The UK energy market
The UK energy market
The energy market is in a state of transition, with climate change prompting an increased focus on renewables, the newly introduced energy price cap and power transmission and distribution systems facing a shake-up. See more about what's happening in the UK energy market.
The energy market explained
Getting power to UK homes and businesses involves:
- generating electricity
- transporting gas and electricity
- selling and supplying energy to customers
Energy companies can be involved in the whole process end-to-end or in just one or two stages.
Instead of most electricity being generated at large power stations using fossil fuels and nuclear power, there has been a rise in the number of smaller power stations, plus the introduction of renewable sources of electricity like wind and solar. These electricity generators feed power into the network to bring it to your home or business.
Transmission and distribution networks
There are two types of electricity network:
- transmission is run by the National Grid and carries electricity long distances around the country at high voltage
- distribution runs at a lower voltage and takes electricity from the transmission network into homes and businesses.
The National Grid is responsible for balancing the system and making sure we all have the gas and electricity we need, when we need it – from a surge in tea making in the ad break in Coronation Street to meeting extra demand when it's very hot or cold. Demand on a cold winter day can be three times as much as average consumption.
As of October 2018, according to the energy regulator Ofgem, there were 73 suppliers competing in the UK domestic energy market. Sixty-four were providing both gas and electricity, seven were supplying just gas and two electricity only. However, over the 2018/19 winter a handful of smaller suppliers have gone out of business.
Since the 1980s when electricity and gas markets in the UK were privatised, the government has encouraged new entrants into the market. Customers have been able to choose the company they want to supply them with energy, but large suppliers still make up around 75% of the market.
Non-switchers lose out
Competition has brought more choice for consumers who switch to cheaper tariffs, but those who don’t switch are still on more expensive tariffs, according to Ofgem’s State of the energy market report 2018.
British households and businesses spend around £50 billion on energy each year. The Ofgem report says consumers on standard variable tariffs could save roughly £320 by switching to the cheapest tariff in the market.
With 54% of consumers still on the default tariff (not including pre-payment meters), this offers a lot of potential for saving. And 61% of consumers say that they’ve never switched or have switched only once.
So why, when there are savings to be had, are so many consumers reluctant to switch?
Barriers to switching energy supplier
When energy markets opened and competition was allowed for the first time, not all the safeguards currently in place existed.
- Door-to-door selling caused mistrust and some people felt that they had been missold.
- Some suppliers were less efficient than they should have been about switching accounts and subsequent billing.
- Comparisons weren’t as transparent as they are now.
- Some people may have ended up switching to tariffs that didn't suit their usage.
However, most of these difficulties have now been resolved.
- Ofgem has made the rules around switching tighter. Salespeople must now use any usage figures you give them to calculate your estimate and see how it compares with your current supplier.
- The Energy Switch Guarantee has been introduced and providers representing over 90% of the market are signed up to it. Under the guarantee, the switch should happen in 21 days and final bills be issued within six weeks.
- Digital comparison through sites like ours allow customers to compare prices, for most of the energy market, to see if they could save. Many of these sites, like ours, also allow you to see a wider range of tariffs from suppliers that you can contact directly. Originally, suppliers could have only four tariffs at one time, but now they can have as many as they like. This can cause confusion, but it also means there is a vast pool of tariffs to choose from – including fixed rate tariffs, solar energy and so on.
For a fuller understanding of how the energy market has changed from the 1980s to 2017, see government statistics in UK Energy in Brief.
Every month we update our Energy Snapshot so you can see at a glance, based on the experiences of our customers, the:
- highest saving tariffs
- most popular tariffs being switched to
- typical savings for different areas of the country
It also helps alert you to fixed-term tariffs that are coming to an end to remind you to take action and find a new deal.
What's the future for the UK energy market?
The future for energy customers could be affected by a number of factors including:
- political decisions
- regulatory changes
- environmental issues
So what do we know about things in the pipeline that might affect the energy market?
Energy price cap
The energy price cap came into effect on 1 January 2019 and limits the amount energy companies can charge customers who are on standard variable rate (SVR) tariffs.
This is currently set at £1,127 a year for an average dual fuel customer who pays by direct debit, while the price cap for pre-payment meter customers is now £1,164 a year.
Read our guide to the energy price cap and how it might affect you.
Smart meter roll out
The government has set the energy companies the target of installing smart meters in every home in England, Scotland and Wales by 2020.
Designed to end estimated billing and help us manage our energy use better, the meters send the supplier automatic readings and consumers can see near real-time information on their energy use in pounds and pence. However, a report published in July 2018 by the cross-party British Infrastructure Group of Parliamentarians (BIG) said that suppliers are "now almost certain to miss the 2020 deadline".
