Under the microscope. Reviewing the micro-business energy market

Transcription

1 Under the microscope Reviewing the micro-business energy market

2 About Consumer Focus Consumer Focus is the statutory consumer champion for England, Wales, Scotland and (for postal consumers) Northern Ireland. We operate across the whole of the economy, persuading businesses, public services and policy-makers to put consumers at the heart of what they do. Consumer Focus tackles the issues that matter to consumers, and aims to give people a stronger voice. We don t just draw attention to problems we work with consumers and with a range of organisations to champion creative solutions that make a difference to consumers lives. Following the Government s consumer advocacy reforms, we will continue to act in the consumer interest across a wide range of sectors until our general advocacy role passes to Citizens Advice in April As part of the reforms, Consumer Focus will establish a new unit to identify and represent consumers interests in complex, regulated sectors, including energy and post issues and, in Scotland, water. Our Annual Plan for is available online at For regular updates from Consumer Focus, sign up to our monthly e-newsletter by ing [email protected], see our blog at blog or follow us on Twitter Cover image by Douglas Robertson; page 4 image by Alexis Bailey Consumer Focus

3 Introduction In 2004 one of our predecessor bodies, energywatch, commissioned a large piece of research called Business energy markets. It explored how the business energy market functioned from small business consumers perspectives. In late 2011 we commissioned to update the report. We were interested to know what had changed and if things hadn t changed we wanted to know why. The micro-business energy market is a complex one and we felt it was crucial to understand more because: the 2007/08 'credit crunch' and subsequent recession and reduction in bank lending has created a very difficult financial climate for small businesses micro-businesses were provided with additional protections on complaint handling under the 2007 Consumers, Estate Agents and Redress (CEAR) Act including the right to take their complaint to the Energy Ombudsman. This has changed the market, mostly for the better. However, there has been an increase in small businesses seeking assistance with debt and disconnection problems. When our Extra Help Unit began operating in late 2008 it was receiving less than 20 cases a month, but by the end of 2010 that figure had more than doubled to over 50. Debt recovery-related cases were running as low as eight a month in December 2008 before climbing to as high as 45 in May They have stayed high since increased protections for micro businesses were introduced as part of the Ofgem Probe in 2010 energy prices for business energy consumers have risen sharply in the last few years making energy bills more of a concern for small businesses and this is expected to continue up to, at least, 2020 as part of the current Retail Market Review Ofgem is proposing to introduce wider protections for small businesses future developments such as Green Deal, smart meters and low-carbon transition have the potential to radically change the energy market for business consumers This report covers the following issues: 1 An overview of the GB business energy market essentially an update on the 2004 assessment to include; switching levels, prices, the state of competition, consumer perceptions, state of redress framework and anything else deemed relevant. 2 Regulation then and now the effects of regulation, both existing and proposed. Has it helped small businesses? Has it reduced competition? How might our 'protection gap' be narrowed? What issues should be tackled as a priority? 3 Competition in the market has it increased or decreased since 2004? What s better, what s not, in terms of choice and access to information about choices? 4 Emerging and future challenges what will the Green Deal, low-carbon transition (including smart meters) mean for prices, competition and contracts? Under the microscope 3

4 The report has provided Consumer Focus with up to date analysis of the business energy market to: 1 Inform our current advocacy work on behalf of micro businesses 3 Inform our work on future developments in the energy market that may affect micro business consumers including smart meters, Green Deal, low carbon transition and the consumer landscape changes. 2 Provide an evidence base for our response to the non domestic proposals in Ofgem s forthcoming Retail Market Review consultations 4 Under the microscope

5 cornwallenergy Micro-business energy markets 2012 A review for Consumer Focus Prepared by: Robert Buckley and Kate Hill

6 Report contents 1 Summary of findings and conclusions Positive aspects Recommendations for Consumer Focus Negative aspects Recommendations for Consumer Focus 7 2 Methodology and approach Terms of reference Process and approach About 8 3 Market overview Basic concepts The energy cost chain Rules and regulation Market structure electricity generation and supply Generation Wholesale trading Networks Taxes and levies Supply Market structure gas production and supply Wholesale markets gas Wholesale trading Networks Taxes and levies Supply 17 4 State of competition in non-domestic supply What are micro-businesses? The micro-business energy market The non-domestic energy market outside micro-businesses 21 5 Terms of trade for supplying non-domestic consumers Negotiated, deemed and out-of-contract supply terms Objections Micro-businesses Renewal and switching Complaints handling and redress Non micro-businesses Consumption provisions Mid-contract changes Credit Third party intermediaries 30 Micro-business energy markets 2

7 6 Energy policy and regulation Development and direction Economic regulation The Electricity and Gas Supply Licences Definition of premises Deemed contracts Micro-businesses Supplier of last resort Consumer transfers Exclusion of cross subsidy Information provision to non-domestic consumers Data for meter readings Ofgem s market investigations Energy Supply Probe Retail Market Review Encouraging liquidity in the wholesale power market Financial services regulation Consumer advocacy 38 7 Consumer views Consumer Direct contact information Contacts in Activity in September Telephone survey of micro-business consumers Awareness and sourcing Engagement with the market Specific features of energy contracts Qualitative comments by micro-business consumers Commentary 54 8 Stakeholder views Level of competition Consequences of micro-business definition Barriers to consumer benefit Role of TPIs Issues for the future 61 9 Comment and conclusions Context Level of competition Consequences of micro-business definition Barriers to consumer benefit Role of TPIs 66 Micro-business energy markets 3

8 9.5.1 Recommendations to Consumer Focus Recommendations to micro-business consumers Challenges for the future 69 Annex 1: Consumer Direct contact codes Annex 2: Organisations contributing to this research Index of figures Figure 3:1: Electricity and Gas Price Breakdowns estimates Figure 7:1: Respondents annual use of energy Figure 7:3: Respondents electricity suppliers Figure 7:5: Type of electricity contract respondent holds Figure 7:7: Actions respondents have taken in the last six months Figure 7:9: Actions taken when reviewing energy arrangements Figure 7:11: Respondents intentions for the next six to 12 months based on their actions in the last six months Figure 7:13: Awareness of respondents that they may be locking into another contract for a year with possibly higher prices or different terms if they do not take any action when they reach the end of their contract Index of tables Table 3:1: Ownership of large-scale power generation capacity by technology May Table 4:1: Non-domestic energy Consumption 2003 and 2010 in the UK Table 4:2: s assessments of non-domestic energy supply contracts that could be held by small businesses Table 4:4: Overview of competition in small businesses gas volumes Table 4:5: s assessments of non-domestic energy supply contracts outside those that could be held by small businesses Table 4:7: Overview of competition outside micro-businesses gas volumes Table 5:1: Consumer Focus s checklist for micro-business energy contracts Table 5:2: Overview of contract price structures for non-micro-business consumers Table 5:3: Consumption provisions in energy supply contracts overview Table 5:4: the UIA s points for non-domestic consumers when dealing with energy TPIs Table 7:1: Contacts from micro-businesses to Consumer Direct Table 7:3: Contacts from micro-businesses to Consumer Direct September Table 7:5: Opinions from micro-businesses on energy supply markets and contracts Table 8:1: Summary of stakeholder views Micro-business energy markets 4

9 Disclaimer While considers that the information and opinions given in this report and all other documentation are sound, all parties must rely upon their own skill and judgement when making use of it. will not assume any liability to anyone for any loss or damage arising out of the provision of this report howsoever caused. The report makes use of information gathered from a variety of sources in the public domain and from confidential research that has not been subject to independent verification. No representation or warranty is given by as to the accuracy or completeness of the information contained in this report. makes no warranties, whether express, implied, or statutory regarding or relating to the contents of this report and specifically disclaims all implied warranties, including, but not limited to, the implied warranties of merchantable quality and fitness for a particular purpose. Heath Farm Cottage Paston North Walsham Norfolk NR28 0SQ T +44 (0) F +44 (0) E [email protected] Micro-business energy markets 5

10 1 Summary of findings and conclusions This report summarises s findings from research on the state of competition in Britain s non-domestic electricity and gas markets in early We have used research we carried out in 2004 as a baseline. We were commissioned to undertake this research by Consumer Focus, the successor body to energywatch that instigated the 2004 research, and we were asked to concentrate on the micro-business sector as this is where Consumer Focus has a statutory remit. In our opinion there has been a generally positive, though slowly accelerating, improvement in competitiveness in the non-domestic energy market since our baseline report of In the earlier report we observed the sector was following a fitful path towards increased competition, being driven largely by tactical activity by the big six 1 integrated generation and supply companies. However, while the general picture is now healthier, there are several aspects of how the markets are working where we consider Consumer Focus should be concerned enough to take action on behalf of micro-businesses. 1.1 Positive aspects We believe that the electricity and gas markets for non-domestic energy customers including microbusinesses are at their most competitive for some years. We conclude this because: independent competitors to the big six including several recent entrants are now active in all non-domestic market sectors and prominent in a number of them there are some encouraging signs from our independent telephone survey that micro-businesses are becoming more confident in the way they deal in the energy markets a significant number of third party intermediaries (TPIs) are working hard with their services that bring the benefits of competition to micro-businesses that may not otherwise be able to access them new and innovative propositions are emerging from suppliers based on factors that include duration of term, price, smart metering, data reporting and green energy Recommendations for Consumer Focus Consumer Focus can encourage the positive aspects of competition we have identified in the nondomestic market through: using its information and resources to encourage micro-businesses to participate in the market, perhaps through joint campaigns with third parties pressing all suppliers to include basic contract information on each micro-business bill, including anniversary dates, duration of current pricing structure and termination arrangements. The objective of this initiative should be to make it easier for consumers to negotiate new terms with either their existing supplier or a new supplier supporting work by Ofgem designed to ensure suppliers improve overall market competitiveness in, for example, wholesale power market liquidity. The objective of this work should be to encourage more competition amongst suppliers by making access to wholesale product easier, removing barriers to entry to the sector supporting work also by the regulator to enhance transparency and predictability of network charges and policy levies. The objective here should be to minimise the scope for shocks in costs outside a supplier s direct control that they may be forced to pass on to consumers 1 Centrica (British Gas), E.ON UK, EDF Energy, RWE npower, ScottishPower and SSE Micro-business energy markets 6

11 establishing much closer relationships with energy suppliers to micro-businesses outside the big six so that they match the good links the organisation now has with the incumbent players. The objective of this initiative should be for Consumer Focus to improve its understanding of the benefits these companies bring to the market and how they differ from their larger competitors 1.2 Negative aspects While the market overall may be improving, problems do occur. These problems need addressing and centre on: unexpected back-bills for energy consumed but for whatever reason not billed by suppliers. Though they may be infrequent, when they occur back-bills can cause great distress to microbusinesses even to the point we are told of forcing them to close a minority of TPIs causing detriment to businesses by misrepresenting the services they offer and the fees they charge blocked switches where suppliers have contractual rights to stop a consumer switching to a competitor. There have been consistent suspicions that some suppliers may be using this objections right for their own commercial purposes to the detriment of consumers apparently very high deemed and out-of-contract prices for situations when suppliers provide energy to micro-businesses with whom they do not have a negotiated contract perhaps because they are start-ups or because existing arrangements have lapsed apparently high prices contained in some roll-over offers that micro-businesses migrate to automatically should they take no action to renew an existing contract Recommendations for Consumer Focus Consumer Focus can help tackle the negative aspects of competition in the non-domestic market we have identified through: pressing all suppliers to follow the example being set by some suppliers of committing not to levy back-bills on businesses covering periods longer than a year ensuring TPIs serving all non-domestic consumers operate to a minimum good standard by using its influence to ensure that a mandatory, robust and independently-administered code of practice is established as quickly as possible. This code should address TPI commissions and the number of suppliers TPIs work with and be the vehicle to exclude the limited number of rogue TPIs from the market asking Ofgem to make public information on the levels of objections incurred by micro-business consumers of the different suppliers covering blocked departures and blocked acquisitions encouraging Ofgem to investigate the cost-reflectivity of the deemed and out-of-contract prices compared to negotiated contract prices as well as the premiums against competitive prices embodied in some roll-over offers Micro-business energy markets 7

12 2 Methodology and approach Below we set out the approach we have taken in preparing this report. 2.1 Terms of reference In 2004 undertook a study 2 of non-domestic energy supply competition for Consumer Focus s predecessor energywatch. This review consisted of a survey of the non-domestic supply markets as they were then operating with recommendations for energywatch on how it could engage in those markets to improve their workings for consumers. In January 2012, was asked by Consumer Focus to update that study by: commenting on the state of non-domestic electricity and gas competition with a focus on microbusinesses comparing the 2004 and 2011 regulatory regimes for the non-domestic electricity and gas markets updating on the assessments of competitiveness from the 2004 report assessing future drivers and challenges for the non-domestic market in general and microbusinesses in particular This report is the output of our updated research and, where we make comparisons, we reference our 2004 research as the baseline report. It reflects the analysis we have undertaken into the structure and workings of the markets supplying electricity and gas to non-domestic consumers in Britain, especially micro-businesses. We have also taken the opportunity to engage with microbusinesses themselves and many stakeholders to gain an on the ground view of these markets. 2.2 Process and approach We undertook the study through a combination of use of our existing expertise, further desk research, telephone and face-to-face interviews with stakeholders and analysis of data provided to us by Consumer Focus. To supplement our research we also commissioned Perspective Market Research Services to undertake an independent telephone survey of 500 micro-businesses. We have thoroughly updated the market review set out in our 2004 report as a baseline. This review is contained in sections 3, 4, 5 and 6 of this report. Section 7 considers consumer views as recorded firstly by information taken from contacts made by micro-businesses to the Consumer Direct helpline, and secondly as a result of the telephone survey that we commissioned of microbusinesses. Section 8 summarises stakeholder views from suppliers and consumer groups, and section 9 sets out our findings and recommendations. 2.3 About The team are independent energy market specialists with expertise including: regulation and public policy within both electricity and gas markets where our Energy Spectrum newsletter is the industry reference point electricity and gas market governance, business processes and systems energy supply markets, of which we undertake regular share surveys 2 (PDF 913KB) Micro-business energy markets 8

13 3 Market overview In this section we summarise the structure of and level of competition in the non-domestic energy markets. As well as being a major feature of the economy in its own right, Great Britain s competitive energy supply industry is essential to the well-being of companies and the public services. Official figures show that in nominal terms 2010 non-domestic consumers spent 20.8 billion 3 on gas and electricity, some 112 per cent more than the 9.8 billion in 2003 that we referenced in our baseline report proved to be the low point in annual spend by non-domestic consumers. Their bills embarked on a steep upward trajectory to 2008 when 23.0 billion was spent. But, though their spend was increasing, the energy volumes non-domestic consumers were buying were in sharp decline. For the 112 per cent more they spent in 2010 on 2003, non-domestic consumers bought 19 per cent less gas and electricity. This section first of all outlines trends in non-domestic consumers demand for electricity and gas and then provides an explanation of the key functions in the supply chains. By showing the scale of non-domestic electricity and gas requirements defined for the purposes of this analysis as all final use for non-domestic and non-power generation purposes it is intended to demonstrate the importance of the markets in supplying them. It also aims to set the scene for later sections of the report, particularly including the survey and review of stakeholder opinions. 3.1 Basic concepts Today, some 29.4 million 4 electricity and 23.0 million 5 gas customers can participate in competitive energy markets in Great Britain. Of these customers, official figures estimate that some 2.3 million are non-domestic electricity users 6 and 284,100 7 are non-domestic gas users. These markets have evolved from public monopoly to competition since the mid-1980s, often requiring support from policy makers and regulators. Liberalisation has also occurred in energy markets elsewhere, most notably via the European Union s directives to open electricity and gas markets to competition 8. Markets in Great Britain opened for larger users first from 1990 in electricity and at around the same time for gas. For smaller users, markets have been open since the late 1990s. Irrespective of how a competitive offer to supply electricity or gas to a non-domestic customer is presented, in preparing it suppliers will assess separately the different costs in the supply chain, namely: energy costs (including wholesale costs, the supplier s costs of servicing the customer, and its margin) charges for using the delivery networks from the production facility to the customer s meter taxes and levies 3 DECC Dukes Table 1:7 Sum of spend by Industrial and Other users 4 Source: 2009 figures, Digest of United Kingdom Energy Statistics 2011 Department for Energy and Climate Change (DECC) 5 Source: 2010 figures, Energy Trends December 2011 DECC 6 Ibid 7 Ibid 8 The EU initiative to stimulate electricity supply competition has resulted in three Directives of the European Parliament and of the Council of Ministers concerning common rules for the internal market in electricity. The first, Directive 96/92/EC, was passed in 1996, to be superseded by Directive 2003/54/EC of 26 June In gas, two similar Directives have also resulted: 98/30/EC and 2003/55/EC. The so-called third package adopted by the European Commission in September 2007 resulting in two further directives. See Micro-business energy markets 9

