Efforts to lower energy bills, such as the price cap on default tariffs, will prove ineffectual so long as most gas and electricity is bought and sold through “opaque” bilateral contracts or supplied to consumers without being traded at all, Switchcraft has argued.
The auto-switching service has criticised Ofgem’s recent suspension of the market making obligation (MMO) which forced large incumbents to offer to trade electricity with smaller rivals and called for more transactions to be conducted on open exchanges.
Whilst acknowledging that their shares have declined in recent years, Switchcraft said the “big six” suppliers still account for nearly three quarters of electricity sold to consumers in Great Britain. The generation market is also dominated by large incumbents. Most were formerly owned by big six companies and several remain so.
The majority of electricity is either bilaterally traded or self-supplied through “over-the-counter” contracts, meaning it has not been subjected to “rigorous competitive pressures from the largest possible number of participants”. A much smaller percentage is traded in competitive auctions on open exchanges.
Switchcraft said this allows large incumbents to trade on better terms than their challengers, which face higher costs as a result.
The MMO was introduced by Ofgem in 2014 in an effort to improve the liquidity of the wholesale market and enhance access for smaller players. It required obligated parties to regularly post bids and offers on trading platforms to buy or sell power over a variety of timescales, whilst also limiting the spreads between the two.
However, the obligation only applied to companies with large shares of both the generation and domestic retail markets, allowing most of the big six to eventually be released by the regulator as they lost customers and sold off parts of their businesses.
After Npower became the latest to secure a release due to its acquisition by Eon, Ofgem decided to scrap the obligation entirely. It said the only two still subject to its requirements – SSE and EDF – would be unfairly burdened by the measure.
Speaking to Utility Week, Switchcraft founder and chief executive Andrew Long said: “Getting rid of the MMO, in the current context, increases the advantages that the large integrated suppliers have in the market.
“It removes transparency and access to the wholesale market for the suppliers who we are all relying on to drive competition in the middle of the market.”
Long agreed it is “a bit ridiculous” for the obligation to apply to so few companies but said it should have been replaced or adapted instead.
“You could have come up with a scheme which takes in a larger percentage of the people operating in wholesale markets so there’s transparency there for the smaller players and it’s not everything stitched up behind the scenes by a handful of big players,” he explained.
“The principle of saying that if you’re a notable player in the market then you have to post bids and offers across the curve – that’s a completely reasonable thing to say – and rather than eliminating it entirely, they could have tweaked the rules.”
Ofgem could, for example, allow bids and offers to be posted for narrower timescales or with wider spreads between them.
“They could have diluted it to make it more palatable and to make sure players who are not tier one in the wholesale market could still reasonably be expected to comply, without getting rid of it all together,” added Long.
Ultimately, it would be “much fairer” for energy to be traded on free exchanges such as those already in place for day-ahead and intraday markets: “It allows a more open playing field for independent traders to trade energy. Obviously with increased trade comes more opportunity for downward pressure on price.”