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Update: will the proposed energy price cap be enough?

Energy prices

Prime Minister Theresa May has announced plans to tackle rip-off energy bills with an energy price cap. But will such a cap be enough to help you?

Update: 6 September 2018

Households on the most expensive energy tariffs could save around £120 per year when a new price cap comes into force this winter. But the cap doesn’t mean you’re protected from overpaying on gas and electricity – switching supplier will save you more.

Alex Neill, Which? managing director of home products and services, said:

“While this cap may bring a price cut for some, people shouldn’t think it will mean they’re automatically getting the cheapest deal on the market. There are still better deals on the market and energy companies must not use the cap as an excuse to delay helping the millions of customers stuck on rip-off standard variable tariffs to move. The price cap can only be a temporary fix and the Government, regulators and the big providers should now press ahead with reforms to create real competition, promote innovation and improve customer service”

Energy price cap

During her speech to Conservative Party Conference, Theresa May announced plans for an energy price cap. The Prime Minister said:

‘The energy market punishes loyalty with higher prices, and the most loyal customers are often those with lower incomes, the elderly, people with lower qualifications and people who rent their homes’

And announced that a draft Bill will be published next week that would give Ofgem powers to impose a cap on all standard variable tariffs.

The move puts an end to months of buck-passing between the government and Ofgem about how to tackle soaring household energy bills. And it looks like it could finally deliver on the government’s pledges made during the General Election.

There are millions of hard-pressed energy customers still suffering due to a lack of competition in the energy market. So any intervention that brings down energy bills will be welcome.

That said, in bringing forward this legislation, the government must ensure that any cap doesn’t result in higher bills overall, undermine improvements in service or bring much-needed innovation to a halt.

To ensure that any intervention that’s made by the government is actually a good outcome for bill payers, we believe that it should pass five key tests.

1. It must not cause longer-term price increases
If bill payers see price reductions overnight, but energy providers offset initial reductions with price increases over the long-term, the cap won’t have worked.

2. It must not remove incentives for providers to improve their service
Consumers have routinely suffered from poor customer service from many suppliers and have faced particular issues with inaccurate bills and poor complaint handling.

3. It must not stifle innovation
The government and the regulator must ensure that the cap does not stop consumer-friendly innovation in the energy market. They must ensure that the smart meter roll-out continues to be advanced in the most cost-effective way possible.

4. It must lead to a truly competitive energy market
Consumers have suffered as a result of a lack of competition in the energy market with the competition authorities estimating that people are collectively overpaying by £1.2bn as a result.

5. It must have clear criteria for bringing any cap to an end
The long-term objective must be for a competitive energy market that delivers for consumers. This means that any price cap should be time-limited. The government and the regulator must set out proposals for the length of the cap, how they will monitor its success, and the criteria by which it will be removed.

Fairer energy

Of course, the cap will not take effect this winter, which may be a disappointment to those who are already concerned about energy costs as we descend into the colder, darker months.

With a number of price hikes by a number of larger and smaller energy suppliers in recent months, energy prices are returning as a top financial concern for many. So the draft Bill must make the most of the opportunity to fix this broken market and deliver a fairer deal.

Now we await the publication of the draft Bill and the full details of the Prime Minister’s proposal.

Update: 11 October 2017

The energy regulator, Ofgem, will extend its current price cap for prepayment gas and electricity meter customers to cover an additional one million households this winter.

The plan will see energy bills cut by an average of £120 over the year for some of the UK’s most vulnerable households, according to the regulator.

The regulator has also said that it will begin consulting on extending the price cap for a further two million households for next winter, once the government’s price cap plans are confirmed. The Prime Minister announced last week that the government will prepare a draft bill to propose an energy price cap, this draft bill is expected tomorrow.

Our managing director of home and legal services, Alex Neill, said:

‘As temperatures dip, today’s announcement will be welcome news to some of the UK’s most vulnerable households. The implementation of a market-wide price cap is clearly going to take some time, so it’s right that the regulator is looking to more quickly protect the most vulnerable.

‘Energy companies must also do much more to engage their customers, helping them to switch to a better deal now. Only time will tell whether all of these interventions will really deliver better outcomes for consumers.’

We want to see a fairer energy market for all households. Every household, even those affected by the energy price cap, could get a better deal by switching. Our free Which? Switch service can help you compare gas and electricity prices and help you find the best deal for you.

Do you think a price cap will be the solution we need to fix the energy market? What else would you like the government to do?

