Energy Shake-Up Could Cut Bills for Low-Income Homes

amberrudd

Low-income households could see their energy bills reduced following an investigation by the Competition and Markets Authority (CMA) into whether energy companies were abusing their position.

Speaking following the report’s publication, Amber Rudd, the Secretary of State for Energy and Climate Change, said:

“Energy customers should get a fair deal from a market that works for them. That’s why we called for the biggest ever investigation into the energy market and won’t hesitate to take forward its recommendations”.

Recommendations made from the investigation include:

– An Ofgem-controlled database which will allow rival suppliers to contact domestic and microbusiness customers who have been stuck on their supplier’s default tariff for 3 years or more with better deals. This will be subject to strict safeguards so that customers can opt out at any time and to ensure that communication meets strictly controlled criteria.

– A transitional price control for the 4 million households who are on prepayment meters, who face limited competition from suppliers and whose ability to switch and find better deals is far more limited than for credit and direct debit customers.

– Strengthening the ability and incentives for third party intermediaries such as price comparison websites (PCWs) to help customers find better deals by giving them access to relevant information like customer meter numbers and allowing them to negotiate exclusive deals with suppliers. This will be accompanied by a requirement for PCWs to be transparent about how they cover the market and the information on display.

– Removing the 4 tariff rule which limits competition and innovation. This will enable suppliers and PCWs to offer tariffs designed for certain customer groups.

– Removing restrictions on the ability of new suppliers to compete for prepayment customers and reduce barriers such as debt issues that make it difficult for such customers to switch.

– A requirement that the approximately 700,000 households on non-Economy 7 restricted meters are allowed to switch to cheaper single-rate tariffs without requiring a meter replacement.

– Helping microbusinesses through improved price transparency, tackling ‘rollover’ contracts with greater notice periods and ending termination fees which prevent switching as well as moves to prompt and engage.

– Ensuring that certain measures in Ofgem’s programme to help provide domestic customers with clearer information are prioritised and ensuring that all measures concerning domestic and microbusiness customer information are ‘road-tested’ prior to introduction.

– Ensuring that the contracts for difference process where the government supports investment in low carbon generation is carried out transparently so that the impact on customer bills is assessed beforehand. There should be a clear rationale for the allocation of funding to different technologies and for the exceptional circumstances when competitive auctions are not used.

– Ensuring that both electricity and gas settlement processes are reformed to lower costs to consumers by enabling more accurate measurement of consumption and more efficient supply – and to enable the full benefit of smart meters to be realised.
Introducing a locational pricing system for transmission losses incurred when transporting electricity to reduce the overall cost to customers.

– Improving the policy and regulatory framework to provide a clear division of responsibilities and transparency in relation to policy creation and implementation and changes to industry codes. This includes strengthening Ofgem’s independence, reporting powers and ability to drive forward changes.

Roger Witcomb, Chairman of the Energy Market Investigation, said in a statement:

“We have found that the 6 largest suppliers have learned to take many of their existing domestic customers – some 70% of whom are on ‘default’ standard variable tariffs – for granted, not just over prices, but with their service and quality. Yet in those parts of the retail markets where competition is working, customers are benefiting to the tune of hundreds of pounds a year by switching. We’re proposing a wide range of bold, innovative measures to enable competition to grow further across the market so that millions more households will benefit.

Clearing the way for competing suppliers, and price comparison websites, to alert customers to the savings they can make will shake up the industry. Given the scale of the problems and the potential savings on offer, we think bold measures like giving rival suppliers the chance to contact long-standing SVT customers are justified.

However, for customers on prepayment meters, a group which contains some of the most vulnerable customers, their options are far more limited. It’s more difficult for their suppliers to compete, more difficult for such customers to switch, and they have far fewer tariff choices. Energy is both an essential and expensive item for many of these 4 million households, whose cheapest tariffs are around £300 more expensive than for other customers. That’s why we’re proposing a transitional price control for them which will remain in place until 2020, by which time they too will be able to benefit from our measures, and from other future developments like the roll-out of smart meters.

Given the number of customers paying too much, many of whom have never considered switching, we thought long and hard about whether to extend a price control for others on the SVT. We believe that over the longer term more substantial benefit for households and microbusinesses will come from making competition work better. In particular, since there are already plenty of competitive deals out there, what we need to do is to persuade customers to take them up. Regulating prices over such a wide part of the market would give customers even less incentive to seek better deals, and all suppliers would be under less pressure to drive prices down and improve customer service. And by creating that situation, it would prove difficult to remove in future.

As well as those directly affecting customers, we are putting in place measures to address problems with the wholesale electricity market and the broader regulatory framework. The fact that energy and climate policies are expected to make up 37% of the household cost of electricity by 2020 shows the impact that policy and regulatory decisions can have on bills. The evident importance of these and other decisions affecting the future of the energy sector demands clarity and transparency – and a policy making and regulatory structure which is fit for this purpose.

We think that this coherent and comprehensive package of reforms to address the problems we’ve found – including those which whilst less evident to customers can still have a huge impact on bills – will help transform the energy sector so that all customers benefit”.