14 Suppliers secure bulk energy volumes to match the customer s requirements typically from competitive wholesale markets. They will also assess their costs in servicing the account and then factor in a profit margin. In the non-domestic sector, suppliers tend to present their offers either as tailored arrangements for larger customers, or as standardised products for smaller users. A breakdown of typical supply costs to smaller and medium users for electricity and gas is shown in Figure 3:1. It shows that the non-energy costs of networks, levies and obligations account for a third of non-domestic power bills and a fifth of non-domestic gas bills. Figure 3:1: Electricity and Gas Price Breakdowns estimates Other Energy & supply p/kwh Electricity - small Electricity - medium Gas - small Gas - medium Prices breakdowns are assessments intended to be representative of typical prices in Great Britain. They are shown exclusive of VAT for one year s supply for arrangements struck during summer 2011 and commencing 1 October 2011 based on delivery charges and taxes current at that date. From the customer s point of view, understanding the pressures on the different cost elements of their bills can be useful in setting their expectations for what they will have to pay for their energy now and in the future. The following paragraphs provide a more detailed overview of the different components of the energy supply chain. 3.2 The energy cost chain Energy is traded by a multiplicity of means at the wholesale level. There are various exchanges and brokers from whom suppliers can source volumes or they may choose to contract direct with producers. Figure 3:2 compares average wholesale gas and electricity baseload annual prices with currency-adjusted oil prices. The first two price markers are critical measures for pricing wholesale energy to non-domestic customers. Baseload provides for the delivery of the same amount of energy every day of the contract period. Figure 3:2 shows that wholesale costs for gas and electricity have been on a volatile but generally rising trend since our baseline report. The time period shown includes our transition to a net gas importer in Now the UK imports nearly half its gas requirements from abroad. From a low point in 2002, British wholesale gas and electricity prices nearly tripled to reach peaks in 2006 before dropping back sharply. Although world energy prices were rising at that time, British wholesale prices rose faster as there was nervousness locally about whether imported gas supplies would flow when needed at peak demand times. A respite in 2007 was short lived as wholesale electricity and gas prices then moved to record highs in summer 2008 at the same time that world commodity markets also surged to peak levels. Micro-business energy markets 10

15 Later in that year rates fell away again as fast as they had risen, to close 2008 very near the levels at which they had started it. Into 2009 wholesale energy rates fell away further, as the global economic slow-down and significant weakening in oil prices (from their highs of 2008) impacted, but with a price upturn occurring through to autumn Aside from trends in related fuel and carbon markets, experience in recent years has shown that British wholesale gas and electricity markets can be influenced by: short-term difficulties at production facilities (eg power stations or offshore gas fields) technical difficulties, constraining bulk energy flows (eg an outage in interconnection facilities restricting cross-border trade) weather, triggering unexpected demand conditions either in Britain or elsewhere through interconnections with north-west Europe perceptions of the longer-term demand and supply balances, most notably: o o o fears during 2007 and 2008 that there might be global energy shortages if demand continued to increase at then historically high rates fears during 2009 especially that the economic downturn had stolen up to five years of demand increases, with the implication that consumption in some markets might not return to 2008 levels for some time in 2010 commercial exploitation of shale gas in the United States would transform the global supply outlook for that fuel from one of expected shortfall to significant surplus actions by producers to invest in, or close, capacity the actions of traders, funds and other financial market participants especially currency traders as international energy commodities are traded in dollars and carbon in euros changes in government or regulatory policy Figure 3:2: Annual average crude oil and wholesale gas and power prices Gas (p/th), Elec ( /MWh), Oil ( /bl) Gas Power baseload Oil ($/bl) Source: Micro-business energy markets 11

16 3.3 Rules and regulation The framework for competitive energy markets is laid down in legislation. For electricity the key legislation is the Electricity Act 1989 (as amended by the Utilities Act 2000, the Energy Acts of 2004, 2008, 2010 and 2011). This legislation requires that companies operating in the electricity market are licensed for the separate activities of generation, transmission, interconnection, distribution and supply. For gas the key legislation is the Gas Act 1986 as amended by the Competition and Services (Utilities) Act 1992, the Gas (Exempt Supplies) Act 1993, the Gas Act 1995, the Competition Act 1998 and the Utilities Act The Gas Act 1986 (as amended) requires that all companies operating in the gas market either seek licences or seek an exemption. Under the Gas Act 1995, gas transportation, shipping (arranging for gas to flow through pipes) and supply activities are licensed separately. Under legislation the Gas and Electricity Markets Authority (GEMA) has been established as the independent regulator. GEMA forms the board of the regulator with the Office of Gas and Electricity (Ofgem) as the executive office. Ofgem is responsible for issuing licences in accordance with regulations that require financial standing and technical competence to be considered. The approach to market design is consistent for gas and electricity. Under the licence regime, companies that own and operate networks are required to put in place central contracts or codes that govern physical and commercial terms of access. Companies that wish to have access to these wires and pipelines must sign on to these codes and abide by their terms. The principal codes are for: electricity: o o o the Balancing and Settlement Code (BSC) allocates wholesale market volumes and puts a value on uncontracted trades to ensure the system operates safely the Connection and Use of System Code (CUSC) governs the commercial terms for access to the transmission network the Distribution Connection and Use of System Agreement (DCUSA) governs the terms for access to the distribution networks gas the Uniform Network Code (UNC) governs balancing and access to the transmission and distribution networks 3.4 Market structure electricity generation and supply The British electricity market is characterised by a small number of large companies that are active in both generation and supply to customers. This big six group of large suppliers is being joined by an increasing number of competitors, some of which are also active in both generation and supply and several of which focus on renewables Generation Electricity is mainly produced from nearly 75GW of large-scale generating capacity connected to the transmission network. The dominant generation capacities are fired by coal, gas or nuclear energy. Three interconnectors link the British market to the Netherlands (1GW capacity), France (2GW) and Ireland (500MW). Additionally there is a further 10GW of smaller-scale generating capacity, much of which is provided by renewable sources, including wind and biomass as well as combined heat and power (CHP) at non-domestic premises. This capacity is connected to the distribution networks and can be referred to as embedded or distributed generation. Large-scale generating capacity in Great Britain is owned by more than 10 companies, but nearly three quarters of large-scale capacity is now in the hands of the big six, as shown in Table 3:1. Micro-business energy markets 12

17 There have been a number of developments in the generation sector since privatisation. In the 1990s there was a big move towards gas-fired power at the expense of coal following falls in wholesale prices and the lifting of EU constraints on burning gas in power stations. Since 2000 efforts have been made to boost the amount of renewables generation. The main policy driver for this was the Renewables Obligation (RO) subsidy scheme for large-scale green generators, especially wind, and more recently the introduction of small-scale feed-in-tariffs (FiTs). In parallel, tough emissions limits have been imposed on many fossil fuel generators, which mean they have to invest in new abatement equipment or close their power stations early. These initiatives have been followed by the current coalition Government issuing in July 2011 its Electricity Market Reform proposals Wholesale trading Generators sell their electricity to suppliers through wholesale trading. The British Electricity Trading and Transmission Arrangements (BETTA) market rules have been in force since April 2005, although this arrangement built on trading arrangements that were initially implemented in England and Wales in Under it participants seek to meet their obligations so that their traded contracted quantities match their metered quantities as closely as possible. They have the following routes to achieving this match: Forward and futures markets these provide for buying and selling large volumes of electricity in advance typically a trade could be for an annual amount or block, an upcoming summer or winter period or for some years ahead. These trades can be conducted via brokers or arranged direct between counterparties Power exchanges there are organised exchanges where counterparties can anonymously buy and sell power. These trades can cover different time periods from a few hours to weeks ahead The Balancing Mechanism this is a tool operated by National Grid as the system to ensure that supply and demand balance in real time. Each day is divided into 48 half hourly periods. An hour before the start of each half hour period gate closure occurs this means that participants have to notify their contracts and no further trading takes place. National Grid then matches supply and demand for that particular trading period by calling on generators and suppliers to vary their output and consumption in order to match supply and demand in real time. Any party that has too much (or too little energy) to meet their customer s demands represented by actual meter readings has to either sell (or buy) using an imbalance price. These imbalance prices often differ from the forward market price because they reflect the cost of bringing extra generation online at short notice Micro-business energy markets 13

18 Table 3:1: Ownership of large-scale power generation capacity by technology May 2011 (GW) CCGT CHP coal hydro nuclear oil other pumped storage wind (offshore) wind (onshore) Centrica (British Gas) E.ON UK EDF Energy RWE npower Scottish Power SSE Total Big Six Dong Energy Drax Power Intergen International Power Magnox Vattenfall Other Total all generators Big Six share (%) 75% 12% 75% 100% 86% 91% 33% 16% 44% 53% 74% Source: data from DECC DUKES Table 5.11 summarised by Grand Total Micro-business energy markets 14

19 3.4.3 Networks Competition is established in supplying customers and also in wholesale energy production. The physical delivery of energy to the meter is, however, not competitive, as it this would mean duplication of wires and pipes, which is economically and environmentally undesirable. Network use in Great Britain is provided on an open access basis. The network owners must accept reasonable requests for access from suppliers and generators who want to flow energy through them and must comply on fair and transparent terms. The charges the network companies levy for providing services are published and consistent for all suppliers. They are designed to reflect the costs incurred by the network companies in moving the energy for each customer through their networks. Charges are set according to published tariffs which are regulated by the Ofgem, the industry regulator. A number of companies operate monopoly services moving electricity around the country. In England and Wales they include National Grid which owns and operates the high voltage electricity transmission system akin to the motorway network. Since 2005 when BETTA was implemented, National Grid became the operator, but not the owner, of the transmission network in Scotland. There are two regional electricity transmission networks in Scotland owned by ScottishPower and SSE respectively. Additionally, there are 14 regional electricity distribution networks in Great Britain that are owned and operated by six different distribution network operators (DNOs) 9. Charges for use of these networks are regulated by Ofgem Taxes and levies VAT is levied on non-domestic electricity supplies at 20 per cent. Additionally the Climate Change Levy (CCL) and RO are payable on non-domestic electricity supplies Supply Suppliers are responsible for selling electricity to industrial, commercial and residential customers. Their operations include the wholesale purchase of electricity, the acquisition of customers and the billing and collection of payments due to themselves as well as other industry players, such as National Grid, DNOs and Ofgem. As we discuss later in this section, supply of electricity to customers sits mainly in the hands of the big six 10. These companies have built their positions through competing for customers and, perhaps more importantly, acquiring rivals. The first years of the liberalised regime saw 14 regional electricity companies supplying consumers in Britain. These companies have consolidated in to five and some have also been subject to take over themselves. Additionally British Gas has established itself as a major supplier of electricity to businesses and households. 3.5 Market structure gas production and supply The British gas market has undergone a fundamental shift from self-sufficiency to near half import dependency in the last decade. Significant new import facilities have been delivered by private investors. The big six are also active in gas supply to non-domestic consumers. They compete with a range of companies from international and national backgrounds. 9 More information on ownership of energy networks is available from the Energy Networks Association 10 P33, Ofgem 2011 report to the European Commission (PDF 1.26MB) Micro-business energy markets 15

20 3.5.1 Wholesale markets gas Since our baseline report, the UK gas market has gone through a very profound shift to import dependency from self-sufficiency. In 2011 nearly half the gas we consumed was imported. Just eight years earlier gas demand was in Great Britain were met wholly from our own production and we were even able to export a near 10 per cent surplus. Gas is imported by pipeline from countries including Norway and the Netherlands and shipped in as liquefied natural gas (LNG) from countries including Qatar and Trinidad and Tobago. Figure 3:3: UK gas consumption and import dependency 1200 Demand (TWh) Net imports (%) 50% Demand TWh % 30% 20% 10% 0% -10% Imports as share of demand (%) % Source: DECC UK producers operate offshore rigs in about 100 fields, almost all located in the North Sea and the Irish Sea. Gas from these fields is landed at coastal terminals. From these entry points, the gas flows through the national pipeline network to consumers. Imported pipeline gas will also enter the national pipeline network at one of these points or at one of four LNG import terminals, also located at the coast Wholesale trading Gas is purchased wholesale from producers and importers for shipping 11 through the pipeline network to customers. As with electricity, there are a number of ways in which these transactions can take place: Forward and futures markets similar forwards and futures trading opportunities are available for gas as for electricity covering periods from days to years ahead Exchanges there are also two structured exchanges and brokered platforms where parties can anonymously buy and sell gas over short and medium timescales The On-the-day Commodity Market (OCM) is used by National Grid as gas system operator to secure volumes of gas for balancing. The gas market clears every day and National Grid then matches supply and demand by seeking more or less gas through the OCM. Unlike electricity other market participants can also access the OCM for requirements of their own 11 Unlike electricity arranging for the use of the delivery network, shipping is a separate licence function from supply dealing with customers Micro-business energy markets 16

21 Unlike electricity, gas can be stored in commercial quantities. This storage capability is an extra tool that can be used to balance demand at peak times. British gas storage facilities are drawn from two types: Those that were developed before competition started and are required to offer access to the wider market Those that have been developed since liberalisation and generally have exemptions from offering access to third parties Britain has a comparatively low level of storage capacity compared to our European neighbours, due to historic reliance on indigenous production from nearby North Sea fields. However, as our production has declined in recent years and imports have increased, a growing need for gas storage has emerged. Several new facilities have been developed but concerns remain that more storage may be required Networks Gas networks are operated and regulated on similar principles as for electricity. National Grid is the owner and operator of the national gas transmission network in Britain. Four companies own and operate the eight regional gas distribution networks (DNs) 12. Their charges are regulated by Ofgem Taxes and levies VAT is levied on non-domestic gas supplies at 20 per cent. Additionally the CCL is payable on nondomestic gas supplies Supply Unlike electricity, arranging for the use of the delivery network shipping is a separate licence function from supplying to end users. Shippers contract with the network companies to use the pipes and also wholesale counterparties for bulk volumes. 12 More information on ownership of energy networks is available from the Energy Networks Association Micro-business energy markets 17

22 4 State of competition in non-domestic supply In this section we comment on the level of competition to supply electricity and gas to micro-business and other non-domestic consumers. Non-domestic electricity and gas markets were the first to see supply competition 20 years ago. Despite the extension of choice to householders, they remain a very important sector of the market. As Table 4:1shows, nearly two in every three terawatt hours (TWh) of electricity consumed in the UK is consumed by a non-domestic customer. In gas excluding power station use this ratio is a still significant one in three, despite a marked reduction since Table 4:1: Non-domestic energy Consumption 2003 and 2010 in the UK (TWh) Gas Change Electricity Change Domestic % % Non-domestic % % Power generation % n/a All 1, % % Source: calculated by from DECC figures in Table 1:7 of DUKES Both gas and electricity demand from non-domestic users have been in decline in recent years. The downturn in power demand started from 2008 when a high of 208TWh was consumed. The decline in non-domestic gas demand has been much longer lasting, starting from 2001 when a high of 336TWh was consumed. The peak to 2010 demand reductions are 38 per cent for gas and 5 per cent for electricity. We expect final figures for 2011 to show that the demand reductions have continued. Below we summarise the structure of the supply markets starting with the distinction between the market for micro-businesses, which is the primary focus of this report, and the wider non-domestic sector. 4.1 What are micro-businesses? Since our baseline report the non-domestic market has been segmented into two for regulatory purposes. Distinct processes and terms and conditions now apply for energy supply contracts involving micro-businesses. A micro-business is defined as a company (not site) that meets at least one of the following criteria: annual electricity demand less than 55,000kWh annual gas demand less than 200,000kWh fewer than 10 employees (or their full-time equivalent) and an annual turnover or annual balance sheet total not exceeding 2 million The micro-business definition in energy markets was introduced as a consequence of Ofgem s 2008 Energy Supply Probe 13. Effective for contracts signed after 18 January 2010, the following protections now apply through new a standard condition 7A of electricity and gas supply licences 14 : before signing the supplier must explain the key terms and conditions to the customers whether the contract is agreed by phone or face-to-face Condition 7A. Supply to Micro-Business Consumers Micro-business energy markets 18