Update: 12 October 2017

We’ve been campaigning for many years to highlight the broken energy market. Over 500,000 supporters supported our Fair Energy Prices campaign, urging energy companies and the regulator to do more to get customers off rip-off standard variable tariffs (SVTs).

So the news that the government has published a draft bill to introduce a price cap should be welcome. But it isn’t quite so straightforward.

Two-thirds of households in England, Scotland and Wales will become much better off overnight when the cap is introduced, giving relief to hard-pressed consumers. 14 million people on SVTs will save themselves hundreds of pounds a year.

But although the Draft Bill requires Ofgem, the energy regulator, to put the cap in place as soon as possible, consumers shouldn’t expect to benefit soon. The Draft Bill will have to go through pre-legislative scrutiny first before a bill goes through the normal legislative process and Ofgem consults on the measure. Then there will be another step of statutory consultation to change energy suppliers’ licensing conditions. It’s unlikely the cap will come into force until winter 2018/19, to remain in place until at least 2020.

Whilst a cap may sound like a positive move, we want the government to safeguard against any unintended consequences like higher prices, reduced competition in the market and poorer customer service. So it is promising that the Draft Bill outlines a temporary cap, and Ofgem will be tasked with making sure competition and consumer incentives to switch are preserved. But there is a long road to travel down before we know what the actual cap will look like.

Update: 13 February 2018

A report published by the Business, Energy and Industrial Strategy (BEIS) Committee has concluded that the government’s proposed energy price cap is necessary to address the UK’s broken energy market.

According to the Committee, the energy market has been dysfunctional for years. It highlighted that the regulator has failed to protect energy customers.

The report found that many energy suppliers are making substantial profits out of around 12 million ‘sticky’ customers who are on poor-value tariffs. The committee believes that an absolute price cap is the best way to tackle this overcharging for energy.

The introduction of a price cap should be a helping hand for millions who are paying over the odds for their energy. However, we’ve stressed that this price cap should not lead to any unintended consequences for consumers, such as poor customer service or higher prices overall.

While the Committee has called for the cap to be urgently introduced, it’s not expected to come into effect until next winter at the earliest. Our research found that you could save up to £305 per year by switching*, so if you think you could be overpaying for your energy then try Which? Switch to compare prices and see if you could get a better energy deal. Even once the price cap is in force, you will have to switch to get the best deals on the market

*A saving of £305 per year is possible by switching from the priciest Big Six standard tariff to the cheapest deal on the market. The figure is correct as of the 1 February 2018.

Comments

I don’t know how Which? are involved, if at all, on discussions with Ofgem about the upcoming tariff cap. Certain information that underlies it is being made available to parties who apply to Ofgem.
@patrick, are Which? aware of this or do they have an interest? https://www.ofgem.gov.uk/system/files/docs/2018/08/notice_of_intention_to_hold_disclosure_room_final.pdf

Hi Malcolm, let me get in touch with our policy colleagues and we’ll get back to you.

@gmartin, thanks George.

The impression I had was that older people were, through inability to engage perhaps, suffering more than others from (lack of) energy switching and paying more than they need for their energy.

So, I was a little surprised to read Which? News today, and the proportion of people on the cheaper fixed-price energy deals. It says:

Again, it’s older energy customers who are more savvy to this. 68% of people overall are on a fixed-term tariff. 78% of those aged 65-74 are. 80% of over 75s are. But just 56% of 18-24 year olds have fixed tariffs, and are potentially overpaying by hundreds of pounds per year.

Read more: https://www.which.co.uk/news/2018/08/revealed-the-energy-customers-getting-a-good-deal-are-you-one-of-them/ – Which?

So those most tech savvy appear to be unaware of savings to be made, or choose not to take advantage of them?

Incidentally, for those who think these fixed price tariffs are not subsidised by those paying the higher variable prices, ask yourselves how an energy company that makes just 5% profit (or less) can sell a product 20% cheaper than their svt. Certainly not because their admin costs are that much less, and the amount they would pay for wholesale energy would have to be around 50% less than for an svt, which seems highly unlikely.

There are plenty of older people who cannot cope with switching and for a variety of reasons. Equally, there are reasons why older people do engage, for example retired people tend to have more time to look after their finances and more need, being on a fixed income. Simple statistics tell us little and may misrepresent the situation.

I expect that we could work out the average amount of money that retired people have is sufficient to live comfortably, disregarding the fact that many enjoy good pensions and others are really struggling to make ends meet. Again, simple statistics tell us little and may misrepresent the situation.

