With the ‘big six’ set to double profits, what we actually need is a ‘small twenty’

With ever-rocketing bills, the time has come to break up the big energy companies.

With ever-rocketing bills, the time has come to break up the big energy companies

Average profits made by the big six from each customer are set to double from £53 to £106 next year, Ofgem reports. This means that the profit margin made from household consumers would spike from 4.3 per cent to 8 per cent.

It was reported that customers would see an average decrease in their bills of £12 annually, but this is only because new rules are set to limit the prices that can be charged by the big six.

Favorable market conditions have contributed to the rise in profits. The wholesale price is low, and mild weather has not put any strain on resources.

Given this situation, it makes sense that the big six are seeing greater profits. What doesn’t make sense is why more of these profits aren’t being passed onto consumers in the form of even lower energy bills or increased investment in the UK.

The problem with the current situation is the way privatisation was handled twenty years ago. Dale Vince, founder of green energy company Ecotricity, says that “[the big six] inherited huge numbers of customers at privatisation which they never had to win through normal commercial behaviour, like fair pricing or good customer service”, leading to our current situation.

Unfortunately, the government thought that ‘privatised’ automatically meant ‘free-market competition’. That was a dangerous assumption. With so few energy companies they formed an oligopoly – a market structure that behaves like a monopoly because there are so few players involved. They control 98 per cent of the market. Tacit collusion becomes quite easy when you only have to be worried about what five other companies are doing.

Just a week ago, the Competition and Markets Authority announced it would begin investigating whether the big six were responsible for price collusion. The head of the regulatory body said “Prices have risen more than they should have, we believe, over the last few years. Profits have risen, prices have risen, margins have risen”. He then called for “more effective competition to drive those prices down”.

The Competition and Markets Authority would have the authority to break up the big six if they determined it to be necessary at the end of their eighteen-month investigation. Specifically, one area that has received special attention is the potential separation of the gas-supply and electricity generating parts of the companies.

Breaking up the energy giants would be the best course of action. More minor actions taken against the big six have actually had the opposite of the intended result. Ed Miliband’s call for a price freeze last September caused some energy companies to buy up a lot of gas and electricity ahead of time, supposedly in case wholesale prices rise during the ban. The result has been more expensive energy right now.

Dale Vince points out that the big six have a history of this: “Talk of blackouts and investment boycotts is a stick that the big six like to beat politicians and regulators with, whenever tough questions are asked or their interests look threatened. The last time we heard this from them was when Ed Miliband made his pledge to freeze energy prices until 2017 if elected.”

Systemic changes need to happen for a healthy industry to exist. Breaking up the energy companies would allow for smaller companies to enter that market as well. For example, as it stands, the big six have been strangling green energy companies out of the market and driving them to a niche role. Breaking them up would allow for innovative and green startups to make themselves a true market force, and the competition would drive down prices for everyone.

We cannot have anymore of the same tactics – we must move to change the whole system.

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