Fixing the broken energy market

Richard Hall, Director of Strategic Infrastructure

The backdrop to the CMA’s investigation

The public has lost confidence in the energy market.  Polling suggests consumer trust in the UK energy sector is lower than in other sectors, and in the same sector overseas.  Consumers overwhelmingly distrust energy suppliers to tell them the truth, and don’t understand what goes in their bills.  Too often basic customer service processes go wrong, and while complaint volumes are starting to decrease they remain at unacceptable levels. Our local network receive tens of thousands of contacts per year relating to fuel issues.

Energy bills have risen much faster than inflation and are the number one concern of consumers.  But despite there never being a greater need for engagement, around 70% of consumers remain on poor value standard variable tariffs and many have never switched at all.  Vulnerable consumers are less likely to switch than the average consumer, resulting in the least able to pay facing the highest charges.

This lack of competitive pressure has resulted in consumers paying more than they need to, with the energy regulator, Ofgem, stating that ‘large suppliers appear to raise prices more quickly and fully when costs increases than they reduce them when costs fall.’  Suppliers dispute these claims, and a toxic cycle of claim and counterclaim has come to surround every round of price changes.  Can consumers have confidence that the prices they pay are fair?

Trust in the sector has steadily eroded over many years and by early 2014 we had reached the point where one poll showed 73% of the public wanting to see tougher regulation of the energy sector while only 2% did not.  Our own polling suggested that 80% of consumers wanted to see the market subject to an independent inquiry.  In June that year, the energy regulator Ofgem pulled the trigger and referred the sector to the Competition and Markets Authority (CMA) for a full market investigation.

Where are we now?

The CMA is nearing the end of its investigation and its findings confirm our worst suspicions.  It estimates that consumers could have been paying about £1.7 billion a year more than they would in a competitive market, and has recommended a series of practical steps to try and give them a better deal.

The most prominent of these is the introduction of a safeguard tariff for the four million households with a prepayment meter (PPM).  Suppliers have been particularly reluctant to serve that segment of the market, resulting in those households getting particularly bad deals and having fewer switching options.  As a stopgap measure, while it tries to foster greater competition and better service standards for those customers, it proposes to put them on lower priced safeguard tariffs.  It reckons this would save the average PPM customer around £80-90 off their annual bill.  In aggregate, it could save these consumers around £300 million a year off their bills.

The CMA expects to introduce the measure in 2017, and would keep it in place until 2020.  The significance of 2020 is that this is the deadline by which every household in the UK is expected to have a smart meter fitted.  The design specification for these meters means they can be used either for prepay or as a standard credit meter, which should mean customers who have previously been stuck on prepay would start to have the same choices as everyone else.

We welcome this proposal as we’ve been campaigning for a better deal for PPM customers for some time.  Our Fair Play for Prepay campaign has highlighted the gap between the prices, choice of tariffs and services offered to prepay users.  Citizens Advice research released this week shows customers on the cheapest PPM dual fuel tariffs pay on average £235 more per year than customers on the cheapest dual fuel direct debit.  But while PPM customers are more likely to be vulnerable than those paying through other methods, this payment method is only a crude match for vulnerability and not an exact one.  We’ll be looking to see evidence that vulnerable consumers who aren’t on PPMs are also protected.

While the CMA does not expect the safeguard to become mandatory until 2017, it does not preclude suppliers from bringing it in earlier.  So we’d encourage suppliers to take this chance to reset their relationship with PPM customers and bring it in earlier on a voluntary basis.

The other proposal that has sparked media interest is the proposal that disengaged consumers details would be made available to all suppliers, so that they could inform them of other deals.  CMA proposes that there would be a central database, updated every six months, that would hold information on every consumer who had not switched for three years or more.  This information would include things like their name and telephone number, the name of their current energy tariff and their annual energy consumption – sensitive information in the eyes of many households.  This information would be made available to other suppliers, who could then contact them by post to offer them better deals.  This proposal is contentious as the CMA has suggested that consumers would need to take steps to consciously opt-out if they did not wish to receive this marketing.  If they don’t, they may receive large amounts of marketing.

We would strongly prefer it if this scheme instead worked on an opt-in basis, in order to reduce the risk that consumers are exposed to large volumes of unsolicited marketing.  We think that many consumers may also be uncomfortable if their personal data is shared without their having given explicit consent.  It is not clear that this kind of remedy will do much for vulnerable households either, as it does not tackle the absence of choice they face.

Perhaps the biggest omission in the CMA’s proposals is anything specifically dealing with the problems that people who rent can face in switching energy providers.  It is far from uncommon for people who rent to be told they cannot switch energy provider, and for tenancy agreements to include clauses that make switching appear impossible or a hassle – for example, requiring the tenant to seek the landlord’s written permission before switching.  In 2005 the Office of Fair Trading (OFT) said that such provisions were a potentially unreasonable restriction in rental contracts.  The CMA is a successor body to the OFT and we want to see tougher action from it to stop landlords preventing their tenants from switching.  If you pay the bill, you have the right to choose your supplier – period.

The CMA has proposed a wide range of other proposals, and we will be spending the coming weeks pouring through its analysis and responding to its findings.  Tell us what you think – what do you welcome, and what more does it need to do?

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  1. Amanda Whiteford

    Whilst in general terms I agree with the statement “if you pay the bill, you have the right to choose your supplier – period” I still think the landlord should be informed but be prevented from objecting unfairly.

    As things stand to move rented accommodation from direct supply to a PPM could put the landlord at a disadvantage when re-letting the accommodation.

    1. Steve Mash

      That is true for now, but when Smart meters are rolled out then it appears end-users have the potential to choose to have meters on PPM or as credit meters.
      Should the landlord still have to provide any permission if that is the case in the future?

  2. Robert Phillips

    I fully agree that the disparity between standard tariffs and the fixed rate tariffs is pretty scandalous especially for ‘vulnerable’ people.
    My recollection is that the initial aim of fixed rate tariffs was simply to ‘lock’ in the rate that a consumer pays for a fixed period – say 1 or 2 years. That being the case there really ought to be a limit on the discount or premium (i.e. difference between the standard and fixed rate) to reflect the fact that the international price of energy could rise or fall during that time.
    In practice these fixed rate deals served a completely different objective; maximising the profit of companies, very much along the lines of the way that home and motor insurance premium operates; in order words through ‘milking’ (i.e. exploiting) customers who are not savvy enough to shop around every year.

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