Big six must trade fairly with small energy suppliers or face financial penalties, says regulator

The energy regulator plans to create a 'Secure and Promote' licence condition in order to promote competition in the wholesale energy markets and to encourage smaller companies to trade.

"Our aim is to improve consumer confidence and choice by putting strong pressure on prices through increased competition in the energy market," said Andrew Wright, Ofgem's senior partner for markets. "Ofgem's proposals will break the stranglehold of the 'Big Six' in the retail market and create a more level playing field for independent suppliers, who will get a fair deal when they want to buy and sell power up to two years ahead."

"Greater price transparency will assist investors seeking to build new generation plant and help secure supplies for consumers, who are also set to benefit from a simpler, clearers and fairer energy market thanks to our retail market reforms," he said.

The final proposals, together with an impact statement, have been published ahead of a planned statutory consultation on the new licence condition, which is expected to take place in the autumn. The changes are planned for early 2014, it said. The document summarises some of the alternatives considered by the regulator, including self-supply restrictions and mandatory auctions of up to 25% of the power produced by large suppliers.

The new licence condition would operate alongside other measures previously announced by Ofgem, including simplified tariffs and proposals to require suppliers to set out the cheapest tariffs available on consumer bills.

If approved, the new license condition will require the 'Big Six' energy suppliers to post the prices at which they buy and sell wholesale electricity on power trading platforms up to two years in advance. They will then be obliged to trade at these prices, both between themselves and with independent suppliers and generators. Companies in breach of the requirements could be fined by Ofgem.

Suppliers will not be able to refuse any "reasonable requests" to buy electricity from small suppliers. They must also ensure that they sell power to small suppliers at a fair price and negotiate with them fairly at all times. Large companies will also be given deadlines for acknowledging requests and responding to them.

The proposals will apply to the UK's two largest independent power generators, Drax and GDF Suez, as well as the 'Big Six' suppliers: British Gas Centrica, EDF Energy, E.ON, RWE Npower, Scottish Power and SSE.

Ofgem said that suppliers had already "responded positively" to its drive to improve liquidity and access to the wholesale energy markets by smaller companies, with the Big Six now auctioning at least 30% of their power on the 'near-term market' for more immediate use. However, the regulator said that more needed to be done to help independent suppliers compete in the 'forward market' for future use.

Energy Secretary Ed Davey said that the Government would take "necessary measures" to implement the proposals as part of its new energy market legislation if Ofgem's plans were "delayed or frustrated". The Energy Bill, which is intended to deliver the most wide-ranging reforms to the electricity market since privatisation, completed its House of Commons passage earlier this month and is now before the House of Lords.

"I want our energy market to be as competitive as possible," Davey said. "An increased role and level playing field for independent suppliers and generators is precisely what will help drive the competition that delivers better value for consumers and businesses."

"I encourage companies to work with Ofgem to implement these proposals as swiftly as possible," he said.