Energy probe could lead to 'major structural change'

An investigation of the UK energy market could result in "major structural change", according to the boss of industry regulator Ofgem.

It referred the industry to the Competition and Markets Authority (CMA) because it does not believe the market is working effectively.

The probe is set to look at the profits of the six largest suppliers.

"This will help build consumer trust and confidence in the energy market." said Ofgem boss Dermot Nolan.

"Now is the right time to refer the energy market to the CMA for the benefit of consumers.

"There is near-unanimous support for a referral and the CMA investigation offers an important opportunity to clear the air."

In March an Ofgem report questioned the effectiveness of competition in the market and recommended a full inquiry. It was then required by law to consult other interested parties before making a final referral.

'Major structural change'

One of Ofgem's central concerns is the structure of the market which allows big companies to be both energy generators and suppliers to households. It wants the CMA's investigation to examine how this works and whether the relationship should be broken up.

"It could lead to a major structural change in the industry and indeed the energy companies themselves." Ofgem's chief executive Dermot Nolan told the BBC's 5 live Money.

And he added: "I do think there are pros and cons to the argument, but we absolutely feel it needs to be examined and settled by the authority and we hope they'll make this a central aspect of the report."

Analysis

John Moylan, BBC News

So what happens now?

The most long awaited competition probe in years will get underway almost immediately. Within days the CMA will appoint the independent panel members who will lead the investigation. That will be followed within weeks by a timetable for the work and its terms of reference.

The scope of the investigation will be crucial. Some big 6 firms say it should be broad, covering everything that makes up our energy bill, from wholesale prices to green levies.

But the regulator isn't convinced. It has highlighted again the core issues that have caused the trust in the energy market to break down - the wholesale and retail markets and the links between the two.

If the CMA finds flaws that are limiting competition, keeping new entrants out and keeping prices higher than they might otherwise have been, then it has the power to undertake structural remedies. That could mean the break up of the big 6 firms.

Our energy market may never be the same again.

End of 'toxic debate'

Ofgem also wants the CMA to examine whether there is sufficient competition between the large energy providers, and whether consumers who do not switch supplier are being set higher prices.

Energy UK, which represents the largest energy companies, said it welcomed the investigation. "The competition inquiry will allow us to put to bed the toxic debate and shine a light on the progress the industry has already made" said its chief executive Angela Knight.

And she added: "There are now more companies than ever in the market, switching is on the up especially to smaller suppliers and the industry is making it easier than ever for customers to engage with their company."

Switching

Earlier this month Ofgem reached agreement with the energy companies to make it easier for customers to switch supplier. Under the agreement customers will be able to switch energy supplier within three days by the end of the year.

Anyone who wants to switch must be given a two-week cooling-off period for the chance to change their mind, before the three-day process starts.

Next-day switching should be in place by the end of 2018 at the latest.

At present, the switching process can take five weeks, including the two-week cancellation period.

'No stone unturned'

Consumer groups welcomed today's announcement.

"This is a watershed moment for the broken energy market and millions of people struggling to cope with spiralling bills," said Richard Lloyd, executive director of the consumer group, Which.

"The investigation must leave no stone unturned in establishing the truth behind energy prices, and while it takes place Ofgem must continue its renewed, tougher approach to protecting consumers. Energy companies must also not wait for the outcome of this inquiry but make urgent changes now to do better by their customers," he said.