Consumer choice and the energy market

We are told that choice is a pillar of all that is right and good in a consumer market. In the world of energy market regulation, choice sits up there above even fairness and competitiveness as a core value to uphold at all cost. At a time when we are questioning every aspect of the way in which we buy, use and generate energy, the supposition that choice is and should remain a core deliverable of a well-functioning energy market remains beyond scrutiny.

Choice does feel like a benign tenet that is relatively easy to accept or to pass over without examination. As a bottom line, customers should have the freedom to choose, to select from available options what is best for them according to their needs or desires. Choice in this instance seems to align closely with fairness and freedom – to choose for yourself rather than have someone choose for you – the freedom to choose, the right to choose. If you have had the freedom to choose, then you are at least partly responsible for what you get.

So what do we know about our choices in the consumer energy market. One thing we have learnt is that despite a decade of substantial change, and a huge increase in new entrant suppliers, the majority of consumers do not exercise choice. The large majority of UK households have never made an active choice regarding their energy supply and this pattern continues despite a whole host of national initiatives to promote price comparison and switching. Not switching is more common amongst low-income households and those who are the most vulnerable to the ill effects of living with a restricted energy supply due to unaffordability. Non-switchers are characterised as ‘inactive’ ‘non-participants’ or ‘disengaged’.

Some households have switched and continue to do so, but the majority remain with whichever incumbent they inherited with their property on whichever standard rate tariff the supplier has placed them. This could be a choice. I would like to pose a different explanation, one that relates more fundamentally to the product/service that is being paid for and how we experience it.

Domestic energy supply is not something the vast majority of consumers can readily opt out from consuming. Regardless exactly how and how much we use it once it arrives to our home, we are going to buy energy. As consumers, when we think about energy we think about the ways in which we interface with it – the plugging in, the turning on, the heating up and so forth. We think about topping up the meter, making sure there is enough for the direct debit, or sending off the quarterly payment. None of this changes according to which supplier we are ‘with’ because what we are buying is a homogenous product – there is no ‘deluxe’ energy supply after all. If we have an energy problem – whether an unaffordable bill, a power cut, a broken boiler or a flickering lightbulb – it won’t be solved by our supplier, or by switching to another. So in every way consumers experience and interact with energy, choice doesn’t make a material difference to the day-to-day experience. So is it surprising that most consumers do not exercise choice?

With this is mind, I suggest that it could be in the best interests of energy consumers if choice were demoted from the highest-order value in regulation of the consumer market, to be replaced in the top spot by other values which more effectively contribute to consumer interest. I suggest an ethically-driven regulatory framework which prioritises affordability, sustainability and the flexibility to benefit from changes to how energy is metered and balanced in future. Providing vulnerable households with greater support and protection should be paramount to every aspect of supply regulation.

This is not to say that consumers should have no choice to switch suppliers or tariffs should they wish to, there are savings to be made and much variation in terms of customer service. Rather it is to suggest that those who do not exercise choice should not be penalised with the worst deal but instead defaulted to a tariff which represents a balanced version of consumer best interests.

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The CMA, energy bills and how the Big Six got off scot-free

We read the Competition and Markets Authority (CMA) investigation into Energy Markets report – with keen interest. We were anticipating something which would highlight the impacts of energy company monopolies, address unfairness for standard variable and pre-payment customers and suggest some useful remedies. What we got was this…

The CMA report effectively blames the 70% of energy customers sitting on expensive standard variable tariffs for being overcharged – because they have failed to switch. They think, despite all the national switching campaigns that have gone before, that more marketing and advertising should be the solution to a problem caused by up to 20% price differentiation between effectively identical products.

We don’t dispute that switching is an approach that works for individuals in the short term – you can find one-year fixed deals which are a lot cheaper than standard tariffs (and we can help you do this). But is it really the best the CMA can do to propose relying on customers (70% of customers!) to sort out the problem?

The CMA report fails to explore any robust approaches to making standard variable tariffs fairer, more competitive, ‘standard’ or indeed ‘variable’. As Dieter Helm points out;
In a well functioning competitive market, suppliers would compete to offer Standard Variable Tariffs. They would be “standard” because the product is homogenous. They would be variable (with lags of course) because costs vary. The CMA identifies the ‘striking’ difference between the prices that different customers pay for an almost entirely homogenous product – over 20% – but instead of framing this as market or regulatory failure – it proposes that customers should be further encouraged to fix this by switching. They note that firms are earning an average 11% more revenue from standard variable customers than from those on other tariffs – but (inexplicably) think that individuals ought to sort this out for themselves.

