22 June 2013

Ofgem publishes its plans for simpler and fairer energy

And if it does, will it destroy competition between the energy companies?

So what's in the plans?

After a two year process of review, much of the content of the plan has already been publicised but in short Ofgem's proposals are to:

• create simpler tariff choices for consumers – the four core tariff rules
• enhance protections for those on fixed term tariffs
• make information clearer with standardised communication tools – the Tariff Comparison Rate (TCR), Personal Projections and A Tariff Information Label
• introduce new rules to oblige energy companies to treat consumers fairly

How have Ofgem's plans been received?

There has been a mixed response with some welcoming the first step in the process. However the new standardised communication tools have been met with criticism with consumer watchdog Which? saying it was "hugely disappointing” that Ofgem had gone ahead with the TCR format, Which?'s executive director Richard Lloyd quoted as saying:

"While these new rules will help make the market simpler and fairer it's hugely disappointing to see the regulator sticking to its fundamentally flawed idea of how energy prices should be presented. This will fail to help people find the best deal easily and could even mislead millions into paying over the odds for their energy.”

Will it make any difference?

There are two distinct and unfortunately conflicting objectives. One is to have a fairer system whereby the vulnerable are protected and no-one pays over the odds for their energy. The other is to have an active, competitive marketplace. But to have a marketplace, you need consumers to switch suppliers and select products. The main incentive to switch is cost. So if we have a "fair” system where nobody has to pay too much, we won't have a marketplace where the active shopper can pick up a "bargain”.

As to the simplicity, each supplier can have 4 tariffs, 3 payment methods, discounts for dual fuel and if you manage the account over the internet, there are 6 main suppliers, several smaller ones plus lots of "white labelling” suppliers like M&S, Sainsburys etc who sell energy from one of the big six. That's enough combinations to put most people off trying to work it out for themselves, even if the suppliers now have to present their rates in a more consistent manner.

Ofgem's Customer Engagement Research

Ofgem also published a report it commissioned to examine energy switching rates among different groups of consumer which revealed some significant differences between the groups.

Rates of switching have been dropping with 12% switching electricity supplier (with very similar figures for gas) in 2012 compared to 14% in 2011, 17% in 2010 and 18% in 2009. Some of the reduction may be due to suppliers offering longer fixes so there was no need to switch in 2012, but the trend is downwards. This didn't include those that had stayed with the same supplier but switched tariff – that accounted for an additional 10% or so.

The most frequent switchers represented a relatively small group – white, ABC1 social grade, internet enabled not renting their homes and already paying by monthly direct debit.

Overall 51% of energy consumers were rated as disengaged having never switched supplier, tariff or payment method and just 21% were actively managing their energy supply.

Asking the non-switchers how much of a saving they would have to make to make changing supplier worthwhile resulted in an average required saving of £153. That's down £14 from last year. There is an issue that if reforms aimed at reducing the differences or unfairness in the current marketplace actually work, then the amount you can save would be reduced and that in itself would put people off switching further reducing consumer engagement.

Conclusion

We are still a long way from a fair system, assuming we can even agree what constitutes a fair system. Even with simplified tariffs there are too many to look at manually. However with 80% of energy users having access to the internet it is very easy to compare energy prices and who cares if there are too many tariffs – you only need to look at the ones that cost the least!

There is without doubt an issue for those without internet access. The engagement research showed only 5% of those without the internet switched electricity supplier compared with 13% of those with. So, if you have a loved one without access to the internet, it doesn't take a lot of effort to find out if they've switched recently and offer to do the research for them.