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Do you think you could beat our tariff test?

Energy tariffs in petrol pump style

We found only one in 10 people could identify the cheapest deal when presented with a range of standard energy tariffs. When shown the tariffs in a simpler form the number shot up to nine out of 10.

Imagine pulling up to a petrol station and instead of seeing that the cost of your petrol is going to be around 142p per litre, you’re presented with a baffling array of figures that are all displayed and calculated differently.

You could have a fixed charge and then add the price per litre on top, or you could have different levels of price per litre determined by how much you fill up. Once you’ve decided this, you then need to work out if you’d be better off on a ‘standard’ deal, or if fixed or variable deals are the way to go. Think it’s a good idea? I thought not. Just imagine the queues!

Gas and electricity pricing

So why do we have this complicated, confusing system for our gas and electricity? The latest investigation from Which? shows that only 8% of people could work out the cheapest tariff when presented with six energy deals. The energy suppliers have each adapted their tariff and pricing structures for their own deals so what we’ve been left with is a market that’s now so complicated it’s nearly impossible to find the cheapest deal.

So, it’s hardly surprising that most people don’t even bother trying to find out the best deal for them, even though some could save hundreds of pounds each year.

We think that consumers have the right to simple, easy-to-compare gas and electricity prices. Why can’t it be simpler? If it was more like petrol pricing, and we had one unit rate we could easily compare all gas and electricity deals at a glance.

Price rises bump up bills

With headlines warning us of higher energy bills, and British Gas and Npower announcing price rises this week, it’s even more urgent that we can work out what the cheapest energy deal is.

Ofgem, the energy regulator, has spent two years reviewing tariffs to try to help you switch to get a better deal. It has promised to be bold and force energy suppliers to cut down on the unnecessary complexity. The question is, will it make the ‘bold’, but necessary, reforms or will it simply cave in under the pressure from industry?

If we don’t get the results we’re looking for, we’ll be demanding that the government steps in to simplify the market once and for all.

Comments

I am all in favour of having simple tariffs that allow easy comparison of prices and it is disappointing that Ofgem has not seen the need for this long ago.

I agree that tariffs should be simple, each company should only be allowed to have two tariffs for domestic supplies.
Tariff one- a fixed standing charge plus a charge for kWh consumed with no time of day variations.
Tariff two- a fixed standing charge plus a daytime charge for kWh consumed and a nightime reduced charge for kWh consumed.
All charges being subject to the approval of the regulator, the standing charge being set once a year on the 1 April, the kWh charges only being variable once a quarter with four weeks notice of a change.
However I do not expect Ofgem/ DECC to anything of real benifit for the domestic consumer.

Robert Nottingham says:
18 October 2012

I agree with simpler tariff structure but believe our Government has to replace OFGEM and enforce maximum price increases like we are told France has now done. The Government must stop sitting bemoaning outside influences and rapidly action energy cost reduction & security of supply plans even if that means using more nuclear, extending our coal fired capacity and urgently getting on with proposals to release our own gas reserves like the USA is. There is no point in being the greenest bankrupt country unable to compete with China, India, etc.

Tariff manipuilation is a by-product of the application of computer-powered algorithms to energy billing [and to other utilities]. The segmentation and fractionalisation of consumption patterns, coupled with discounts or penalties for particular payment arrangements and alternative contract terms and durations has allowed the suppliers to have a field day in consumer bamboozlement. The results are impenetrable and un-compare-able across the sector [despite what the hated operatic heavyweight would have us believe]. As B Martin recommends above, a set of simple, compare-able, standardised tariffs should be a requirement for any energy company allowed to trade in the domestic market. They could have other tariffs for people with special requirements or who are willing to take a very long contract or a market price-fluctuating or a fixed-price deal.

The ability to charge incrementally and acording to diverse factors should be put to better use to reward consumption during off-peak periods and deter consumption during capacity shortfalls. This does not have to be a simple night/day rate tariff as there are periods within those bands, and at weekends and holiday times, when – partly due to weather conditions but also other capacity or load determinants – demand exceeds output sufficiently to justify engage in serious demand management. This is more easily applied to electricity consumption which, while not immune from weather-related factors, is more stable overall and more susceptible to time-related incentives than gas. Gas consumption is more sensitive to weather conditions and seasonal factors [but can be stored, unlike electricity] You can do the washing at night but you won’t want the heating on overnight and off when you get up. The hard part is to find a way of presenting the data to the consumer to enable them to exercise more economical options.