The CMA’s finding and recommendations become even more perplexing when they correctly identify that those on low incomes, with low qualifications, living in rented accommodation or who are above 65 are typically paying more for energy due to being more likely to be on standard variable tariffs. The CMA quickly start referring to these customer groups as ‘disengaged’ and thus are able to set out their proposal for solving the problem through a programme of ‘engagement’…

So what do they propose? Wait for it… The CMA intend to circulate the personal details of everyone on a standard variable tariff to other energy companies, so that they can be sent direct marketing with details of cheaper offers. That’s it.

There are many reasons why this response is lacking. We summarise a few here (thanks to Dieter Helm’s analysis http://www.dieterhelm.co.uk/energy/energy/flawed-in-almost-all-its-parts-the-final-cma-report/):

1. Wholesale market prices have fallen 30% over the last 3 years and standard variable tariffs barely reflect this. How will more marketing effectively address this disparity?

2. Energy wholesale prices are becoming increasing fixed as more and more generation is contracted (FiTs and capacity contracts) at a set price per unit by government. This means there will be increasingly less difference between the cost of wholesale energy and thus less reason for difference in consumer pricing.

3. How many people read unsolicited mail from companies trying to sell them products? Aren’t we already bombarded with marketing – why will this be any different?

4. This proposal identifies that low income and vulnerable households pay more, but fails to come up with a proposal which will really respond to this aspect of the problem.

On a different, but related matter, if you think that Ofgem should use their powers to stop the unfair treatment of vulnerable energy customers by suppliers – so do we, and we’ve started a petition about it: https://www.change.org/p/ofgem-the-government-s-energy-regulator-stop-energy-suppliers-from-forcing-vulnerable-customers-into-debt

Is there anything good about standing charges?

Standing charges on your energy bills. Those daily charges for gas and electricity that you just have to pay, every day, whether you use any energy or not. We get lots of calls from people with concerns about standing charges and have found that energy companies are often pretty rubbish at letting customers know what they are for and how they work. So I thought I’d write a blog about it.

So what are they for? Standing charges relate to the cost of supplying a property with electricity and, if you have it, gas. You could think of it like a rental charge for using the pipes and wires, whereas your unit rates are for the price of the actual energy that you use.

So what’s the problem with standing charges? Well, there are a few, which some of our members are all too familiar with…

  1. You pay even when you’re not using anything. This one relates to gas. Most households who have a gas supply use gas for heating, hot water and cooking, but some use gas for heating, but cook and heat water with electricity. Assuming you don’t use any heating between around May and October, this means that for five months you aren’t using any gas at all. The problem is that if you pay a standing charge, then this is applied even if not a single unit of gas is used. So if your standing charge is 27p, this could amount to paying over £40 for those months. The problem gets even worse if you have a pre-payment meter because you probably won’t have topped up over the summer and when you do, so you can put your heating on, the meter will swallow up a whopping £40. Great.
  2. Standing charges are not fair. They charge the same amount daily to every household, regardless how much is being used or how many people live there. This means, effectively, that the less you use, the more you pay for each unit – so not a very good incentive to be energy efficient!
  3. Standing charges are confusing. A big part of our job is trying to help people take control of their energy use so that they can save money, get a fairer deal and be more comfortable at home. Standing charges make bills more complicated, and whilst I understand why they’re there, I also think suppliers could do a better job of explaining them to customers and finding ways to avoid the issues highlighted above.

So are standing charges good for anyone?

Yes. If you are a low user, standing charges mean you pay more per unit, BUT if you are a high user, standing charges mean you pay less per unit. This is because the standing charge is the same, per day, regardless how much you use. So standing charges work out better for higher energy users.

Are there tariffs which have no standing charges?

Yes, there are. There are a few companies out there who offer tariffs with no standing charges. We wouldn’t recommend them for everyone, though, because tariffs without standing charges have higher unit rates. This is because the suppliers will always need to cover their costs (and earn a profit!) – so they will either split the costs between standing charge and unit rate, or they will recover all the cost from the unit rate alone. Therefore, tariffs without standing charges are only usually a winner if you are a very low user, or if your house is going to be unoccupied for a significant part of the year, or if you only use your gas for heating.

If you think you might be better off switching to a tariff without standing charges, but aren’t sure, give our team a call on the general enquiries number (01752 477117) and we should be able to help.