Entry has slowed down, but market concentration continues to decline
3.69. As of June 2019, there were 86 active licensed suppliers in non-domestic markets, a net decrease of three suppliers compared to June 2018. This is in contrast to last year, when there was a net increase of 10 suppliers. This was partly driven by exits of suppliers that had been mainly active in the domestic segment, such as Affect and Extra Energy.
3.70. Around 40% of business customers use gas rendering dual fuel discounting less prevalent than in the domestic market and resulting in a large proportion of separate
54 We source data on gas and electricity meter points directly from network operators, while the sources for gas and electricity demand data are: BEIS - Natural gas supply and consumption and BEIS - Supply and consumption of electricity. Spending data is sourced from DUKES_1.7 and is expressed in nominal terms.
55A non-domestic customer is defined as a microbusiness if they meet one of the following criteria, as established in existing gas and electricity standard licence conditions: employs fewer than 10 employees (or their full time equivalent) and has an annual turnover or balance sheet no greater than
€2 million; or uses no more than 100,000 kWh of electricity per year; or uses no more than 293,000 kWh of gas per year.
58 contracts for gas and electricity. Furthermore, in contrast to the domestic market, suppliers in the non-domestic market are not obligated to offer a supply contract to customers upon request. This leads to greater segmentation based on customer needs and costs to serve. As of June 2019, 45 non-domestic suppliers provided both gas and electricity, 22 only gas and 19 only electricity. Different groups of suppliers serve small and large businesses, with around half serving microbusinesses.
3.71. Non-domestic markets were liberalised earlier and have historically been less concentrated than the domestic retail market, with several suppliers besides the six large domestic suppliers (Figures 3.18 and 3.19). Between June 2018 and June 2019, these suppliers continued to increase their market shares in all segments and
concentration levels declined, albeit at a lower rate than in previous years. In both gas and electricity large business segments, the HHI was at or just below 1,000.56 For the small gas and electricity business segments, the HHI was respectively at 1,148 and 1,139.
Figure 3.18. Non-domestic market shares for electricity in June 2019
Source: Ofgem’s analysis of Elexon data.
Note: Electricity profile classes’ definitions refer to Elexon Guidance. Profile classes 3 & 4 are typically small businesses and market shares are measured in terms of meter points;
profile classes 5 to 8 and half-hourly (HH) customers are typically larger and market shares are measured in terms of volume.
56 The Herfindahl-Hirschman Index (HHI) measures market concentration by summing the squares of the market share of each player. See the note below Figure 2.1 for a more detailed explanation.
59 Figure 3.19. Non-domestic market shares for gas in June 2019
Source: Ofgem’s analysis of Xoserve data.
Note: Market shares are measured in terms of meter points for businesses with gas consumption under 73,200 kWh and in terms of volume for businesses with gas consumption over 73,200 kWh.
Microbusinesses still face significant barriers to engage
3.72. In May 2019 we launched a review of the microbusiness retail market,57 which aims to identify suitable measures to improve outcomes for microbusinesses. Despite
changes to the regulatory framework,58 including the remedies implemented by the CMA in 2017, 59 there is evidence that the market is still not working well for some microbusinesses and that they continue to face significant barriers to engage.
3.73. Our evaluation of the CMA’s price transparency remedy found that, although the remedy has improved the level of price information that is available to
microbusinesses, engaging with the market remains difficult for microbusinesses due to
57 See https://www.ofgem.gov.uk/system/files/docs/2019/05/opening_statement.pdf
58 In 2013 we introduced ‘Standards of Conduct’ for microbusinesses to act as overarching rules for suppliers to follow when engaging with microbusinesses. We also introduced rules to limit back billing in November 2018.
59 On 26 June 2017 the CMA issued an order to suppliers to stop locking firms into automatic rollover contracts. The CMA also ordered suppliers to help microbusinesses search for the cheapest available deals, by making information clearly available on their websites or via a link to a price comparison website. See https://www.gov.uk/cma-cases/energy-market-investigation.
60 price complexity, inconsistent implementation of the remedy across suppliers and low awareness, especially among the smallest of the microbusinesses.60
3.74. Our data61 indicates that, within the microbusiness segment, contract types vary significantly across the different consumption categories. The smallest microbusinesses (with consumption below 15 MWh in gas and 5 MWh in electricity), which account for around 40% of the microbusiness meter points, continue to have the lowest proportion of customers on negotiated contracts62 – 65% in gas and 62% in electricity in Q1 2019 – which represents only a slight increase compared to 2017 and 2018. However, the proportion of customers on negotiated contracts was between 76% and 87% for microbusinesses with higher consumption levels (see Figure 2.20).
60 See
https://www.ofgem.gov.uk/system/files/docs/2019/05/evaluation_of_price_transparency_remedy_-_final_report.pdf
61 We regularly collect data on microbusiness meter points, prices and contract types from British Gas, CNG Ltd, Corona, E.ON, EDF, Gazprom, npower, Opus, SSE, ScottishPower and Total Gas and Power. This data does not include typically home-based single site businesess (for instance, where an individual uses one room in their home as an office). These are unlikely to engage with the business energy market, instead consuming energy under a domestic supply contract.
62 Negotiated contracts involve a customer choice and include both customer acquisition and retention contracts. Conversely, default contracts refer to any contractual arrangement (evergreen, rollover or out of contract) that applies in cases where the customer does not make any choice at the end of a fixed contract. A deemed contract is normally in place when a customer moves into new premises and starts to consume gas, electricity, or both, without agreeing a contract with a supplier.
61 Figure 3.20: Proportion of microbusiness meter points in varying consumption brackets and contract types
Electricity
Gas
Source: Ofgem’s analysis of suppliers’ data
Note: For 2017 and 2018 the data shown in the charts refers to the proportion of meter points on the different types of contracts at the end of the year. For 2019 it refers to the end of the first quarter.
62