EU to clamp down on UK's 'ill-functioning' energy market

The UK was today named in a Europe-wide competition crackdown on an "ill-functioning" energy market.

The European Commission has sent formal notices of legal action to 25 of 27 member states for breaching rules on consumer protection, transparency and pricing.

"In this time of economic and financial crisis, it is simply unacceptable that European consumers and companies suffer the burden of an ill-functioning energy market," energy commissioner Andris Piebalgs said.

The move came as a row simmered over claims by energy watchdog Consumer Focus that households were being overcharged by almost £1.7 billion because suppliers are not passing on lower wholesale prices.

But regulator Ofgem said the research was "misleading" and the Energy Retail Association (ERA) - which represents energy suppliers - also cast doubts over it.

The European Commission is concerned there is not enough openness from operators of gas and electricity transmission networks on capacity available - hindering new entrants to the market and eventually leading to higher prices for consumers.

It wants the UK transmission system operator - National Grid - to co-ordinate more closely with France and Ireland over capacity on the network. National Grid operates gas and electricity transmission networks for the whole of Britain.

Mr Piebalgs added: "The Commission is determined to take all necessary action to ensure that European consumers can benefit from real choice, better prices, and enhanced security of supply that only an open and competitive market can provide."

The Commission is worried over an apparent lack of enforcement of its regulations among member states and has also criticised five other countries for maintaining regulated prices in defiance of the market.

In the UK, energy bills rose by 42% last year with the average household paying £1,293 for the year.

Consumer Focus deputy chief executive Philip Cullum said its research showed consumers overpaying by around £74 per household since the start of the year.

He also called for a further 8% cut which would save £157 on current prices by the winter.

"Energy firms should take immediate action to put things right. A failure to act, and to ensure that people pay a fair price for energy, could have serious consequences for the sector."

But Garry Felgate, chief executive of the ERA, said the watchdog had made basic mistakes in its report.

He said: "The amount of gas and electricity a customer uses can form as little as half their annual bill.

"The remainder includes other costs, such as transporting gas and power and meeting the Government's carbon emissions reduction targets - all these costs have risen sharply in recent years."

Ofgem added: "Contrary to press reports today, Consumer Focus have not used the same approach for calculating wholesale costs as Ofgem. We have shared with them our concerns about their methodology.

"We are concerned that their approach may mislead consumers."

Mr Cullum responded that the figures were "robust" and the group had taken into account the extra costs mentioned by the ERA.

Michelle Mitchell, charity director for Age Concern and Help the Aged, said the Consumer Focus findings were "scandalous".

"Energy companies are shamelessly maximising profits at the expense of their customers, forcing some to cut back on heating in an attempt to reduce bills," she said.

Liberal Democrat energy spokesman Simon Hughes said: "The Government has allowed the big energy companies to do as they please and they have taken full advantage.

"Energy companies were quick to hike up prices when costs rose, but they have been very slow to bring them down now costs have fallen.

"This has left people paying shockingly high fuel bills. The weather may be warm now, but when winter comes thousands of elderly and vulnerable people will suffer because they cannot afford to heat their homes."

Ofgem added on the Commission's move: "Ofgem will be considering these matters carefully and we are committed to ensuring compliance."