The importance of the global energy industry cannot be understated. As the world powers towards further industrialisation, the companies that provide the energy that makes it possible have become ever-more important. However, it’s fair to say the profits they make are staggering – and they face little in the way of actual competition.

Nowhere is this more apparent than in the UK, where the so-called ‘Big Six’ energy companies have carved out a nice big market for themselves that allows them to charge customers whatever they want. While most British people have, over the years, accepted their fate of ever-increasing energy prices, it became a huge bone of contention as households were tightening their belts at the height of the financial crisis.

Capped action
Last year, politicians began rounding on these energy companies, making threats of capping prices while also ordering firms to give back some of the profits they had made through apparently dishonest methods. The ‘Big Six’ – EDF Energy, REW Npower, SSE, Eon, British Gas and Scottish Power – reacted forcefully, claiming that they were merely pricing the market in response to global trends. However, the public didn’t seem to buy it, feeling that a cartel of firms had been formed that could charge whatever it wanted.

Opposition leader Ed Miliband earlier this year repeated his threat to freeze prices for the first two years of a potential Labour government in 2015, as a result of profit increases that had soared in recent years, despite the economic downturn and rising prices for consumers. Between 2009 and 2012, the industry saw retail earnings jump from £233m to £1.1bn, according to the UK’s energy regulator Ofgem. According to the regulator, the average annual household bill for gas and electricity is currently £1,315, a significant jump from the sub-£1,000 before 2009.

Other criticisms included the way in which firms collected money, as well as paying out refunds. Indeed, in February 2014, the firms were told by regulator Ofgem to pay back £400m it had accumulated from closed accounts. In another move, Ofgem set out new rules that its Chief Executive Andrew Wright told politicians was designed to break the companies’ “stranglehold” on the market. The rule changes included companies being required to give more information about the cost of trading electricity from the generator business and the disparity between it and what consumers pay.

Announcing the reforms, Wright said he hoped it would spur greater competition in the UK’s energy industry. “These reforms give independent suppliers, generators and new entrants to the market, both the visibility of prices and opportunities to trade that they need to compete with the largest energy suppliers.”

Wider impact
The issue of corporate social responsibility (CSR) has become increasingly important for major energy firms in recent years. Ensuring that both firms act in a responsible way has been frequently discussed over the years. In late 2012, Ofgem released plans that it hoped would lead to a “simpler, clearer, and fairer energy market for consumers”. However, little has been done to actually clamp down on the way firms charge consumers.

The reforms Ofgem announced earlier this year were widely panned as being inadequate, and in August a number of industry experts laid much of the blame for the high prices at the door of the regulators. The criticism came as part of the 18-month long investigation currently being conducted by the UK’s Competition and Markets Authority (CMA) into competition in the energy sector, which had been requested by Ofgem.

A statement submitted by five former regulators called Ofgem’s attempts at regulating the market since 2008 as a possible reason for higher customer costs. “Regulatory interventions to promote more consumer engagement can increase customer and supplier transactions costs, leading to lower customer benefits including via higher prices, and weaker rather than stronger competition. Regulatory interventions can also affect suppliers’ ability to compete as well as their incentives to do so,” the statement said.

One of the former regulators, Stephen Littlechild, told The Sunday Telegraph newspaper, “I am not taking a view as to whether profits are the right level or not, all I’m saying is they have gone up consistently since Ofgem started intervening in the market. I’m not aware of anything else that could have caused it. The only thing causing higher profits is the restriction on competition [Ofgem] has imposed.”

Some of things Ofgem were being criticised for were there cutting of certain tariffs, which the regulator claimed was an attempt to simplify the way customers paid for energy. One of the consequences, however, was that cheaper tariffs previously offered were withdrawn, resulting in higher average prices. However, in response, Ofgem rejected the criticisms, citing the tough stance they’ve taken against energy firms for breaking any rules. “There certainly has been tight enough regulation. One of the chief examples of that is that when energy companies have broken the rules we have taken tough action against them. We have levied more than £100m in fines and redress on energy companies since April 2010, so compliance is something we take very seriously.”

Cause and effect
How this plays out remains to be seen, but Ofgem certainly needs to address the rising cost of energy in the UK. While the criticisms levelled at energy companies in the UK could well be valid, they do neglect the fact that these private companies have a duty to their shareholders first, and the wider public second. At the same time, it’s not just consumers who are impacted by energy companies, but also the wider communities in which the firms generate their power. Thankfully, many of these firms are starting to take serious the impact that they have on the communities that they serve, while also looking at ways in which they can reduce costs to customers and provide them with greater choice.

Many are investing heavily in new CSR initiatives, and all are complying with Ofgem and the government’s Energy Companies Obligation (ECO) scheme that was set out in early 2013. The ECO was designed to ensure that companies are legally bound to deliver energy efficiency measures to domestic users, helping to build a more sustainable energy market. It works alongside the Green Deal, a similar initiative aimed at helping the construction industry design more energy efficient buildings.

Most firms trumpet their commitment to these initiatives, and have detailed CSR pages on their websites and in their annual reports. However, while the work many are doing is admirable, some of it might need to be taken with a pinch of salt.

Measuring the work energy firms do for communities is difficult. One noted example is the scandal-hit US firm Enron, which was well known for publishing lengthy environmental and social reports into all the work it was doing to give back to communities. However, while much of this was laudable, the company was also deceiving shareholders about its profits; a scandal that ultimately led to it collapsing in 2001, with many of its senior executives being sent to prison in disgrace.

There is certainly no suggestion that any of the ‘Big Six’ energy companies in the UK are operating in a similar way. However, if their commitment to CSR is to be truly tested, it must be done by a robust and meaningful set of regulations by a strong body like Ofgem. Hopefully, the review by the CMA into competition in the energy sector will result in a level playing field for the industry where proper competition is encouraged and firms are not free to set prices as and how they choose.