Lack of competition in the energy market costs us billions

There are a few problems with having utilities under national ownership:

1) there is less focus on cost – several studies in Australia shows that the costs of energy networks in states that kept public ownership (NSW and QLD) are significantly higher cost – whether looking at running costs or when investing in assets. National Grid in the UK will invest £20bn pounds during its currently regulatory period. Not only is that likely to be done on time and under budget, the cost savings will also be shared with consumers under Ofgem’s new regulatory regime. Can anyone think of a government £20bn investment scheme that has delivered similar results?

2) Competition does give a focus on customer service. The big six have scored poorly but there is a reasonable amount of differentiation amongst them. E.On in particular stands out of late in making big improvements (USwitch survey’s show this more clearly). New entrants all have the best customer service – is that a surprise? You can’t win customers if you treat them badly.

2) Competition does bring innovation. Whether it is Hive or Nest, or a whizzy app (see reviews of British Gas’s app here: https://itunes.apple.com/gb/app/british-gas/id340473961?mt=8). The high street banks are not a fantastic example of innovation or customer service – but compare the experience of walking into a bank branch these days with a big post office.

On government controlled prices, are you confident prices will be set to reflect costs? History suggests, prices can be used to buy votes or to raise taxation through indirect means (fuel duty anyone)? Few have heard of the current government’s carbon price floor which imposes a top up tax on all carbon dioxide emitted by the power sector (it gets passed through to bills like all costs). Last year it raised over £1bn for the Treasury.

Lastly, I agree we should all pay a fair price for our energy and the vulnerable need to be protected. However, keeping the price of things artificially low so that it is affordable for the vulnerable is very expensive way of going about things, as paying for subsidies for the non-vulnerable quickly gets into large numbers. For the same pot of money, a targeted scheme (whether direct payments or free energy efficiency solutions) would give a much bigger benefit to those who need it most.

I am not supporting re-nationalisation of energy supply, RTA. I very much agree about the need for innovation. Unfortunately, privatisation has gradually brought some problems, so pricing is complex and it is difficult to know if we are getting good value for money. I am also not happy about the extent to which our energy supply is in now under control of other companies and the extent of investment on wind power, when it is obvious that we need a more diverse approach to renewable energy.

I am not suggesting subsidies other than protecting the poor from being hit to a greater extent than heavy users by standing charges.

As you say, there are risks with government having influence on energy prices but not many people seem to have much confidence in the present situation. What I am seeking is simply a way to stop companies making excessive profits. They are not charitable organisations, nor should they be.

I think we can all agree that trust is the big issue and regaining it would solve most of the problems.

I would point out that the present climate appears to assume all the big 6 are all guilty. I find it amusing that it is the big 6, not the big 5 – poor EdF has not made a profit from energy supply since public data started being disclosed in 2009. If it is good to be suspicious of the big six, surely it is good to be suspicious of those accusing them too, even Which?. There is plenty of good that campaigning has done (improving customer service, more public awareness, etc.), but Which?’s energy campaign appears to me to by far its most successful in grabbing headlines. Given the boost to its profile, is there a danger it continues to cry wolf when the moment has passed and it is time to move onto other more worthy but perhaps less media friendly issues?

The good news is that CMA should report mid year on excessive profits and competition and all. I hope that starts the process of rebuilding trust.

On complexity, there is tendency to blame tariff proliferation for a lack of trust. However, all consumer services show that the large majority knows how to switch and when they do so they are confident in their choices. Research in the railway area shows that customers dislike tariff complexity, but when asked if they would prefer a move to flat pricing with no chance of saving money (booking ahead, travelling at really low demand times), they firmly reject any simplification. I’ve seen enough variety of opinion on Which?’s discussion boards to see that some hate standing charges while others don’t mind them. Others love paper bills, or apps, or credit interest on their balances. One size rarely fits all. Tariff simplification means giving up choice.

RTA – The comparison with railways is useful and something we can all relate to. As you say, different consumers find it difficult to cope with a diversity of tariffs yet may complain if what they want is not available. I am fed-up not being able to pay for what energy I have used by direct debit. That’s simply because I have had years of building up excessive credit balances and having my direct debits increased when there is demonstrably no need. That would not suit those who prefer to budget for a fixed monthly payment.

Some time ago I found out that many people rarely switch supplier and some have never done so. I know some of them and the reasons are varied. In some cases they are old and decrepit or have health problems. Fortunately everyone I know in this situation is, to the best of my knowledge, quite well off and living in their own home rather than in rented accommodation. Not everyone is so fortunate.