It seems younger people should be targeted perhaps to show the savings they could make, through social media? However, once a lot more people switch to these cheaper tariffs they will no longer remain cheaper. Profitability will be maintained by increasing their prices.

These might be simple statistics but I’m not clear why they might be misleading. Are 78% of those 65-74 not on fixed term tariffs, as Which? state? Some might try to read more into these stats than they warrant – for example they make no mention of which section of the 65-74 year olds have them.

I am very much in favour of extending serious uses of social media. I’ve suggested that social media could be useful to alert more people about recalls in the absence of a comprehensive system to raise awareness.

Perhaps social media could be used to raise awareness of how those on SVTs are being exploited by companies (most or all?) since unlike most products, electricity and gas are the same irrespective of which tariff you have chosen or been put on. My comment was more about the general use and misuse of statistics.

Electricity and gas do not cost the same, neither to individual companies nor to individual tariffs. Larger companies hedge their costs by buying forward, for maybe several years, at a cost. Others, particularly small ones, rely on spot prices which may well be cheaper in the short term but are volatile. Energy comes from different sources in different mixes, with different costs. The product might be the same but the costs are not.

From a consumer’s point of view, all that matters is that their supplier is selling the same product at different prices, unless the consumer is alerted to the fact that a specific tariff offers a benefit, such as electricity from 100% renewable resources. (Of course it is the same electricity but hopefully the company can justify this claim with reference to its suppliers.)

I’m quite keen to be able to choose a fixed price tariff for a year or two.

So buy at the cheapest price. Just like we can with other products.

I will carry on supporting the efforts of Which? to help consumers in general and not just myself.

As are we all, presumably, when it’s appropriate.

There has been a long standing problem that those on prepayment meters and paying for their energy in advance were paying more than the majority that pay in arrears. This has changed, although it is still cheaper to pay by direct debit: https://www.which.co.uk/news/2018/08/revealed-the-energy-customers-getting-a-good-deal-are-you-one-of-them/

The energy price cap (£1136 for an average user) will help those who don’t, or can’t help themselves. For those that can, it is a poor solution. They should switch to a cheaper tariff. Since Which?Switch makes this quite easy why do Which? not advertise this on TV where many would see the advantage and the link to the service? As Which? takes commission on switching from many suppliers it could be self funding. A better use for my subscription than supporting a mortgage service.

For those that do manage to switch to a cheaper tariff – for whatever reason – it is a benefit.

It seems odd to ask for “competition” when there are around 70 energy providers – probably too much competition in fact. Some have fallen by the wayside, others are, or will be, in trouble as wholesale energy prices rise as they will not have the financial resources to ride them out.

I believe that abolishing subsidised fixed price fixed term tariffs – artificially cheap – will hurt many people like me but benefit a majority of users on the profitable variable tariffs. We should, in the main, all be on those and simply pay the market rate for energy. We do for petrol and diesel.

The companies will still be able to compete on price but apparently eleven million customers will benefit from the price cap. Those on standard variable tariffs include a substantial proportion of those who struggle to pay their bills, so it’s good news for them. It will push up the price a bit for those of us who choose a cheaper fixed price tariff.

Those who would benefit most would be the ones to move to a more competitive tariff, a far better win than having a price cap.

It is quite surprising how many knowledgeable people with the means to change simply do not bother or think it worthwhile.

For some the savings might not be worth bothering about but the key benefit of price capping is that it helps protect vulnerable people who struggle to make ends meet.

There are currently 98 tariffs that are cheaper than the cap – up to £267. 36 are £100 or more cheaper.That is worth bothering about, I’d have thought, and be a help towards making ends meet.

The vulnerable are unlikely to engage with the market otherwise they would do this now. The price cap will help them. A lower price cap could help them more.

Abolishing subsidised fixed price tariffs would help them even more. Not that those of us who use them might be happy, but it would be fairer.

We could, of course help the vulnerable to move to cheaper tariffs. I assume many vulnerable people do receive help. The non-vulnerable who do not bother, or don’t feel the savings worthwhile, can make their own choice.

While a cap may help some, mostly marginally, I think more radical measures would be more helpful.

