Energy's Death Spiral - R.I.P SVT
Is it time for the standard variable tariff model to be abandoned?
In a recent speech reported in Utility Week, Npower admitted for the second time in a matter of weeks of the existence of an implicit cross-subsidy between loyal customers on expensive Standard Variable Tariffs (SVT) and savvy switchers enjoying low or negative-margin deals.
They also provided some support to the view of CAP and other debt advisors that an increasingly heavy burden of this cross-subsidy falls on the vulnerable and the poor. npower are not alone. Witness recent SVT price increases from most of the large suppliers if evidence were needed.
Whilst few will reach for their violins in sympathy for the large incumbents, it is clear from the speech that the energy companies themselves are not enjoying the experience, and feel somewhat trapped by the way the market is set up. Moreover, this pressure will only accelerate as other technology, such as battery storage, comes on stream and reduces the profit pool of the market further.
There is a strong irony in the fact that the unintended consequence of Ofgem, CMA and others obsession with switching as the only yardstick of consumer engagement, is that the more people switch, the bigger cost and profit burden on the remaining loyal and potentially vulnerable customers.
Whilst the political and media outcry at every price rise is somewhat disingenuous (as some of the increases are due to policies of their making), it is clear that people in the UK have had enough. Sadly, too many new entrants have created “me-too” price-led models which rely on gouging customers on higher SVT later down the road. At some point the commercial model of the energy companies will reach breaking point where the cross-subsidy is no longer sustainable.
That point is very near.
It is hard therefore, not to have sympathy with conservative John Penrose’ proposal to create a "differential price cap" between SVT and the cheapest tariff. Surely, this would increase fairness whilst allowing some competition? Indeed some energy companies might support it as it props up the old commercial model. But it is likely to be a clumsy tool in reality with its own unintended consequences; reducing the financial incentive to switch, dampening competition, and hampering product innovation in the long run.
The market needs a better structure to deal with the challenges ahead. The "SVT and discount" model has run its course, and it may be time to do away with SVT altogether. Perhaps a move towards a renewal model more akin to insurance would be better; whilst the savvy might still bag the good deals, it would create a regular event-trigger for customers to review their arrangements, create more product innovation amongst suppliers, force them to compete regularly for their customer base, segment and understand customer need more carefully, price costs accurately into the deals, and be fairer to the vulnerable.
- Big Six price cap legal challenge a possibility Eon boss refuses to rule out legal challenge as he warns cap 'could become permanent'
- Suppliers 'ill advised' to thwart price cap - Ofgem CEO Dermot Nolan expects co-operation from companies over safeguard tariff
- Water firms face pressure on credit quality from 2020 Research from Moody’s says most companies will come under pressure in the wake of the PR19 price review