Friday, 24 June 2016

Energy Market criticisms for everyone - even customers

The competition and markets authority review of the energy and gas markets, two years in consideration, is out today. They don't think the Big Six have been systematically gouging their customers but they have some serious criticisms none the less. Domestic customers as a whole have been paying £1.4bn a year more than necessary and customers on prepayment meters have been hit worst of all - they end up paying 12% more than they should. The report has criticisms for OFGEM, DECC, the energy companies and also customers.


More customers should try switching suppliers
In one survey of 7000 customers, 34% said they had never even considered switching supplier and 56% said they had not switched, did not know if it was possible, or was not sure if they had switched in the past.

You would have thought that low income households would be more aware of energy price competition and more likely to switch - in fact the opposite is true. Low income households are less likely to switch.

When I switched recently it was very easy. All you have to do is:
  • Contact your chosen new supplier and ask to switch.
  • Your current supplier will ask you to confirm - say yes you want to switch
  • Eventually you are given a date for the actual switch and you have to send in the meter reading for that day.
  • If you want to pay by direct debit you have to set that up with your new supplier.
The report actually recommends that details of customers who have not switched for three years should be made available to other supply companies, to encourage competition. There will be an opt-out for customers though.

OFGEM has been over-restrictive in setting the number of tariffs that companies can offer
The RMR reforms included restricting the number of tariffs that companies can offer in order to simplify the market. Unfortunately they are now so few tariff 'slots' that it is difficult for suppliers to offer good deals for all their customers. As a result customers on prepayment meters (16% of all customers) are nearly all on the most expensive tariff - the standard variable tariff. These customers pay £260 to £320 more than customers on cheap direct debit tariffs. Also it is not possible to give special tariffs (with a low standing charge) to low user customers.

Suppliers should publish tariffs for businesses, not expect them to negotiate individually
As of 2013, 45% of micro businesses were on default tariffs and paying more than necessary. However, it seems suppliers expect businesses to negotiate individually to get a better tariff which makes it a lot more difficult to compare prices.

Business customers are paying £180 million/year more than they should.

DECC should not allocate CfD subsidies to renewables without competition
Under the new renewable subsidy scheme, contract for difference, renewables companies have to compete for subsidies and this is fine. However, DECC can also allocate CfDs without competition - as it has done for the new nuclear power stations at Hinkley Point. When this happens, the costs are almost certainly higher than they would have been with competition.

Regulatory codes are managed by industry, for industry rather than for customers.
There are now 10,000 pages in 11 separate industry codes that regulate a range of technical and policy areas. These are managed by the industry participants themselves and they have conflicting interests so move slowly. OFGEM has identified a number of changes that would improve competition or otherwise benefit customers but does not have the power to force them to be accepted.

Settlement systems for electricity should incentivise demand shifting
Wholesale prices for electricity vary through the day and are higher at peak times. However, suppliers are always charged as if their domestic customers have a fixed demand profile. This means there is no financial incentive for suppliers to encourage their customers to shift demand, even though this would reduce overall costs.

Generators in remote locations should pay extra for higher transmission losses.
Charging generators for transmission losses according to their location could save £150 million/year by 2025. At the moment, generators are paid according for what they generate regardless of how far it has to travel to meet customers demand. However, greater distances mean greater transmission losses and so the delivered energy is less.

This is just a headline summary of the report overview. You can find more information here.

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