Hi Malcolm, interesting comments on this topic. I suppose I fall into the vulnerable category you mention. I am in my 70’s on a low income and receive the warm home discount. My energy provider has an Economy 7 tariff which I have used for years and at every assessment they advise I am on the cheapest tariff. Except the latest assessment where they advise my cheapest hours rate (between 12.30am and 7.30am) is to be doubled. Currently, I use those hours to shower, use my hairdryer, cook, vacuum and do the washing and heat my flat – I have overnight storage heaters. From 1st October, on the new rate, there will effectviely be no Economy 7 as the two rates together (day and night) match a standard rate. Comparison sites give me a bleak scenario offering the next best provider at £53 more than I’d pay my existing provider. My annual bill will increase by almost £100. I have complained to the energy provider but must wait 28 days for a reply. No savings for me. Perhaps the savings for the masses is being taken from the vulnerable. Can’t see the energy companies willingly taking the loss of £1bn.

I assume that the companies will put up their prices for new fixed contracts to compensate from loss of income from overcharging those on standard variable tariffs.

I do not understand why you should be losing cheap overnight electricity, Anne. Which company are you with at present?

Two possible approaches are to speak to Citizens Advice and to go to the energy ombudsman, though you are expected to be in dispute with your company for two months before contacting the ombudsman.

Let’s not forget that many of the most vulnerable will be on prepayment tariffs, so their ability to shop around for low prices will be quite restricted.

Luckily, I’m not in that position myself and I have actually just switched tariffs.

In line with the Which? advice here:

which.co.uk/reviews/cutting-your-energy-bills/article/how-to-save-on-your-energy-bill/how-to-switch-energy-supplier

for a quicker and easier switch, I chose a company signed up to the Energy Switch Guarantee.

I’d certainly recommend that anyone who might be considering switching for the 1st time, but who is worried about any potential complications, should also limit their choice to the companies in that scheme.

In my case, I haven’t suffered any very significant price disadvantages from switching to such companies.

Slightly off topic, I’ve also just not switched Broadband suppliers, after a quick phone call to haggle with my existing supplier. Next year, I hope to get around to haggling my house and car insurance premiums too.

Prepayment tariffs have until recently been the most expensive way to buy energy but this long standing problem has been addressed. It’s generally those who have been in arrears with their bills that land up on these tariffs – not just the vulnerable but those who cannot manage money for whatever reason. I don’t have the figures to hand but there are vulnerable people on ordinary meters too, avoiding debt by living in inadequately heated homes.

Anne, hello. You do want to protect your warm home discount if you change suppliers. Here is a list of all the energy companies who participate:
https://www.gov.uk/the-warm-home-discount-scheme/energy-suppliers

Looking at suppliers through Which?Switch, in the lower cost end with decent Which? scores are Bulb, Ebico and Co-Op who all offer the warm home discount scheme and list Economy 7 at normal rates (as we stand today anyway).

I assume that the companies will put up their prices for new fixed contracts to compensate from loss of income from overcharging those on standard variable tariffs.

I’d estimate that, on average, for every £10 the SVT is reduced to a capped level, fixed price contracts will go up around £15.

Those of us on fixed price contracts have been subsidised for years, so it’s hardly unexpected.

I’ve posted about subsidised (probably mostly loss-making) fixed price contracts for a couple of years now. I believe they are wrong (but I take advantage of them – why not?). Why should I buy my energy 20% cheaper than someone else using the same company just because I enter into a 1 year contract? Even if I break the contract and pay an exit fee I’ll probably be quids in.

I fail to understand why Which? have ignored this and not campaigned to have them abolished. If you want “fair” energy pricing this is a straightforward example of what is “unfair” to many.

I would be happy if we all paid the same price for energy and it would save the need for price comparison sites. Competition could still take place within the industry, for example where our energy companies buy their energy from.

Energy costs are different depending upon their source and the contracts made by the energy companies. Admin costs differ. Currently distribution costs differ depending upon distance from source. So prices to the consumer will differ as with any other commodity in a free market.

Making all of us pay the same for our energy – price control – will simply benefit efficient suppliers by giving them high profits. Is that what we’d like?

When energy prices are stable, small companies can enter the market and make competitive offers as they buy at today’s (spot) prices. The major suppliers smooth out the costs of energy by buying forward, several years, but this costs them although it protects consumers in the longer term. So the small companies, if prices were decreed to be all the same, would make a killing and, when prices rose, simply exit the market (we’ve already seen a few do that).

I’d rather see genuine competition keeping prices down, and giving choice.

Ogem consulted 4 groups (not very large) around the country as part of the price cap investigation.

There was no consensus on whether the cap should be high or low; high cap would protect those on lower tariffs, but give more complexity; low cap would increase cost of lower tariffs but reduce complexity. Many were protective of low cost tariffs, and put price ahead of service.

Concern about the viability and service from small energy companies.

