Energy Retail in Great Britain: Moral Hazard and the Illusion of Competition

16 December 2021
George Anstey, Soren Christian, and Matthew Newell

The focus of British policymaking in the energy retail market since the late 2000s has been to promote entry and ultimately to cap prices with the aim of protecting disengaged consumers who had hitherto failed to engage with the energy market. In a white paper responding to the slew of recent supplier failures in the British energy market, NERA Director George Anstey, Senior Consultant Soren Christian, and Research Officer Matthew Newell set out the recent history of policy and regulation in energy supply markets and explain how current arrangements shift costs from shareholders in failed suppliers to customers, in a clear case of market and regulatory failure. The authors also estimate the direct costs to customers from those failures and set out potential options for reform.

British energy policy over the last five years has not created true competition, but only the illusion of competition, as measured by the sheer number of “competitors,” which peaked at over 70 in 2018. Underlying market and regulatory failures have allowed new suppliers to take bets on risky business practices using customers’ money. As wholesale market conditions worsened, the underlying market failures have resulted in an unprecedented bill for British energy customers of a sum as yet unknown, but possibly over £3 billion. The scale of the costs to be recovered from consumers lead to the government regulator for the electricity and gas market, Ofgem, announcing its 2022 Action Plan for regulating suppliers for financial stability over the short-to-medium term.

British energy markets need reform to promote sustainable business models. Those reforms will need to address the ability or incentive of suppliers to take risks, or reduce the costs to customers when they fail, or a combination of all three. The project of designing electricity markets is one of compromise and the current set of compromises is not working. Therefore, Ofgem’s announced intention to reform the market is to be welcomed; however, ensuring that the new regime gives the right incentives to suppliers is critical to its success. The job of the regulator and the policymaker is to design those incentives to harness the benefits of competition. Energy customers have a right to expect future regulation and policy to distort competition less than it has in the past.