Having said that, I think we need to be careful with charging plans that set out – with the best of intentions – to reverse the present perverse incentives for higher consumption through lower unit prices or marginal costs. Some people have to keep the house heated to 70C all day long so universally charging more as consumption rises, as sometimes advocated, needs more sensitive consideration and should be relative to personal circumstances and accommodation volume. If there is a case for remodelling the tariffs to favour economy in demand – and, in general, I think there is – then there might need to be a mechanism for offsetting the higher charges some energy customers would have to incur to keep them out of hospital, or indeed living any kind of life. The winter fuel supplement is a coarse instrument that would also benefit from the creative use of charge and credit adjustment facilitated by computerised metering and billing. At last, and only just, can I see a possible positive outcome from the smart metering programme, but it must be harnessed to a good for society and the consumer and not just the profits of the energy companies.

John wrote: Some people have to keep the house heated to 70C all day long….

A cooling off period is required. 🙂

The rest makes great sense, though I’m a little worried about the cost of installing smart meters and how the electricity companies might choose to use them.

Thank you Wavechange. I mixed up Fahrenheit and Celsius. I obviously meant 20C [70F].

I agree with your point on smart meters. It would be dreadful if they led to even less visible and more impenetrable manipulation of fuel bills. Charging per unit per second would become technically feasible.

Unravelling tariffs is complex but the reason this complexity is there is simple.
Suppliers will try to make the standing charge low, they will hide some of it in a two tier unit price structure so as to make the lower unit price for higher usage not look too large.
If they pitch the numbers correctly the victim sees a standing charge which looks competitive and a unit price for the amount they’ll use also looking competitive.
You will need a reasonable arithmetic ability, the time and incilination, and a good idea of your annual consumption to calculate and annual cost and therefore properly compare suppliers.
In other words it’s a marketing con, but they nearly all do it.
It needs to stop because it borders on misrepresentation through unnecessary over complication.

I’d prefer to see no standing charge and a simple unit cost regardless of how much you use each year. Comparison then becomes simple.
However they will probably argue the standing charge is fundamentally necessary, although I don’t see why standing charge costs cannot be part of unit costs.
So as a poor second I’d go for a standing charge followed by a single tier unit cost. Size of standing charge then becomes the only element to hood wink people with. Not perfect but better than the arithmetic puzzels they make us solve now.

Perhaps the standing charge could be set by Ofgem instead of being left to the manipulation of individual suppliers.

The UK’s love affair with standing charges goes back to the early days of domestic energy supply which was largely undertaken by municipal or public board-type organisations which had to raise huge amounts of capital for developing a whole new infrastructure and the standing charge was a relatively simple way of securing a return. The same considerations do not necessarily apply today to the same degree. Network maintenance and capacity renewal are still major expenditures but most new infrastructure provision is charged to the originator of the new demand, be it a housing estate, school, factory, Network Rail or highway authority.

Presumably the bulk of the revenue from standing charges goes to National Grid and other energy distribution networks. Their costs are historic and not necessariliy related in any way to consumption levels; it’s more to do with the economics of supplying dispersed properties and renewal of the infrastructure. I can see the merit of an equalised standing charge to cover these elements.

The generators and the energy supply companies have consumption-related costs which are appropriate for a unit-price tariff and not a standing charge. Their administration, metering and billing costs are an overhead that would not upset the overall economics of consumption-based tariffs and do not justify a standing charge.

Agree with all that has been said before me.

Would just add two points:

1) b.martin’s suggestions are eminently sensible and should be adopted. However we should expect the prices per unit to FALL when the wholesale cost of energy falls and this should be within 24 hours of the wholesale price falling, whilst keeping the 4 week notice period for increases.

2) My view is that we SHOULD have as tanding cahrge for clarity: the standing charge shodul be set by OfGEM or by Government and it should apply universally no matter who your supplier is. This is because the standing charge is, ostensibly, for maintaining the supply network, which is national. Although there are regional companies (DNO’s) responsible for the geographical areas, they should be paid from a central ‘pot’ which is filled by the standing charges which the energy companies should collect on behalf of the ‘pot holder’ (ideally OfGEM or a Government department). By doing this it would be easy and clear to see how much each supplier is charging for the actual fuel used and admin costs for dealing with network maintenance would be reduced.

It’s not surprising that so few people can accurately pick out the cheapest tariff as things stand currently, which has clearly benefitted suppliers.

The reason that tariffs incorporate a standing charge or two tier structure is to enable the energy suppliers to recover their fixed costs, such as the distribution & transportation of gas and electricity throughout the country, as well as green taxes; Standing charges ensure everyone contributes irrespective of their consumption.