23 within 10 days of sign-up the customer must receive a full written contract, including renewal terms termination notice may be given by the customer at any time for a fixed-term contract (though the customer must arrange new terms to continue after expiry if it wishes to remain on a contract supply rather than out-of-contract terms) the supplier must send the customer details of key renewal terms between 60 and 120 days before contract expiry. This information must include prices and details of what will happen if the customer does not wish to renew or take no action 30 days is allowed for the customer to negotiate a new contract with the incumbent or switch to another supplier. Renegotiated terms with the incumbent must be valid for the 30 day period in the event that no action is taken by the customer the supplier can roll-over new terms for a maximum of one year formal dispute resolution procedures must be operated by the supplier, and there should be access to the Energy Ombudsman scheme As we discuss in section at the time of writing this report, Ofgem is consulting through proposals to extend the protections afforded to a wider group of non-domestic customers. 4.2 The micro-business energy market Suppliers are obliged to know whether or not a business customer meets the micro-business criteria and have been taking different approaches to securing this requirement. Statistics on the total number of businesses in the UK are gathered by the Office for National Statistics. Figures for show that there were 2.04 million businesses in Britain with fewer than 10 employees from an overall total of 2.46 million businesses. There is little information on the energy requirements of these businesses. undertakes regular surveys of shares for the supply markets for domestic and non-domestic electricity and gas. This survey segments the non-domestic market by factors including energy volumes and numbers of meters attaching to contracts. The most relevant information from the latest survey of standings at 31 October 2011 is shown in Table 4:2 below. It shows that there were 1.77 million electricity contracts that were predominantly non-half hourly metered and attaching to either single site or 2 9 meter multi-sites with 0.60 million such contracts for gas where consumption through the typical meter was less than 25,000 therms. The definitions we use are different from those in the licences outlined above. However, we believe they form useful context for understanding the micro-business energy market. Our measure of micro-businesses accounts for the vast majority of non-domestic energy contracts 97 per cent but only around a fifth of volumes Micro-business energy markets 19

24 Table 4:2: s assessments of non-domestic energy supply contracts that could be held by small businesses Electricity Gas under 25k th Total Contracts (mn) Energy volume (TWh) Volume/contract (MWh) Source: Companies supplying electricity to micro-business customers in winter were drawn from a variety of backgrounds including: the big six Centrica (British Gas), E.ON UK, EDF Energy, RWE npower, ScottishPower and SSE energy producers Drax through Haven Power, International Power, Total Gas & Power, Ecotricity and Gazprom Energy independent suppliers First Utility, Opus Energy, Business Energy Solutions, Green Energy and Good Energy As Table 4:3 shows, 10 of suppliers held shares of electricity volume of at least 1 per cent of small businesses, with seven serving more than 3 per cent. Four suppliers, all from the big six, held shares by volume of more than 10 per cent. Competitiveness as measured by the Herfindahl-Hirschman Index (HHI) has been generally increasing in recent years, falling from 1,820 by volume at 31 October 2008 to 1,717 at 31 October We note that these figures are at the top end of the range 1,000 to 1,800 where economists perceive a market to be moderately rather than highly concentrated. Table 4:3: Overview of competition in small businesses electricity volumes Volumes at reporting date HHI Suppliers with share >1% Suppliers with share >10% Suppliers with share >3% 31/10/2008 1, /10/2009 1, /10/2010 1, /10/2011 1, Source: Companies supplying gas to micro-business customers in winter were also drawn from a variety of backgrounds including: the big six Centrica (British Gas), E.ON UK, EDF Energy, RWE npower, ScottishPower, and SSE energy producers Shell Gas Direct, Total Gas & Power and Gazprom Energy independent suppliers Contract Natural Gas, Corona Energy, Opus Energy, Business Energy Solutions and Regent Gas Table 4:4 shows that there is a higher number of suppliers active in the small business gas market than in electricity. We record 12 with a volume share of more than 1 per cent and seven with a share of more than 3 per cent at 31 October But there are just two suppliers with shares of more than 10 per cent, both from the big six. Micro-business energy markets 20

25 Competitiveness as measured by the HHI for micro-business gas has also been generally increasing in recent years. The index reduced from 2,600 at 31 October 2008 to 2,284 at 31 October These figures are above those for micro-business electricity and in the range where economists perceive a market to be highly concentrated. Table 4:4: Overview of competition in small businesses gas volumes Volumes at reporting date HHI Suppliers with share >1% Suppliers with share >10% Suppliers with share >3% 31/10/2008 2, /10/2009 2, /10/2010 2, /10/2011 2, Source: 4.3 The non-domestic energy market outside micro-businesses Four-fifths of non-domestic electricity and gas is consumed through the 3 per cent of energy contracts that stand outside our closest estimate of the micro-business definition. This energy is used by larger industrial and commercial customers as well as the public sector. Table 4:5 provides an overview of the non-domestic energy market outside our assessment of the micro-business sector with 50,000 electricity contracts and around 20,000 gas contracts consuming 150TWh and 200TWh of energy respectively. Table 4:5: s assessments of non-domestic energy supply contracts outside those that could be held by small businesses Electricity other than micro-business Gas other than micro-business Total Contracts (mn) Energy volume (TWh) Volume/contract (MWh) 3,000 10,000 5,000 Source: supply market share survey 31 October 2011 Companies supplying electricity to customers outside the small business sector in winter included: the big six Centrica (British Gas), E.ON UK, EDF Energy, RWE npower, ScottishPower, and SSE energy producers Haven Power (owned by Drax), Total Gas & Power, International Power (through both GDF SUEZ Energy UK and IPM Retail) Ecotricity and Gazprom Energy independent suppliers Opus Energy and Smartest Energy As Table 4:6 shows, 11 suppliers held shares of volumes of at least 1 per cent, with seven serving more than 3 per cent. Four suppliers, all from the big six, held shares by volumes of more than 10 per cent. Competitiveness as measured by the HHI has generally been around 1,500 in recent years. We note that these figures have consistently fallen in the range 1,000 to 1,800 where economists perceive a market to be moderately concentrated. Micro-business energy markets 21

26 Table 4:6: Overview of competition outside small businesses electricity volumes Volumes at reporting date HHI Suppliers with share >1% Suppliers with share >10% Suppliers with share >3% 31/10/2008 1, /10/2009 1, /10/2010 1, /10/2011 1, Source: Companies supplying gas to customers outside the micro-business sector in winter included: the big six Centrica (British Gas), E.ON UK, EDF Energy, RWE npower and SSE energy producers Shell Gas Direct, Wingas UK, Statoil, ENI, Total Gas & Power and Gazprom Energy independent suppliers Contract Natural Gas, Corona Energy, Opus Energy and Regent Gas As Table 4:7 shows, the gas market outside micro-businesses is characterised by the highest number of active suppliers. At 31 October suppliers held shares of volumes of at least 1 per cent, with nine serving more than 3 per cent and four suppliers more than 10 per cent. None of the companies with shares of over 10 per cent are from the big six. Consequently competitiveness as measured by the HHI is shown to be at the highest of the four sectors. The HHI has consistently been around 1,100 in recent years, at the low end of the range where economists perceive a market to be moderately concentrated. Table 4:7: Overview of competition outside micro-businesses gas volumes Volumes at reporting date HHI Suppliers with share >1% Suppliers with share >10% Suppliers with share >3% 31/10/2008 1, /10/2009 1, /10/2010 1, /10/2011 1, Source: Micro-business energy markets 22

27 5 Terms of trade for supplying non-domestic consumers In this section we discuss the terms on which non-domestic consumers purchase their gas and electricity. After more than 20 years of a competitive energy market for non-domestic consumers, all suppliers have standard terms of contract which in theory are negotiable as well as the price. From the consumer perspective these terms and conditions should be read carefully and considered just as carefully as prices when weighing up new contracts as, until very recently, it has been deemed that business users did not need specific regulatory protections when buying energy. The key assumption that underpins energy competition is that supply contracts are legal documents just like contracts for the supply of any other goods and services to businesses. The introduction of the micro-business regulatory classification 16 has introduced some specific protections for smaller non-domestic consumers, but just-like-any-other-product assumption still holds, especially for larger non-domestic consumers. The micro-business classification has also reinforced well-established differences in the way smaller and larger non-domestic consumers contract for their electricity and gas. These differences centred on legacy thresholds from market opening: in electricity the trigger was 100kW maximum demand, the level at which half hourly metering must be installed; and in gas it was 732MWh (25,000 therms) annual consumption, the level at which a contract rather than tariff supply would have been made available before liberalisation. Smaller users tend to be served by suppliers with standard priced products, while larger non-domestic users would expect to negotiate individual terms. Below we review the main terms on which gas and electricity are made available to non-domestic users, after outlining the main contract types and rules for transferring between suppliers. 5.1 Negotiated, deemed and out-of-contract supply terms There is no obligation on the electricity or gas supplier to make available a contract to a business consumer. Consumers must negotiate a contract with their supply company. It will define parameters including the quantity of energy, period of delivery and terms of payment. However, there are circumstances when a negotiated supply contract will not be in place between a consumer and a supplier. These circumstances will be when either a contract is deemed to exist between a consumer and a supplier or when a consumer has moved to out-of-contract or default terms. Deemed terms will apply when there has not been a contract in place between a consumer and a supplier at a particular premises. The competitive energy market works by allocating every meter at every premise to a particular supplier with rules for how those meters can switch from one supplier to another. When a business starts or takes on a new premises, deemed terms will apply until the consumer is able to negotiate a supply contract with a supplier. Out-of-contract terms apply when a negotiated supply contract has expired or otherwise ceased to exist between a consumer and a supplier. Both sets of contracts provide suppliers with protections that enable them to continue to make energy available to a consumer. But, in comparison with negotiated supply contracts, they attract much higher prices and more onerous terms. Deemed terms will allow termination for switching to a negotiated supply contract (not necessarily with the incumbent) at shorter notice than negotiated supply contracts. 16 See section 4.1 Micro-business energy markets 23

28 Premium prices in deemed and out-of-contract terms are justified by suppliers on the grounds that they will still be responsible for wholesale settlement of the energy used by the consumer, even though there is no formal contract in place. This situation, it is argued, exposes the supplier to short-term energy purchase commitments, which may be very expensive, and the supplier will wish to seek protection against this. In comparison with commercially-negotiated contracts, deemed and out-of-contract terms are likely to be both expensive and onerous and efforts should be taken to establish new arrangements as a priority. 5.2 Objections Unlike providers of other products and services, electricity and gas suppliers to business have a right of veto to consumers switching their purchase to a competitor. This is known as a transfer objection. Internal energy industry rules allow suppliers to object to a consumer being switched from its wholesale settlement account to another operator s in certain circumstances. Suppliers typically state in their terms and conditions of supply that they have this right and the circumstances in which it may be used. Three circumstances in which a supplier may be expected to object to a customer transfer are: where an existing contract is in place. Supply contracts will specify termination arrangements including a window during which notice can be given. Only if these arrangements have been complied with may a switch occur. These terms prevent consumers from switching early before a contract has run its course a debt is outstanding. This is meant to allow the supplier the opportunity to collect any outstanding debts before the consumer switches away. In practice consumers need to make sure they pay any bills promptly, especially when they are in the process of switching away from a supplier an unauthorised party has attempted to switch. Circumstances in which this may occur include when the landlord holds the contract with the supplier, but the tenant attempts to switch The combination of out-of-contract rates and objections means that consumers need to proceed very carefully when switching. Failure to terminate an existing contract properly could lead to a supplier objecting to a transfer, an existing supply contract expiring and the consumer being migrated to more expensive out-of-contract terms or, as we discuss below, being rolled-over to a new arrangement. 5.3 Micro-businesses There are several useful guides 17 that show micro-businesses how to benefit from competitive energy markets. Consumer Focus has produced the checklist for energy contracts that is shown in Table 5:1 below (PDF 161KB); (PDF 564 KB); (PDF 1MB) Micro-business energy markets 24

29 Table 5:1: Consumer Focus s checklist for micro-business energy contracts Check whether your business qualifies as a micro-business and is therefore eligible for the benefits of the new energy contract reforms. Contact your energy supplier to let them know that you are a micro-business and should be treated as such. Check your energy contract. The new rules will apply for any contract signed after 18 January Contact your supplier if you don t have a hard copy or do not receive one when you enter into a new contract. Look out for correspondence from your energy supplier as you approach the end of your energy contract. You should receive a letter as you approach the contract s notice period, which could contain important information. If you do not wish to be rolled-over at the end of any contract signed after 18 January 2010, inform your supplier that you want to opt-out. If you opt-out of rolling-over, but do not negotiate a new contract, you are likely to be placed on out-ofcontract rates with your current supplier. While on out-of-contract rates, energy brokers (TPIs) may call claiming to offer you the best available deal. Do not commit to any offer on the phone and check with your current supplier to see if they can better the broker s rates. If you inform your supplier that you are a micro-business but do not opt-out of rolling over, you are likely to be rolled over into a new contract. You should receive a hard-copy of this roll-over contract within 10 days of the end of your previous contract and should check that this contract lasts no longer than 12 months. Before, liberalisation tariff prices for the small and medium sized business sector were revised from April each year. Now, micro-businesses will normally be sourcing their electricity and gas on fixed price contracts with defined renewal procedures. These contracts will typically have durations of between one and three years. This change has been led by suppliers responding to demands from their customers for budget certainty. Unlike the domestic market, suppliers are not obliged to publish their prices and terms of supply for business consumers. Many suppliers make their standard contracts publicly available, for instance through their websites. But pricing is always derived individually even if the base rates are derived from standard schedules. As the market for micro-businesses is characterised by multiple buyers requiring one of a relatively small number of tariffs, suppliers tend to develop standard price schedules. These schedules will form the baseline from which they will negotiate with consumers. Typically these schedules will address factors including: how the customer chooses to pay. Suppliers will want to charge more for payment terms other than monthly direct debit as their costs to support alternatives are higher whether the customer would be new to it an acquisition or established a renewal. Acquisition prices from suppliers have tended to discount renewal prices whether the offer is for a single fuel (gas or electricity) or dual fuel (gas and electricity). Some price advantage may be available for buying gas and electricity contracts from the same supplier, though dual fuel contracting is nowhere near as established in the non-domestic markets as it is in the household sector whether the consumer is dealing direct or through a third party intermediary that requires a commission the duration of the proposed contract. Typically the longer the contract the higher the price Micro-business energy markets 25

30 the credit rating of the customer. A low credit score, or start-up business, may attract a premium priced contract offer or one with tighter payment terms. There is no obligation for a supplier to make a contract offer to a non-domestic consumer, unlike in the household sector where one must be made available on request whether the supply is to be green or not, with the former attracting a premium. Care needs to be taken by buyers of green energy to ensure they understand what the premium they are paying is providing. The Green Energy Supply Accreditation System 18 validates the credentials for microbusinesses but has yet to extend to larger business users These standard terms are generally applied with tailoring of prices by wholesale trading profiles and payment mechanisms. Pricing for micro-businesses tends to be less responsive to day-to-day changes within wholesale markets and more to general trends. Use of profiling19 means that these customers tend to be thought of by suppliers as more predictable in terms of demand usage. This situation, along with the large number of sites within this sector of the market, and the potential for variation in delivery charges (pricing offers in this sector of the market are typically all-inclusive), means that suppliers are likely to develop standard offer matrices Renewal and switching The introduction of the micro-business classification has brought two important new rules that govern renewing contracts. Firstly, the supplier must make sure the micro-business is aware of the legally-binding contract and specify its time period. Secondly, it must send out renewal information to a pre-set timescale and notice for termination must be no longer than 90 days. If the microbusiness customer takes no action on renewal, they may find themselves rolled over to a new one year supply contract. Typically written notice to terminate a contract will be required from a consumer by a supplier. Consumers should always check this notice as providing notice in accordance with it will give the ability to switch supplier. Failure to provide this notice will hinder access to the market, including potential opportunities to switch to a new supplier. It may also not get the best out of the incumbent supplier who may only offer its most competitive prices when it becomes aware the consumer could be on the point of switching. Should a contract not be terminated, it may either lapse entirely or, possibly, be superseded by a new arrangement led by the supplier. Should it lapse, the consumer is likely to be transferred to outof-contract terms Complaints handling and redress Energy suppliers are obliged to set out how they deal with complaints 20 from their micro-business customers. Suppliers will also customarily define how they will manage complaints from larger consumers. Typically they will deal with complaints through: providing a means for the consumer to contact the company for example their account manager or sales adviser by phone or in writing to raise the complaint with a response inside a specified timescale escalating the complaint to a more senior level in the company if the initial response is not satisfactory alerting the consumer, if they are a micro-business, to the Citizens Advice Consumer helpline 21 and Ombudsman Services: Energy. Vulnerable micro-businesses or those who are at risk of disconnection can use the services of Consumer Focus Extra Help Unit Profiling refers to the use of standard industry profiles applied to allocate volumes consumed at non-half hourly meters 20 They must be subject to the complaint handling standards regulations. An example is here: Micro-business energy markets 26

