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Ofgem’s ‘simple energy tariffs’ aren’t simple enough

A pile of lightbulbs

Were your winter energy bills shockingly high? If you’re thinking of switching suppliers to save money, the vast array of tariffs on offer might put you off. That’s why we need genuinely simple energy prices.

This spring may have been the coldest for more than 50 years, according to provisional figures from the Met Office. By June, I bet most of us have turned off our central heating. But I can’t have been the only person turning up the thermostat on the odd cold evening over the past few weeks.

I’ve tried to avoid doing so. After a longer and colder winter than usual, my gas bills have rocketed. Meanwhile my fixed-term energy deal came to an end earlier this year and I’m now on a more expensive standard energy tariff.

Obviously I need to get onto Which? Switch and find myself a cheaper energy deal. And yet, like many people, the thought of comparing and contrasting different energy company offers makes my heart sink.

This is one of the paradoxes of the energy debate. Energy prices are consumers’ top financial concern. Yet very few people switch supplier to save on their bills. In fact, in a new Which? survey, more than half of people said that they had never compared their energy tariff with others on the market to check if it was worth switching.

We need simplicity to get people switching

We’ve long thought one of the reasons for this is the overly complex way that energy tariffs are structured and priced. And that’s why we’ve been calling on Ofgem and the government to introduce a single unit price for energy tariffs – it needs to be as easy as possible to spot the cheapest deals at a glance.

In October last year, the Prime Minister promised to intervene in the energy market and force energy companies to put their customers on the best deal for them. We supported these plans, but warned that they would not work without the additional introduction of simple energy prices.

Our new research shows why the current proposals from Ofgem do not go far enough. When we asked people to identify the cheapest deal for them from a range of tariffs using Ofgem’s tariff comparison rate (TCR) proposal, just three in 10 got the right answer.

This shot up to eight in 10, when the tariffs were presented in the style of a petrol forecourt display, using a single unit price. Two thirds of people surveyed said they preferred the single unit price model, compared to just one in 10 for the TCR.

With MPs debating the government’s plans for energy market reform this week, there is still time to improve these proposals. But this will require the Prime Minister to intervene again and make sure that his energy reforms work for hard-pressed households.

Comments
Profile photo of william
Member

You’ve mentioned Ofgems current proposals, but what are they ? I suspect you’re right in what you say about what they’ve done but without evidence of what it is I’m only able to guess.

And yes to using which switch but you’d save more money if they then signed up via a cashback site if that company was offering, if not use a cashback site to go through to which switch and get a possible £17.50 cashback ( current at time of writing for the one cashback site I looked at).

Profile photo of Katie Benson
Member

Hi William,

The full details of Ofgem’s proposals can be found in this PDF document under ‘simpler energy tariffs’.

Ofgem has proposed a Tariff Comparison Rate (TCR) with the aim of allowing consumers to compare the price of different tariffs across the market. The TCR is based on medium usage of both gas and electricity, but only a quarter of consumers are medium users. As a result, three quarters of people could be advised on a deal does not represent their actual usage.

Profile photo of wavechange
Member

One hundred and ninety two pages. I want the executive summary. 🙁

Profile photo of william
Member

@Katie, Thank you, I think. Well I can certainly see what you mean. I almost died of old age by the time I found the section describing their proposed pricing structure.

Does seem like they’re trying to make things more complicated rather than more simple.

They do seem to have gone the way I was originally thinking by trying to cater for the different tariffs the are out there, like economy 7 etc. But that just brings us back to were we are know.

Profile photo of Katie Benson
Member

Sorry about presenting you with such a meaty document on a Monday morning!

Profile photo of william
Member

No need to apologise, I’m sure you didn’t write it.

Profile photo of malcolm r
Member

wavechange, there is an executive summary, but the relevant bits of detail you’ll want are in the section on tariff proposals. Not too much to plough through.

Profile photo of wavechange
Member

So there is. I was so busy looking at the length of the document that I missed this. Thanks, Malcolm.

