Britain’s Big Six energy suppliers are to face a full-scale competition investigation after regulator Ofgem said profits in the sector quadrupled to more than £1 billion in three years.
Ofgem said a probe by the Competition and Markets Authority (CMA) would “consider once and for all whether there are further barriers to effective competition”.
“Profit increases and recent price rises have intensified public distrust of suppliers and highlight the need for a market investigation to clear the air,” it said.
Ofgem has launched a consultation on its proposals which it must complete before making a final decision on referring the sector to the CMA.
The investigation would be the first full-scale competition probe into the energy market and would see the UK’s biggest suppliers come under an unprecedented level of scrutiny, with the threat of being broken up.
Ofgem said it had already introduced a series of reforms which come fully into force from next month but had proposed a full CMA probe to reassure consumers and back up its attempts to achieve a “simpler, clearer and fairer energy market”.
It comes a day after Big Six supplier SSE announced it was slashing profits to pledge a price freeze on bills until January 2016, putting pressure on rivals to do the same.
Today’s Ofgem announcement concludes an assessment carried out with the Office of Fair Trading and the CMA.
It confirms previous concerns about barriers preventing smaller suppliers entering the market, and the large market shares held by the bigger companies.
The report found that retail profits – from supplying gas and electricity to homes and businesses – increased from £233 million in 2009 to £1.1 billion in 2012.
Ofgem said there was “no clear evidence of suppliers becoming more efficient in reducing their own costs” and further evidence would be required “to determine whether firms have had the opportunity to earn excess profits”.
It also said declining consumer confidence – with 43% not trusting energy companies to be open and transparent – could deter people from “engaging with the market” and getting a better deal on tariffs.
There was also concern over whether “vertical integration” – energy firms having both energy production and household supply divisions – was in consumers’ interests.
Ofgem said a market investigation would determine conclusively whether these ought to be separated.
But British Gas owner Centrica defended “vertical integration” of its supply and production arms as being in the interests of customers “promoting security of supply and helping protect customers from volatile price movements”.
The firm welcomed an independent review “free from political interference”, but said competition in the market was already “intense” and rejected the suggestion there might have been “tacit co-ordination” with rivals.
Chief executive Sam Laidlaw also voiced fears that a lengthy probe could damage confidence at a time when investment is needed.
“We hope that a lengthy review process will not damage confidence in the market, when over £100 billion of investment in new infrastructure is needed,” Laidlaw said.
“A prolonged period of uncertainty could damage investment at a time when Britain’s energy security is being seriously challenged.”
E.ON chief executive Tony Cocker said: “We will review the detail set out in today’s report. A full market investigation by the Competition and Markets Authority is the only way to restore full public confidence to the energy sector and depoliticise the whole issue.
“Whilst we have already made a large number of changes such as running our businesses separately, simpler tariffs, simpler bills and further investment in levels of service, a full investigation will once and for all get to the heart of any structural issues that exist or are perceived to exist and help us to all deal with many of the myths and misinformation that surround the energy market.”
SSE said it believed that the energy market in Britain was competitive, had brought significant benefits for customers, and that much had been done in recent years to make it more transparent and easier to understand, ranging from greater liquidity in the wholesale electricity market to simplification of tariffs in the retail markets.
In addition, there has been significant investment in energy infrastructure – SSE alone has invested over £7 billion in the last five years.
“Nevertheless, many of the key features of the energy market have become politically contentious and been subject to significant change designed to achieve a mixture of objectives,” the firm said in a statement.