31 Ombudsman Services: Energy may investigate a complaint from a micro-business consumer in two circumstances: if after eight weeks (for the big six) or 12 weeks (for other suppliers) no response has been forthcoming from the suppliers if the consumer has received a deadlock letter from the supplier. This letter indicates that, on the information available, the supplier s own complaints handling procedures have been exhausted. The consumer can then refer their complaint to Ombudsman Services: Energy within six months of receiving this letter The Ombudsman can impose a settlement that the supplier must implement within 28 days. This settlement may involve: an apology or explanation; an award to a maximum 5,000 including VAT; and a service or action that will benefit the consumer. There is no appeal to the Ombudsman once a final decision has been made and the consumers have up to two months to accept it. 5.4 Non micro-businesses For larger consumers bespoke pricing structures apply based around standardised terms of supply. Such consumers are normally billed monthly on fixed term contracts that can run for periods of years. They do not have the protections accorded to micro-businesses for redress and renewals. Annual contracting for larger business users for both electricity and gas has become typical, with a renewal date of 1 October or 1 April most common. There are two main types of contract pricing structures in electricity and gas supply contracts: fixed and flexible arrangements. The choice of energy purchase contract is a very important choice for larger non-domestic consumers and will often depend on the balance between: establishing stability and predictability of energy costs against a budget ensuring that energy costs do not fall out-of-line with prevailing market conditions, and therefore potentially against competitors If stability and predictability of energy expenditure against pre-set budgets are sought, then a fixed price contract may be preferable. Aiming for price competitiveness may lead to a flexible or floating purchase arrangement being sought. But this is to simplify a choice which need not necessarily be either or as flexible contracts may be managed to give price certainty extending out over periods of months or even years ahead. In a fixed price energy supply contract, the supplier makes an assessment of the expected costs for delivery and adds this to the wholesale charges. The customer pays agreed unit rates for the contract duration, probably in a traditional tariff type structure. It is worth checking whether changes in non-energy costs and taxes during the life of the contract can be passed through or whether the rates agreed remain firm throughout. Pass-through pricing is very common though there many variations between suppliers as to what are, and what are not, included as pass-through elements. Flexible contracts also differentiate between the wholesale cost and the other charges and taxes. The wholesale costs may set by a formula related to published traded market indicators published by price reporters and brokers. Such mechanisms can allow the customer to make frequent purchasing decisions throughout the duration of the contract. The applicable published charges such as delivery, transportation and metering are billed at pass-through, and other costs, for example the supplier s administration fee and any balancing and risk management charges, are agreed in advance. The broad principles of each of the main pricing structures are summarised in Table 5:2 which gives a simplified comparison between fixed and flexible pricing structures. 21 Citizens Advice Consumer Service took over the Consumer Direct helpline function from 2 April 2012 Micro-business energy markets 27

32 Table 5:2: Overview of contract price structures for non-micro-business consumers Pricing Structure Characteristics Electricity Gas Fixed (all-inclusive) Incorporates rates covering all supply chain cost elements Wholesale, distribution, transmission, losses, metering and data collection charges, Renewables Obligation costs are usually included CCL and VAT are usually excluded Wholesale, transportation, metering and data charges are usually included CCL and VAT are usually excluded Fixed (Passthrough) Separation in billing of published charges from non-published commercially negotiable cost elements Variations in pass-through elements, but typically include distribution and transmission charges, distribution losses, settlement charges, taxes and levies Transportation and metering billed at pass-through Sometimes administration and management charges are identified Less commonly, balancing risk swing Flexible Separation of the commodity cost from the other fixed elements Delivered costs set according to a mechanism related to agreed measures of wholesale rates Mechanism can either be a specific formula or customer nomination of index values and energy quantities All other elements are billed at pass-through or pre-agreed rates Commodity cost element moves according to a formula related to agreed measures of wholesale rates All other elements are billed at pass-through or pre-agreed rates Source: Renewal and switching arrangements apply in non-microbusiness supply contracts are different to those for micro-businesses There are no roll-over protections instead out-of-contract terms are more likely. The Ombudsman mechanism also does not apply to larger consumers as they are held to be more capable of securing redress through their supply contracts Consumption provisions Payment terms are very important, with penalty charges for late or non-payment. All contracts should always be read with care before signature. Areas related to energy consumption worth paying heed to are set out in Table 5:3. Micro-business energy markets 28

33 Table 5:3: Consumption provisions in energy supply contracts overview Feature How it works Action Volume tolerance bands Volume tolerance bands are now common. These impose penalty clauses if the company s actual consumption during the contract life exceeds measures of expected consumption at the time of contract placement by the agreed tolerance band, typically +/- 10%. Make sure you are happy with the tolerance band set within your contract. Monitor your energy consumption closely, and if necessary take action (eg demand management) to avoid breaching tolerance band. Advise your supplier as soon as possible if you see that consumption could be outside the band. Early enough notice may negate the need for it to apply penalty charges. Capacity overuse Reactive power Distribution network charges and supply contracts often contain a cost element for capacity, the maximum take that the meter is expected to consume. All electricity meters have a declared net capacity (or in the case of gas a seasonal offtake quantity/soq), and if this is exceeded capacity over use penalty charges can be incurred. Reactive power charges are part of electricity distribution network charges. A certain amount of reactive power is assumed with the distribution network charges, however if this level is breached then reactive power charges are applied. Reactive power is alternating current that is not measured by kwh meters, but which must still be provided by the supplier. Monitor your meter maximum demand levels against your declared net capacity to make sure it is not exceeded. If demand levels are close, make sure you raise the declared capacity. Use good energy management to monitor equipment. Monitor and check energy bills regularly. Source: Mid-contract changes The switch to competitive markets has made prices more volatile and often prices to consumers vary considerably as wholesale market rates change. Suppliers must pay out the majority of revenues they collect from consumers to third parties, normally leaving them with a small balance to cover their in-house costs and provide a profit. Periodically these third party costs alter, sometimes very significantly, and suppliers may seek to pass-through the effects of such changes to their consumers, for example on anniversaries within multi-year agreements. Likewise, clauses that attempt to attribute costs for unexpected consumption outcomes are becoming progressively more common in energy contracts. Normally they are related to volume tolerances as outlined in Table 5:3. Micro-business energy markets 29

34 5.4.3 Credit Competition in electricity and gas rely on a complex network of transactions involving customers, suppliers, producers, network operators, the regulator and the taxman. Often these arrangements require suppliers to pay for services used by their customers in advance of being paid themselves. Sometimes these payments can be made weeks if not months in advance of suppliers billing their customers. Speed and certainty of payment are very important to suppliers, especially as their profit margins normally represent a small proportion of their turnover. The financial terms on which electricity and gas supply contracts are made available are therefore extremely important and have lately been described under the generic term credit. It is not uncommon for businesses with a perceived high credit risk to receive no response at all when they offer their energy supply contracts to tender. Ultimately, this can mean prolonged exposure to outof-contract terms, which can be very expensive and probably damaging to the consumer concerned. Suppliers will generally assess credit risk based on a combination of the consumer s financial strength (counterparty risk) and the potential financial exposure to the market that supplying that consumer brings with it (underlying risk). In the event of early termination as a result of consumer default, the supplier must sell back the undelivered volume to the market (mark-to-market risk) involving the risk that the sell-back price will be below the buying price. This risk assessment will take place at the start of a contract negotiation. Suppliers will be keen for financial information at this stage and their appetite will continue throughout the life of the contract. In some instances suppliers may seek security guarantees or cash deposits from consumers before making offers. These measures can act as constraints on the ability of consumer to access opportunities from competitive supply contracts. 5.5 Third party intermediaries In view of the increasing complexity of energy markets and the low level of resource and expertise of consumers in these markets, many companies have established themselves as third party intermediaries (TPIs) between customers and suppliers. More specifically: brokers offer products from a range of suppliers to their customers and act on the customer s behalf. These brokers can use telesales, internet switching sites or bespoke software to deliver their services agents sell the products of a particular supplier and act on its behalf in dealing, typically, with smaller customers As a sector TPIs are very diverse in structure, ranging from sole traders to substantial companies employing hundreds of staff. They also differ in terms of the route to market they use, from telephone and doorstep sales to the internet. TPIs provide value to non-domestic consumers and their suppliers by: making consumers aware of the opportunities available to them from energy supply competition, and providing a convenient route to accessing them offering suppliers a low cost, incentive-based route to market (they can therefore be particularly useful to non-incumbent suppliers) Micro-business energy markets 30

35 facilitating the collection and verification of customer information and data for suppliers to price (or in the case of agents providing such customers with a price on behalf of the supplier), which is a service that is especially important for small sites, whether they are individually owned or part of larger groups prompt analysis of complex pricing offers to enable the quick decision-making necessary in markets which can be very fast moving Perceived increased complexity and uncertainties in the market arising from price volatility and supplier failure have encouraged many customers to use the services of TPIs, and they can act to stimulate competition on behalf of their clients. Their fees are commercially negotiated and payable in a variety of ways, including fixed rates, a share of savings (whereby the TPI is entitled to a percentage share of the money it claims it will save the customer as a result of its activity) or a commission, usually payable by the successful supplier. There have been periodic concerns that some TPIs may have used their information advantage to strike deals in their own rather than the consumer s best interests. For example in March 2011 we undertook a review for Consumer Focus of the TPI market for micro-businesses 22 and recently an electricity supplier to larger users has argued that more transparency on commission paid to energy brokers over electricity contracts for business customers would lead to a healthier market 23. We address the issues around whether to regulate TPIs in section 8.3 in the light of Ofgem s proposals on the issue in section The Utilities Intermediaries Association is a representative group for energy TPIs. It operates an accreditation for energy TPIs and has also produced guidance for consumers on dealing with TPIs This guidance includes the questions for TPIs shown in Table 5:4 below Micro-business energy markets 31

36 Table 5:4: The UIA s points for non-domestic consumers when dealing with energy TPIs Internet switching sites Always be streetwise when looking at switching sites, don't be lulled into a false sense of security by titles containing advice help, cheaper bargain etc. These are still businesses who intend to make a profit. Always look to see how many suppliers a site deals with. Always be aware that suppliers DO NOT have a fund from which they pay switching site commissions this is usually included in the price quoted by the site. Be wary of sites claiming that it costs you nothing! Be aware that the Consumer Focus Confidence Code ONLY applies to a site s domestic services NOT to its business services. Brokers Always ask, Where do you get your income from? What do you actually do for me? Always ask, when TPIs advertise their services as being free, Which services are free? Beware of the all-encompassing clause which may read something like (The Broker/Consultants name) may deal solely with the supplier in all matters relating to the purchase of gas and/or electricity This, in effect, could prohibit the customer speaking to their supplier or any other third party. Always ensure that you know who your supplier is for gas and electricity. Always ensure that all the elements of a supplier's bill are on the quotation and that you have agreed to any others that may appear. Always read your meters at the end of each month. Even if you do nothing with these readings, if anything goes wrong they are invaluable to back up any complaint. Always ask the TPI (broker/consultant) or telesales person you are talking to if they are signed up to a code of practice and Independent Redress Scheme. Check that any switching site you consider using is signed to a business switching accreditation and redress scheme. Micro-business energy markets 32

37 6 Energy policy and regulation In this section we discuss how the energy policy and regulatory frameworks affect how non-domestic consumers contract for their electricity and gas supplies. The current energy policy framework is built on the central concept that competitive markets are better than regulation in serving customers. As highlighted in section 3, competition in energy markets is focussed on the provision of services from a number of contestable functions such as energy production and supply. As well as the oversight of monopoly network services, some residual regulation is necessary to protect customers from abuse by dominant players and to deal with any remaining market distortions. But regulation is also used to deliver specific government policy objectives, be they economic, social or environmental. Examples of such initiatives that currently apply are the RO and the CCL. Different aspects of energy policy and regulation relevant to business customers are considered in more detail below as follows: Development and direction Economic regulation Financial services regulation Consumer representation 6.1 Development and direction The Department of Energy and Climate Change (DECC) was created in October 2008, bringing together energy policy (previously with the BERR Department for Business Enterprise and Regulatory Reform) with climate change mitigation policy (previously with Defra Department for Environment, Food and Rural Affairs). DECC is responsible for energy policy, although many other government departments and the devolved administrations also have a considerable interest in it. DECC s 25 current priorities for the gas and electricity markets are to: deliver secure energy on the way to a low-carbon energy future though reform of the energy market to ensure that the UK has a diverse, safe, secure and affordable energy system and incentivise low-carbon investment and deployment. As part of this role DECC produces an Annual Energy Statement 26 that summarises progress drive ambitious action on climate change at home and abroad through work for international action to tackle climate change, and work with other government departments to ensure that the UK meets its UK carbon budgets efficiently and effectively save energy with the Green Deal and support vulnerable consumers by reducing energy use by households, businesses and the public sector, and help to protect the fuel poor manage the UK s energy legacy responsibly and cost-effectively by ensuring public safety and value for money in the way the UK manages its nuclear, coal and other energy liabilities 25 (PDF 979KB) 26 Micro-business energy markets 33

38 6.2 Economic regulation While DECC develops and implements government energy policy, Ofgem is responsible for the economic regulation of energy markets. When the electricity and gas industries were privatised, independent economic regulators were established and Ofgem has fulfilled this role since it was established by the Utilities Act Ofgem s main objective is to protect the interests of existing and future energy consumers wherever appropriate through effective competition or by other means. Ofgem s key functions include: issuing, modifying, enforcing and revoking licences setting price controls in the natural monopoly licenced sectors investigating and penalising those in breach of licence conditions Although explicit price controls on gas and electricity supply prices were removed a decade ago, Ofgem has teams tasked with ensuring that effective competition develops through extensive market monitoring and investigations as required. The enforcement of the Competition Act 1998 is carried out by Ofgem, concurrently with the Office of Fair Trading, where the agreement or conduct relates to commercial activities connected with the generation, transmission, or supply of electricity and the transmission, distribution and supply of gas. Ofgem s recent work on competitiveness has included two major investigations into competition in energy supply in recent years. These investigations are the 2008 Energy Supply Probe and the 2010 Retail Market Review. As we discuss below, both have or will have important implications for the markets supplying energy to non-domestic consumers, especially micro-businesses. Despite these recent developments, in terms of supply, the business customer market is significantly less regulated than the domestic customer. This is evidenced by some sections of supply licences only taking effect if the supplier is supplying domestic customers. 6.3 The Electricity and Gas Supply Licences The Electricity Act 1989 provides for the licensing of electricity suppliers. The Gas Act 1986 provides for the licensing of gas shippers and suppliers. The licensing of suppliers under the Acts is now applicable on a Great Britain-wide basis, and the licences themselves contain standard conditions for all suppliers. Obligations under these licence conditions relevant to suppliers in the non-domestic commercial markets are summarised in the paragraphs below. Overall they are less extensive than those under which electricity and gas suppliers to households must operate Definition of premises Standard Licence Condition (SLC) 6 of the electricity and gas supply licences specify whether a premises is domestic or non-domestic. It states that unless the context otherwise requires, a nondomestic premises is a premises, that is not a domestic premises. It also defines the treatment of any domestic premises that may be supplied subject to a non-domestic multi-site contract Deemed contracts Suppliers must prepare deemed contracts under SLC7. Where there is no contract explicitly agreed between a customer and the registered supplier of a premises, the deemed contract terms apply. Deemed terms must not be unduly onerous. There is no duty to supply non-domestic premises. Micro-business energy markets 34

39 6.3.3 Micro-businesses SLC7A defines the scope of and rules for suppliers dealing with micro-businesses. We discussed the provisions in section 4.1 as they are very relevant to how the non-domestic energy markets are currently operating Supplier of last resort Under SLC8, in the event that one supplier ( A ) loses its licence to supply (by becoming insolvent or having its licence revoked for some reason), Ofgem can direct any other licensee ( B ) to become a Supplier of Last Resort for some or all of the customers of A. This mechanism is allowable provided that it will not significantly prejudice the ability of B to continue to supply its customers, and fulfil its contractual obligations for the supply of electricity or gas. Ofgem, from time to time, asks licensees if they wish to be considered as a potential Supplier of Last Resort in the event that this was to happen. Once the process begins, other licence requirements come into play regarding information to be given to customers and prices that will apply. This mechanism has only been used once in recent years when the customers of Electricity4Business were transferred to British Gas in October Consumer transfers SLC14.2 provides for suppliers to be able to block a transfer of a consumer from them to competitors in certain circumstances. These circumstances will be specified in the contract between the supplier and the consumer as summarised in section 5.2 SLC14.A provides for suppliers to facilitate consumer transfers within three weeks Exclusion of cross subsidy As a condition of their licences, suppliers are bound not to give any cross-subsidy to, or receive a cross-subsidy from, any related business (SLC19.B) Information provision to non-domestic consumers The supply number (electricity) and meter point reference number (gas) must be provided by licensees to customers either annually or with or on each bill. These obligations are contained in SLC20 of each licence along with the requirement for information on how to resolve disputes between the customer and the supplier. The condition also provides for suppliers giving their customers contacts for safety contacts for gas escapes or electrical dangers. SLC21.A obliges suppliers to provide annual information to their consumers who are subject to the Carbon Reduction Commitment (CRC) Energy Efficiency Scheme. This information is to aid the consumers in their compliance with this policy mechanism Data for meter readings SLC21.B obliges suppliers to use consumer meter reads for billing if it considers [them] to be reasonably accurate. If it does not consider a reading to be accurate, it must take all reasonable steps to contact the consumer and secure a replacement. 27 Other earlier examples are listed on Ofgem s website Micro-business energy markets 35

