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.


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

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:

British Gas does something great…

Yes, you did read the title correctly… and no I haven’t lost my mind. I’m about to congratulate an energy company for seeing the future and attempting to deliver it.

‘Free Energy at the Weekend’ reads the headline, ‘Gotta be a catch’ comes the reply. Well yes, and no is my observation. You may have seen that British Gas are now offering a tariff to households with smart meters which will give them ‘free’ daytime electricity on a Saturday or Sunday.

There is a huge degree of cynicism regarding energy companies, much of it justified. However, this time I think British Gas deserve some credit for taking a punt on what many perceive as the future of domestic energy – so what’s the deal?

Time of use tariffs are nothing new, as anyone who lives with storage heaters will tell you. Economy 7 tariffs, designed as a way of using the surplus energy that non-responsive power stations supply, have been in existence for years. Offering  cheap electricity during the night, and slightly more expensive electricity during the day, they have provided a make-do solution for the imbalance of electricity on the grid. Smart grids are destined to change that – with smart meters being the domestic device that allows this to happen.

The new tariff from British Gas aims to capitalise on the 2.89 million smart meters that have already been installed in homes across the country ( although you can’t yet switch supplier to BG if your smart meters were installed by another energy supplier).    The new tariff does not charge customers for any electricity used between 9 – 5 on either a Saturday or a Sunday (customers choice). Neither does it charge any extra for electricity at other times ( over and above other British Gas tariffs )

Can it save you money?

This is the key question, and it depends how much you can change your behaviour and your starting point. If I punch in my details to a comparison site, the BG tariff is 19% more than the current cheapest deal – the question I then need to ask is can I switch 19% ( or more ) of my electricity use to a Saturday between 9 and 5? The answer, for me, is quite simple – not a chance.

Different households will generate different numbers using the above approach, and for some this might prove financially worthwhile. British Gas conducted it’s own trials and found that the average customer saving was £60 – based on it’s own standard tariff. And that’s the rub of this, it is not the cheapest way to buy your energy.

So why the congratulations?

BG deserve recognition for introducing a tariff that actually has the legs to deliver behaviour change among UK households. Energy monitoring devices have been around for ages and whilst there are some ardent energy monitoring stalwarts (me included) the impact of these devices is rarely sustained after the novelty has worn thin. Improving on this by offering a ‘free’ period gives real control back to households. The joy you can feel by completing your 17th load of washing, safe in the knowledge that all you’ve paid is the 26p standing charge, is not to be sniffed at.

I hope the take up of this tariff proves a success for 2 reasons:

  1. It’s one of the first demonstrable and practicable uses for smart meters  -as such it has the ability to be used as an engagement tool on the smart meter shy.
  2. It has the potential to make households consider their energy usage as part of their normal routine.

What ever your thoughts on smart meters, or British Gas, this really could be the start of something big…..

Contentment before Capacity

I have a new life mantra –  I found it, as I expect a lot of people do, in a pub. Though perhaps unusually it did not take several trips to the bar to discover, nor was it necessary to spend any cash to unlock the inner recesses of my mind. Rather disappointingly I saw it on a sign as I walked past, it simply read,

‘We welcome drinkers who reach contentment before capacity’

Clearly this is a sensible path to follow for anyone entering a pub – but what if we apply the ‘contentment before capacity’ principal to things that don’t contain alcohol?  Things like:

food ( don’t think anyone would argue with that )

work  (again, we’re onto a winner here)

technology ( do we need more tech in our lives?)

overdrafts ( who wants to reach the capacity of these?)

energy mix of national grid ( what…? )

reducing fuel costs by true community engagement ( I can see I’ve lost you now )

The last 2 points may not exactly follow suit but this is an energy blog after all, so what do I mean?

This is about a balance. It’s having realistic, but still ambitious, expectations of what can be achieved whilst accepting what can’t.  Let’s think about how this plays out….

Consider the energy mix of the UK. Who wouldn’t want it to be from 100% renewable sources, but how realistic is that? Is it an achievable aim? Can we only reach contentment if we have 100% renewable capacity? I suggest the answer should be no, we can’t, and with current technologies we never will. I’m not suggesting we should be complacent, or for a minute we accept that this is the ‘greenest’ government ever but spending resources focussing on unachievable goals simply reduces the amount of resource available to actually solve issues.

Fuel poverty is a key social issue for the UK. Can we only be content when no household is suffering from fuel poverty in the country? Of course we should always be championing the cause, highlighting the social injustice which has led to 15,000 of Plymouth’s households having to choose between heating and eating.  But ask yourself the question, can you honestly for-see a time when no household in Plymouth suffers from fuel poverty?

I think DECC asked itself this question when publishing the latest fuel poverty strategy. This sensibly puts efficiency improvements to the home at the heart of the issue. I don’t accept that it goes far enough quick enough – but I am content that it’s a realistic approach.

The bottom line, as far as I’m concerned, is that we need to be careful of the battles we choose. I have absolute admiration for anyone who can keep believing in a cause no matter how unlikely the desired outcome, and clearly some causes are so emotive, and so fundamental that to give up hope would be to destroy it’s reason for being.

I hope you don’t think I’m on an apathetic come down, there are a wealth of issues within PEC’s remit that demand the passion and attention they are given by PEC’s many contributors. My point is that by focussing on the ambitiously realistic we are far more likely to succeed in our aims and reach contentment before capacity. I’ll raise a glass to that – just the one…

Stay warm and well – learn from a pelican

Plymouth residents have some very tricky houses to keep warm. Houses that are older and without a handy cavity to pop insulation into. There are underperforming heating systems, and sometimes, no systems at all. We have the weather to contend with too and wind that can drive rain right through gaps and cracks. Or else damp laidened air to settle on cold walls and grow black mould. Perhaps you’re living with an illness or long-term condition and worry whenever the fuel bill comes in. You’re not alone, almost half of the city worries with you.

A few months ago, when standing at a pelican crossing a friend nodded at the yellow control box and said “Do you know what’s under there?”
“Chewing gum?” I replied.
“Apart from that!”.
Well no, it turns out that I didn’t know. There is a small metal cone with grooves waiting to rotate and tell you it’s safe to cross. I was utterly amazed! I had no idea help like that was available.

And here’s the thing, there is help available…

I often meet residents who say they are astounded that PEC can help. They don’t know there is a fund to help clear energy arrears. That if eligible you can get £140 towards your electricity bill each year. That we can visit your home or talk to surly suppliers for you. That we will help you switch and knock an average of £185 from an annual bill. That suppliers can be made to take note and offer extra assistance if you have an illness or vulnerability. That grants for insulation and boilers can be found. That we can help apply for welfare benefits to maximise income and minimise worry. But we can, you know.

So today, see this blog as a friend pointing at the pelican crossing and saying “Guess what’s there”. You never know, it might just be the help you’re looking for.