The government’s energy changes mean fewer people will switch

The government's energy changes mean fewer people will switch

The government's energy changes mean fewer people will switch

The energy regulator Ofgem has today announced it is proposing to refer the energy market to the competition authorities. This report, which is only five years too late, contains the ‘shock’ fact there’s tacit co-ordination on energy prices – even though each year energy firms bleat like sheep and raise prices together.

Within the report, a key concern is the lack of competition and consumers switching. Yet it’s important to understand that both the government’s policies, and indeed Labour’s price freeze will have the net effect of massively reducing the numbers shifting to new energy suppliers.

Please don’t automatically read that as a criticism of the policies. Both parties aim to reduce the price (or at least reduce the increases in price) for the majority of people; but the majority of people don’t switch. Therefore what’s good for most isn’t necessarily good for switching.

So I thought I’d bash out a look at the key recent changes and the impact they’ll have on switching…

  • A reduced number of tariffs lessens pricing differentials.

    For the sake of transparency and simplicity the government has legislated that energy firms can only have four main tariffs.

    The net effect of this is a homogenisation of prices – in other words, we narrow the gap between the typical tariff and the cheapest. This is good news for many – it means 90-year-old grannies with no web access no longer pay quite so much as someone like me to boil a kettle.

    Yet as was very predictable (in fact I did predict it here) narrowing the differential decreases the gain from switching. So now I talk of someone on a typical tariff saving up to £150 a year, where in the past it was £250 or £300.

    This very obviously diminishes the switching appeal, although I’d still say it’s worth it as it only takes a few minutes – see Cheap Energy Club – but we can already see people are less keen to move when gains are smaller.

  • Price freezes mean people don’t switch.

    Nothing makes people switch more than price hikes. It acts as a call to arms. The last switching season (at the end of 2013) saw mammoth switching volumes. But as soon as that’s over, it’s very difficult to get mass switching action until another moment of price flux.

    Labour’s call to freeze prices, the governments reduction in green tariffs, the fact most energy firms have said they don’t intend to increase prices this year and SSE’s promise to freeze prices until 2016, quite simply means switching volumes will be tiny.

    In fact, this is counter logical, the best time to switch is now, when there is price stability as you get a more accurate comparison. Yet in general the public doesn’t react that way.

  • So in fact, freezing prices can mean some pay more as they accept the status quo rather than actively choose the market’s leading tariff. Though of course, if freezing prevents hikes for the majority – who wouldn’t switch anyway – there is a net gain.

  • Ofgem’s recently banned cashback switching incentives.

    While this is more minor, I do find it frustrating. It did this as a worry that people would be encouraged to move to an expensive tariff to get the upfront cashback. Somehow it missed the fact that some may’ve also been encouraged to move to a cheap tariff because they get cashback upfront.

    The right solution would’ve been to improve the way cashback and pricing was communicated, not to remove a switching incentive.

    Bizarrely though, it has decided that voucher incentives are fine. So a firm can’t give you £100 cashback, but it can offer near cash £100 Love2Shop vouchers, which can be spent in a huge range of high street stores. I’m not quite sure how different that is.

    At one point it looked like comparison site cashback switching would be banned too, but we successfully managed to argue to keep this as it applies across a large range of tariffs rather than a specific tariff (hence why Cheap Energy Club can still give £30 cashback and other comparison sites can too give cashback incentives via our special links).

Again, let me stress that (barring the cashback rule), I’m not saying I necessarily disagree with the policies, just that we need to acknowledge that if you set switching as a key performance indicator, you have to incorporate the impact of policy changes.

There are a couple of potential switching boosters. New smaller suppliers will garner support from more sophisticated consumers who want to make a deliberate stance to avoid the big six, although it’s important to note that on price these suppliers aren’t (and possibly with the current market structure aren’t able to be) necessarily cheaper. Perhaps the split of energy company vertical integration will help that.

There’s also the push towards collective switching where a trusted intermediary or local agency negotiates a deal with an energy supplier then gets people to sign up. It’s a great principle, the problem is that so far not one collective switch has been market leading on price – comparison site best-buys still beat them and I don’t see that changing. 

For example, we now have over 1m members of the Cheap Energy Club, yet big suppliers are simply unwilling to offer market leading deals without terrible conditions such as "you can’t then contact consumers for three years after the cheap fix ends to say switch again". We will keep looking for a good one though.

Yet these switching boosts are minor compared to the other factors so overall, I suspect we will see hugely reduced switching volumes in 2014 compared to 2013.