Reducing household energy prices impact case study
Impacting Household Energy Prices
Even before the current 2022 energy crisis, UK households were struggling to pay their bills, with energy expenditure accounting for 11% of total spending among the poorest 10%. A major competition review of the energy market was undertaken by the Competition and Markets Authority (CMA) resulting in a £1b annual saving on household bills in 2019 and leading to even greater savings today. This review included evidence from research conducted by Prof Catherine Waddams Price and colleagues at the University of East Anglia’s (UEA) Centre for Competition Policy (CCP).
Impact of consumer inertia
Guided by CCP’s findings, the CMA developed a new understanding of consumer behaviour and the role inactive consumers who did not ‘shop around’ for a better deal played in the dynamics of the market.
"The CMA’s historical view was that consumers reacted quickly to prices and would seek out the cheapest supplier. The Centre for Consumer Policy (CCP) work demonstrated that this was not the case in energy markets and also offered key insights on the reasons why it was not."
- Chair, Competition & Markets Authority Energy Market Investigation
This was one of the main findings of the CCP-informed CMA review: weak consumer response significantly inhibited competition in household energy markets. In fact, the CMA estimated that the inertia of energy consumers was costing them each £300 a year in lost savings on their energy bills, a total annual detriment of £14b.
Impact on the four-tariff rule
CCP research also highlighted the detrimental effect on competition of regulatory interventions, particularly the ‘four-tariff rule’ which led to companies withdrawing low price offers for low-income households. Removal of the regulatory constraint enabled those less well-off households to benefit from the greater choice available. In fact, its removal strengthened competition generally, benefiting all consumers.
Impact on the design of the price cap
As a result of the review, the government decided to cap the prices which energy suppliers could charge those consumers who had not recently engaged in the energy market. Imposition of the cap required primary legislation, with UEA’s CCP involved throughout the debate with Parliament. A relative cap was rejected and CCP’s evidence on previous regulatory interventions was widely cited in the pre-legislative committee’s report as well as in a House of Commons briefing on the energy market.
"The immediate impact of the cap would be to save customers up to £1b a year through reducing the degree of market power enjoyed by the bigger firms, as well as forcing them to rapidly become more efficient."
- CEO, Ofgem
The wider impact
The fundamental challenge posed by CCP research to the conventional theory of market competition and consumer engagement continues to impact today, at home and abroad. Here in the UK, UEA’s research has provided a solid grounding for government and regulators as they attempt to help householders struggling to pay their energy bills. While abroad, in Australia, for example, the Victorian Essential Services Commission based the review of its own default tariff in 2019 on CCP research. Beyond energy, CCP research influenced the super-complaint across various markets in the UK by the consumer organisation, Citizen’s Advice.
"The overall impact of the research was considerable; it represented a questioning of the conventional theory of market competition and consumer engagement that is taught to all students of microeconomics."
- CEO, Ofgem