Mixed feeling about who should subsidise the vulnerable; some were happy to do it through their bills, others wanted the benefits system to do it. Many did not know who constituted the vulnerable.

https://www.ofgem.gov.uk/system/files/docs/2018/09/understanding_attitudes_to_and_behaviours_under_a_cap.pdf

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It won’t affect those on existing fixed term contracts.

I suggest that the next problem to be dealt with the large credit balances accumulated by some customers. I was discussing this with a friend of a friend who was over £1400 in credit to SSE, despite repeated efforts to recover the money. She has now moved to another company and recovered the money from SSE.

E.on and Scottish Power both manipulated my direct debit to keep me well in credit. Ovo does not do this, probably because it would have to pay me interest on the credit balance. Maybe other companies should do the same, or be required to.

I’ve just left Scottish Power – they’ve just emailed to say they’ll be sending me a cheque for the £5.82 that they owe me.

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I recovered rather more than that. At one stage they more or less doubled my direct debit when I was well in credit, and they did not even send an email to let me know they were doing it.

With E.on they refunded the credit balance for one fuel on my dual-fuel account and I had to chase them for a second payment. They did apologise for their mistake.

The latest message about an energy campaign just arrived from Which?: It concerns the energy price cap and includes:
“The government and regulators must push ahead with industry reforms to create real competition, promote innovation and improve customer service. We have asked Ofgem to continue focusing on making sure the market works better for all consumers.”

However, no details as to what Which? proposed should be done by Ofgem. What have they actually asked for?

I was on a variable rate with Powerhouse, but a little while ago they wrote to me informing me that I would be transferred to a standard tariff, perhaps they though I wasn’t using enough. They said that was on the best tariff with a fixed price and I think they said if the price went up I would continue to pay the same but if it went down I would pay less. I have not replied but I assume I am now on the standard rate. In the past I have stuck with my then provider no matter what they charged. I changed just over a year ago but I am not sure that what I have been told is to my benefit. I use electricity for cooking and lighting.

I am with Ebico for gas only and they have raised my Direct debit to a whopping £90.00 a month,up from £56.00. I use gas for heating and hot water only.

I live alone and use what power I need. I am at an age when I find it difficult to make the necessary comparisons, At this rate I will not be able to afford much else on my budget.

Your monthly direct debit will have been calculated on the basis of the information you have provided about your use, John. Hopefully your direct debit of £90 per month will have resulted in a substantial credit balance. If you have an online account you can log in and explore your payments, charges and current balance, otherwise it’s a case of looking at the bills you have received.

If you do have a substantial credit balance it’s worth reducing your monthly direct debit. This can often be done on the energy company’s website and there is no need to contact the bank. It’s worth keeping an eye on your balance. I reduced my direct debit at Easter and expect to have to increase it again around November because I will be using more gas.

If you are on a fixed rate tariff your charges will remain the same throughout the contract period, unless there is a change in the rate of VAT.

Powershop have a complicated tariff. You can elect to buy “powerpacks” that are discounted chunks of energy, special offers, each month and using these you should get the lowest possible bill. In the first year they offer a “price promise” that, based on the annual energy usage you’ve submitted, will be the price you pay if you don’t take the packs. After that year if you don’t take packs you’ll pay their baseline tariff, which is considerably more expensive.

With me so far? It may be simpler in practice than it seems on paper…..but to get a good deal you have to use their powerpacks when they are made available. And these depend not only on your annual energy usage, but following a typical usage pattern.

They are not fixed price tariffs so presumably the tariffs could change.

Worth a go? No exit fees. So if you are prepared to be an active customer and use the powerpacks the estimate I have is the cheapest on the Which?Switch list, and a lot less than the more mainstream suppliers.

Any catch? Well, they are very new, but backed by npower. I think it might be worth a go when my fixed term ends in November. Anyone else had any experience of them? Perhaps Which? could do a piece about how their approach works.

Interesting – thanks for flagging, Malcolm. I’m looking into whether we’ve done any work on Powershop and this way of selling energy. I’ll keep you updated.

Sounds like they are emulating GiffGaff’s marketing. It gives great flexibility and low cost in the mobile market.

Richard P Beauchamp says:
26 September 2018

I know we are all consumers and Which is a consumer organisation but what of future consumers. The cheaper energy is today the more many of us will use. The knock on effect on price or availability or both for our descendants is a matter we should consider.

I’ve suggested that SVT tariffs support lossy fixed tariffs, and that the SVT cap might change that. Ofgerm say, in a Q&A webinar:
“4. Question: What analysis has Ofgem undertaken on the impact on fixed tariff customers (potentially seeing higher prices)? If so, what is Ofgem’s understanding of the net impact of this cap on customer bills across all customer types?