Profile photo of ChrisGloucester
Member

Yes I agree tariffs are too complex and completely misleading.
I would argue all standing charges and multi-tier tariffs are a complete rip off designed by marketing people to mislead people into thinking the deal is question is the best one.
Plus low users trying to do what everyone says is the right thing, “use less”, subsidise those who use more because they can afford to.
No standing charge and one unit price is the only fair and honest approach.
Anyone babbling on about suppliers having to cover fixed costs with a standing charge should be asking how supermarkets and petrol stations manage, they have fixed costs too but seem to get by without standing charges.

Profile photo of djmp99
Member

neither do they charge the same price for identical products

Profile photo of djmp99
Member

okay so tariffs are a bit tricky but switching is easy. I generally switch every 12-18 months and have done so for the past decade and longer.

Profile photo of ChrisGloucester
Member

Yes switching is easy but we wouldn’t have to do it so often were it not for the smoke and mirrors of complex tariffs. No standing charge and no multi-tier tariffs I say. Make it fair for all and simple to compare.

Member
Will says:
2 June 2013

I wonder about the movement in gas prices in particular. My bills (and I have switched twice in the last 5 years) are up about 80% since 2008. Over that time, the wholesale price of gas, give by the Henry Hub Natural gas (from the FT commodities) has fallen from over $12/unit to under $4. Admitted the last 12 months prices are up from $2.5 to $3.96/unit, so expect prices will rise again; but I don’t remember any earlier falls….

Member
Jed says:
3 June 2013

The Which switch tool helped us save money, but after a few months the energy compay put their prices up. So we moved to a new company and it happened again!

Annoyingly they said this was due to wholesale price increases, but at the same time on their website a cheaper tariff was available!

Profile photo of wavechange
Member

Energy is a major cost for many consumers, so simplicity is vital. Like Chris, I support the single unit price system proposed by Which?

To reassure customers concerned about fuel prices, I would like to see prices fixed for a full year. In the case of customers who have switched supplier, prices should be fixed for two years to discourage suppliers from attracting new customers and then putting up prices. If the same rules apply to all suppliers, no one can argue that they are not fair.

When referring to fixed prices, I mean fixed prices – not like the carry on we have with mobile phone contracts.

Profile photo of srh1957
Member

Why don’t OGFEM produce a calculator which the energies companies have to use.
You put in your usage and it produces a quote based on the energy company’s tariffs.

Member
Jed says:
3 June 2013

They shouldn’t be allowed to change the tariff within the first 3-6 months, even if it’s not a fixed contract. Currently you can sign up one day and they can change it the next.

Member
Member

02 June 2013
OFGEM STATEMENT RESPONDING TO WHICH? RESEARCH ON ENERGY TARIFFS
“Our proposals for a simpler, clearer and fairer energy market are the most radical changes to the market since competition began. Our tariff comparison rate is only one element of a comprehensive set of reforms, which address the different ways consumers engage in the market.
“Ofgem‟s reforms would include a cap on tariff numbers to no more than four core tariffs per fuel. Companies will also be required to put their cheapest deal on bills, annual statements and other letters to customers. In addition we are looking at how the most vulnerable customers, and those most unlikely to switch, can be given information on the cheapest deal available across the entire market.
“The conclusion that Which?‟s approach is simpler than Ofgem‟s results from them testing a greatly simplified version of their own policy on customers. But they do not own up to this in what they have published.
“So unless they intend to prohibit discounts for payment method, dual fuel and paperless billing, their own proposals will be more complex than they suggest. Also, it is misleading to consider just one aspect of Ofgem‟s reforms in isolation from all the other improvements to transparency we are promoting.
“Our tariff comparison rate is similar to the „typical APR‟ used in financial services. It gives customers an indication of how their current deal compares with other suppliers. Customers will also get personalised price comparisons, plus details of the supplier’s cheapest deal on every bill and annual statement. These are just some of the many changes we are bringing in to help customers find the best deal for them.”
Ends

Profile photo of william
Member

“Our tariff comparison rate is similar to the ‘typical APR’‟ – I thought that had been stopped and they were supposed to use the equally pointless representative APR now.

Profile photo of malcolm r
Member

Pete, one contentious issue in the conversations about tariff structure has been the justification for a standing charge as one of the options. I asked Ofgem for their comment and posted this in an earlier conversation. Would you like to explain why you think a standing charge is a justifiable option?
Secondly, I wonder when smart meters are widespread whether that will lead to different energy prices at different times of day.Where will simple tariffs be then? Savvy consumers could reduce their costs by timing some appliances to run appropriately. Will this happen? Trying to oversimplify tariffs may not be in the consumers best interests.

