Plus ca change, plus c’est la meme chose

One way or another energy prices, energy suppliers, consumers and policy makers continue to make headlines.

We have had, on the supplier front, Npower’s purported non-payment of UK Corporation Tax, SSE being fined over £10million for mis-selling; and British Gas being hauled over the coals for making “excessive” profits over the last winter. This is all unfolding against a backdrop of a flat-lining economy, increased use of food banks as those at the margins struggle to cope and a policy landscape that seems somewhat bereft of ideas that will genuinely change the energy engagement model for consumers. Switching rates are down again and the solutions being mooted are unlikely to change that. Instead of educating the British public in the practical steps they could take to buy energy cheaper and then use less of it; we appear to have decided to legislate and regulate our way towards affordable energy prices. If this approach worked, I would be all in favour of it, but in truth we are being negatively impacted by the law of unintended consequences as regards our ability to achieve reduced energy prices. Let us take a few examples by way of illustration of the problem.

The mis-selling scandals that have beset the industry in recent years, culminating in the latest round of fines to be levied upon SSE, are simply unacceptable and you would have thought that introducing rigorous regulation would be hugely welcomed; and indeed it no doubt is by the layman in the street. However the thing about regulation, as we have seen in recent days with the collapse of the Co-op Bank acquisition of the TSB branches from Lloyds, is that it introduces a barrier to doing business; and in the energy supply space it certainly mitigates against new entry into the market. The costs of compliance are high; and in an environment where the big 6 can rely on an 85% customer retention rate by doing nothing, why would they seek to actively sell solutions if the activity of pro-active selling attracts such a regulatory burden as well as all this opprobrium from the general public. Recent moves would indicate that suppliers are taking the view that it is far better perhaps for them to simply stop doing direct selling altogether.” Hurrah”, many of you might say. “Pushy salesmen confusing me with jargon and selling me unsuitable products are something I am better off without”.

The irony is that the most vulnerable people in society are also the ones least likely to pro actively seek better deals for themselves and switch. The vast majority of the elderly or the marginalised do not trust the internet or have no access to it; and will only switch through a face to face doorstep sale or via a telephone cold call (you can check out OFGEM’s own figures on where switches come from in their IPSOS Mori survey, here). If suppliers can’t effectively control the compliance costs of these activities then they simply pull out. Statistically 85% of UK households could save over £150 per annum through switching. If suppliers stop selling then the vulnerable will be completely cast adrift. So the pertinent question in this space might run along the following lines; How many instances of mis-selling are there as a percentage of overall sales and is the UK collectively better off having mis-selling and switching; or no mis-selling but no switching either. Are we correct in thinking that far better for 100 people not to switch or be mis-sold to than for 1 person to suffer from mis-selling so that 99 may prosper from switching? There is no science behind the ratios here; I am merely trying to illustrate a point that seems to have been lost in the wash somewhere.

But surely, I hear you say, the latest OFGEM rulings enforcing simplification of tariffs and a requirement to always place someone on the lowest priced tariff in a category will protect the vulnerable? This would only be true if that supplier had the cheapest energy tariff of all in the category; and in any event the simplification and insistence on lowest pricing simply removes the lowest priced energy tariffs from the market and ends with a general upward averaging trend as suppliers converge their energy prices on a new, higher price point to ensure that their profits are protected given that they no longer have the possibility of price discrimination between target markets. This will mean, in all likelihood, that in the first year those inactive consumers will benefit from a slight reduction in their standard energy price. However this will come at the expense of any deals to be had by the pro-active switchers as the suppliers will be restricted in the number of energy tariffs they can offer as well as the fact that the lowest price must be rolled out to all. So, in a world where the regulator tells consumers that they are on the best variable (for example) deal from their supplier, and where product innovation is prevented by tariff controls, where exactly is the incentive to switch and generate competition? My view is that we will see switch rates go down through a combination of price convergence and a misguided perception in consumers that the regulator has got their back so why shop around anyhow.

The big 6 already supply energy to 99% of UK households; how exactly is a combination of the various elements illustrated above going to help the new entrants break in?

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