Asymmetrical Price Response in Energy Supply: A Review of Ofgem's Analysis

Fri May 13 20:24:38 UTC 2011
By Graham Shuttleworth

Energy UK asked NERA to comment on Ofgem's short paper dated 21 March 2011, entitled "Do energy bills respond faster to rising costs than falling costs?" To summarize Ofgem's conclusions, the paper states that "This analysis found some evidence that energy bills follow an asymmetric trajectory," but "[b]ecause of the number of plausible reasons for finding asymmetry, the implication for consumer harm is not clear cut." Recent discussion of this topic has sometimes focused on the first statement -- that prices move asymmetrically -- without noting the second statement -- that such evidence may not mean that customers are suffering actual harm. Thus, there is some doubt about the results of Ofgem's analysis, but in any case evidence of asymmetrical price responses would not of itself prove the existence of competition problems, or of any harm to consumers, in retail markets for the supply of energy in Britain.

In this report, NERA Director Graham Shuttleworth comments on the economics of asymmetrical price response, including a number of different interpretations of price asymmetry, and on the econometrics (i.e., statistical analysis of data) that Ofgem used to examine pricing behaviour in British retail energy markets.

Mr. Shuttleworth concludes that further work would be required to establish whether or not there is asymmetry in price responses, because Ofgem's work cannot be relied on. Even then the existence of asymmetric price responses would not prove (and their absence would not disprove) that there was any lack of competition in retail energy markets.