40 6.4 Ofgem s market investigations We have already noted that Ofgem has undertaken two major reviews of competition in energy supply markets. These are its 2008 Energy Supply Probe 28 and the follow-up 2010 Retail Market Review 29. As we summarise below, major changes for the supply licences have already resulted, with the likelihood of more to follow Energy Supply Probe Helping small business consumers was one of the major themes that Ofgem decided to address as a result of its Energy Supply Probe. This review of energy competition was launched in spring 2008, and it produced an initial report in October that year. One of its conclusions was that terms of trade may be being used in the small business sector to restrict the benefits of competition. This conclusion centred around whether it was acceptable for a supplier to automatically roll over consumers onto new contracts if they took no action to renew an existing arrangement. Ofgem used the definition set out in the Gas and Electricity Regulated Providers (Redress Scheme) Order 2008 to introduce more protections for micro-businesses. As we noted in section 4.1, a micro-businesses was defined as one that employs fewer than 10 people; or which uses less than 200MWh of gas (nearly 7,000 therms) per year or 55MWh of electricity per year; or which has an annual turnover of less than 2 million. The Energy Supply Probe initially proposed to remove a supplier s ability to roll-over micro-business contracts in all circumstances. But Ofgem later amended its proposals to: roll-over contracts having a maximum duration of 12 months there being no more than 30 days between reminder notice of the expiry of the existing arrangements and the deadline for switching supply or signing up to a new contract with the incumbent customers being able to give notice at any time up to the close of the termination period and not during a defined window during the contract s lifetime suppliers being obligated to alert consumers of a contract s expiry and promote their engagement with the market These changes were subsequently incorporated in SLC7A of both the gas and electricity supply licences. Ofgem also at this point decided that the standards of all TPIs should be raised to match the best through a code of practice that meets Office of Fair Trading standards. It reached this decision even though it did not have a regulatory remit that covered TPIs Retail Market Review Ofgem launched its Retail Market Review in November 2010 as an investigation into the markets for electricity and gas for households and small businesses in Britain. At the point of writing this report, the review has not been completed. The review builds on the findings of the Energy Supply Probe and saw initial conclusions published in March It decided that further action is needed to make energy retail markets in Britain work more effectively in the interests of consumers, and it tabled a series of proposals to achieve this objective Micro-business energy markets 36

41 These proposals were consulted on in the period to November 2011 to February 2012 for nondomestic consumers and include: inserting standards of conduct into their licences, which aim to ensure that suppliers (and the brokers that represent them) are fair, honest and transparent in their dealings. The new standards will hold suppliers responsible for the activities of brokers that have a direct or indirect relationship with the supplier. All sales and marketing to business will be required to be accurate, not misleading and written in plain English extending the scope of existing licence condition (SLC7A) for micro-businesses to businesses with less than 50 employees and an annual turnover of no more than 10 million. This will require suppliers to provide clear and transparent contract terms and conditions and to inform customers how they can prevent their contract being rolled-over. Following its decision on whether to expand SLC7A, Ofgem will also review the roll-over clause in the current licence condition, although it has said further work is needed on who the licence protects before it can do this a range of reforms to better protect businesses from unfair sales practices. These include an Ofgem accreditation scheme for Codes of Practice governing TPIs; and asking the Government for new powers to take enforcement action directly against brokers for misleading marketing in the business sector through enforcing the Business Protection from Misleading Marketing Regulations 30 reviewing whether suppliers are compliant with licence conditions which ensure they cannot unjustly frustrate businesses switching to a competitor Ofgem s final proposals are expected in the late spring of Encouraging liquidity in the wholesale power market Following its Retail Market Review in March 2011, Ofgem also concluded that consumers were at risk from low volumes of wholesale power trading. This could restrict competition and distort the link between wholesale and retail prices. Because suppliers could not be as confident as they would like in buying wholesale power, there might be a barrier to entry that was reducing competition in supply markets. To remedy this, the regulator set out the following proposals: Introduction of a Mandatory Auction (MA) where the big six are forced to sell up to a quarter of their generation volumes to competitors (Possibly) the creation of Mandatory Market Making (MMM) arrangements to allow quick access to small volumes of power for balancing ahead of gate closure In February 2012 Ofgem opened a consultation on its objectives for the wholesale market which, it said if met, would enable it to more effectively underpin competition. The consultation proposed focussing on the development and delivery of an MA selling key longer-dated products, but keeping the MMM as a possible fall-back. 30 The Business Protection from Misleading Marketing Regulations 2008 prohibit businesses from advertising products in a way that misleads traders and set out conditions under which comparative advertising, to consumers and business, is permitted. Micro-business energy markets 37

42 6.5 Financial services regulation Competition in energy markets has stimulated the development of a wide range of trading mechanisms and arrangements, some of which involve the use of financial instruments. Aspects of energy trading which involve financial instruments are subject to regulation by the Financial Services Authority (FSA), which in February issued guidance for energy market participants in what is a highly complex area. The vast majority of energy purchases by consumers, being physical supply arrangements, do not involve financial instruments, and are, therefore, not subject to FSA regulation. 6.6 Consumer advocacy Consumer Focus is a statutory organisation, created through the merger of three organisations energywatch, Postwatch and the National Consumer Council by the Consumers, Estate Agents and Redress (CEAR) Act The Act: established Consumer Focus to address consumer issues across different sectors, undertake cross-sectoral research, and provide a voice for consumers in dialogue with companies, regulators, Government and Europe. The functions in energy previously undertaken by energywatch for domestic and micro-business consumers were inherited by Consumer Focus extended redress schemes to all licensed energy suppliers and postal services providers to resolve complaints where suppliers and service providers have not been able to do so, and provided for compensation to be paid to consumers where it is appropriate. These arrangements apply to domestic and micro-businesses only enabled Consumer Direct to become the single point of contact for all consumers to obtain information and impartial advice as well as sign-post consumers and provide them with help when making a complaint. Again this support is aimed at domestic and micro-business consumers Consumer Focus receives around a third of its funding from the Department for Business, Innovation and Skills (BIS). Funding also comes from energy suppliers and the postal industry. Consumer Focus s core work in terms of energy consists of: securing a fair deal for energy consumers covering households and micro-businesses the Extra Help Unit, which assists vulnerable consumers. Its scope includes micro-businesses in danger of disconnection On 1 April 2012 the Citizens Advice Consumer Service took over responsibility for providing consumer advice and information previously provided by Consumer Direct. This advice includes helpline services available to micro-business energy consumers 32. A regulated industries unit (RIU) is currently being formed that covers existing Consumer Focus energy work. In 2014 it will become part of the Citizens Advice service (PDF 289KB) Micro-business energy markets 38

43 7 Consumer views In this and the following section we present the results of our research in to current conditions in the microbusiness energy markets. In this section we summarise the results of our research in to the views of microbusinesses themselves. In the following section we review the experiences and opinions of other stakeholders including suppliers and consumer representatives. Our research consisted of: a review of information from a sample of non-domestic consumer contacts to Consumer Direct. This sample consisted of categorised information for 2011 plus case notes for one month of that year September a telephone survey of 500 small and medium-sized enterprise (SME) consumers that we commissioned from an independent market researcher 7.1 Consumer Direct contact information Consumer Direct is the government-funded service that offers information and advice to consumers on problems with goods and services, energy and post. It can give specific advice about resolving energy enquiries and complaints. Consumer Direct records details of the types of contacts it receives for use by Ofgem, Consumer Focus Trading Standards and other bodies. To provide some context for our research, Consumer Focus made available to us to information from one month of contacts to Consumer Direct by micro-businesses about their energy contracts. Contacts received by Consumer Direct from micro-businesses are categorised into one of 70 contact types across four broad categories: The sales process Metering issues The supply relationship, mainly in terms of billing and payment issues The transfer process A listing of the codes is included at Annex Contacts in 2011 During 2011 a total of 9,997 contacts were received by Consumer Direct from non-domestic electricity and gas users in Britain. They represent the contacts made by consumers who have been looking for additional information and support beyond that available from their supplier. They may represent complaints but also may represent requests for further information. We believe that the information is a useful indicator of micro-business customers concerns about energy markets; though we note that non-domestic energy suppliers are not obliged to print Consumer Direct details on their bills. We also believe it is useful to compare headline trends with the energywatch contact data information that we reviewed in the baseline report 34. In summary the Consumer Direct contact information reveals: more contacts were received about disputes concerning problems arising from contracts (30.1 per cent) than any other issue 34 This was information collected by energywatch for contacts from all business consumers covering the period November 2003 to May 2004 Micro-business energy markets 39

44 more than one in 10 contacts (11.8 per cent) were concerned about back-billing or a catch-up bill they received issues with metering and connections or alterations of supply formed a small but notable proportion (5.5 per cent) of the contacts 35 Table 7:1 compares the 10 most common contacts in 2011 with the most common contacts received over the period November 2003 to May Table 7:1: Contacts from micro-businesses to Consumer Direct 2011 Contact (2011) Number Share (%) Contact ( ) Share (%) (2011) (2011) ( ) Problems arising from contracts 1, Disputed account 36.1 Back-billing/catch-up bill received 1, Sales misinformation 7.6 Non-domestic contract issues 1, Estimated bills/ consumption 6.5 Connections/alterations of supply Frequency/infrequency of bills 5.3 Clarity of bill Refunds 4.6 Customer not responsible for bill/debt Transfer in error due to incorrect data 4.1 Debt recovery practices Problems arising from contracts 3.7 Pricing information Billing problems with old supplier 3.6 Misrepresentation Supplier objection to transfer under contract 2.8 Disconnection following due process Inaccurate meter reading on transfer 2.3 Source: s analysis of Consumer Direct data for 2011 plus our baseline report for energywatch for This headline review tends to suggest that more customer concerns are generated by the independent actions of suppliers rather than the more industry-wide structural issues, as it tends to be unresolved billing and payment that represent around 60 per cent of the contacts received in This is approximately the same share that was seen in contacts figures in the baseline report. Contacts relating to sales have significantly decreased since indicating that it is now much less of an issue than it has been previously. Table 7:2 illustrates. The stand-out conclusion is that in 2011 problems arising from contracts was the most common cause of contact, yet in the previous analysis, this type of contact had just a 3.7 per cent share of all the contacts in the period. 35 Though we note that some of the contact categories have been amended and new ones added; when the Baseline Report was undertaken done only 40 categories existed compared to 70 for 2011 Micro-business energy markets 40

45 Table 7:2: Contacts from micro-businesses by category 2011 and Number ( ) Number (2011) Share (%) ( ) Share (%) (2011) Sales Metering 404 1, Supply 4,760 6, Transfer 1,761 2, Total 7,795 9, Activity in September 2011 Source: s analysis of Consumer Direct data. In September 2011 there were 1,003 contacts from micro-business consumers. The top 15 contacts by category received that month are listed in Table 7:3. We were able to review case notes recorded by Consumer Direct s advisers. Table 7:3: Contacts from micro-businesses to Consumer Direct September 2011 Contact Number Share (%) Problems arising from contracts Non-domestic contract issues Back-billing/catch up bill received Misrepresentation Customer not responsible for bill/debt Clarity of bill Debt recovery practices Disconnection following due process Pricing information Supply point number information Connections/alterations of supply Company contact details Supply point administration query (MPRN/MPR) Supplier objection reasons unknown Meter provision or exchange Source: s analysis of Consumer Direct data. Many of the contacts were attributable to different suppliers, brokers and network companies and many consumers mentioned more than one company or party in their contact. Table 7:4 summarises those companies that were mentioned by consumers in their contacts, differentiating by group between whether the companies were from the big six, others suppliers, network companies or TPIs. Micro-business energy markets 41

46 Table 7:4: References to companies by type in contacts from micro-businesses to Consumer Direct September 2011 Company type Number of contacts Share of total Big six supplier % Other supplier % Big six supplier % Big six supplier % TPIs (all) % Big six supplier % Other supplier % Big six supplier % Network companies (all) % Other supplier % Big six supplier % Other supplier 7 0.8% Other supplier 7 0.8% Other supplier 7 0.8% Other supplier 4 0.5% All % Source: Consumer Direct data analysed and anonymised by Table 7:4 presents a summary of contact data, but care needs to be taken with its interpretation, as absolute contact numbers may reflect factors including the scale of the supply businesses as much as any tendency to provide better or worse customer service. A review of the information presented in Table 7:4 suggests the following: Five suppliers with the most small business customers 36 are all amongst the 10 companies for which Consumer Direct received the most contacts in September 2011 TPIs as a group featured in more contacts (9.4 per cent) than network companies (3.8 per cent) A handful of smaller suppliers also attracted contacts We estimate that contacts by big six supplier in September represented approximately per cent of our estimates of their total customers. For other suppliers the ratios were typically above this ranging as high as 0.5 per cent of their total customers. The most common causes for contacts to Consumer Direct concerning TPIs were: misrepresentation; problems arising from contracts; and other non-domestic contract issues. Suppliers were also mentioned on occasions in the contact information (not necessarily because they were a cause of any problem, but because they were part of a broader situation). 36 According to the results of the telephone survey in section 7.4 Micro-business energy markets 42

47 7.4 Telephone survey of micro-business consumers In order to understand better the experience and opinions of British micro-businesses with respect to their using the gas and electricity markets, we commissioned Perspective Research Services 37 to undertake a telephone survey. Perspective surveyed for us 500 micro-businesses that were responsible for sourcing their own electricity and gas supplies from a regionally and sectorally representative base. Interviewees had to confirm they were micro-businesses before they were asked to participate in the survey. The interviews were allotted 10 minutes duration and contained 31 questions. We particularly wanted to understand more about: how aware respondents were of their requirements for electricity and gas and how they sourced them results are summarised below under the heading awareness and sourcing how frequently they engaged with the market and whether they preferred to do so direct or through a TPI results are summarised below under the heading engagement with the market how aware they were of mechanisms that apply in energy contracts but not in arrangements for other goods and services. These mechanisms are automatic roll-overs and the suppliers right to object to a transfer results are summarised below under the heading specific points in energy contracts their general levels of confidence in dealing in the markets. We did this by asking the consumers to what extent they agreed with statements we proposed to them on the market. Results from this element of the survey are included under the heading perceptions of the market Awareness and sourcing All the 500 micro-businesses were responsible for sourcing their own energy supplies rather than indirectly through a landlord. Some 220 (44 per cent) also had a gas supply which they sourced themselves. The ratio of 44 per cent gas to electricity supplies is broadly consistent with our estimates shown in Table 4:2 of there being 0.6 million micro-business gas contracts to 1.77 million micro-business electricity contracts or a ratio of 33 per cent. Therefore, it appears that the penetration of gas in the micro-business energy markets is much lower than electricity. Figure 7:1 shows that a little over a third of respondents (34 per cent) consume less than 5MWh (5,000kWh) of electricity a year. Half that proportion (17 per cent) consumed between 5MWh and 10MWh of electricity. In total, therefore, half of the consumers surveyed required less than 10MWh of electricity a year. Of the balance a further 10 per cent used between 10MWh and 20MWh, with a similar proportion consuming more than 20MWh. The mean annual consumption of these consumers was 16.9MWh. Approximately one in five (20 per cent) of those completing the questionnaire on behalf of their company did not know what their annual electricity usage was. The majority (32 per cent) of the 220 businesses with a gas supply said they used up to 5MWh of gas. Some 15 per cent of companies used 5MWh-10MWh and 13 per cent used 25MWh-54.9MWh. Four companies each had an annual usage of 100MWh-150MWh and over 200MWh, while only nine companies (4 per cent) had an annual gas usage of 55MWh-100MWh. Some 14 per cent of respondents did not know what their gas consumption volume was. The mean annual gas usage was 23.2MWh Micro-business energy markets 43

48 Figure 7:1: Respondents annual use of energy Perhaps unsurprisingly there was greater awareness of expenditures than energy volumes. Some 91 per cent of those with an electricity supply were aware of their expenditure on the fuel more than 11 percentage points higher awareness than for volumes. For gas the differential was much smaller: some 86 per cent of the 220 consumers with gas were aware of their volume consumption against 90 per cent awareness of expenditure. The majority of respondents on both gas (61 per cent) and electricity (57 per cent) disclosed expenditures of less than 1,500 a year. The mean gas spend was 3,962 a year, higher than the 3,210 on electricity. We believe the gas mean spend may be higher than the electricity mean spend because 12 (5 per cent) of the 220 gas respondents had turnovers of more than 0.5 million and spent more than 5,000 a year on their gas. This position suggests to us that, for a small proportion of micro-businesses, gas is a very significant part of their operating costs. Figure 7:2 shows the distribution on gas and electricity spends by survey respondents. Figure 7:2: Respondents annual energy spend Micro-business energy markets 44