However, notwithstanding the fact that fixed costs need to be recovered, energy suppliers need to make it far simpler for customers to identify the cheapest tariff. As things stand, once the introductory or capped period ends, you are routinely advised that your tariff is transferring to the standard tariff, despite the fact that cheaper options are available from your own supplier. It’s hardly surprising that there’s little customer loyalty. Suppliers must be forced to be more explicit with the information they present to their customers, in order that everyone can clearly see if they could save money by switching tariff. Until we get to a position where simple like for like comparisons can be made between suppliers’ domestic tariffs, we surely are not going to see mass switching by the general public.

Getting rid of standing charges will help smaller consumers and those that use more power will pay a bit more. We have got to do something to encourage people to be less wasteful.

optima services
You say:
“The reason that tariffs incorporate a standing charge or two tier structure is to enable the energy suppliers to recover their fixed costs, such as the distribution & transportation of gas and electricity throughout the country, as well as green taxes; Standing charges ensure everyone contributes irrespective of their consumption.”

Please clarify, are you saying you think it is appropriate that “everyone contributes irrespective of their consumption” ???

I certainly don’t think it appropriate. To my mind those who use most should pay more and that is achieved by incorporating “fixed costs and green taxes” in the unit price, and a single tier unit price at that.

Standing charges, if you think about it, are rediculous.
Does a petrol station have a standing charge to cover fixed costs payable soon as you drive on the forecourt and regardless of how much fuel you buy?
Is there a standing charge to cover fixed costs payable as you walk into Tesco to by groceries?
Of course not, so why is it that gas and electricity suppliers do?

Hi Chris,

Customers who try and reduce their consumption or use less electricity/gas should obviously be rewarded.

However, suppliers are charged by distribution companies for the infrastructure to deliver the electricity and/or gas to your property. The meter operator companies charge them for renting the meter and to pay for someone to come out and read the meter. The majority of these charges are fixed, irrespective of consumption.

In your example with the forecourt, whilst it is similar in that the commodity price is a unit rate (just like buying a litre of petrol), you also pay road tax, of which some goes to maintain the road infrastructure (similar to a standing charge).

optima services.
Thank you for clarifying your point of view.
However I still completely disagree.

You mention road tax as kind of equivilent to a standing charge?
Well as you will be aware the VED price varies with Co2 emmissions which corelate very closely to consumption. Therefore the “standing charge” for petrol purchase varies by the amount you use. Lower Co2 output, lower consumption. higher mpg equals lower VED or “standing charge”. Right down to a level where VED is £0.
So, following your own argument lower gas and electricity consumption should equate to lower standing charge, perhaps even down to a £0 level?

Now of course VED is not a standing charge, it’s just tax, with vast majority of it going to general Government public spending rather than to maintain the roads So I’m afraid as a “substitute standing charge” example it’s not really a very good one is it?

I would however be interested in any other more suitable example you can offer where a standing charge exists to cover fixed costs for any commodity. Perhaps one which is really a standing charge and not simple taxation?
Or could it be that standing charges for Gas and Electicity supply are just a way of suppliers guarenteeing a base income regardless of the how little or how much they sell?
And perhaps a way of making the unit price look that bit lower?

Consumers don’t put up with such nonsense when buying anything else so you’ll have a job convincing me it’s right or fair to put up with it when buying energy.

But by all means try.

I’ve just taken the test. Did I pass? It doesn’t seem to say.

I wondered too, Stephen. There were only three straightforward calculations to do and the hard bit of finding the relevant information had been done for us.

I didn’t waste time trying to do the test, like the “real world” calculations which energy companies would like to force on us, it’s unjustified effort – they’ll change the prices again soon anyway. An earlier point here about setting price increases once a year at the start of April, with 4 weeks’ minimum notice, is well-made. The idea of “shopping around” for energy resources is unrealistic for most people with limited incomes and other demands on their time. I took part in the “Big Switch” promoted by Which?, which didn’t turn out perhaps to be as big as hoped, but at least represented some collective action to try to get a good deal for consumers over the long term, rather than individual action as a customer of international conglomerates, whose prices are only valid until the next spike in global commodity markets.

Good point Stephen. Apologies, we’ve updated the test now. The correct answer to the complex question is Npower.