I was quite surprised how much my current insurer charged for arranging my new home insurance. I wonder how much switching energy suppliers costs – max, min and median. My last switch was a nightmare, exchanging emails and phone calls. I’m sure it’s not typical but it can happen. Changing tariff with a supplier – as mentioned by Malcolm – should not be expensive.

The energy companies will have to do a lot to regain my trust. I see a need for more public consultation involving the many who don’t have much of a clue about energy supply. Maybe if supermarkets sold energy it might help people to engage with looking for better prices. They have certainly made an impact in other areas previously dominated by specialist companies.

“Maybe if supermarkets sold energy”. Co-operative, Sainsbury, M&S currently, but just agents for others. All the small “competitive” companies seem even pricier in my area than the big ones. I’d like to see a genuine co-operative (as opposed to the Co-Op) energy company with customers as shareholders able to share profits.

Thanks Malcolm. I did know about M&S but not about the others. I should have said I was thinking more about services available in supermarkets rather than online. There are still many who are more comfortable with face-to-face contact or do not use computers, at least for financial transactions.

Perhaps supermarkets could market energy in the same way that insurance brokers select the most appropriate cover, at least for the companies on their books. Customers might have to bring along their recent bills but as you have pointed out, it’s not too difficult for someone to do a price comparison online. An after-sales service would be needed in case of problems and it’s unlikely that a supermarket would provide personal service free of charge.

Like we have financial advisers, should we have energy advisers to whom we entrust our account? Working for a fee of course – no commission. OK – tongue in cheek a bit. but, like many things in life where we are either lacking in knowledge or facilities, lacking in will to make the effort, or don’t have the time to do it ourselves, we pay a fee for others to do it for us. Maybe “household advisers” who handle all our essential negotiations – energy, banking, breakdown cover, car and house insurance, mortgage, benefits – who have the skills to get the best deals to save us money.

I was going to mention IFAs but thought it would be simpler to use the insurance broker as an analogy. There is certainly scope to go further, but helping people try to secure lower energy prices for a fixed fee could be a good start. Little expertise should be needed unless something goes wrong.

What about the Government capping profits? Surely that is the way forward and the Control Authorities could determine if any cheating is going on when the Companies are audited. Any profit over the capping would be paid back to customers.

Bob, most of the government have studied PPE and never taken part in the real world, so do not understand business and how they can manipulate accounting to minimise apparent profit and tax liability. They would likely make a mess of it, deter investment and use it for political gain (“freeze energy prices – a bit laughable when they fall, as now). I’d rather see real competition – that is what gets down to fair profits. The problem is the time it takes to investigate and make recommendations, by which time its all history.

I think apart from real competition we need Ofgem to become competent enough to publicise exactly how the energy market works, and to act quickly when, as Which? has pointed out, they seem not to follow energy prices. And I’d like to see a consumer-owned co-op where we get a profit share back. then the other companies might change their ways?

Ofgem does publish such a study. It’s called the supply market indicator:

https://www.ofgem.gov.uk/publications-and-updates/charts-outlook-costs-make-energy-bills

It tries to show the make up of bills although the methodology is debated.It does show expected profits of a typical supplier who has hedged forward electricity and gas. It does show profits rising to some £100/per customer.

Historically, the indicator has been inaccurate for a number of reasons. It will also be a surprise for most industry followers if the big six come anywhere close to reporting £100/customer profits in 2014. That’s most because of the warm weather that had a dramatic impact on consumption. It would equate to a margin of almost 10% whereas most companies would be happy with 4-6%.

While it is good to maintain a high level of scrutiny on any sector, it would be useful if those making accusations (such as Which?’s persistent use of “billions of pounds of savings / overcharging”) compare them against the data. The data for 2009-13 show that the big 6 made a range of profits – the low point in 2009 was an aggregate of £221m, the high point in 2012 of £1190m (Ofgem data from audited company accounts). Those are big numbers but not “billions of pounds” of excess profits that should easily come back to consumers if only competition was working better.

RTA, I have drawn attention recently on a parallel conversation to Ofgem’s SMI. I think it helps people understand that energy bills are not just “energy”. In fact 56% is not.

However, what Ofgem have done is publish an average bill make up from the “Big 6” – reflecting what they are currently doing. What I have suggested is that they should also take their own look at what they would regard and justify as fair costs for wholesale energy, transmission charges, company operating costs and margin – what I’ve described as a model company (not an average of the existing ones) – to show us whay they think fair charges should be on our bills. We can then judge existing suppliers against that benchmark.

We, the consumers, need to see that there is a fair basis for our bills.

I agree there is too much headline-grabbing without putting balanced arguments behind the hype. We should be treated as intelligent consumers capable of making judgements, but need the information to be able to do that. Energy is too important for it to be dealt with behind closed doors.