Profile photo of malcolm r
Member

This conversation develops as if there will be no choices available to consumers. I believe in choice, so if you don’t agree with standing charges then go for a tariff that does not have one. If you want to pay a single unit charge, use a supplier that offers that. If you don’t want direct debit or paperless billing, then don’t go for those option. If you don’t want your costs to increase for a year, choose a fixed-price deal. If you don’t agree with the philosophies behind these options, then you don’t need to go for them.
To find your best deal you need to do a minimal amount of work – probably once a year. Record you gas and electricity consumption and put it in a calculator – try Switch with Which? – and the work is done for you. The deal that gives you the lowest predicted annual bill is the one most of us want, and it really is not that difficult to arrive at if you try.

Profile photo of dave newcastle
Member

Malcolm R,
I agree to a certain extent but one does have to ask is it reasonable to expect our very elderly and folk who are not particularly bright to use a computer to sort out the cheapest energy supplier? They don’t have to do this in the supermarket or at the petrol station.

Profile photo of malcolm r
Member

Dave, I am a little elderly and, speaking for them, I think a lot have more savvy and computer literacy than you give them (us) credit for! However, it does open up the question of how those of all ages should be able to access deals if they do not have internet access or skills. Family help is one way (most are online), there should be telephone equivalents, and printed data in, say Which? for example.
Regarding supermarkets – how do you decide which is the cheapest without physically visiting them and comparing prices?

Member
s downing says:
3 June 2013

My cheap (in fact very cheap) tariff was removed by the supplier. When I asked why they said it was because Ofgem had insisted on them ‘making the tariffs simpler’, so naturally they removed the cheapest. So I moved to another supplier only to find they did the same a month later and when I asked why they replied ‘as ofgem had told them to simply the tariff. Now moved again.
I complained to ofgem and told them that as they were obviously useless , better not to interfere.
However now I find it is you ‘Which’ who are to blame. WE DO’T NEED SIMPLE SCHEMES WE WANT CHEAP SCHEMES. DO NOT INTERFERE UNLESS YOU REALISE THE CONSEQUENCES. HOW DOES SIMPLYING HELP ? IT MERELY REMOVES OPTIONS.

Profile photo of william
Member
Profile photo of malcolm r
Member

An interesting (?) comparison of European energy prices can be found at&filetimestamp=20130523135053
A quick look shows the UK in 2012 was 16th out of 27 for electricity price (91% of the average price) and 12th for gas (81% of the average price).
However, what is more striking is the increase between 2010 and 2012 – UK electricity increased by 23% (only Cyprus and Latvia having larger increases) and gas by 38% (Spain only higher at 68%).
Hope I’ve got the numbers right – I’m sure thousands will check this fascinating topic. However we have to ask why we suffer increases so out of proportion with the rest, whilst being somewhat glad we don’t buy electricity in Denmark or Cyprus (66% more than we pay) or our gas in Sweden (120% more).

Profile photo of william
Member

Don’t forget that in the UK, around 20% (£300) of the average user bills is paying for green initiatives. Not sure how they fund those in other countries.

Profile photo of malcolm r
Member

William, according to Ofgem 6% of your gas bill and 11% of your electricity bill go to “Environmental charges” – the green initiatives (fact sheet 98, Jan 2013). Where do you get 20% from?

Profile photo of william
Member

I thought the average bill was about £1400 and that green costs amounted to around £300.

Just done a check online and I see I’m slightly out depending which website you get figures from. and it would be £300 won’t be until 2020.

And the current average hike in bills is only around 8%, sorry.

Profile photo of evil c
Member

My fixed rate dual fuel Co-op Energy deal (done via Which? ‘The Big Switch’) ends 31st July. Co-op Energy have made me a new fixed rate dual fuel offer that would come into effect on 1st August and end on 30th April 2014.

I am not happy about this offer as I have to accept it on or before the 11th June. After the 11th the offer expires and if I stay with Co-op Energy after 31st July I would be put on the Variable Pioneer tariff, more expensive than the offer prices.