49 The micro-businesses sourced their electricity in the main from the big six (88 per cent, or 440 of the 500 respondents). Just over a quarter of respondents (26 per cent) had E.ON UK as their electricity supplier, and just under a quarter (24 per cent) had British Gas as their electricity supplier. ScottishPower had a share of 11 per cent of the respondents, while EDF Energy and RWE npower each had a 9 per cent share. The SSE Group had 8 per cent of respondents as customers. Of the non-big six suppliers, Opus Energy (12 respondents, or 2 per cent) and Haven Power (11 respondents, or 2 per cent) were cited most. In total 11 companies either did not know their electricity supplier or refused to identify it. Figure 7:3 provides more information. Of the 220 respondents who had a gas supply, 45 per cent of the businesses were supplied by British Gas and 17 per cent by E.ON UK. RWE npower had an 8 per cent share, while ScottishPower and the SSE Group both held a 6 per cent share. There were seven Utility Warehouse customers and 14 businesses were with other suppliers, including Business Energy Solutions, Corona, Good Energy and Opus Energy. Five businesses either did not know who their gas supplier was or did not disclose the information. Figure 7:4 provides more information. We believe the proportions shown in Figures 7:3 and 7:4 resemble reasonably closely suppliers actual shares of the micro-business energy markets and give us confidence in the other findings of the survey. Figure 7:3: Respondents electricity suppliers Figure 7:4: Respondents gas suppliers Micro-business energy markets 45

50 7.4.2 Engagement with the market The significant majority of micro-business consumers were aware of the terms they were receiving their energy supplies under. Only 6 per cent of survey respondents in both electricity (30 of 500) and gas (13 of 220) told us that they did not know under what terms they were being supplied. The majority of electricity consumers (76 per cent) and gas consumers (73 per cent) were being supplied under fixed term supply contracts. Broadly a fifth of electricity (17 per cent) and gas (20 per cent) consumers were supplied under terms that could be migrated to an alternative supplier at 28 days notice typically these arrangements would be in place with the historic incumbent supplier. The remaining consumers (1 per cent in both gas and electricity) were served under deemed or out-ofcontract terms. Figures 7:5 and 7:6 summarise this information. Figure 7:5: Type of electricity contract respondent holds Figure 7:6: Type of gas contract respondent holds Micro-business energy markets 46

51 Figure 7:7 summarises market engagement reported by respondents. In the last six months 16 per cent of the 500 respondents said they have switched one or more of their energy suppliers, while 22 per cent said they have moved to a new contract with one or more of their existing energy suppliers. The remaining respondents had undertaken neither of these actions in the last six months. Figure 7:7: Actions respondents have taken in the last six months Of those that did switch to a new supplier or a new contract, Figure 7:8 shows that 34 per cent (57) of 166 businesses said they contacted another supplier directly, while 25 per cent (41) of businesses said they switched when another supplier contacted them. Comparison websites were used by 17 per cent (28) of respondents to switch their supplier or contract 38. Some 12 per cent (20) contacted a broker themselves, while 9 per cent (15) were approached by the broker. Figure 7:8: Processes used by respondents who have switched to a new contract or supplier 38 Unlike the household sector, price comparison websites often have direct contact with their customers to ensure that the most appropriate contract is selected and a new contract is struck. Our survey did not ask if contacts with price comparison websites or other brokers led directly to new supply contracts being arranged Micro-business energy markets 47

52 More detail on the actions taken by consumers when reviewing their energy arrangements is shown in Figure 7:9. Some micro-businesses noted that they had taken more than one action as the total number of actions taken across the 500 companies was 617. The most common action was visiting price comparison website (36 per cent), with calling suppliers direct accounting for 30 per cent. Seeking advice from an energy broker and visiting supplier websites accounted for similar proportions at 12 per cent and 14 per cent respectively. Figure 7:9: Actions taken when reviewing energy arrangements The survey also asked respondents to comment on their business intentions for the coming six to 12 months as Figure 7:10 illustrates. Again the number of actions at 563 was greater than the number of respondents, indicating that some consumers intended to take more than one action. But 300 consumers (60 per cent of the surveyed businesses) stated that they neither intended to switch supplier nor strike a new contract in the coming year. The remaining 200 businesses intended to either switch their supplier (117 actions or 21 per cent) or organise a new contract with their existing supplier (146 actions or 26 per cent), perhaps indicating that they held multiple energy supply contracts. Micro-business energy markets 48

53 Figure 7:10: Respondent s intentions for the next 6 to 12 months We wanted to understand more about the extent of engagement with the energy markets across our sample. Therefore we asked the consumers to tell us what they intended to do in the next six to 12 months based on their actions in the previous six, again allowing for multiple actions. The results are summarised in Figure 7:11. They show that the 500 companies intended to take 590 actions between them: 308 expressions of the intention to take no action. If these expressions of intention correspond to survey participants on a one-for-one basis they equate to 62 per cent of the micro-businesses in our sample of 500. Of these 308 companies 40 (13 per cent) had switched an energy supplier in the previous six months, 52 (17 per cent) had struck a new deal with an existing supplier and 216 (70 per cent of the 308 taking no action and 43 per cent of the 500 total sample) had undertaken neither action There were 131 expressions of interest in striking a deal with an existing supplier, split 32 from companies that had switched in the previous six months (24 per cent), 47 (36 per cent) from micro-businesses that had struck a deal with an existing supplier and 52 (40 per cent) from micro-businesses that had undertaken neither action There were 92 expressions of interest in striking a deal with an existing supplier, split 27 from companies that had switched in the previous six months (29 per cent), 25 (27 per cent) from micro-businesses that had struck a deal with an existing supplier and 40 (43 per cent) from micro-businesses that had undertaken neither action Micro-business energy markets 49

54 Figure 7:11: Respondents intentions for the next six to 12 months based on their actions in the last six months Specific features of energy contracts We wanted to test micro-businesses awareness of two specific features of energy contracts that do not occur in arrangements for other goods and services. These are the incumbent suppliers : conditional rights to object to a non-domestic consumer switching to a competitor right to roll-over a micro-business onto a new supply arrangement if the consumer takes no alternative action Some 9 per cent (44) of businesses said they have had a supplier object to them switching to another provider as Figure 7:12 shows, while the remainder said they have never had a supplier object. The main reason (41 per cent) the 44 businesses had a switch objected to was because they were still in a contract with the supplier. For 18 per cent of the objected businesses, the reason provided was due to businesses not having complied with the termination provisions of their contracts. A bill or an unpaid outstanding balance and the supplier objecting to prevent the customer from leaving were the joint third reasons given for objection to transfer to a different supplier. Micro-business energy markets 50

55 Figure 7:12: Respondents response as to whether an energy supplier has ever objected to them switching to another provider We tested for awareness of the roll-over rules firstly by seeking to understand whether consumers were aware of the expiry date of their fixed term contracts. When asked if the respondent s business was aware of the expiry date on its fixed term contract, 70 per cent of the 383 businesses on a fixed contract said they were aware. A similar proportion (72 per cent) of respondents said that they were aware that they could get locked into another contract with higher prices if they reached the end of their current contract without taking any action. Figure 7:13 illustrates. Figure 7:13: Awareness of respondents that they may be locking into another contract for a year with possibly higher prices or different terms if they do not take any action when they reach the end of their contract Micro-business energy markets 51

56 7.4.4 Qualitative comments by micro-business consumers The micro-businesses were also asked to respond to eight qualitative statements in order to assess their opinions of the energy markets they dealt in. They were given a range of five answers to each of these statements ranging from don t know to agree/disagree slightly and agree/disagree strongly. The aggregated responses from the 500 micro-businesses are shown in Table 7:5, and we have summarised them in Figure 7:14 by comparing the total agree statements (slightly and strongly) with the total disagree statements (slightly and strongly). The responses show that: there was a near equal split in consumers agreeing (45 per cent) and disagreeing (44 per cent) with the statement I find it impossible to compare prices across suppliers. Some 12 per cent either did not know enough to provide an answer or did not express an opinion when asked if we find it straightforward negotiating favourable terms and conditions of supply, more than half as many respondents (51 per cent) agreed as disagreed (33 per cent). The remaining 15 per cent either did not know or did not wish to answer this statement more than double the respondents (60 per cent of total) agreed with the statement I wish I was better informed and able to make better choices in this area against 27 per cent disagreeing and 13 per cent expressing no view or not having enough information to answer nearly half of respondents (46 per cent) agreed that our supplier(s) offer(s) good value for money against 32 per cent that disagreed and 24 per cent that did not express a view or declined to answer a clear majority (65 per cent) concurred that the bills we receive are clear and easy to understand against 26 per cent that did not and 9 per cent that did not express a view or declined to answer twice as many respondents (61 per cent) agree that I don't really understand the pricing models used by suppliers as disagree (30 per cent). Some 9 per cent either did not know enough to answer or did not express an opinion notably more respondents (46 per cent) agreed with the statement our supplier(s) made it very clear what would happen at the end of our contract than disagreed (32 per cent). This was the statement that at 22 per cent recorded the highest proportion of those that either did not know enough to answer or did not express an opinion twice as many respondents (62 per cent) agreed with the statement I am confident who to go to for help if I have a problem with my energy supplier as disagreed (31 per cent). This statement recorded the lowest proportion (7 per cent) of those that either did not know enough to answer or did not express an opinion Micro-business energy markets 52

57 Table 7:5: Opinions from micro-businesses on energy supply markets and contracts Agree strongly (5) Agree slightly (4) Neither agree nor disagree (3) Disagree slightly (2) Disagree strongly (1) Don't know Agree (5+4) Disagree (3+2) I find it impossible to compare prices across suppliers I wish I was better informed and able to make better choices in this area Our supplier(s) offer good value for money The bills we receive are clear and easy to understand I don't really understand the pricing models used by suppliers Our supplier(s) made it very clear what would happen at the end of our contract I am confident who to go to for help if I have a problem with my energy supplier We find it straightforward negotiating favourable terms and conditions of supply Micro-business energy markets 53

58 Figure 7:14: Summary opinions from micro-businesses on energy supply markets and contracts We find it straightforward negotiating favourable terms and conditions of supply I am confident who to go to for help if I have a problem with my energy supplier Our supplier(s) made it very clear what would happen at the end of our contract I don't really understand the pricing models used by suppliers The bills we receive are clear and easy to understand Our supplier(s) offer (s) good value for money I wish I was better informed and able to make better choices in this area I find it impossible to compare prices across suppliers Agree (5+4) Disagree (3+2) Numbers in chart key correspond to those shown in header row of Table 7: Commentary The Consumer Direct contact data provides a useful checklist of the concerns micro-businesses have, especially when things go wrong. We believe the telephone survey, though constrained by resources as to its coverage and scale, reveals a number of useful insights in to the consumer perspective on micro-business energy markets. In our opinion the two strands of research suggest: gas penetration to micro-businesses is much lower than electricity as all 500 respondents had a requirement for the latter fuel but only 220 (44 per cent) for the former. This level of gas penetration is much lower than in the domestic market where around four-fifths of power consumers also burn gas average spend on gas exceeded average spend on electricity, indicating for those that used gas it could form a greater part of their operating costs than electricity most customers have switched from legacy tariff arrangements to fixed term contracts that they have negotiated with suppliers, indicating that at some point they have needed to engage with the market the Consumer Direct data show that back-billing, though infrequent, is a major cause of distress to micro-business consumers. The majority of contacts involving micro-business users to Consumer Direct concerned existing contracts in In contrast with 2004 there were relatively few contacts concerning misrepresentation by suppliers in the sales process the big six successor companies to the privatised gas and electricity incumbents hold much the highest market shares. According to the telephone survey, between them they served 87 per cent of both the gas and electricity contracts held by survey respondents. In electricity no supplier served much more than a quarter of respondents contracts. In gas British Gas served nearly half of respondents

59 proportionately micro-business consumers supplied by non-big six companies were at least as likely to contact Consumer Direct as consumers supplied by the big six nearly 40 per cent of the micro-businesses had been active in the market in the last six months. More had struck a new deal with their existing supplier than switched to a new provider. Nearly a fifth of those that had not been active in the market in the six months indicated that they intended to strike a new deal either with their existing supplier or a competitor in the next year equally 40 per cent of micro-businesses have not engaged with the market in the last six months and do not appear to have the intention of doing so in the future consumers initiate much of the activity in sourcing new arrangements either by directly contacting suppliers or indirectly through websites and brokers the Consumer Direct data shows that the conduct of some TPIs has caused problems for some micro-businesses one in 10 consumers have had a transfer objected to. The majority appear to understand the reasons why their incumbent supplier blocked their attempts to switch to a competitor there is high awareness of roll-over arrangements with consumers appearing to understand that in the absence of any other action they will be migrated to a new one-year arrangement by their incumbent The overall picture presents micro-businesses as much more aware of and engaged in the market than we were expecting. While some of the feedback we received from stakeholders supported this assessment, not all was consistent with it, as we note in the following section. Micro-business energy markets 55

60 8 Stakeholder views In this section we continue our review of stakeholder opinions addressing those of energy suppliers and consumer representatives. In order to assess stakeholder views beyond the micro-businesses canvassed in the telephone survey, we contacted a number of suppliers and trade associations that serve small businesses. Information on our study was also posted on the Consumer Focus website. We specifically sought views on: the level of competition in supply to non-domestic customers in general and micro-businesses in particular. We comment on this theme below under level of competition general trading conditions for micro-businesses, including terms of contract, pricing and margins and standards of service, including the use of roll-overs, with particular emphasis on how they differ from the wide non-domestic market and whether they have changed since increased protections for micro-businesses, were implemented in 2010 following Ofgem s 2008 Energy Supply Probe. We comment on this theme below under consequences of micro-business definition issues that may act to inhibit non-domestic consumers, especially micro-businesses, from benefiting from competition in supply and how they might be addressed. We comment on this theme below under barriers to consumer benefit the role of agents, brokers and other TPIs including whether there is a need for them to be specifically regulated in either the micro-business sector and/or the wider non-domestic market. We comment on this theme below under role of TPIs how competition in supply could develop over the next two years given the proposals arising from Ofgem s Retail Market Review, the introduction of the Green Deal and other policy initiatives. We comment on this theme below under challenges for the future In total we received feedback from 14 organisations in writing or by telephone or by face-to-face interview, for which we are very grateful. The feedback was received during the period January to April A list of respondents is attached at Annex 2. They include consumer groups and TPIs as well as energy suppliers. This section outlines a summary of the views we received concerning each of the five themes highlighted above. 8.1 Level of competition The majority of suppliers acknowledged that the big six played the most significant role in the nondomestic market. Some claimed that this role made it difficult for competitors to enter the market due to a lack of wholesale power liquidity and trading options available to the smaller suppliers. One respondent pointed out that in the micro-business market this dominance has caused a lack of differentiation in the level of competition. One trade group told us that in its opinion the market is not a happy picture with a perception of follow my leader on pricing and a lack of competition. Furthermore, it claimed that the suppliers themselves are not focussed on their customers. Service is poor and when something goes wrong consumers can feel they are dealing with a disinterested monolith. On the other hand, several representatives from suppliers including the big six told us that the market for micro-businesses was the most competitive it had been for some time. One company particularly mentioned that there is some very aggressive pricing by competitors in the SME market, which is often below cost and has affected its own ability to acquire new customers. Another told us that there had been a step change in attitudes since the recession. Micro-business energy markets 56

61 Another supplier described the competition in this sector as fierce due to the prevalence in the use of TPIs by micro-businesses. Standards and performance between suppliers were mentioned to often differ, so it was suggested that exposure of performance and service by Consumer Focus would help acknowledge this and provide greater monitoring and improved customer understanding of the options open to non-domestic consumers. One of the big six suppliers said it believed competitive pressures on suppliers will provide the best outcome for customers. Another of the big six suppliers described the levels of competitive activity for SME customers as being high, but it observed that new entrants are gaining ground, though it still remained to be seen if they can develop into long-term businesses. It noted there to be more competition between the big six themselves with special offers and promotions becoming a greater feature of the market. In its own research and monitoring, it has observed sharp changes between suppliers in their levels of competitiveness and found that consumers are very aware of the opportunities open to them. An intermediary told us that in its opinion no more than one in five micro-businesses was active in the market, though there was higher awareness (50 per cent) of the existence of roll-overs. It cited a switching rate based on its own research of 7 per cent. This intermediary also told us that rollover prices were much higher than competitively negotiated prices. It cited a premium of 40 per cent in roll-over electricity prices for micro-businesses and 53 per cent for gas based on prices current in January Consumer groups were particularly concerned by back-billing. Back-billing describes the practice of suppliers sending amended accounts to consumers seeking extra payment for energy consumed. These bills normally arise due to new information to the supplier indicating that the consumer had paid in past periods used more energy than it had been billed for. Sometimes the amounts claimed could be very substantial to the point of threatening the existence of the recipients businesses. Though suppliers may negotiate, the payments can still be very substantial. Support was expressed for back-bills to be limited to one year rather than the current maximum of seven. One trade group contrasted the situation on back-billing in energy unfavourably with that in water. It told us it was working with the Office of Water Services (Ofwat the water industry regulator) to try and cap the practice in advance of the start of non-domestic water competition. 8.2 Consequences of micro-business definition We particularly wanted to understand whether the introduction of the micro-business category through SLC7A in January 2010 had changed the experience of consumers in the non-domestic energy markets. Two suppliers commented that the energy industry does not do enough to clearly differentiate between the contractual relationships between suppliers and non-domestic consumers and those between suppliers and domestic consumers. Compared to the domestic sector, safeguards in place for businesses are relatively weak even though smaller business customers engage in a similar way to households. These suppliers said that the introduction of SLC7A, following Ofgem s 2008 Energy Supply Probe, has improved this situation, but the improvements have only been modest and only apply to micro-businesses. It seems that some suppliers have taken on the responsibility themselves of treating small businesses and micro-businesses the same. One supplier commented that the micro-business definition is a laudable attempt at clarity in defining a segment of the market, but in practice it said the definition is very hard to apply. It said that it already defines all its SME customers as micro-businesses and it would not make much difference to extend the definition to businesses with less than 50 employees and an annual turnover of no more than 10 million as Ofgem is currently proposing under its Retail Market Review as outlined in section Micro-business energy markets 57