Apologies – I didn’t quite get your previous point.

However, I wonder what exactly Ofgem would be giving an opinion on.

1)Transmission and distribution charges are regulated. There are the same for all suppliers. No hedging forward or other strategy will impact this. As Ofgem regulates these charges, it’s opinion is probably going to say they are fair.

2) For wholesale energy costs, Ofgem would have to choose a hedging strategy – maybe it could offer various model companies with different strategies. I don’t think regulators are any better than the rest of us at forecasting future changes in commodity prices.

3) Ofgem has never run a supply company so its perspective on operating costs are limited to what data it can gather. To be fair to your point, I’ve not seen any effort to compare costs to other supply sectors although in its CMA referral it did suggest there had not been enough competitive pressure on costs. Costs though can be very different: bad debt costs are zero for pre-pay but an issue for those billed in arrears; paperless billing saves money, as does having customers inter-act only by the internet; smart meters will mean an upfront investment but significantly reduce meter reading costs and customer bill queries. Importantly, service levels can be very different – no frills compared to premium service – and will bring different costs. Competition if it works will mean there are companies out there trying to fit into every niche.

4) What’s the companies strategy / life cycle position? British Gas invests heavily in its brand and aims to sell service products as well. Utility warehouse wants to sell you everything. If you are a new entrant, you will have to be super competitive to win customers. Marketing costs will be high. You will also lack scale and costs may be higher per customer as a result. New entrants in today’s market have not made a profit for several years, and will expect decent profits ahead to pay for that investment. To say low profits or losses today is a benchmark for incumbents is as wrong as suggesting high profits in the eventually successful new entrant’s recouping phase would be justified for the big six. Ofgem did once opine on acceptable levels of profits but the range it gave was wide and it has been very silent on the issue since.

Fixed tariffs have their attractions but while they give peace of mind during their term, there can be a sudden jump or fall when you re-tender. It would be interesting to compare whether locking in fixed price deals has meant bigger bill jumps than otherwise – I’ve not seen any data on this one.

Like all fixed deals, timing is everything. If you’re unsure whether you’re picking your moment (and the last 12 months have shown how much fixed deals can move up and down), there is no real reason why the differences between fixed and standard variable tariff shouldn’t equal out over time (as long as commodity prices don’t always move in one direction).

RTA, currently you are not locked in to many fixed price deals – my point.. You can leave for a better one without penalty, which is what I do if prices fall, or stay with it if they rise. You can then pick the best deal from your existing or another provider. They allow you to shop around for the cheapest energy, just as you may do with other purchases. i’ve changed 3 times with my present supplier as prices have fallen to save around £130 over a year. Little effort – just accessing my web account and selecting the better tariff.

I just don’t think there is a free lunch here.

A variable rate tariff is a forward hedged product. Fixed price deals are a hedged product. Overtime, they will equal out if they are hedging on a similar length.

It appears different if you can keep switching (i.e. break the hedge when appropriate). You get the free lunch if you get someone else to pay for the expensive energy that has been procured on your behalf – but who is going to pay? If everyone kept switching fixed price deals they would be priced with a premium for such a risk. Either that, or the unlucky provider would go bust and all remaining providers would think hard about risks and require a higher margin in future (exactly what happens in insurance).

Perhaps put differently, there is a free lunch today because more active customers switch away from the standard variable today and leave the less active customers on it who pay. However, by their act of switching, suppliers are put under pressure to be keen in their pricing on the standard variable tariff so as not to loose to many customers, so even this is not without its merits.

Anyhow, suppliers I have talked to say that in customer surveys a significant majority want to remain on the standard variable tariff and don’t want to move to fixed price deals.

RTA, I am astonished at the claim that customers “want to remain on a standard variable tariff” given that it is the most expensive, and that fixed price deals are usually penalty-free cheaper options. Customers who say this need educating, probably by their supplier, instead of allowing them to remain “cash cows”. A bit like my annual discussion with the AA to agree a premium nearer the on-line offer – usually around 30% less than they initially ask for. But those who don’t bother end up paying for it.

Variable tariff income will no doubt boost profits, and allow knowledgable customers cheaper “fixed” tariffs. If variable were abolished then fixed would increase in cost to make up the margin.

Colum, I think there were always better deals to go for before the internet, it was just a lot more difficult to trawl round and find them – it would involve letters, visits to brokers, banks, phone calls (if you had a phone) – only two energy companies and one phone company then of course. The internet has made that shopping around easy for the masses so if you take the trouble you can now choose the best deals available.

