David Cameron has promised that energy firms will need to move people to their lowest tariffs under new legislation (see the MSE News story). This is a rather surprising policy for a Conservative government, as it flies in the face of the notion of competitive energy markets.
However that doesn’t make it a bad thing. Our past poll data shows the majority of the public support it. The real question is can he, or even will he, actually deliver it? Here are my mullings…
Energy market competition has only worked for the proportionately small number of active rate tarts (like me). The main public policy issue, as has long been identified, is that those who don’t switch – whether through financial illiteracy, mental health issues, misplaced loyalty or fear – pay radically more than those who do.
A typical bill post-price hikes will be £1,380 a year, yet there are many paying less than £1,100 for the same usage (see the Cheap Gas & Electricity guide for how). This two-tier system isn’t something the public like. Indeed, look at this poll of 3,500 people we ran in September 2011…
Are there too many gas and electricity choices?
Politicians have finally stumbled upon the public anger about energy bills and are looking at remedies.
One of the main criticisms is that some people, those who switch and understand the system, get much lower bills than those who don’t. So here’s a simple (perhaps over-simple) choice…
Which of these would you like to see?
|Lots of choice – cheap deals for the active, even if it means the rest pay more
|604 votes (18 %)
|A few simple tariffs – even if the cheapest deals rise in price, but the most expensive fall
|1,260 votes (37 %)
|One flat rate per company– A simple averaged charge
|1,564 votes (46 %)
As it clearly shows, the PM is onto something. People don’t want choice, they prefer to know they’re not being diddled compared to someone else, even if it means paying more.
What does David Cameron’s policy actually mean?
It’s very difficult to say. There’s no meat on the bones at all – meaning widespread confusion. We could’ve done without such woolliness – I’ve had people ask me if they’re wrong to act now because of the proposal, which is completely counter-productive.
What he actually said was:
"We will be legislating so energy companies have to give the lowest tariff to their customers.”
And there’ve been acres of newspaper space dedicated to it, however none of it answers the two main confusions:
- Confusion 1: What will energy companies actually need to do?
If they have to provide lower tariffs, what’s the actual mechanism for this? Here are just a few options…
Energy firms must move everyone to their cheapest deal. This is of course how the policy is meant to read, but I’d be surprised if it does mean that as it’d be the biggest change to the gas and electricity market since privatisation – and quite shocking from a Conservative Prime Minister. It effectively closes down market competition to roughly one tariff per company.
It would likely result in energy suppliers having one tariff with a price slightly above mid-way between a company’s current lowest and highest tariff. That means prices would rise for many who are now on competitive tariffs, but prices would fall for the majority – as things average out.
This would mean the only market competition would be between firms’ tariffs, and switching provider has always been more difficult to get people to do instead of just calling their own firm.
Energy firms must move everyone to their cheapest deal – but give an opt-out. Here you do allow various tariffs, but using push-economics, people are automatically-enrolled onto the cheapest. Then again, unless it’s to stick with a green tariff, why would anyone refuse to be on the cheapest? And as the problem is that people don’t act – it’d leave a similar scenario to the one above.
Energy firms must write to everyone telling them there’s a cheaper tariff. While this doesn’t actually fit what the PM has said, and is a much watered-down version, I suspect this is the most likely outcome. In effect companies will write to people telling them they could get a cheaper deal – and rely on them to act.
If that’s all this is, while it’s a welcome step, it’s a relatively damp squib compared to the announcement, as people don’t trust their energy providers.
- Confusion 2: What is the lowest tariff?
What is the lowest tariff?
Who defines it?
Is it calculated in a bespoke way for each customer based on usage patterns?
How do we factor in the difference between fixed and variable tariffs?
How do we factor in the choice of green tariffs?
Do we allow different charges (as we do now) for fixed, direct debit bills and prepayments?
Overall I’m glad to see the Prime Minister intervening. For a long time (see my many past blogs) I’ve ranted that we shouldn’t have a go at energy companies as they’re just doing their job to make profits for shareholders, what we need is political and regulatory action to bring down prices.
However the frustration here is that it’s a nice headline-grabber, but at the moment means very little. So while some other consumer groups have come out saying this is a massive change, I’m holding fire on any applause until I see exactly what the PM is proposing.
Your thoughts welcome via the comment boxes below.
Related past blogs
- Energy price hikes: Why there’s ‘still time to fix’ when it was ‘urgent, fix now’
- When will Eon raise prices?
- Surprise call from Ed Davey, Energy Minister – on collective switching
- Energy price cuts – was it wrong to fix?
- Ditch prepay meters for free and let MSE switch for you: ideas given to Chris Huhne
- What I’m going to tell the PM at today’s energy summit…