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

  1. itdoesntaddup

    Nice myth that the Big 6 were formed at privatisation. They weren’t: they came out of the great merger boom of 2002, which was the consequence of the Utilities Act 2001. Before all that we had much more competition for retail supply, and much more competition between generators that had led to falling prices in real terms. Proper competition between generators was further suspended by the Renewables Obligation and all the susbsequent distortions and centralised control imposed by one layer of legislation after another.

    Still, increasing the number of suppliers might increase competition – provided that all the central diktats are also removed that mean that the present industry is effectively a series of PFI subcontractors to an inefficiently run government policy that is a disaster for cost and energy security.

  2. Guest

    Ah yes, allowing massive price rises and removing safety legislation always helps.

  3. Leon Wolfeson

    “Competition” does not work with the current structure of i.e. RO’s and the vertical nature of power companies. We should move to a carbon-tax based structure and break up the vertical integration….Ireland’s single energy pool is worth studying.(yes, it means no “green” energy companies, but it does a lot for prices!)

    Simply introducing more companies is no panacea. And splitting up electric and gas service would end quite a few discounts and introduce more paperwork… (splitting up generation, distribution and customer billing, now…)

  4. itdoesntaddup

    Competition works. Safety legislation is not the issue here. It is mandating expensive energy sources as policy, and then using the Big 6 oligopoly as scapegoats for bad policy, which happens to include allowing the very same massive price rises you dislike in order to pay for it.

  5. itdoesntaddup

    Pool pricing is not problem-free, but it is certainly better that the present price fixing arrangements decided by politicians, the DECC and OFGEM.

  6. Leon Wolfeson

    Herpes would be better than the current system of RO’s, which is 100% politician decided…don’t blame people for doing their jobs.

    Pool pricing is considerably better than the other viable alternatives, especially if generation is separated and we have a carbon tax.

    (Renewable owning companies would, of course, need to be able to cover shortfalls (i.e. winter storm times) by either owning or agreements with gas-generating companies)

  7. Guest

    Yes yes, it’s not an issue that you’d abolish it, and raising prices with faux “competition” would work for your wallet.

    Not ending current policy on i.e. RO’s suits you, and you are not advocating it in your post for a reason. Just faux “competition”, i.e. the same owners, at one remove.

  8. itdoesntaddup

    I DEFINITELY want to see the back of ROs and CFDs that subsidise expensive energy. Then again, I know you have comprehension difficulties.

  9. blarg1987

    Don;t you mean the Utilities act of 2000? The Big 6 were partially formed at the start of privatisation, however over the years they bought out their competitors until we have the Big 6 we have today.
    It doe snot matter what the industry is it will always have that problem, look at computing as an example of the hundreds if not thousands of computer companies that were formed in the 80’s how many do we have today?
    New market entrants will never be able to compete unless you break everything up into smaller companies or they have a hell of allot of capital so they can set up everything straight off (e.g. aldi and lidl in the UK food market).

  10. Guest

    So what worse system do you want? And no, I comprehend you want much higher bills and more profit for yourself perfectly well, as much as you cry because I noticed that.

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