"Decent energy value"? I beg to differ

Ian Preston on an invidious outcome of Ofgem’s prepayment meter tariff cap ...

19 July 2017

“This is really weird” one of CSE’s energy advisors said to me the other day. “For customers of four of the big six, direct debit is now more expensive than prepay.”

For those who know anything about the domestic energy market, this is very unusual indeed, but not unexpected, as I explain below.

For years, customers on prepayment meters paid more than direct debit customers – even though they are typically poorer. This is because energy companies had an interest in moving people to direct debit, as it significantly cuts administration and servicing costs. And they could get away with it because prepayment meter customers tend to switch supplier less than direct debit customers – they’re more “sticky”, in energy-policy parlance.

So what’s changed?

In short, from 1 April this year, Competition Market Authority (CMA) recommendations on capping the cost of prepayment meter tariffs came into force, dramatically cutting the profit margins made in this segment of the market by British Gas, Npower and the rest.

But instead of living with lower profits (as the CMS intended), the energy companies appear to have made up the shortfall by raising margins elsewhere, namely via their many customers on standard variable rate tariff (SVT) – roughly half of the total market.

These people are now paying a premium for their energy usage, even though the cost of supplying them hasn’t gone up. Many pay by direct debit and probably assume – as was the case for many years – that this effectively earns them a discount.

However, Ofgem figures suggest that after the CMA cap was introduced the average price of SVTs offered by the big six increased in the first half of this year, reaching £1,129 at the end of May, representing a differential between the average SVT and the cheapest tariff on the market £280 – the highest it’s been for some time. See the chart below.

Added together, the 14.3 million SVRT customers of all the big six could be spending an incredible £3.7bn more than they need to.

Iain Conn, the CEO of British Gas’s, parent company Centrica, defended his company (which has the highest number of SVT customers of the big six) against the charge of making excessive profits from a particular group of customers. “Standard tariffs are not necessarily the evil empire and they are actually offering decent energy value,” he insisted.

But I disagree; to me this looks like blatant profiteering.

We know that Ofgem are looking at the problem, but there are at least two different aspect to consider.

The first is to carve out a specific level of protection for vulnerable customers who don't switch - for all kinds of reasons - and whom their suppliers have left stranded on SVTs.  This is the territory for a protective price cap combined with careful targeting and I'll return to this issue in a future post.

The second is for Ofgem to start applying the fundamental regulatory principle it has recently outlined that the companies should 'treat their customers fairly'.

The companies will argue that this principle explicitly isn't meant to apply to pricing.  But this issue isn't really about pricing. It's about failing to engage with customers effectively so that they are clearly making an active and informed choice to go on to – or stay on – an SVT. It can't be considered 'fair' for a supplier to send one email or letter towards the end of a fixed term deal with the default option that no response would result in transfer to an SVT at significantly higher prices.

How about using the knowledge gained from behavioural economics and have the default for 'no response' as rolling on with the latest fixed price deal with a requirement for the customer to have to 'opt out' to go on to an SVT? It won't solve the problem entirely (and would undoubtedly have some other interesting effects on tariff design), but it would ensure all consumers start to develop more of a sense that their suppliers are treating them fairly.

Ian Preston is Head of Household Energy Services at CSE | @Ian_Preston76

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