Media Briefings

Retail Energy Prices in the U.K.:

  • Published Date: August 2012

Ofgem’s efforts to promote fairness led to higher charges for all

A ban on price discrimination introduced in 2009 by the UK’s gas and electricity regulator Ofgem led to higher retail energy prices rather than lower ones, according to research by Professors Morten Hviid and Catherine Waddams Price. Their study, published in the August 2012 issue of the Economic Journal, provides support for Ofgem’s decision in July 2012 to allow its so-called ‘non-discrimination clause’ to lapse.

The non-discrimination clause required energy companies to charge the same mark-up in different regions. But because the same companies are entrants in some regions and the default (incumbent) suppliers in others, the clause motivated them to raise their lower prices not reduce their higher ones.

The research confirms previous evidence that banning price discrimination may lead to some or all prices increasing in the particular circumstances of the energy market. The thinking is as follows:

  • Many consumers are loyal to gas and electricity firms with incumbency status. They need large price differentials to switch, which means that new entrants have to use heavy discounting relative to incumbents to attract new customers.
  • As each UK region is characterised by a former regional (electricity) incumbent and a former national (gas) incumbent, as well as several entrants, all of which are (electricity) incumbents in other regions, this resulted in each energy retailer charging different prices across different regions.
  • If firms are obliged by regulation to bring their prices closer together, they are more likely to raise the price in regions where they are entrants, with little consumer loyalty and lower margins, than to lower the price in markets where they are incumbents with very loyal consumers and high margins.

If all firms increase their prices where they are entrants, this reduces the competitive pressure on the incumbent electricity and gas supplier, which is likely to respond by increasing its prices too.

Ofgem introduced the non-discrimination clause because it was concerned about fairness, so that consumers who are vulnerable and do not switch suppliers are not (relatively) disadvantaged in the market. Such preference for short-term 'fairness' is common – for example, campaigns for national pricing to avoid 'postcode lotteries', even if everyone pays more.

This raises widespread challenges for an appropriate model to capture such preferences, where the importance of equity issues displayed by politicians and consumer groups often seems opposed to the recommendations of standard economic analysis.

As well as reviewing the clause and examining how well the market is working in its Retail Market Review, Ofgem has been tackling the source of consumer loyalty and trying to increase consumer activity in the market. Whether loyalty arises from genuine affection for the incumbent or from inaction is not addressed in this study, but it is an important focus of extensive consumer research by these authors and their colleagues at the Centre for Competition Policy at the University of East Anglia.

Notes for editors:Non-discrimination Clauses in the Retail Energy Sector’ by Morten Hviid and Catherine Waddams Price is published in the August 2012 issue of the Economic Journal.

The authors are at the Centre for Competition Policy at the University of East Anglia. The Centre is sponsored by the Economic and Social Research Council (ESRC).

For further information: contact Romesh Vaitilingam on +44-7768-661095 (email:; Morten Hviid via email:; or Catherine Waddams Price via email: