialLarge commercialIndustrialLarge industrial % 0% 10% 20% 30% 40% 50% Small commercial Medium commercial Large commercialIndustrial Interruptible % Electricity Gas Firm Shows price rises Oct ’03-Oct ’04; Source: Cornwall Consulting

14. Insert strapline Making markets work for consumers Price drivers  Wholesale price changes

15. Insert strapline Making markets work for consumers Price drivers Jun ‘03Oct ‘04 Percentage change Electricity (£/MWh)193585% Gas (pence/therm)214090% Source: Heren. Prices are for traded one-year baseload/NBP contracts

16. Insert strapline Making markets work for consumers Domestic prices have not fully passed through higher wholesale prices Real terms (Aug 2004 prices); Source: Ofgem

17. Insert strapline Making markets work for consumers Price drivers  Wholesale price changes –Emissions trading  Renewables Obligation escalator (5%-10% impact on average customer bill – up to £25)  RPI inflation in back and front offices  Ofgem keeps under review the link between supplier costs and domestic prices

18. Insert strapline Making markets work for consumers Conclusions  Retail competition is very healthy in UK  However, competition authorities must always be vigilant  Process took 15 years, with strong political support  Other countries learn from UK mistakes

19. Insert strapline Making markets work for consumers Promoting choice and value for all gas and electricity customers