Government to legislate on energy prices

What has been said?
In answering a question about rising gas prices, Mr Cameron told MPs “I can announce that we will be legislating so that energy companies have to give the lowest tariff to their customers.” It is understood that the announcement arose from the Prime Minister’s concern that energy suppliers were ignoring requests to offer lower prices voluntarily.
The Prime Minister’s spokesman has also been reported as saying that although customers had been encouraged to move accounts in order to obtain the cheapest tariff, few had done so.
How would it work in practise?
Here are a couple of scenarios we have thought up.
Scenario 1 (Pre-Nationalisation Pricing?)
If all customers are moved onto the supplier’s cheapest deal then, by definition, there will be only one tariff per supplier. (There may be other tariffs on offer but as there will be no customers on them then that is purely academic and can be ignored).
In the ultimate analysis this would send us back to a situation where we were 15 years ago where, for example, British Gas had a single tariff with different prices based on different payment methods. In this scenario the customer has very limited choice but would still be able to compare prices offered by different energy suppliers. Would this be helpful? Maybe not.
Consider the table below which shows the post-increase energy bills for an average usage customer on a Standard tariff paying their bills quarterly by cash or cheque. The difference between the three suppliers is less than £2 on annual bill of £1350. That’s 0.15%. 15 hundredths of 1%.

Standard Prices

Standard Prices

Scenario 2 (Commercial Energy Pricing Model)
An alternative model, currently used in the commercial energy market, would be where companies offer a range of tariffs of fixed duration on any given day (for example 1year, 2 year or 3 year contracts). This would allow customers to stay on their legacy tariffs (long term cheap deals that they purchased at lower prices) until expiry, and would allow suppliers the ability to price against their varying daily costs.
The difficulty with this model is that it doesn’t really work well for businesses. There is essentially zero price transparency in the commercial energy market. Energy suppliers refuse to publish tariffs and prevent their brokers from doing so on the basis that they are confidential. As such we doubt this model benefits business customers. It would only be viable for domestic consumers if total price transparency was forced onto energy suppliers through legislation.
Implications for customers?
At a very simplistic level, if we move to a situation where we have just one tariff per supplier then clearly there will be some winners and some losers. With some 75% of consumers on expensive standard tariffs (or standard tariff clones) then the number of winners will outnumber losers by a ratio of around 3:1. In general consumers on expensive tariffs will benefit while those on discounted tariffs will lose out.
In term of the gains and losses it is a bit of guesswork but here is a rough back of the envelope calculation.
The price differentials between the cheapest and standard tariffs vary by supplier but are in the range of £80 to £190 when compared on the basis of the same payment method. If you take into account a change in payment method from Cash/Cheque (expensive) to monthly direct debit (cheaper) then you can pick up an additional £80 to £100. That’s £160 to £290 in total.
For the purpose of this exercise we have made the following assumptions (which we accept as being very rough and ready). What our simplistic analysis shows is that customers who have made the effort of shopping around will be giving up 3 times more in losses (for the greater good) than customers who have not engaged with the energy market (and for whom the price reductions will in any case be fairly small).
Standardised Energy Pricing Analysis

Standardised Energy Pricing Analysis

Implications for energy suppliers?
Bizarrely this may be good news for energy suppliers. They will be able to offer simpler tariffs, on which they will presumably be able to make guaranteed returns, without having to go to all the trouble to dream up complicated and confusing tariffs in the guise of pretending that they are actually competing for new business as opposed to confusing customers to the point of total inertia.
So do energy price comparisons work?
The answer is undoubtedly yes, for the people that use them. Consider savings statistics for users of Half of our customers who switched supplier in the past 12 months achieved an annual saving £366, with the top 10% getting a saving of £495. The average saving was £170 which includes those that went onto a more expensive fixed tariff to protect themselves from price increases.
If consumers can save so much so quickly the questions that need asking are….
“Why don’t comparisons work for everyone?” and “What is stopping customers engage with energy comparison sites?” Both of these will be covered shortly.

What we think: 
At first glance David Cameron’s comments about legislating for cheapest tariffs looks like a throw back to pre-privatisation days. However there are clearly areas where legislation is required where suppliers have failed to deliver or where regulation has been too slow or ineffective. These include forcing simpler tariffs and bills, putting a proper lid on tariff proliferation and confusion, ensuring total price transparency and ensuring energy suppliers sign up to the same set of extensive rules that energy price comparison sites have to abide by.
Switching energy suppliers through a price comparison site is quick, easy and secure and can save you £200 in a matter of minutes. There is therefore a strong case for looking into why consumers are not engaging with energy price comparison sites and whether this is being impeded by the actions of suppliers and regulators.

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