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Is competition in the UK energy market real?

By Mark Fitch, PA energy regulation expert 

The cost of energy is never far from the front-page headlines and often a divisive political issue. Nevertheless, everyone is agreed on one thing: if the energy market is working effectively, it can protect customers from being overcharged. So the call from all sides has been to inject more competition to ensure customers get a fair deal.

To this end, at the end of 2013 Ofgem published its state of the market report with the Office of Fair Trading and the Competition & Markets Authority. This work provides a broad framework to measure competition and assess whether the energy market is “serving the interests of households and small firms.” 

In our view, in addition to measuring the number of firms and their share of production, these three bodies need to work hard to show whether all customers really can make a competitive choice (whether the most vulnerable customers are aware of the choices available to them) and whether customers do indeed switch suppliers when their bill rises. 

There is significant scope to create a clear picture of what an effective competitive market actually looks like and how this should be measured.

A framework for measuring competition that focuses ruthlessly on making a difference for the consumer, would provide a clearer picture of the energy market. This framework would not only measure the competitive environment, but also segment the market into groups of customers with common needs and measure the underlying drivers of their satisfaction.

Measuring competition in the energy market

Academically sound and well-understood metrics, such as the HHI index (a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them), demonstrate whether competition is structurally sound and if there is the potential for competitive behaviour.

However, just because a market has the structure to be competitive, it does not automatically follow that it is functioning well in reality. To test this, there are a number of factors we can measure. 

These include: whether information is readily available to all, whether there are hidden barriers (such as around changing payment), or whether there are parts of the market where no real choice exist. Perhaps most importantly of all, we need to be able to show how perceptionally competitive the market is. This means that customers are not only able to execute choice, but they can also perceive that a fair deal is possible – and that they have the power to make realistic choices between offers.

In practice, we need to examine what customers understand: what they say and whether they see, feel and act on the choices available to them. One test would be to ask customers to describe the differences between brands in the marketplace – can they perceive any real differences or does the market appear identical to them?

Measuring customer satisfaction

When focusing on energy bills and customer attitudes towards them, it is vital that we take into context the wider squeeze on household incomes. We also need to pinpoint a customer’s satisfaction with their energy supply in order to test that market. We must avoid confusing this satisfaction with a company overall as it may be providing them a broad range of services. For example, if an energy company provides excellent service of a customer’s boiler, this may create a positive ‘brand halo’ effect in the customer’s mind that is unrelated to price of energy.

Net Promoter Scores – which measure the loyalty of a company’s customer relationships – are a popular metric. However, no single top-line measure will explain definitely why an energy customer is satisfied or advocating their energy supplier. We therefore need to understand the drivers of satisfaction as well as the underlying drivers if we are to understand if companies are truly giving customers what they want. 

Critically, our suggestion is for a segmented view. This would divide the market into different groups with common needs and then design individual strategies to ensure the market works for all. As the vulnerable and disadvantaged have the most to gain from finding the best deals, their specific needs, preferences and behaviours need to be fully understood. This then allows them to help themselves. 

Once we are clear about what we want to measure, and how we are going to measure it, we need to consider all the implementation needs at the outset. This means defining the research approach (right method, sample, analysis) as well as ensuring the implementation ecosystem is in place (stakeholders, governance forums, decision rights, processes and infrastructure). Only then can we be sure that the market really is doing all it can to protect the interests of customers.

To find out more about our views on creating effective competition in the energy market, contact us now.

Ron Norman
Energy and utilities
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Liz Parminter
Energy and utilities
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