There are far too many tariffs – npower who currently supply me have 26 electricity and 10 gas tariffs. Multiply that by the other suppliers, include price rises, variation in your estimated consumption – warm or cold winter for example – and ensuring you’re on the best tariff ia a bit of a lottery, even with on-line calculators or a computer.
I am in favour of different tariff structures, however. If you are connected to the grid you should pay your share of the distribution cost – either by a standing charge or through unit charging. If the tariffs were simpler – as in the tariff test – then finding the most economical one for you would be fairly simple if you are numerate.
However an alternative would be for the energy company to simply bill you on the most appropriate (lowest cost) tariff for the whole year – why make you choose?
The difference between buying petrol and home energy is that for the latter you are choosing for at least a year’s supply and, given the tools (as in the online calculators) you have time to work out the best deal. But we should concentrate on a minimal number of tariffs to make this as easy as possible.

Chris – re standing charge. A phone line is similar – fixed rental then cost per call. The comparison of VED and mpg is a little distorted – having a high mpg car doesn’t mean you pay more for fuel as you may do a lower mileage than someone with a low mpg one. Remember most of your fuel cost is in tax – VAT and duty – so you pay more to the Govt as you do more miles.
Looking at standing charge vs two tier electricity tariifs, the annual usage (at a lower unit price) is not very high to compensate for the standing charge. I estimate around 2000kWh, or just under 3 kW for 2 hours a day – cooking, lighting, washing. Well under the average I would have thought.

Malcolm R,
You are correct regarding your example of phone line rental being comparable with energy supply standing charge. However I don’t think that’s right or fair either.
Because you found another example which again is a traditional left over from the days of public ownership it doen’t make it right, especially now everything is in private fee market, free enterprise, profit orientated hands.
And as regards your comment on VED. Remember a previous commenter made the comparison of VED with energy supply standing charge.
My point was lower Co2 emmitters (high mpg regardless of how many miles they cover) pay lower VED, or lower standing charge. If you make that comparison, which I wouldn’t.
The point is with VED, lower Co2 and therfore probable lower consumption, for any given mileage, is lower, (the VED is lower, the standing charge is lower) whereas with gas and electricity (lower consumption = good) it’s not.

I maintain that now energy supply is in private ownership they should operate as any other business in private ownership and that in the vast majority of cases does not include a distorted system whereby part of their sales income is guarenteed through a charge regardless of whether any (or how much of their product) is purchased.

As I previously said,
Consumers don’t put up with such nonsense when buying anything else so it will be a job convincing me it’s right or fair to put up with it when buying energy (with the addition of “and a phone service”)

My basic point is you’re paying out before you actually buy anything, fundamentally wrong to my mind.

Chris – I was not justifying phone line rental, simply answering your query about similar arrangements to the standing charge.
Whilst you may argue whether the principle of a standing charge is right or not, what matters is the final bill. And from what I have looked at for most people the final bill will be least if you combine a standing charge tariff with a single unit rate. Whatever happens, the supply companies will seek to make their desired profits one way or another – abolish standing charge and unit prices will rise. You can’t regulate profits – subsidiaries will transfer funds to their holding companies under the guise of Admin Charges or some such thing to hide their true gain.
So the alternative? Nationalisation won’t work – Govt cannot run businesses competently. It can investigate cartels, and penalise – but it is slow and rarely has enough teeth or the expertise. It must come down to pressure from the consumers through a decent watchdog. Incidentally, industrial and large scale users I believe negotiate their own contract prices – guess who gets the rough end of this stick.

Malcolm,
I agree with a liitle of what you say but mostly I don’t.
Firstly putting the phone line rental as a comparison with standing charge to one side.
You say that the final energy bill will always be lower it unit price is combined with a standing charge, and that it is the final bill that matters?
Well I agree it’s the final bill that matters and I agree that suppliers will find a way to achieve and increase their profit margin one way or another, but I fail to see how you conclude that the abolition of a standing charge will automatically lead to a higher overall bill level.
To my mind abolition of a standing charge will favour those who use less, and I think that is how it should be. I agree that unit price following abolition of standing charge would increase, and therefore very high consumers might well be paying out a little more than they do now, and I also think that is how it should be.
Currently higher level consumers are being effectively subsidised by lower level consumers because of the standing charge. Usually that means the less able to pay are subsidising the more able to pay. Or an extreme comment might be “the cold poor are paying to keep the warm rich warmer”.

Moving on to nationalisation.
You say “So the alternative? Nationalisation won’t work”
The alternative to standing charges is not necessarily nationalisation. We could to my way of thinking make energy supply more fair by abolishing standing charges without nationalising energy supply. So I’d say a rather tenuous link there.
As regards nationalisation “not working”. Well I’d agree nationalised energy supply like we use to have very probably wouldn’t work. Back then there was no acountability, no competition and you’re right Government are very poor at running business (poor at many things it seems currently). However a modern day nationalised supply doesn’t have to be like that.

