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Simplification of energy market is long overdue

Energy Secretary Ed Davey yesterday attempted to fulfil David Cameron's promise that all consumers would be put on the "lowest suitable energy tariff".

Whether that means lower bills is a moot point.

Certainly, the current dense foliage of tariffs offered by the Big Six energy companies looks like confusion marketing, designed to boost their profits by bamboozling the consumer. With a mass of eye-catching discounts for new customers, two-tier tariffs, charges that may or may not include a standing charge and various fixed-price deals, it is so hard to compare prices that switchers often end up paying more. So simplification is overdue.

Not everyone will benefit. The 20% who currently enjoy special discounts are likely to lose out as those tariffs disappear. (When Scottish and Southern Energy "streamlined" its tariffs last year, there were 15% increases for those coming off special deals.)

By contrast, simplification should help lower-than-average users, who are penalised by two-tier pricing. And it will mean the end of legacy tariffs, where out of inertia or misplaced loyalty, customers stayed on obsolete high tariffs. Many such customers are older people on fixed incomes, who can least afford to pay over the odds. These customers, along with the 80% who rarely switch, should see lower bills. How much lower and for how long? Those are the pertinent questions.

Without fundamental reform of the UK energy market, there is little to stop prices rebounding in a market that is essentially an oligopoly, its tariffs rising and falling in lockstep. Yesterday's announcements assume a level of competition which does not exist. A new tougher regulator, who could prevent energy prices rising like a rocket each time wholesale prices nudge upwards, and falling like a feather when they come down, would be a good start. But that could only happen in the context of a market where wholesale and retail operations were separated. At the moment wholesale markets are so opaque even the regulator does not know who pays what and the Financial Services Authority is currently investigating whether those markets have been rigged.

One option would be to force producers to sell some of their gas and electricity into a pool, to give new energy suppliers a more even playing field and encourage genuine competition. The Government should also be devoting more resources to encouraging all consumers to reduce energy consumption and use power more efficiently. Successive rises in energy bills for those whose real incomes are falling merely adds insult to injury.

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