62 Most suppliers had no problems extending SLC7A conditions to cover micro-businesses, but one warned that Ofgem needs to be mindful that one size does not fit all and that there is sometimes a disproportionate effect on small suppliers. This supplier believes that there should be a full review of all licence conditions to see which are relevant for smaller suppliers and which are relevant for larger suppliers as there should be separate guidance in terms of enforcement action for differing sizes of suppliers. This proportionate regulation should be reflected in some of the conditions. All of the suppliers who provided their view to us said that they believed that roll-over contracts work well as they currently stand and should not be removed as this would make consumers worse off as more would end up spending extended periods on out-of-contract rates. Some suggested the problem might also be helped if a two-week grace period is introduced, while others thought that a deemed rate may be preferable rather than out-of-contract rates. However, one supplier commented that this would not be practical as with no possibility of denial of service the consumer would move to out-of-contract rates. It added that a two-week grace mechanism would also be more expensive for suppliers to hedge. Another comment was that if roll-overs are taken away, contract choices will also be taken away from customers, which would be a problem for customers with poor credit. One independent supplier to micro-businesses with no legacy customers analysed its experience of managing roll-over contracts in 2011 specifically for us. It told us that: 38 per cent of customers accepted the roll-over offer presented to them ahead of the termination deadline 14 per cent of customers declined the roll-over offer 48 per cent of customers did not provide explicit instructions and the contract was automatically rolled over for a further 12 months It also told us that the customers that left it during 2011 were on average billed for 111 days at its out-of-contract rates before they had a new arrangement in place with a competitor. From these figures, it argued that if roll-overs were to be prohibited, many more customers would end up spending extended periods on out-of-contract rates, incurring greater costs than necessary. On the other hand, one trade group told us that there was some evidence that its members preferred to be on an out-of-contract arrangement for a short period of time rather than being rolled-over, as they could then source a new contract rather than be forced in to an arrangement not of their full choice. In its view capping roll-overs at a year and the introduction of the Ombudsman Service were steps forward, but micro-businesses needed the full protections accorded to household consumers. In any case it said more should be done to raise the current very low profile of the Ombudsman. New business start-ups or business moves were cited as a distinct area of the market with particular problems. Due to the availability of information on these companies from marketing lists and the benefits available to them from switching from deemed to contract terms, these consumers were aggressively targeted by TPIs. Unfortunately some of this TPI activity was leading to unauthorised attempts to switch thus triggering objections noted in section 8.3 below and consumers being signed up to uncompetitive contracts. 8.3 Barriers to consumer benefit Two independent suppliers claimed that the way the big six operated their objections processes is a major factor preventing micro-business consumers from benefitting from supply competition. One particular supplier said it has clear evidence of consistent blanket objections being made by some larger suppliers, without a valid reason, simply to buy the incumbents sufficient time to attempt to win back customers or to persuade them to enter into a new contract with the existing supplier. A smaller supplier said that a common tactic used by the incumbent supplier is to offer the consumer more attractive terms than were previously offered, which could also often be more Micro-business energy markets 58

63 attractive than the terms agreed contractually with the new supplier. The customer is then put in a position where it has to reject the more attractive rates from their existing supplier, to comply with the contractual obligations they have already entered into with a new supplier or to break that contract by not completing the transfer and risking termination fees from the new supplier. This supplier believes that specific governance is required as such practices are being used by larger suppliers to prevent smaller suppliers from gaining a foothold in the market place. Other suppliers told us that some of their competitors would make multiple attempts to switch consumers that they held under contract in the hope that one would prove successful. If they were successful such suppliers would gain an account that by rights they were not entitled to as it was under contract with a competitor. Two independent suppliers said they support moves by Ofgem to stop suppliers abusing the objections process for transfers of supply as they believe further clarification is needed from Ofgem in relation to the win back process. One specifically said that the right for a supplier to object to switching on debt grounds should be maintained. Another noted that a few suppliers are very aggressive in how they apply objections to customers leaving them for win back, saying that, if these suppliers raised their standards to those of the rest of the market, the market would work better both as a whole and for consumers, potentially avoiding the need for further regulation. An intermediary told us that in its experience more than a third (36 per cent) of micro-businesses had experienced a transfer objection. A different supplier said that practices surrounding the management of changes of tenancy can sometimes also frustrate the change of supplier process. This supplier has therefore expressed its support for Ofgem to investigate these issues further. One of the big six said it is not in favour of enforcing standards for conduct for micro-businesses through a licence condition. Doing so would, in its opinion, make suppliers even more risk adverse in how they deal in the market. It added that this would probably not be to consumers benefit as suppliers generally want to look after their customers. The level of forensic resource you would need to prove compliance would probably form a barrier to entry, which would also not be of benefit to consumers. 8.4 Role of TPIs Trade groups acknowledged the benefit TPIs brought to micro-businesses, but they were very concerned that a minority were taking advantage of the consumers they purported to serve. One group told us that TPIs were mixed at best and the current lack of regulation is troubling especially on transparency of representation and commission. It claimed that TPIs only exist because the micro-business market is uncompetitive, so they provide a specialist resource to time-constrained consumers. More transparent information would eliminate the niche that TPIs fill. Nevertheless, it wanted to see a single mandatory code of practice for energy brokers and suggested that the regulatory regime for mortgage brokers provided a good comparison for energy TPIs. All the suppliers acknowledged that more needs to be done to regulate the activity of TPIs in the energy sector. That said there seemed different views as to who should take the responsibility for imposing and managing the regulation. It was mentioned that efforts should be made to require TPIs to declare whether they represent a subset of suppliers or whether the whole market should be investigated. One supplier considered that seeking powers to enforce the business protection from misleading marketing regulation is the preferable solution to intervene with TPIs directly rather than having to employ a surrogate route via a supplier. Others said that TPI commissions should be disclosed and that they would be in favour of a licence condition mandating the disclosure of commission rather than the formal regulation of TPIs as they believe this would stimulate further competition. Micro-business energy markets 59

64 One supplier said that, although it supports a licence condition for brokers, it believes that an Ofgem accreditation scheme for TPIs would put some restraints on trading. It said that if a licence condition is to be put in place, so too will policies for compliance and enforcement penalties. Other suppliers felt that a standard licence condition that would result in suppliers only being able to deal with brokers that are officially accredited (in effect compliant with a code of conduct approved by Ofgem). One particular supplier strongly felt that a code should be implemented now and then, once it has been established, the detail of it should be gradually built up, which would be more cost effective than making a code perfect from the start. With the number of brokers there are this supplier thinks that it would be impossible for the suppliers to police a code of practice as they would need new departments and huge budgets to regulate the TPIs it deals with and conduct audits. It therefore believes there should be a code of practice, where the broker is independently monitored and audited, and as part of this the suppliers should be obliged to answer questions on the activity of the broker. Comments were made by one respondent that TPIs are negatively impacting the energy market and that greater regulation of them is needed. This respondent was therefore supportive of Ofgem s approach to tackle TPIs. However, there were some serious concerns aired about Ofgem s proposal to put the onus on suppliers to regulate the behaviour of TPIs through the introduction of either a sales and marketing licence condition or a Standards of Conduct (SoC) licence condition. Meanwhile, other suppliers were more than happy to take on a licence condition and pass on any cost implications to its customers. A trade association commented that it is cautious of Ofgem s suggestion of the accreditation of various codes and thinks that Ofgem should accredit one which is already in place (that is, the one it, the association, had developed). It said that a situation cannot be allowed where TPIs just flit between codes as they are disciplined by one. It added that, if there was more than one code, there would be no central database that suppliers and consumers can check to see if a TPI is signed up to a code. This association said it does not see the necessity for a supplier s licence condition in the suggested format, but it would support a condition where suppliers needed to use a TPI signed to a code, making the code responsible for oversight and discipline. Two of the big six suppliers said that they were establishing their own codes of practice/conduct, which they would like to be seen accredited by Ofgem and independently administered and supported by other suppliers. One said that its code would ideally have an independent manager and an independent adjudication panel for disputes and to challenge its operation. It added that, even if other suppliers do not support the code, it will deliver it anyway. The other supplier commented that it has introduced its own set of standards to address its own concerns over TPI transparency and professionalism and to determine which TPIs it is willing to work with on the customers behalf. This supplier also established a TPI agreement that outlines a code of conduct that TPIs must adhere to in order to work with it. However, it has found that TPIs have simply decided to take their business elsewhere. Despite this, the supplier said that it hopes the proposed industry code of practice and standard of conduct will change this and create transparency and trust in the future. Another of the big six suppliers said that there needs to be regulation covering transparency of TPIs but it added that TPIs should not be policed through suppliers, rather they should be self-regulated. It said suppliers have a role to play in making sure that they only accept signed contracts from accredited TPIs, but the accreditation, redress and management for TPIs needs to be managed by TPIs. This supplier also commented that there should only be one accreditation scheme. It said it too has a code of conduct with TPIs that is enforced through a TPI contract, however, competitive pressures mean this contract is very difficult to enforce. Micro-business energy markets 60

65 8.5 Issues for the future This theme was raised with stakeholders primarily to understand if they believed Ofgem s Retail Market Review proposals and the introduction of the Government s Green Deal, smart metering and other energy policy initiatives would change the way micro-business energy markets operate. One trade group told us that it was essential confidence was rebuilt in the energy supply markets so consumers would have confidence in the extra costs they were being asked to pay for the Government s Electricity Market Reform programme. If the issues Ofgem s Retail Market Review is designed to address are suitably resolved, then one supplier has no doubt there will be significant future benefits to micro-business consumers as a result. Comments were also made that the review proposals are a significant and positive step in the right direction, but it must not mark the end of Ofgem s attempts in improving the situation for businesses. This supplier said it would also like to have seen Ofgem state that all energy suppliers should pledge to reduce back-billing for micro-businesses to one year and extend it to protect all small businesses. However, a different supplier said it rejects Consumer Focus s view that back-billing should be limited to one year for micro-businesses. With respect to the Green Deal, one supplier said it was unclear as to what role it will have in recommending the Green Deal providers to customers, but thinks it is important to ensure there is absolute transparency and protection for the end customer. It was also noted that market changes that the Green Deal will bring are likely to lead to an increased role for TPIs, as there would be scope to provide advice on Green Deal providers as well as energy services. A couple of independent suppliers expressed concerns that the Green Deal could lead to market foreclosure. This meant they would need to participate in the administration of the scheme even though they had far fewer customers over which to recover the costs, putting them at a commercial disadvantage relative to the big six. Meanwhile, comments were made that, although suppliers are gearing up to support administration of the Green Deal, how it will result in benefits for customers remains to be seen. One trade group told us that, while the Green Deal may offer opportunities for small businesses to undertake energy savings projects, it was nervous that they would be denied the opportunity to deliver services through it as the big six would carve work up between themselves. Table 8:1 provides a summary of stakeholder views. Micro-business energy markets 61

66 Table 8:1: Summary of stakeholder views Consumer groups Non-big six suppliers Big six suppliers Level of competition Competition appears to be increasing as more names are coming in to the market Unexpected back bills are causing significant distress to a minority of consumers A tough market to get established in due to major presence of the big six Lack of access to wholesale product is constraining competition to the big six Market is at its most competitive for some time New entrants appear to be establishing in competition to the big six Promotions and discounted offers mean price are becoming much more volatile Consequences of microbusiness definition Generally has been an improvement with limits to rollovers and the ombudsman for independent dispute resolution Some concern that even limited rollovers may not be appropriate One-year rollovers offer the best balance between access to market and passive consumers Extension would increase regulatory burden One-year rollovers offer the best balance between access to market and passive consumers Improved ability to manage disputes in a timely manner through Ombudsman Barriers to consumer benefit Lack of competition in the market Poor service and disinterest by large suppliers Poor performance by some TPIs Mis-use of objections by big six suppliers seeking to win back customers Lack of access to wholesale power Anti-competitive behaviour by large suppliers Mis-use of objections by independent suppliers seeking to gain customers with a throw it at the wall approach Misrepresentation by some TPIs Role of TPIs Can be helpful but too often seem to cause as much trouble as suppliers Better information would mean more of the market could go direct TPIs play a critical role in making the market work as a channel to new business Have worked hard to ensure their TPIs operate professionally Over-regulation could stop TPI channel working TPIs play a critical role in making the market work as a channel to new business Have worked hard to ensure their TPIs operate professionally Regulation is probably necessary to stop abuse by some TPIs Future challenges Retail competition needs to be made effective so consumers buy in to costs of EMR Care is needed to Green Deal delivery is not carved up to exclude SMEs Feed-in tariffs may offer consumers insulation from changing prices in volatile energy markets

67 9 Comment and conclusions In this section we set out our opinions on competitive non-domestic energy markets and make recommendations for how Consumer Focus and its successor may be able to improve the situation of consumers. 9.1 Context In the course of this report, we have undertaken much research and analysis into the structure and workings of the markets supplying electricity and gas to non-domestic consumers in Britain, especially micro-businesses. We have also taken the opportunity to engage with micro-businesses themselves and many stakeholders to gain an on the ground view of these markets. We have actively sought views on areas where improvements may be made to their functioning, which would result in direct benefits to micro-business consumers of electricity and gas. In this section we present our conclusions on the nature of business supply competition as it stands now in the spring of We believe there are many positives and a general increase in competitiveness of the sector since our last report in 2004, but suggest some areas of concern and some possible remedies. These recommendations are both at a policy level and where Consumer Focus or others may wish to engage more directly, with a view to improving the position of microbusiness energy customers in competitive supply markets. We have followed the same structure as section 7 by theme as below: The level of competition in supply to non-domestic customers in general and micro-businesses in particular. We comment on this theme below under level of competition General trading conditions for micro-businesses, including terms of contract, pricing and margins and standards of service with particular emphasis on how they differ from the wider nondomestic market and whether they have changed since increased protections for microbusinesses were implemented in 2010, following Ofgem s 2008 Energy Supply Probe. We comment on this theme below under consequences of micro-business definition Issues that may act to inhibit non-domestic consumers, especially micro-businesses, from benefiting from competition in supply and how they might be addressed. We comment on this theme below under barriers to consumer benefit The role of agents, brokers and other TPIs including whether there is a need for them to be specifically regulated in either the micro-business sector and/or the wider non-domestic market. We comment on this theme below under role of TPIs How competition in supply could develop over the next two years given the proposals arising from Ofgem s Retail Market Review, the Green Deal and other policy initiatives in play. We comment on this theme below under challenges for the future Our overall conclusion is that the market for non-domestic energy customers including microbusinesses is at its most competitive for some years. New entrants and independent competitors to the big six are active in all market sectors and prominent in a number of these. This extra choice for consumers also extends to new propositions based on factors that include price and price management, smart metering, data reporting and green energy. On the other hand when problems occur they can be very distressing for the micro-businesses and the individuals involved. These problems need addressing. But we are nervous that trying to address these problems through mandated licence conditions will squeeze competition from the market by being too onerous on all suppliers, but especially independent suppliers without expensive dedicated legal and regulatory resources. We believe that consumers and suppliers would benefit from an improvement in services, especially when things go wrong. Micro-business energy markets 63/72