Why not continue with say the big six suppliers, operated by the same professionals, still in competion with each other but all state owned. The state becomes the shareholder. All profit, and currently there seems to be plenty of it, going to the treasury. In a model like this Government won’t have to run the bussinesses (badly) but as the shareholder Government could apply the same pressure as do currently private shareholders. The big difference would be of course that rather than go for maximum profit Government could peg the level of profit and keep prices down, and we the electorate theroretically at least could control the Government through the ballot box.
That way all the failings of “old nationalisation”, no acountability and no competition are sorted. Cap this off with a real regulator (rather than the poor excuse for one that is ofgen) and a fundamental part of UK infrastructure could operate for the benefit of us all.

Of course the big problem is that to buy back the family silver the Government will need the will and the money, both it seems in short supply, so I doubt even if enough people were to agree this would be happening anytime soon.

But I’d vote for it.

This conversation has wandered from simple tariffs.
I still maintain that may proposal of 14 October should be the only tariffs for domestic consumers. I should have added that surcharges or discounts would not be allowed. Charges due to method of payment would not be allowed. It would for the consumer to chose the method of payment i.e. monthly or quarterly bill and payment by cheque, direct debit, in the case of the Co-op cash over the counter at any of their shops and online via the internet.
No variation from the standard charges would be allowed, light users would get their own reward by having a smaller bill than a high user. Any real deserving cases needing help to pay for electricity and gas should be delt with separately by other government agencies by means of direct payment to the individual concerned, funded by general taxation.

If Ofgem decided what the options are to be offered it would be very easy indeed for customers to make comparisons with other suppliers.

Ofgem should also dictate when tariffs are reviewed, so all companies’ prices go up (or down if energy becomes cheaper) at the same time.

Minimum number of tariffs is a must. However, if it is cheaper to process direct debits then those who choose to use it should benefit. Why should they subsidise those who choose a payment method that is more expensive to process and administer?

Then let those who choose the less expensive payment option have some Tesco Clubcard points (my supplier already does, so it’s not as ridiculous as it sounds) or a free bottle of toilet cleaner.

There is no point in simplifying charges and making them easy to compare if we then go and complicate them.

Regarding your tariff test it would appear that Npower is the cheapest up to about 3000kWh,above that BG is the cheapest.Am I right?

Edward says:
18 October 2012

Why is no mention made of tariffs by Coop Energy which appears to be good value?

Hi Edward, for the purpose of the test and our investigation we just looked at the six major energy suppliers – however we would like all energy companies to simplify their tariffs.

Anything as complicated as energy tariffs includes a scam somewhere along the way.

When is 9% not 9% but really 16.5% ?
Scottish Hydro have increased their prices by 9% overall for electricity & gas. [Wrong ] When asked for clarification by me, they replied that my electrical actual tariff increase was in fact 16.5% ! Seemingly, I have to pay more while others [nationally] pay less ! – Is this postcode energy policies ?

Linda Ridgley says:
18 October 2012

The calculations would be slightly easier if we reverted to having a Standing Charge and just one rate for units. Trying to work out the amount you would pay for the first, more expensive units and the lower rate for the rest makes the calculations complex and not easy to compare. One would almost think it was done on purpose to confuse!

I mainly agree with the previous correspondents but comment further. Too many consumers shy away from the arithmetic. It is relatively easy to determine either the energy used or the energy costs from the supplier’s paperwork. Putting this data into a comparison site is equally easy – job done. I think the main problem starts with our educational system which appears afraid of MAKING pupils learn maths to a level which allows simple calculation, like learning the times tables.

StationManor says:
18 October 2012

I just was reading today that the gasprice in the Netherlands will be €80 a year less due to lower prices on the international market. This as a result that the economics are downn. Who is telling the truth?

Chris – you equate low energy users being poor and subsidising high energy users who are “rich”. This is not so – higher users will often be larger families, poorer insulated houses etc. Low energy users may have smaller households, better insulated. Neither is necessarily rich or poor.

Malcolm,
Yes perhaps my choice of word was not the best.
However my real pont was that if there is no standing charge and just one unit price it all becomes a level playing field for all rich and poor.
Low users because they are in smaller houses, are better insulated or just less well off won’t be subsidising high users, who might be in bigger houses, might not be as well insulated or might be better off.
Surely the same cost for all proportional to usage must be the fairest approach?
But that’s not what we have now with standing charges, and tariffs with changing unit price depending on usage.