Answer: We present analysis on the impact of the cap on FT customers in the Draft Impact Assessment and discuss its significance in Appendix 2 of the consultation. The impact on customers on fixed tariffs is much more uncertain (than for SVT and default tariff customers) as supplier behaviour and customer behaviour is harder to predict. We state that we expect that some suppliers may increase their fixed tariffs to recover reduced SVT revenues, but this is uncertain as suppliers face greater competitive constraint on FT prices. If some suppliers do increase prices, their FT customers are more likely to be engaged and may choose to switch to maintain low prices, or choose to stay with their supplier as they see fit. As part of our decision making process we analysed scenarios where fixed prices remain largely unchanged and scenarios where many suppliers choose to increase fixed tariffs to offset revenue reductions from the default tariff cap.

I’d like to repeat my view that “artificially priced” fixed price fixed term tariffs could be removed to the benefit of all SVT customers, by giving a general price reduction without the need for an artificial cap. And to simplify choice.

Sorry — Ofgem.

Richard, once we have far more sustainable energy sources, such as tidal stream and storage, energy will not be such a potentially-limited resource. Do we want more nuclear?

Building more energy efficient houses, upgrading older ones, energy efficient lighting, all help to contain the demand for energy. Electrical energy will increasingly be the primary source and we need to plan for its production now, for domestic, transport and manufacturing use.

Any ideas how we can reduce the fossil fuel used in air travel?

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Sorry, reply in wrong Convo 🙁

Thanks duncan. I was thinking of getting away from fossil fuels. Seems some doubt about biofuels emissions. From the Guardian July 2017:
“The Royal Academy of Engineering report says, however, that some biofuels, such as diesel made from food crops, have led to more emissions than those produced by the fossil fuels they were meant to replace. Instead, the report says, rising biofuel production should make more use of waste, such as used cooking oil and timber.

Ten years ago biofuels were seen as ideal, low-carbon, replacements for the liquid fossil fuels that power the majority of the world’s transport systems. But concerns grew that first-generation biofuels, made from food crops, were increasing food prices and were often as polluting as fossil fuels when all factors in their production were considered.

Are both of these right? It seems from Ofgem that substantial numbers of people are switching. But are they the habitual switchers? Are the sticky customers still stuck? Be useful if full information were provided.

Energy switching rates aren’t rising despite there being more gas and electricity deals to choose from, Ofgem’s report reveals.

Read more: https://www.which.co.uk/news/ – Which?

”When it comes to energy shopping… During January to July 2018…
3 MILLION Electricity customers switched
2.5 MILLION Gas customers switched
During this time …
33% of total switches across both fuels
moved to small and medium suppliers (net gain)
827 THOUSAND for gas (net gain)
980 THOUSAND for electricity (net gain)

Small energy firms: how they sell the cheapest deals
Newer or smaller energy companies don’t have the overheads of big businesses. Nor do they have legacy systems, for billing or customer service, which are costly or complex to update. Founders of a new energy company can design it in the most efficient way.

Read more: https://www.which.co.uk/news/2018/10/do-smaller-energy-companies-really-offer-better-deals/ – Which?

I imagine some consumers think that they pay mainly for electricity in their electric bill. It might surprise them to find that, in an average bill, only a third of what they pay is for actual electrical energy (33.5%).

25.5% is for its distribution, 17.5% for “environmental and social obligations (a kind of tax), 17% for the suppliers’ operating costs, and 6.5% for vat, profit, and incidentals.

So how does a small company beat bigger suppliers? They only have operating costs to play with (so a part of the 17% can be saved), and possibly being exempt from some social costs (if, so, that seems unfair). They can buy at current spot prices, but that leaves them very vulnerable when costs rise if they’ve sold a lot of fixed price deals, and their svts will rise quickly. We’ve seen some go out of business as a result, leaving us to pick up the costs.

I wonder how many of the 60 energy suppliers are just in it for a quick profit, and will disappear when the market changes against them. Make hay while the sun shines perhaps. 60 competitors is far too many, in my view.