68 Things do go wrong and this seems to be often due to reasons outside the suppliers control and problems arise sometimes because of issues that arose before they took on a customer. As a result independent suppliers, who by definition have competed their customers away from an incumbent, may suffer the unfortunate combination of dealing with legacy problems with a lower level of resources than the big six. With energy supply also generally being a low margin business, the pressure will be on them to secure resolution sooner rather than later. For this reason, expectations on service provision may be different for smaller suppliers than for the big six who may be better resourced to solve individual complex problems. We note that Consumer Focus s energy activities are to be taken over by Citizen s Advice from April We have assumed that the advocacy role undertaken by Consumer Focus for microbusinesses will continue through Citizen s Advice. If this is not the case, we hope that the Government ensures that responsibility for energy advocacy for micro-businesses is formally allocated to another body after the winding down of Consumer Focus. For simplicity of drafting we have addressed all our recommendations below to Consumer Focus. 9.2 Level of competition In our 2004 report we expressed concern that competition to supply non-domestic consumers was reducing. However in section 4 of this report we noted an increasing presence of competitors to the big six in the micro-business markets for electricity and gas during recent years. Anecdotal evidence from suppliers is that competitive activity in the micro-business energy markets is also increasing. We view this increase in competition as a very encouraging development, especially as several of these newer entrants have developed their own propositions in areas such as smart metering and green supply. We also note encouraging signs of consumer engagement from the telephone survey in section 7, especially of the proportion of consumers that had or intended to strike a new supply arrangement. By disseminating information, Consumer Focus can play a role in encouraging micro-businesses to access the competitive opportunities available to them. It generally has good relationships with the big six concerning micro-businesses and has worked hard to engage with these companies. However we believe it can also coax further benefits from competition for micro-businesses by ensuring that the regulatory framework in which suppliers operate is not unnecessarily or overly burdensome. Having regard to these factors we recommend: Consumer Focus should publicise its existing information resource for micro-businesses for example by promoting it through trade and industry groups. Consumer Focus should continue to enhance this resource as it becomes aware of new challenges for micro-businesses from electricity and gas markets Consumer Focus should press all suppliers to include basic contract information on each microbusiness bill, including that concerning anniversary dates, duration of current pricing structure and details of termination arrangements, so that customers can see clearly when and what they need to do when their current arrangement expires Micro-business energy markets 64/72

69 Consumer Focus should support work by Ofgem and, through changes to industry codes, by suppliers to improve overall market competitiveness. Examples of this work include Ofgem s proposals for increasing liquidity of wholesale power by the big six and industry proposals to modify the electricity Connection and Use of System Code and Distribution and Use of System Agreements to oblige network companies to give firmer information on their charges in future years. A good example where Consumer Focus can currently make a helpful contribution is Ofgem current consultation on the related issue of addressing volatility in network company charges that arises as a result of price control settlements 39 Consumer Focus should encourage trade groups to make sure their own members are aware of the opportunities available from competitive energy supply markets, for instance through joint campaigns or by holding an information bank that third party groups can use as the base for their own campaigns As was made clear to us several times in the course of this research, independent competitors to the big six are sometimes very small companies and resource constrained. Consumer Focus should work hard to understand these competitors and how they differ from the big six. Consumer Focus should prepare an induction pack to introduce itself to new suppliers as it becomes aware of them. This pack might include information on Consumer Focus, contact details for relevant Consumer Focus staff, plus a means of obtaining a basic information on the supplier perhaps through a questionnaire or face-to-face or telephone interview. The objectives should be to ensure that Consumer Focus understands the market position of the supplier and that the supplier understands Consumer Focus s role, responsibilities and perspectives 9.3 Consequences of micro-business definition We discussed the new licence conditions (SLC7A) for micro-businesses in section 5. We believe they have created much more distinct markets for electricity and gas for small business consumers than we reported in The application by many suppliers of the micro-business rules to a broader group than technically defined by the licence condition has effectively extended the protections to a wider group of consumers, even before the adoption of any further changes in the scope of these conditions that may result from implementation of Ofgem s current Retail Market Review. Overall we believe the micro-business rules have been a benefit to micro-business consumers and recommend: Consumer Focus should press all suppliers to include information on their bills on their redress arrangements, including whether they treat a consumer as a micro-business and the microbusiness consumer s right to seek dispute resolution from the Energy Ombudsman Consumer Focus should support the extension of the micro-business protections offered through SLC7A to a larger group of businesses but on the basis that energy volume thresholds are used. This proposal is currently on Ofgem s agenda through its non-domestic Retail Market Review proposals. In principle this extension offers benefits to a wider group of consumers, but needs to be implemented by suppliers based on easily definable criteria. These criteria should be based on energy consumption rather than revenue or employee numbers as this demand information is readily available to suppliers in the running of their business Consumer Focus should encourage all suppliers to provide clearly written terms of contract to all their micro-business consumers including explicit statements on how they will make and administer role over arrangements 39 Mitigating network charging volatility arising from the price control settlement. Ofgem consultation opens 13 April 2012, closes 11 June Micro-business energy markets 65/72

70 9.4 Barriers to consumer benefit Our analysis and consultations with stakeholders and the customer survey suggested that overall the market for supplying non-domestic consumers is at its most active for some time. However, a number of practical issues emerged that are causing problems for micro-business consumers. They include unexpected back-bills, blocked transfers, very expensive deemed and out- of-contract prices, plus difficulties caused by abusive behaviour by some TPIs. We make separate recommendations on TPIs in section 9.5 below, but concerning the first three problems we recommend: Consumer Focus should press for all suppliers to follow British Gas, SSE and E.ON UK 40 and commit to issue no back-bills to business that extend for greater than 12 months or to explain in a policy the circumstances in which they would seek to back-bill a micro-business for a period of greater than 12 months. One area where more information might be helpful is explaining to consumers that having a revenue meter on their property may incur a charge even if no energy is taken or has been for several years; Although we make specific comments on TPIs in section 9.5 below, we also believe Consumer Focus should specify a letter of authority and recommend that micro-businesses use it when they delegate responsibility to TPIs to source energy contracts on their behalf. We have been told of instances where letters of authority have apparently been tampered with or worse to allow TPIs to seek contracts without the explicit consent of the consumer. A standardised letter41 may help minimise such occurrences if it is stamped, say, with the year of issue and if it enables provision for an individual signature in a position that can readily be compared from letter to letter Consumer Focus should press Ofgem to make public information on the levels of objections incurred by micro-business consumers of the different suppliers. This information should be published at least annually and should include blocked departures from a supplier as well as blocked acquisitions (where a supplier has been unable to take on a new account because the incumbent has objected) Consumer Focus should ask Ofgem to investigate the cost-reflectivity of the deemed and out-ofcontract prices posted by suppliers compared to negotiated contract prices. We particularly question any premium between out-of-contract and deemed prices and believe Ofgem should investigate such differentials carefully. We recommend Ofgem publishes a factsheet on deemed and out-of-contract prices and main supply terms (specifically including payment) for microbusinesses to increase transparency in this opaque area 9.5 Role of TPIs A number of the issues that we found concerning TPIs reprised those that we raised in our January 2011 report for Consumer Focus, Watching the middlemen 42. Our perception continues to be that the majority of TPIs provide businesses in general and micro-businesses in particular with value by enabling them to strike supply contracts that lack of time, contacts or knowledge may otherwise preclude them from. However, many suppliers, consumer groups and TPIs themselves hold major concerns about the conduct of a minority of TPIs Perhaps with tick box options for micro-businesses to specify the exact services they require eg contract renewal for gas/electricity/gas and electricity 42 Micro-business energy markets 66/72

71 In the Consumer Direct data we saw cases where TPIs had apparently mis-sold contracts or misrepresented their services. These cases were consistent with anecdotal evidence that we heard from some respondents to this report. We saw the same desire for a general raising of standards through a mandated code of practice for TPIs that we found in Watching the middlemen Recommendations to Consumer Focus There has been some progress in raising TPI standards in the last year, but not with the speed or to the extent we hoped when we wrote Watching the middlemen. We noted 43 Ofgem s Retail Market Review Proposals to run an accreditation scheme for Codes of Practice governing TPIs and take responsibility for enforcing the Business Protection from Misleading Marketing Regulations. The Utilities Intermediaries Association has also continued to develop its membership and code of practice, though perceptions of its role in the market remain mixed. Suppliers too have been working on codes of practice of their own. There is a danger that these initiatives from a variety of sources could become unfocused and frustrate a widely-held objective of bring the standards of all TPIs up to those of the best. Consumer Focus needs to play its part in the establishment as soon as possible of a single, independently administered code of practice that all TPIs must adhere to. Ofgem should be the accreditor of this code and the code should address: the coverage of supplier offers that the TPI normally makes, expressed as a ratio of the number of suppliers in the market a commitment only to permit accredited personnel to present consumers with information on energy contracts and negotiate with suppliers on their behalf an obligation on the TPI not to inhibit in any way the consumer s ability to communicate with the supplier an obligation on the TPI to ensure that all their representatives authorised to source energy supply contracts on behalf of micro-business consumers adhere to the code whether they are directly or indirectly employed by the TPI a change mechanism for the code so that it can evolve in the light of market conditions an obligation on the TPI to provide a printed summary of all offers reviewed to the microbusiness on request that highlights the contract that the TPI has recommended. The TPI should also be able to provide full information on the contract offers it has evaluated an obligation by the TPI to operate a complaints handling mechanism and report to the scheme operator the number of complaints received periodically and the proportion that are resolved an obligation on the TPI to provide on request to the consumer a written statement of any payments it earns as a result of placing the contract on behalf of the consumer. This statement should include all commissions, incentive payments and other fees for negotiating the contract. Commissions should be those received directly from the consumer but also indirectly from the supplier. All supplier commissions should be declared, including performance-related payments specific to an individual contract plus, for example, reward commissions that may be triggered for delivering particular targets an independently-administered sanction mechanism that has the effect of excluding individuals that breach the code plus TPI companies that are found to have benefited from supply contracts that have been found to be sold in breach of the code. A central register of decisions concerning these individuals and companies should be maintained and publicised by the scheme administrator 43 In section Micro-business energy markets 67/72

72 Several parties have argued to us that the code should also include the recording of all telephone conversations between TPIs and micro-business consumers that concern arranging supply contracts. This measure may be a desirable outcome in itself, but we do not believe it is essential to a robustly functioning code of practice for TPIs. This statement is subject to the provisos that suppliers have the obligation only to accept supply contracts, they notify all instances of receipt of contracts from unauthorised TPIs or their representatives and the code of conduct is ably enforced by an independent administrator. The Utilities Intermediaries Association is in place and operates a code of practice 44 for TPIs, and E.ON UK 45 has also developed an independently administered code that it believes is capable of wider adoption. Consumer Focus should ask Ofgem to explore as a matter of urgency whether either of these codes or any others that gain traction incorporates the points we have set out above and if not, whether it is feasible for them to do so. It should then judge the capabilities of the respective parties to manage and implement the codes. We believe one code only should be authorised to minimise the scope for confusion among customers, and Consumer Focus should recommend that on a time-limited basis the most appropriate code becomes the mandated code for energy TPIs serving micro-businesses. This process should give the selected code administrator the opportunity to prove itself. This proving itself function should include the ability to make changes to the code that keep pace with the way TPIs seek to do business with micro-business consumers. Alternatively, should it not be possible to agree a suitable code of practice in the way described above, Consumer Focus should recommend that Ofgem mandate a code of practice to be administered under contract by a third party that does incorporate the elements we have highlighted. Whatever model is chosen, a deadline of April 2013 should be set for the introduction of the code, with TPIs allowed a further six months to become accredited. The code should start with coverage of micro-businesses only, though we suggest if it is successful its remit should be extended to all business consumers as soon as possible Recommendations to micro-business consumers In the expectation that a suitable code of practice for TPIs will shortly be put in place we continue in the meantime with our recommendations from Watching the middlemen for micro-businesses when they use TPIs. Micro-businesses should: remember TPIs are businesses that need to make a profit so claims of free service should always be challenged always instruct a TPI in writing confirming exactly the work required, with a letter of authority the TPI can present to suppliers. The letter of authority should be dated, time-limited and tied to a specific task always provide full information to the TPI on energy consumption, contracts and credit status so the TPI can secure the best offers available never commission more than one TPI to secure contracts as this will create confusion amongst suppliers and probably result in fewer and more expensive offers always ask for full, itemised evaluations of all quotations the TPI has secured on their behalf, including commission payments Micro-business energy markets 68/72

73 9.6 Challenges for the future Official projections for future costs to all consumers show a track of rising unit costs for their energy 46. With fossil fuel prices expected to be on a long-term rising trend, the Government s Electricity Market Reform proposals promise a shift to a low-carbon energy system. Using energy as wisely as possible will pay, but it should not be assumed that all consumers have the wherewithal in terms of knowledge or resources to invest in energy savings measures. Moreover it would probably suit micro-businesses better to invest in the products and services of their own businesses rather than in a property that often they will not own. The Government s proposed Green Deal47 is slated as one route micro-business consumers can fund long-term energy savings without burdening themselves excessively because measures will be paid for through bill savings (the so-called golden rule). It will build on a developing market for energy services by tying long-term energy savings directly into electricity bills. There is an expectation that many suppliers will be involved in delivering the Green Deal to microbusiness consumers. But at this stage offerings are still under development, and there is little hard and fast information on how they may develop. Consumer Focus and its successors will need to monitor developments in this sector carefully Micro-business energy markets 69/72

74 Annex 1: Overview of Consumer Direct contact codes Overview of Consumer Direct contact codes Code Contact Code Contact AD1 Priority Services Register DT1 Quality of supply AD2 Energy efficiency advice DT2 Reliability of supply/supply disruptions AD3 Pricing information DT3 Connections/alterations of supply AD4 Supply point number information DT4 Difficulty or delay in obtaining connection/alteration to supply AD5 Company contact details (non-compliant purposes) DT5 Excavations/reinstatement AD6 How to change supplier DT6 Emergency service provision gas AD7 Maximum Resale Price DT7 Network safety AD8 Non-domestic contract issues MA2 Inappropriate staff behaviour AD9 Smart Metering information MA3 Misrepresentation BE1 Failure to set up DD/DD at incorrect level MA4 Consumer agreed only to receive information BE10 Online tariff problem MA5 Signatory not responsible for account BE11 Security deposits ME1 Meter accuracy BE12 Missing/misdirected payments (credit meter) ME2 Meter provision or exchange BE13 Incorrect meter reading on transfer ME3 Meter positioning BE15 Multiple MPRs/MPANs for one Site ME4 Meter reading/data collection BE16 Amount on bill does not match smart meter energy display ME5 Supply point administration query (MPRN/MPR) BE2 DD unauthorised withdrawal ME6 Suspected meter tampering BE3 Backbilling/catch-up bill received PC1 Contact about price comparison provider BE4 Clarity of bill PP1 PPM settings (incorrect tariff rate/incorrect debt repayment rate) BE5 New bill not received/frequency of bills PP3 Delay in issuing PPM card (currently on supply) BE6 Customer not responsible for bill/debt PP4 Difficulty charging PPM card/card faulty/card lost BE7 Failure to refund PP5 PPM misdirected payments BE8 Final bill not received PP6 Issue with change of payment method from PPM to credit or vice versa BE9 Disputed use of premises : business/domestic SM1 Smart meter installation CS1 Contact not registered by company SM2 Problems with energy display/in home display CS2 Phone queue too long TR1 Transfer in error due to incorrect supply point information DD1 Unsuitable or unaffordable payment scheme to cover debt TR10 Supplier objection - reasons unknown DD2 Debt recovery practices TR11 Failure to correctly apply for transfer DD3 Unable to request suitable payment methods (fuel direct, PPM) TR2 Cancelled contract not actioned DD4 Disconnection/forced PPM without proper TR3 Breach of erroneous transfer charter process DD5 Disconnection/forced PPM in error TR4 Problems arising from contracts DD6 Disconnection following due process TR5 Supplier unable to supply DD7 Vulnerable customer disconnected TR6 Supplier objection to transfer on grounds of debt DD8 Disputed rights of entry TR7 Supplier objection to transfer on grounds DD9 PPM self-disconnection (unable to credit meter) of contract terms (deemed contacts) Micro-business energy markets 70/72 TR9 Transfer windows

75 Annex 2: Respondents to request for information and Consumer Focus would like to thank the following organisations for their contributions to this research: Business Energy Solutions British Chambers of Commerce British Gas Contract Natural Gas Corona Energy E.ON UK EDF Energy First Utility Federation of Small Businesses Makeitcheaper RWE npower SSE uswitchforbusiness Utilities Intermediaries Association Micro-business energy markets 71/72

76 Consumer Focus Fleetbank House Salisbury Square London EC4Y 8JX t: f: e: Media team: /8006 Published: September 2012 If you have any questions or would like further information about our research, please contact Hannah Mummery, by telephone on or via For regular updates from Consumer Focus, sign up to our monthly e-newsletter by ing or follow us on Twitter If you require this publication in Braille, large print or on audio CD please contact us. Deaf, hard of hearing or speech-impaired consumers can contact Consumer Focus via Text Relay: From a textphone, call From a telephone, call