Botched privatisation?

Surviving architects of privatisation point to a series of interventionist policy mistakes which they believe distorted the market, undermined competition and led to the explosion in the number of suppliers – followed by the cascade of failures and ongoing industry collapse. The result is higher costs to remaining companies and their customers.

George Yarrow, a former non-executive director of the Gas and Electricity Markets Authority and now chairman of the Regulatory Policy Institute, says the private market began well as the 12 regional energy monopolies were “competing fiercely to expand”.

A key tactic was to push into new territory with prices to undercut the regional incumbent.

“If you look at the early period, from around 2002 when the deregulation was pretty much complete through to 2007, the market was operating very competitively. The margins were very tight in that period, and there was competition among the incumbents,” Yarrow says.

He argues this began to go wrong when extra support akin to a subsidy came in to encourage new suppliers: “That has led to all of the bankruptcies today.”

Still-standing rules to ensure households will not be left without power if their supplier collapses, Yarrow says, act as an incentive for new companies to offer very low prices, and attract customers, without acknowledging risks in their model.

But if they do collapse, other firms – and their customers – are left to pick up the tab.

“The small suppliers are, certainly in the startup phase, more risky,” he says.

“There has been an over-encouragement of small suppliers. They can do well in good market conditions when prices are falling, which they were at the beginning of the century. But when times get hard, they are inclined to take more risks.”

For instance, Octopus Energy began taking on customers of Avro Energy after the small supplier failed in September 2021.

Risky behaviour worsened in 2009 with fresh rules, says Yarrow. Competition was based on price “discrimination”, offering new customers lower bills than existing clients.

Regulators and then politicians – he calls Ed Miliband, energy secretary at the time, “the prime culprit” – questioned and then blocked the practice.

This “wiped out competition between the Big Six [consolidated from the 12 through the 1990s] and Centrica”, says Yarrow, leading to extra demand for new companies to join the market and undercut larger rivals’ prices.

Those close to Miliband admit the rise in new entrants spiked in 2011 and 2012, after the Coalition Government took over, but argue the pursuit of mass entry to the market did not take place on his watch.