I would also question the comment that because “newer or smaller energy companies don’t have the overheads of big businesses” they can reduce prices. While it is true that the bigger companies probably have much bigger overheads they are spread over a very much larger customer base and therefore are likely to form a smaller proportion of their operating costs. As Malcolm has indicated, it is the exemption from the environmental and social obligations that makes the smaller firms more economical and it is questionable whether this remains a fair policy. It was presumably introduced to incentivise the fragmentation of the energy industry into smaller [and theoretically more competitive] units. The challenge for the major suppliers, who are clearly losing customers, is to reduce their operating costs in line with the consequent reduction in their profits. If they cannot do this then their legacy systems and overheads will cause them to become uncompetitive unless they take defensive action like SSE and Npower are doing by amalgamating. A reduction in customer service capacity and a rise in prices are more direct ways of closing the gap.

I am surprised that it is considered that the newer and smaller companies can be more efficient than the majors on their billing operations. I can understand that they will not have the extensive tail of customer data clogging up their computer systems but most of that is just parked, since it is inactive, and most of what remains – being current customers – is primarily [probably well over 80%] used for automated billing and income reconciliation which in the majority of accounts is likely to be an uncomplicated settlement by direct debit or on-line transfer. Other forms of payment, moving home, changes of personal details and other account interventions will, as a proportion of transactions, be more or less the same for all companies large or small. Newer companies will, though, probably have more queries and changes as a percentage of their accounts since their customers are likely to be less switch-averse compared with the baseload of customers with the major suppliers who are disinclined to change, or, if so, only to a different big five company. Customer churn could run at a higher ratio in the smaller companies if they succumb to the problems identified by Malcolm on future energy procurement and customers keep jumping from one to another to catch a cheaper deal. As smart metering expands its coverage I think the larger companies will have the advantage and would be able to offer bigger incentives to make the change and try to lock people in with smarter tariffs.

Collectively, the more billing systems there are, with each one having a percentage of spare capacity for growth, overall efficiency of the smaller sector would be expected to decline as each system needs it management and maintenance infrastructure. Perhaps small companies will share databases or intermediary service providers will set up combined operations for them.

I have long thought that in terms of the cost of energy the distribution costs are far from transparent and that there must be considerable scope to bear down on them. Distribution is largely unaccountable as an ingredient in the consumer price of energy; it is an unseen operation that is largely taken for granted and, because the cost is passed through to customers and can be separately categorised on the bill, historically there has been little interest in being more economical in distribution. However, if the industry does start to take a harder look at the impact of distribution costs on consumer prices then I cannot see the smaller suppliers as having as much leverage against the unit costs of distribution per account as the major companies.

Something that has not been mentioned that does have a major effect on the economics of energy supply is the advantage held by the bigger companies in the commercial sector. The smaller companies are unlikely ever to have the enormous sales of energy into the industrial, commercial and public service sectors. They will pick up some shops and offices but will never have the economies of scale available to the major suppliers where one account can be worth millions of pounds. This is the ballast that keeps the big firms upright in the choppy waters of international commodity prices.

I do not believe the major companies are taking full advantage of the opportunities available to them to hold their prices down and offer more attractive tariffs; they have become complacent that the only way is up as energy demand has been on a rising curve for years – and electrified motoring is likely to add to it significantly. British Gas has lost a lot of customers but it did have a virtual monopoly of gas accounts and it has taken a long time for the propensity to switch on such an essential commodity to make inroads into its market share. But it has woken up, and like the other big companies, can afford to advertise its way into consumers’ minds.

I suggest that there is a need for a minimum of eight major companies to exert pressure on the market and stimulate greater efficiency and a competitive service taking into account administrative efficiency, distribution cost reduction, customer service, and tariffs.

In the ‘newer and smaller’ sector I think twelve or fewer suppliers would be more sustainable and over time would expect that to be achieved by amalgamation as the real world economics start to bite. At the moment the new boys are snapping at the heels of the big boys but there will come a time when they will have to start fighting amongst themselves and an orderly process of rationalisation would be in the interests of domestic consumers. The risk of sudden collapses is that there might be no medium-sized supplier [such as The Cooperative Energy which has stepped in on previous occasions] standing ready, willing and able to absorb them, especially if there is a rush to the exits.

Usio Energy, an energy supplier with around 7,000 domestic customers, has ceased trading. Another small supplier gone.

“Usio Energy, an energy supplier with around 7,000 domestic customers, has ceased trading. Another small supplier gone.”

What does that tell you? It tells me that they were offering unprofitable, underpriced contracts, and unsurprisingly have gone bust. Unfortunately, due to the incompetence of regulator Ofgem, we all bear the costs of this company’s commercial ineptitude.

Maybe all those solar panels and wind farms aren’t so cheap after all.

