CMA and PPMs: how simple is the simple solution?

The Competition and Markets Authority (CMA) is only weeks away from revealing its retail remedies to help fix the energy market, and the sector is eagerly anticipating the outcome of the investigation.

The CMA probe, which was originally due to report in December before being pushed back into this year, will have prepayment meters (PPMs) as a priority area and will aim to find a solution to this difficult issue, as highlighted in an update by the competition authority last month.

The problem is that PPM customers tend to be the most vulnerable consumers who are least able to afford their energy bills, but because of their meters are faced with the highest tariffs. Citizens Advice states PPM customers face a premium of up to a third over their direct debit-paying counterparts.

With the retail sector being on the cusp of a government-mandated smart meter revolution, the CMA has suggested that prioritising prepay could promote competition and prevent the poorest consumers paying an energy premium.

Smart meters are estimated to generate an average 2.8 per cent energy consumption savings, which would immediately reduce bills, while making it easier to switch would also open up the PPM market to a new wave of better deals. This all seems like a simple solution.

However, as with most things in the sector, the simple solution appears not to be as straightforward as first thought, and has led to divisions within the energy retail world.

First up, Smart Energy GB, the consumer engagement campaign for the national smart meter rollout, stated that while PPM customers “have the potential to feel the most benefits from smart meters”, there could be knock-on consequences to the programme.

“A decision to require suppliers to halt rollout plans for those with traditional meters before all those with PPMs are upgraded could have an impact on the date for the overall completion of the national programme, with consequent impact on consumers’ bills,” it added.

PwC director of power and utilities strategy and regulation, Stuart Cook, echoes this concern, and added that prioritising PPMs in the smart meter rollout “is treating some of the most vulnerable customers as guinea pigs”. They would be faced with the teething problems associated with new technologies and then potentially left without being able to benefit fully from them once these have been dealt with.

“Whilst in principle it makes sense to prioritise prepayment customers for smart meters, there are practical difficulties,” he added.

Citizens Advice has remained reserved in its response to the CMA provisional plans, but stated it would support PPM prioritisation, although it acknowledges there is a risk with this approach.

That risk comes from the SMETS 1 meters that are the only ones currently available for installation – SMETS 2 meters will not be available until August 2016 when the Data and Communication Company goes live.

The first iteration (SMETS 1) of smart meters are hamstrung by their lack of “full smart functionality”, according to Citizens Advice. This means that a software update may not be sufficient to upgrade them to SMETS 2 standards, leaving PPM customers with them installed facing the possibility of losing the smart functionality if they switch supplier, putting them back into the situation they were previously.

Utilita has also expressed concerns the CMA’s initial PPM remedy could leave energy companies with substantial stranded assets and the costs associated with that. This, the PPM-focussed retailer said in its response to the CMA, has meant some suppliers have been reluctant to install smart-PPMs because they believe they will have to be replaced only a few years down the line.

One solution put forward to help resolve the dilemma of when pursuing PPM prioritisation has come from comparison site Money Supermarket and does not involve a specific focus on PPM customers at all.

The site’s energy expert Stephen Murray said that PPM prioritisation will not result in more engagement unless there is more awareness of the ability to switch.

“By prioritising the least engaged customers I don’t think you will increase engagement in the industry at all.

“Creating awareness has to come from Ofgem to alert customers of switching and general campaigns. That is what will increase consumer engagement.”

What the CMA will recommend is already causing debate and division within the energy sector over whether PPM prioritisation will help those most vulnerable customers and those stuck on the worst deals to access better energy tariffs.

The CMA, much like the industry itself and government, will be eager to ensure those most in need do get the tools to help them pay less, but the issue remains as to whether the simple solution of giving them the tech first, will actually be beneficial.

The debate will continue and, as the mass rollout of smart meters draws closer, finding an answer becomes ever more urgent.