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Limited energy tariffs doesn’t mean limited prices

Energy tariffs: large cooling towers at a power station

Last month, the Prime Minister stunned the media, the energy industry and even some of his cabinet colleagues. He promised to legislate so that energy companies have to give the lowest tariff to their customers.

The announcement was quickly branded as a shambles. Had the PM even meant to make this commitment? Did he get his facts right? And was the commitment possible? The general public were less sceptical. When we asked you on Facebook whether he should keep his promise, a whopping 97% said yes.

From what we’ve read and heard today, it sounds like the government has tried very hard to deliver the PM’s plan. Its proposal is to build on Ofgem’s recent suggestion that each energy company should only have four tariffs per fuel. It will then legislate so that of these four tariffs, one has to be a fixed price, fixed term deal and one will have to be a standard variable deal.

And they will scrap so-called ‘dead’ tariffs – the huge array of old deals in the energy market that people sit on, often paying much more than they should. People on these deals will be migrated across to the new offerings.

Clear, fair and easy to compare

Around three quarters of us are on standard variable tariffs, so this plan should ensure that we’re put on to our suppliers’ best deal for us. The only way we could get a better deal would be if a fixed term tariff was cheaper, or by switching to a cheaper deal with a rival company.

This seems like a neat fix. But, and it is a big but, on its own it will not lead to more effective competition between energy suppliers or drive down prices. So the government needs to go even further. It needs to ensure that energy prices are presented in a clear, consistent and simple way.

It’s blindingly obvious if you shop around for petrol, whether one garage is cheaper than another. But we all know that’s not the case with gas and electricity. Our recent investigation found that only one in 10 were able to identify the cheapest deal when presented with a range of standard energy tariffs.

Rebuilding customer confidence

We want people to be confident that this new cheapest tariff is not only the best deal from their supplier, but that it also compares well with other deals across the market. People must be able to see the cheapest tariff at a glance. This should also put more pressure on energy prices, since customers are more likely to leave a supplier if they can easily spot a better deal from their competitors.

So the government must legislate for a simple, single unit price for energy that will be applied to all tariffs. And more must be done to make sure the cheapest price is also a fair price.

Recent inflation-busting energy bill hikes, profit announcements and accusations of market manipulation have left people questioning whether they’re paying a fair price for their energy. That’s why we need the government to launch an urgent and swift independent review in to what’s really behind the rising cost of energy.

Comments
Member

Hopefully this will make price comparison websites redundant in this market. If only . . .!

What consumers also want is more stability – we don’t actually enjoy constantly reviewing our tariffs and switching suppliers with all the attendant risks, or being pestered by energy companies who tell us they have shaved a milli-cent off their rates so they are now better than BG or E.on or whatever. We want a market where we can be at ease over energy prices knowing that we won’t be penalised for staying loyal or ripped-off for not giving 12 months notice. Plus we want bills that make sense and can be understood by the average householder.

Member

1. The proposal should stop people being left on old tariffs, or transferred to “standard” (higher price) tariffs when a deal runs out. But that will cost the energy companies, so other consumers will pay more to compensate.
2. Identify the cheapest deal at a glance? This is a commercial market, so energy companies themselves will not help you find the cheapest tariff around – that’s for us to find – just as with insurance and banking for example. So we’ll still need price comparison sites to source the best supplier. For those not on the net, Which? can help by publishing best buys, as it does for banking.
3. Legislate for a simple single unit price for all tariffs? I’m not sure what this means, but if you mean all suppliers charging the same unit price, there’s no competition is there? The key is to make sure that real competition exists, no cartels operate, and that wholesale gas and electricity prices are published. But none of this is simple for the suppliers – they will buy future supplies for different periods, taking a risk with the movement in prices. Petrol is not sold at a single price per litre – how is other energy different?
4. One thing is for sure – the energy companies will make the profit their shareholders expect whatever legislation is imposed. If we really wanted to contain energy costs, then the expensive wind farms, solar panel feed in tariffs and other green energy projects done for political reasons would not have been implemented.

Member

The only way the government will make any difference in this market is to either buy out one of the suppliers and preferably one which generates most of its own power ( EDF springs to mind as 60% comes from its own nuclear generators) or create a new supplier with as much generation as possible. then the government can set whatever prices they like ( hopefully lower). Otherwise the energy companies will just find neat , legal, tricks to get round whatever the government says.

Of course, the other thing that would lower prices is to stop passing all the green levies onto the customers, Don’t we all pay around £300 a year for towards this ?

Member
Len M says:
21 November 2012

What worries me, is that it’s proposed to do away with two tier tariff and have a regulated standing charge. I turn off my gas boiler in the summer for about 4 months, and use an immersion heater in a very highly insulated tank for hot water. This is heated mainly on the low rate on Economy 7. A daily charge for those 4 months, even with a slightly lower basic unit rate, would certainly put my bills up.
I understand, though, that as well as the four standard tariffs, non-standard tariffs will still be available. This aspect has not been mentioned in any of the media, and I wonder if Which? has any more information about this. It has been said that there may be cheaper rates available on non-std tariffs, but generally people will opt for the standard ones, as they perceive these as being regulated, and so less of a risk to change to. Prices will generally go up!

Member

This is already creating confusion here. They say we’ll have a choice of just 4 tariffs and go into some detail how these tariffs will be structured. I have a couple of questions for them:

1. Will my 4 tariffs be the same as those in, say the West Midlands who pay less than Cornwall for their energy?

2. I’m on a Economy 7 tariff as there’s no gas in the village. Does their announcement mean the end of E7?

I prefer to stay all electric as it’s really the only practical fuel that can be produced from green sources, woodburning, if that’s really green being just a niche alternative.

Member

Having fewer and simpler tariffs will only be effective if genuine competition exists in the market place. Consumers already benefit from a simple ‘pence per litre’ tariff when buying energy from a petrol station. Consumers can shop around easily as well. Obviously, pricing domestic energy isn’t quite as simple as this, but if the free market works reasonably well on the petrol station forecourts, there is no reason why it shouldn’t work in the retail energy sector.

Member

Does the free market work for petrol / diesel? In my area their are only marginal differences in price between all the fuel suppliers – I don’t think there is much evidence that they are really competitive. I fill when I’m nearly empty, 70 litres, so stand to gain most by shopping around. However, at 8 miles per litre (mixing units!) it’s only worth driving 2 miles (4 miles return) to save 1p a litre. So no real incentive to shop around. The fuel companies probably trade on this. Yet they must have significant differences in costs and overheads which will be reflected in the cost to them of the fuel they supply. But not passed on. This is the free market operating – otherwise you get a price war, the weakest go out of business or relent, and we settle back to a market norm. It happens in all businesses – and is no different in electricity and gas supply.
And please don’t suggest nationalisation – inefficient unimaginative unincentivised public servants cannot run businesses.
Perhaps we need a different business model as an alternative – set up an energy cooperative where the profits go back to the members, or go to keep down future costs. Those who choose to be members would then have a direct involvement in the market.

Member

8 miles per litre is about 36 miles per gallon, so the priority is surely to change the car rather than shop around for cheaper fuel. 🙂

Meanwhile back on topic, I think the government should set the maximum tariffs for energy supply and let the companies compete by offering better deals.