Thursday’s backbench Commons debate on energy prices has prompted politicians and others to consider a number of possible alternatives to the remedies made by the Competition and Markets Authority (CMA), following their investigation last year into electricity and gas prices. Around 70% of domestic energy customers remain on energy companies’ Standard Variable tariffs (SVTs) and could save up to £200 by switching to a cheaper deal, but nevertheless decline to switch. In a new Sustainability First paper, I have argued that any potential solution to customer ‘stickiness’ needs to be measured against two key objectives designed to ensure that any remedy adopted is fair to all customers. My two ‘tests’ are: (1) that the arrangements encourage companies to price competitively and to innovate to meet the changing needs of the market, and also (2) that they avoid particularly unfair pricing for any domestic customer or group of customers.
The CMA remedies broadly deliver on the first of my two objectives by removing some previous barriers to increased tariff innovation. But the CMA only delivers on the second to the limited extent of providing protection through a price cap to customers on prepayment meters. For the roughly 50% of households that are able to engage in principle – but for whatever reason choose not to – the main CMA remedy is to provide those customers with more information about energy pricing and switching. The CMA does not seem to have looked across to thinking from the Financial Conduct Authority, who recently said, in its Future Mission Statement:
‘Public policy makers have traditionally assumed that people will make the ‘right’ choice for their needs if they are given as much information as possible… Our own research has also shown that that too much information can confuse consumers’.
Customers are being encouraged by the Government and regulators to become more engaged not just in their energy bills, but in choosing their retail bank and making financial provision for their retirement, to mention just two. But is this the right approach? Each of these activities takes time and effort, and many people will want a ‘good enough’ solution, not necessarily the absolute best. If people choose not to make the effort, does this mean we leave them to the consequences of their inaction, particularly where essential services are concerned? Or do we seek to avoid anyone being particularly unfairly treated or exploited? This is why both of my key objectives are important – both to encourage competitive pricing and to avoid unfairness.
None of the solutions proposed so far to tackle customer ‘stickiness’ – either by the CMA or others – fully meet my two objectives. One that seems to me to come closest, assuming there are no radical changes in current market arrangements, is in two parts. First, as proposed by Dieter Helm, energy suppliers offering an SVT should make public for scrutiny by customer watchdogs and other commentators the margin they anticipate making on it. This would seek to deter companies offering cheap deals to engaged customers at the expense of those on the SVT. Second, the evidence suggests that in reality many customers actually prefer an SVT and, if switching, would opt for their new supplier’s SVT. But, in contrast to switching to a 12-month fixed price deal, no price protection is afforded in moving to a new SVT. As we have seen in recent weeks, price increases by one energy company tend to be followed fairly quickly by the others. It is possible for a customer to get caught out by switching to a company that has not yet put up its price but is about to. In my paper, I therefore suggest that price comparison sites should also start to include the date on which the SVT was last changed. Although far from perfect, it may, by requiring transparent information on the last price increase, at the very least offer the consumer bodies some insight into whether a new price increase might be in the offing – and so might help confidence in the switching process.
There are also lessons for the future. The Government’s plans for a new ‘smart’ energy world with smart meters and greater customer flexibility assumes that customers will respond to better information and greater price differentiation by changing their energy purchasing and usage patterns in response to time-of-use or other ‘smart’ tariffs. If the experience of stickiness in today’s domestic energy market is anything to go by, this could be a hard sell with many customers. More research is needed on the likely response of typical customers, and not just the enthusiastic minority.
The Sustainability First discussion paper – “Engaged, or just good friends? – An exploration of retail electricity and gas pricing and ‘sticky customers’” – is available on the publications page of our website – www.sustainabilityfirst.org.uk.
Associate, Sustainability First