The report also suggests that consumers might not receive the savings anticipated, partly because the programme has been "plagued by repeated delays and cost increases".
One of the factors that’s been putting people off getting smart meters is that many first-generation meters lose their smart features when people switch suppliers. Plus, people in places with poor mobile signals have found that their smart meters don’t work.
The report suggests that savings could be as low as £11 on a dual fuel bill and some consumers have decided that getting a smart meter installed is currently not worth it. On the other hand many people find smart meters useful because it means that their bills are always accurate, and they don't find themselves with large catch up bills when they have forgotten to supply a meter reading in time.
However, if suppliers fail to meet the installation targets they face fines of up to 10% of turnover.
Some suppliers are introducing cheaper smart meter tariffs, as an incentive to get people to switch. Most are currently from small suppliers but the Bix Six are beginning to offer them too.
Suppliers are now being pushed to speed up the roll out of second-generation smart meters – but it looks as if the deadline might slip to 2021 or 2022.
BIG has recommended that Ofgem protects customers from the ever-increasing costs of the roll out and fines simply being passed on.
Ofcom's work with "disengaged energy consumers"
During its investigation into the energy market, the Competition and Markets Authority (CMA) found that it’s not working for everybody.
People who stick with the same tariff year after year can end up paying more than those who switch. This has prompted Ofgem to trial research and services to help encourage non-switchers to be more proactive in seeking better deals.
It has already run a few trials including a collective energy switch, which offers customers an exclusive tariff negotiated by an Ofgem-appointed independent price comparison service, together with a simple process for starting a switch online or by phone.
Energy back billing fixed at 12 months
In the past, consumers who have had only estimated or inaccurate bills could find themselves facing large bills going back years. Ofgem says these shock bills are typically as much as £1,160 but can be as high as £10,000, putting some customers into financial difficulty. Smart metering can help avoid this situation.
Back bills can arise from problems with a supplier’s billing system, or from suppliers estimating bills until they have an actual meter reading, which may show that the customer’s consumption is higher than expected. Suppliers then send a ‘catch-up’ bill to recover the difference.
Ofgem is now banning suppliers from back billing customers for energy used more than 12 months ago where it’s not the customer's fault. There is, of course, an exception for consumers who actively prevent the supplier from taking accurate meter readings or tamper with the meter. Consumers have been protected since May 2018, and microbusinesses have also been included in the protection from November 2018. So suppliers are now not able to get back money for longer than 12 months.
The Electricity System Operator (ESO) is changing from April 2019
The National Grid is setting up the ESO as a stand-alone business within the National Grid Group. The aim is to make sure the company acts fairly and independently of any other part in the energy sector. Its job is to operate Great Britain's electricity network to ensure that:
- supply and demand are balanced second by second and in the longer term
- power flows across the network safely and reliably
As Britain moves to a low-carbon power grid, it will be up to the ESO to ensure that reliability of supply remains at its current high level and that consumers are put at the heart of everything it does to ensure value for money.
See more about what the change will mean for suppliers and consumers.
Interesting facts from other international energy markets
We always want to understand what encourages competitive markets and drives customer engagement to get better deals. So back in August 2017 we produced a report comparing energy markets internationally.
Working with the independent think tank, the Institute of Public Policy Research (IPPR) we looked at switching levels, use of smart meters and lessons that can be learnt from countries such as Australia, France, Germany, Sweden and the state of California. Some of the interesting initiatives we found were:
- California: net energy metering is used to help consumers benefit from producing green energy from rooftop solar panels. On the other hand in the UK, the government scheme to encourage small scale renewables – the Feed-In Tariff – is to be closed to new applicants from 1 April, 2019
- California, Germany and Australia: increased incentives are offered to encourage consumers to use PV solar panels.
- France: time-of-use tariffs allow consumers to take advantage of periods of low demand. The installation of smart meters in the UK could help facilitate this here.
- Australia and Sweden: personal energy management solutions such as apps, smart appliances and smart meters are offered by energy suppliers to help consumers manage and monitor their own energy consumption easily. Smart home technology is helping increase this now in the UK.
- Sweden: offers more transparency by providing consumers with access to all information on tariff deals.
Other energy developments
Peer-to-peer energy trading is now beginning to develop around the world, including Germany, Australia and the USA. It involves people generating their own energy from renewable energy sources (RESs) in homes, offices and factories, and sharing it with each other locally.
A number of trial projects are being set up working in different ways.
Find out more about these kinds of schemes and community energy schemes in Ofcom's report Local Energy in a Transforming Energy System.