5.1 In 2006 the Competition Commission (CC) published the findings of its market investigation into competition in the supply of domestic bulk LPG.215 Given the in-depth nature of that investigation, we have focused on developments since then, and on areas that the CC investigation did not cover, namely competition issues in cylinder LPG, and consumer protection issues in the supply of domestic bulk LPG.
5.2 Our key findings are as follows:
• For domestic bulk LPG, the CC investigation identified competition problems in the market and introduced remedies to address these problems. These remedies were implemented by means of two Orders governing the supply of domestic bulk LPG to individual tank customers and customers on metered estates respectively.216 We have looked at the initial impact of the Orders, which came into force in 2009. While it is too early to draw firm conclusions, the Orders appear to have substantially increased switching rates for individual tank customers but have had less impact on switching rates for metered estate customers. The OFT will continue to
undertake its statutory duty to keep under review the effectiveness of and compliance with the Orders.
• We also considered consumer protection issues in connection with the supply of bulk LPG. The OFT has concerns that some contract terms may not be entirely consistent with consumer protection
215 Market investigation into supply of bulk liquefied petroleum gas for domestic use, June 2006 (the CC Report). The CC Report is published at:
www.competition-commission.org.uk/rep_pub/reports/2006/514lpg.htm
216 www.competition-commission.org.uk/inquiries/current/gas/lpg_order_final.pdf and
www.competition-commission.org.uk/inquiries/current/gas/notice_order_metered_estates.pdf
legislation. We are engaging with suppliers to seek, where
necessary, improvement in the clarity of contract terms, particularly concerning cancellation and switching rights. Among other things, adequate and clear cancellation and switching rights ensure that consumers have options in the event of their supplier varying the price of LPG within the term of its supply contracts.
• We found that cylinder LPG is relatively little used as a primary source of domestic heating, and conversely that the domestic heating market is a small part of a much wider and predominantly commercial market for cylinder LPG.217 We have not sought to draw definitive conclusions about the wider market. Nonetheless, some features are worth noting. There are few cylinder LPG suppliers upstream and some domestic cylinder LPG users have a limited choice of retailers downstream. Furthermore, distribution and retail arrangements for cylinder LPG are heavily constrained by vertical agreements that in effect require dealers to deal exclusively with one supplier. Given the concentration in the upstream market, these agreements could potentially restrict competition. The OFT may return to these issues in the context of the wider cylinder LPG market at a later date (subject to OFT prioritisation principles).
Introduction
5.3 LPG performs the same household functions as mains gas, but is
delivered by road and stored on individual premises. It is either obtained as a by-product when refining crude oil at refineries and petrochemical plants, or directly from North Sea oil or gas wells. It is subsequently delivered from the supply points in liquefied form to a primary storage facility where it is stored by a process of refrigeration or pressurisation.
It is then ready for purchase by resellers. Once purchased, the LPG is usually delivered to bulk distribution depots and cylinder-filling plants,
217 This is taken from Appendix C of the CC Report. More detail relating to the supply chain can be found in this Appendix.
some of which are combined on large sites, by means of large bulk road tankers.218
5.4 There are two types of LPG – propane and butane. According to the website of the UKLPG, which is the trade association for suppliers of LPG in GB:219
• 'Propane is used primarily for central heating, hot-water, gas-fires, convector heaters and for cooking.
• Butane is used mainly in cylinders for portable applications in mobile heaters in the home, and for leisure activities such as boats,
caravans and barbecues.'
5.5 Our study concerns the use of LPG as a fuel for domestic heating
purposes. Hence, this report focuses on propane gas, which is the main type of LPG used for this purpose, and references to LPG in the
remainder of this section should be construed as referring to propane gas (unless otherwise stated).
5.6 Households can be supplied with LPG in two different forms:
• Bulk (tank) LPG, where propane gas is delivered by tanker to an external storage tank on the customer's premises, which may be sited above or below ground. This is the most common domestic form of LPG used. In 2006, the domestic supply of bulk LPG was the subject of an investigation by the CC, resulting in the
implementation of remedies aimed at improving competition in the market.
• Cylinder (bottled) LPG: this is usually delivered to households in pre-filled gas cylinders and tends to be used in locations where a
218 This is taken from Appendix C of the CC Report. More detail relating to the supply chain can be found in this Appendix.
219 www.uklpg.org/exceptional-energy/what-is-lpg
customer is unable to site a tank, or where tanker access is an issue.
Various sizes of cylinder can be purchased for home heating: large (typically 47 kg) sizes for central heating and smaller sizes (including 7 kg and 15 kg butane cylinders) for indoor room heaters. Small propane cylinders are also available for patio heaters. Per energy unit, cylinder LPG is more expensive than bulk LPG and it is used by far fewer homes.
5.7 Around 150,000 households220 use bulk LPG and 25,000221 to 50,000222 households use cylinder LPG for heating purposes in the UK. It is
unlikely223 that households would switch from one to the other, as bulk is cheaper and generally preferred, while cylinder is mainly used where bulk cannot be supplied, for example due to space constraints.
5.8 The distribution of households using LPG across the UK is shown in the following map.
220 CC Report, paragraph 2, page 3. The CC Report also found that an estimated one per cent of households in NI use bulk LPG—2.5 per cent of those outside the mains gas network (paragraph 1, appendix H).
221 OFT estimate based on the difference between the figure given in the Consumer Focus Report for bulk and bottled LPG households in GB and the number of bulk LPG households estimated in the CC Report.
222 Supplier responses to OFT information requests, based on returns from at least 85 per cent of the market.
223 Albeit possible, as we have heard of a few such instances from consumers and suppliers.