Following the publication of the Competition & Markets
Authority (CMA) Energy market investigation – summary of
provisional findings report on 7 July we thought it
worth looking at the details and key concerns that the
CMA has highlighted some six months before its final
report.
There is no doubt that one of the most
striking finding of the CMA’s survey of domestic and SME
electricity and gas customers is the lack of
understanding of, and engagement with, retail energy
markets by up to half of the UK population. Some of the
key findings of this survey explain the extent of the
problem:
1. 36% of domestic energy customers did
not think it was possible or did not know it was
possible to change one or more of the following: tariff,
payment method and supplier
2. 34% of respondents
said that had NEVER considered switching supplier
3. 56% said they had NEVER switched supplier, did
not know it was possible or did not know if they had
done so
4. 72% said they had NEVER switched
tariff with an existing supplier, did not know it was
possible, or did not know if they had done so.
There are two key problems highlighted. Firstly, the
lack of engagement means that up to half of domestic
customers are sitting on Standard Variable Tariffs
(SVTs) which are, on average, 10% higher than
non-standard tariffs for electricity and 13% higher for
gas across the six largest energy firms.
What
compounds this problem is that this lack of knowledge
and engagement with tariff and supplier switching falls
hardest on the poorest in society who are most likely to
be paying top SVT-based prices for their energy.
For example, 20% of customers with total household
incomes below £18,000 had switched supplier in the last
three years, whereas be contrast 35% of households
bringing in over £36,000 per year had switched over the
same time period.
The fact that 15% of customers
(up from 7% in 1996) are now on pre-payment meters,
aggravates the problem still further. Consumers on
pre-payment meters are given less tariff options and pay
more for their energy. Pre-payment meters are generally
installed where customers have poor payment histories or
bad credit ratings.
But we also know from this
report that disengagement and switching levels have
actually been falling since 2008 – the year that the
recession really kicked in. So why did we stop switching
at exactly the point when household incomes were
tightening and we ought to have been looking for savings
wherever we could find them? You have to read deep into
the report to understand all the moving parts
contributing to the problem.
But what is clear is
that the CMA is convinced that many of the energy market
reforms of recent years which were designed to promote
better customer engagement have actually had the reverse
effect.
Ofgem’s Retail Market Reforms (RMRs)
which came through in late 2010 gets singled out for
stinging criticism in the report: “Some RMR measures
restrict the behaviour of suppliers and constrain the
choices of consumers in a way that may have distorted
competition and reduced consumer welfare” says the
report on page 32.
The
reforms which the CMA says are questionable are,
firstly, the insistence on a maximum limit of tariffs
(to 4 only) that suppliers are able to offer at any
point in time, as well as simplification of cash
discounts and bans on complex tariffs. What the CMA
indicates is that these restrictions actually stifled
retail innovations. It reports evidence of some
innovative tariffs being withdrawn and various discounts
being removed following the RMR’s implementation.
Essentially the deals become less abundant and interest
in switching naturally fell away as the head-line
grabbing deals disappeared.
The Price
Comparison’s Websites (PCW) also had their wings clipped
in the RMR and this looks to have had a negative impact
on market effectiveness, adds the report. The fact that
the PCWs were no longer allowed to compete with each
other by reducing sales commissions (either directly by
passing on cashbacks or indirectly by securing exclusive
tariffs from suppliers) stifled the market, says the
CMA.
Prohibition of regional price discrimination
through SLC 25A in 2009 and the decision by the Big Six
to stop door step selling from 2011 are also factors in
diminishing switching numbers, finds the report.
The result is that 20-30% of domestic electricity
customers have been with their current supplier for more
than 10 years. For gas, the range is wider – 10-40%
depending on the supplier. Incumbent suppliers of
electricity in each region have retained 35-45% of their
region’s customers for 10 years plus.
The CMA report
goes further to say that the duties and tasks for the
DECC and Ofgem need to be reviewed and possibly
redefined. Ofgem says that “its competition duty has
been progressively down rated relative to other duties
in the last 10 years”. The CMA even considered whether
Ofgem’s role now “overlaps excessively with DECC’s role,
leading to sub-optimal decision-making; and whether the
coincidence of DECC’s and Ofgem’s roles risks
undermining Ofgem’s independence”.
It concludes
that some competition-related changes enforced by Ofgem
over recent years may have happened because it was
facing pressures from the DECC. If true these are pretty
serious allegations.
Whatever the structural
problems in the governance of the retail electricity and
gas markets it’s clear that right now it is not serving
consumers very well. The statistics are disturbing –
domestic UK customers have, on average annually overpaid
their suppliers by £1.2 billion; whereas hard-pressed
SME and micro-business customers (also based on annual
averaging over 2009-2013 period) have overpaid £0.5
billion per year. So, if the market had been functioning
healthily over the selected five year period, the UK’s
consumers and small businesses would have been a lot
more engaged with the energy market and a lot better
off. The trick for regulator and the Government as a
whole is to stimulate consumer engagement successfully
without stifling the market in the process.
A
limited-time price freeze would surely not have done the
trick as it would have killed investment by generators
and retail innovation by the Big Six. But are we instead
heading for compulsory regulation to force suppliers to
move the bulk of disengaged consumers into the best
tariff possible for them automatically? We will know
this and other recommended reforms when the CMA presents
its final report in December.
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