First Utility has taken over all of Usio Energy’s customers. FU has 740,000 accounts so can easily absorb the Usio customers. FU is honouring the credit balances of Usio customers and debit balances will fall to be dealt with by the administrators so will not affect FU. There is a small impact on all consumers, however: the cost of protecting customers’ credit balances will be met partly by First Utility, and the rest will be covered by the safety net put in place by Ofgem and funded by a pro rata levy on all domestic energy suppliers. The safety net allows suppliers to recover the cost of credit balances; this appears to me to be an equitable arrangement and it provides stability by not imposing unfair costs on the acquiring company and its customers.

So long as Ofgem continues to provide a safety net there is no particular risk from signing up with one of the small suppliers, but the possible loss of a favourable tariff needs to be borne in mind as a potential consequence.

It is repeatedly said that we must help those who do not switch their energy supplier to ” save up to £305 a year”.

It seems the mortgage market has the same problem, but on a much larger scale, where a saving of up to £8700 (in extremis) is available – 28 times as much – and yet, with big savings available, some simply cannot be bothered.

Will this produce demands for a “mortgage cap”? I doubt it, but it does illustrate that many people don’t care what they pay, even when they know they can save. No doubt this permeates all purchasing – insurances, holidays, cars….. How can we, or even should we, change these people? Is giving them the information on which to base their decisions, and easy means to make a change, not sufficient?

https://press.which.co.uk/whichpressreleases/one-in-three-homeowners-dont-know-what-mortgage-rate-they-are-on/
…….”However, in London average house prices are significantly higher and the cost of an SVR mortgage could be as much as £727 more each month – over £8700 per year.

Of those on SVR who had been on the same mortgage for at least the past five years, when asked why they hadn’t switched one in five (22%) said it wasn’t worth the hassle and one in seven (15%) claimed that they hadn’t thought about it.

There is a clear level of apathy when it comes to mortgage deals, as four in 10 (41%) of those on SVR explained that they would be unlikely to switch if they came across a cheaper deal today.” .

Some figures from Ofgem for 2017:
“£1,117 The average dual fuel bill for a customer of the six largest suppliers in 2017: a fall in real terms of £52 from 2016

8% The proportion of total expenditure that low-income households spent on energy in 2016-17 (last year: 10%)

19% The proportion of households in England living in privately rented homes that are identified as being fuel poor, compared with just 11% of all English households

2% The proportion of customers repaying a debt for both fuels in England, Scotland and Wales

17 The number of disconnections in Great Britain in 2017 (last year: 210)

17% The reduction in household energy consumption over the last 15 years, after adjusting for changes in temperature”

Ofgem’s “state of the market” shows more people switching but more help needed for the vulnerable.
”The profits and market share of the six largest energy suppliers have fallen as more people switched last year
A quarter (25%) of customers are with small and medium-sized suppliers as more people switched to get a better deal.
The market share of the six largest suppliers has fallen to a new low as a result and their annual profits fell last year for the first since 2014, by 10% to £900 million…………………..
Competition is benefiting more energy consumers but many others, especially the vulnerable, are still getting a poor deal, according to Ofgem’s annual State of the Energy Market report.

https://www.ofgem.gov.uk/publications-and-updates/profits-and-customers-fall-six-biggest-energy-suppliers-competition-increases?utm_medium=email&utm_source=dotMailer&utm_campaign=Daily-Alert_11-10-2018&utm_content=Profits+and+customers+fall+for+six+biggest+energy+suppliers+as+competition+increases&dm_i=1QCB,5WVB8,F31FFV,N502H,1

I wonder if people are misled by the information given on the “price cap”. It is not a cap on your energy bill, just a maximum price your supplier can charge for each unit of energy – gas and electricity – that you use. The “typical bill” quoted is simply what a “medium user” on a dual fuel contract will need to pay. A medium user takes 3100 units of electricity and 12000 units of gas and the typical bill under the cap will then be around £1140. Use more, and you’ll pay more, but at the maximum unit costs allowed still.

The amount you will pay also seems to depend upon in which area you live. Ofgem give these here for different areas. https://www.ofgem.gov.uk/system/files/docs/2018/08/aug_2018_-_cap_levels_for_publication.pdf. However, confusingly, they are for slightly different usages – 3200 units of electricity, 13500 units of gas (what a medium user used to be, I think; we use less these days). The costs also exclude VAT. But they mean that for this usage the bill will vary from around £1180 to £1250 a year, depending where you live. The difference seems down to the network cost – the cost of moving energy down to pipes and wires from source to home.

The real answer is to move to a fixed price tariff, while they are still more competitive, to make real savings.