Beryl, you might find this link helpful in amking your decision.
https://www.ofgem.gov.uk//about-us/how-we-work/working-consumers/supplier-performance-consumer-complaints

That makes fascinating reading, Malcolm. I would be interested to know what constitutes a complaint. I have rung e.on many times when I had a large credit balance or they had informed me of a forthcoming rise in my direct debit that was obviously unnecessary. I rather doubt that this was classed as a complaint.

Thanks Malcolm the data was very informative. The Which? February Magazine issue also contains some interesting data on customer service but it’s an added bonus to be able to compare actual figures.

wavechange, from Ofgem:

“Energy suppliers are required to record any expression of dissatisfaction made to them by a consumer as a complaint.”

“Most complaints were about billing, prices and metering. There has been little change in the subject matter of complaints since 2012.”

Thanks Malcolm.

Scottish Power’s figures are set to rise when they receive a phone call about the 40% increase in my direct debit despite being £105.17 in credit. (I did overstate the increase in an earlier post.) I found out only when I logged into their website. I will wait for the next bill before contacting SP.

How difficult is it to send an automated email advising of a change in direct debit? Am I being unreasonable to expect to be informed about a 40% increase in a payment?

Wavechange and Malcolm: The FCA constitutes a complaint as follows:

“(a) alleges that the complainant has suffered (or may suffer) financial loss, material inconvenience, and

(b) relates to an activity of that respondent with whom that respondent has some connection in marketing or providing financial service or products, which come under the jurisdiction of the Financial Ombudsman Service.”

The full version is @fca.org.uk – Complaints Data.

May be of some help when you contact SP Wavechange!

Thanks Beryl. The FCA has a very different idea of what constitutes a complaint to Ofgem.

I’m waiting to see what happens when I receive my next bill. I’ve been using quite a lot more gas than usual because I’ve not been very well recently, so an increase in direct debit would be appropriate. Nevertheless, SP was not to know about this.

Ofgem seem to have just about as all-encompassing definition of a complaint as you could wish. I wonder how many more complaints the FCA would have to record if they adopted the same approach?
wavechange, unless you have a smart meter I don’t know how SP would know – or do you use Facebook? Hope you are on the mend. 🙂

I am sorry to hear you have not been too well of late Wavechange, I hope you are feeling a little better now. I have just checked my latest SP account and I am £192,48 in credit after they halved my monthly DD. This should align with my usage last year and prevent my account being too much in credit as was the case at the start of the high usage period in October 2014.

My son bought me a Slanket for Christmas which has been an absolute Godsend during the very cold and not feeling so well days and has enabled me to save on my gas bill. (Tip of the week!)

Thanks both for your kind wishes. I’m on the mend. The main reason my gas consumption is greater than usual is because I have been stuck at home for most of the past six weeks, whereas normally I’m out for some time most days. I don’t use Facebook or have a smart meter. I expect that part of the increase in direct debit may be because of cold weather.

I know that e.on had a record of my ‘complaints’ because they occasionally mentioned that I had called about the same issue on previous occasions.

At the time of my troublesome switch from e.on to SP, I mentioned my problem with growing credit balances and SP told me that they did this deliberately to offset larger bills over the winter period.

I have enough in my current account to cope with unexpected rises in direct debits but what would happen in the case of someone who ended up with an overdraft as a result?

Thanks Andrew and everyone. It’s very nice to have all these kind comments. I just slipped on the ice walking off my Christmas pudding and have had to do a lot of resting. I’m nearly mended. 🙂

Winter tyres next time wavechange. Although you would think a substantial portion of Xmas pud would have lowered your centre of gravity sufficiently to prevent you tipping over? Glad your are on the road to recovery. -;D

I’m certainly on the look out for good non-slip footwear that performs well in cold weather, Malcolm.

Alex – Maybe I should do a risk assessment on the consumption of Christmas pudding.

Thanks Andrew. I’ve bookmarked that. I had better wait until the left foot gets back to being the same size as the right one. 🙁

worth looking at last year’s models of walking boots – one of my sons bought a decent pair of £130 boots for £65 from Millets.

wavechange – you could afford 2 pairs of different sizes on this basis to accomodate your current feet and as a hedge against the future. 😀

My son always shops at Millets for his shoes but swears by Hi-tec brand but it maybe worthwhile looking at the other 4 Which? recommendations next time. Meantime, my slanket has a special pouch at its base in which to harbour feet Wavechange!!!

Right – I will take as much care with the condition of my footwear as I do with car tyres in future. Better get back on topic. 🙂

Maybe the energy companies should be adding slankets to the energy saving light bulbs and other products they sell to help us cut our energy bills.

They could give them out free instead of smart meters !!!

Blanket with sleeves? Last winter they were called Snuggies. We used to call them dressing gowns. -:(

Good idea Alfa, smart slankets sounds more appealing than smart meters!!!