Mandatory power sales by Big Six could encourage independent energy suppliers, regulator says

A new consultation (71-page / 1.8MB PDF) by regulator Ofgem proposes mandatory auctions as part of its 'road map' to open up the electricity market to extra competition. These would require larger companies such as British Gas and SSE to sell a range of wholesale products over different timescales to independent suppliers rather than concentrating on short-term supplies as they do currently. The target amounts to nearly half of the UK's domestic power use, the regulator said.

Ofgem announced plans to reform the electricity market in March 2011 calling for the availability of a range of products to support independent suppliers, robust 'reference prices' to allow suppliers to plan ahead and an effective short/near term power trading market. It said that progress had only been made on the last of these since its last announcement.

"Since Ofgem announced that the Big Six companies needed to change radically their ways, they have made progress," said Andrew Wright, Senior Partner for Markets with the regulator. "We have seen pledges to simplify tariffs, moratoriums on door-step sales and now auctioning of power in the short-term market. This is to be welcomed. However, the needs of independent suppliers have not yet been met and this is why Ofgem is proposing to introduce mandatory auctions to force the pace of change and increase transparency."

The consultation will close on 8 May 2012; however, Wright said that suppliers would not have to wait until its plans were in place to act.

"Ofgem has set out clearly the three objectives we want met and energy suppliers now have the chance to take the lead and deliver this increase in liquidity," he said.

Under the proposals, the Big Six would have to sell 25% of their power in a variety of different products, many of which will be on the forward markets – allowing smaller suppliers who purchase wholesale to guarantee suppliers months or years in advance. This would allow suppliers to 'hedge' or spread out power purchases over different timescales, and as a result they would be better equipped to avoid the risks of market volatility. Currently independent suppliers only account for 2% of the market, according to Ofgem's figures.

Any mandatory auction would be part of a wider package of wholesale electricity market reforms, including proposals for simplifying the number and structure of tariffs and tougher supplier standards of conduct, the regulator said. Final reforms will be published in the summer.

Energy law expert Matthew Collinson of Pinsent Masons, the law firm behind Out-Law.com, said that although the proposals were "positive" for smaller suppliers already in the market, any decisions on new investment will likely continue to be taken against the wider background of the Government's Electricity Market Reform (EMR) programme, which is still developing. Legislation reflecting the contents of the EMR is due to be approved in 2013, although many of the changes are not expected to be in force until 2014.

"Many independent generators secure funding for their projects on the basis of long-term power supply arrangements to meet the 15, 20 and 25 year terms of their bank loans, so it may be a few years before they are able to take advantage of any increased liquidity driven by Ofgem's proposals," Collinson said.

Energy Secretary Ed Davey welcomed the announcement, saying that tougher competition for suppliers would lead to better deals for consumers. "Right now only six big companies have 99% of domestic customers - energy bill payers in this country need more and better choices," he said.

The Government had cut burdensome regulations for smaller suppliers and was looking at increasing the regulator's powers further to "ensure fairer outcomes for consumers", he said.