With a great deal of difficulty I was able to obtain both my Electricity and Gas consumption in kWh from Co-op Energy, and this only because I have given them monthly readings every month. However, if I were to use a switching service to compare prices now, I couldn’t switch before the 11th June or indeed at any time before the 31st July, as I would then have to pay an exit penalty of £30 per fuel.

On the 22nd January 2012 Co-op Energy demanded the end of what it describes as the ‘one-sided’ industry practice which locks customers in to a fixed price contract and then penalises them up to one hundred pounds if they decide to switch supplier.

On the 8th March 2012 in their Blog they said, “We think exit penalties are unfair and we’ve started a campaign to get the other energy suppliers to waive their exit penalties if people want to switch. In the current climate, suppliers should be doing everything they possibly can to help people save money.”

Co-op Energy, in their Welcome Pack letter to me 20th May 2012 wrote, “Shortly before July 2013 we will be in touch to explain your future options to you. If we do not agree an alternative option, you will automatically be switched onto our current Variable Pioneer tariff.”

It seems that ‘options’ actually means ‘limited time offer’. As regards ‘if we do not agree an alternative option’, this means ‘take it or leave it’. When I ‘phoned them to get my kWh, I asked if the fixed price deal was negotiable and also whether they would match or compete against a lower price deal from another supplier. The answer to both questions was no.

It doesn’t seem right to me that I have to accept an offer 7 weeks before my deal ends, as it takes away my ability to compare other suppliers offers in a level playing field. In fact it penalises me because if I decide to switch it will cost me £60 in exit penalties.

Profile photo of skeptictank
Member

I am with British Gas and I agree that there is no transparency in the tariffs. My bills list me as on British Gas “standard” tariff, but there is no listing of a standard tariff on their product offerings so I have no basis on which to compare. There is also no information on their web site to the cost breakdown of a standard tariff.

I have installed a energy saving meter but I can’t program in the unit cost into the device because I can’t find any place on British Gas’s website that reports it. What is worse is a call to their customer support line left me no wiser.

Profile photo of malcolm r
Member

skeptiktank – put “British Gas tariffs” into Google and it will take you to a site where you choose the fuel, tariff, put in your post code to get your unit rate. Or click on this link http://www.britishgas.co.uk/products-and-services/gas-and-electricity/our-energy-tariffs/Tariffs-A-Z.html.

Profile photo of malcolm r
Member

For those interested the final proposals from Ofgem are in the document at the following link:

https://www.ofgem.gov.uk/sites/default/files/docs/decisions/the_retail_market_review_-_implementation_of_simpler_tariff_choices_and_clearer_information.pdf

On the controversial question of tariffs and standing charges:
“Tariff structure and surcharges
2.13. Stakeholders were supportive of our effort to standardise and simplify tariff structures. Some stakeholders do not feel the policy goes far enough and have proposed we consider removing standing charges and adopt a single unit rate structure. While our policy requires suppliers to adopt a standing charge and unit rate structure, we do not specify the level of standing charge and consequently any standing charge can be zero. Ofgem does not regulate prices in the retail energy market, and therefore the level of any prices results entirely from the commercial decisions of energy suppliers. Suppliers have fixed costs which they may look to recover through a standing charge. However, given the level of demand for low or zero standing charge products, in a competitive market we might expect such tariffs to be offered.
2.14. One respondent expressed concern that if wide proliferation of standing charges occurs it may undermine tariff simplicity. Whilst a wide proliferation of standing charges may work against what we are trying to achieve in terms of simplicity and comparability, we consider the potential for this to happen is significantly limited by our proposals to introduce a tariff cap. Moreover, there are benefits if consumers have a degree of choice over the standing charges to which they are exposed. This, in part, is why we are not proposing a range of rules around the standing charge element of our proposed revisions to the tariff structure. As with other areas of the package, we will monitor market developments and do not rule out taking steps to introduce further remedies in the event that there is evidence that more needs to be done to protect consumers and improve competition.”

And on communication
“Cheapest Tariff Messaging (‘CTM’) provides consumers with personalised information on how much they could save by switching tariffs with their current supplier. This is designed to improve consumers‟ awareness of the savings available from switching and prompt them to consider their options.”
which, of course, may also give the customers sufficient information to help them shop around – to see if other suppliers can offer a cheaper annual bill.