Trust and transparency are the long term energy market solutions
A price cap is a short-term fix for the energy market. Over the long haul, only trust and transparency can deliver a truly competitive market that benefits all customers, says Jason Frayne.
Energy prices and energy policy were hot topics during the 2017 election campaign. While each party promised a different approach, an industry shake-up seemed certain from all sides – along with increased intervention in the form of a price cap and market review.
We still do not really know if, how, or when market changes will come about. Any shred of certainty offered by the leading parties’ election manifestos has all but evaporated thanks to the surprise election result and consequent political upheaval.
It is possible that the energy marketplace will now suffer from uncertainty and delay while the government struggles to get itself right-side up. There will be the need to redefine key pledges. There will be the requirement to consider the stance of new political allies if a successful coalition is formed.
Although a price cap was a common theme among the political parties this June, agreeing the details and execution will inevitably take longer under a minority rule.
An opportunity to drive change
Within the energy industry, general opinion seems to be that a price cap on standard variable tariffs (SVTs) is not a long-term solution to the problem of unfair energy pricing. A price cap does nothing to nurture a competitive and customer-centric energy market. Nor does it address the problem of non-engagement across large swathes of domestic energy users. Something more careful and intelligent must be done to protect the consumer – something drawn from wider policy, which also safeguards the long-term health of the marketplace.
This moment of political uncertainty could be a moment for the sector to voice its ideas and drive change. It would be fair to say that government focus has not been on a thriving free market – where customers compare prices and switch regularly to secure good deals – but this possibility still exists. The industry just need to find new ways to make it happen.
It has an opportunity to call for policy that creates the right environment for smaller, more innovative suppliers to thrive alongside the bigger players, for community schemes to co-exist with traditional schemes, and for everyone to benefit from a more agile, competitive marketplace. Above all, we need policy that will get everyone on-board – including the domestic end-user.
Fear and inertia – a symptom of a larger disease
In our increasingly digital and customer-centric world, the domestic energy market lags behind. While online switching levels are increasing, Which? reports that a staggering two-thirds of its members have never switched supplier – despite energy bills being the number one consumer worry.
Across the UK, the number is even lower, with only 15.8 per cent of all energy retail customers switching, according to the Financial Times.
Despite there being 52 different energy suppliers by the end of 2016, most customers remain with the big six. Their failure to switch reveals a lack of trust in the marketplace and its processes. The fear and inertia may have been caused by a bad experience or unexpected bill.
Many simply do not believe one supplier is any better than another. Some think switching will be a hassle and are sceptical about the savings promised, believing that hidden costs will wipe out any perceived price difference.
The deregulated marketplace was intended to benefit customers through competitive pricing and increased service standards. The industry would benefit from the push to innovate and invest. Unfortunately, competition has never gone all the way to achieving this because only a small percentage of domestic customers switch regularly, while others never do.
This allows some suppliers to keep default tariffs hundreds of pounds higher than their cheaper tariffs, confident that their loyal customers won’t move. A price cap cannot remedy this. It may actually leave loyal customers worse off if suppliers cluster their default prices up towards the cap. Engaged customers could also be punished if uncertainty in the marketplace means fewer low-cost deals are made available to them.
The future needs an engaged energy user
As the energy mix changes, we are already asking our business customers to become “prosumers”, taking part in demand-side response, for instance. Long term, the sector will also need to ask domestic users to think about how and why they use energy. If it writes off the possibility of engagement now, it is setting itself up for a fall in the future.
One of the first approaches the industry should take is also one of the simplest: for a variety of reasons, many customers simply do not want to switch online. Companies need to get out there and talk to them.
Doorstep switching done properly can offer those less likely to switch online a different way to engage. Face-to-face energy advice that is trustworthy and transparent can help suppliers reach lower income families and over-65s, who are less likely to switch and most in need of a better deal.
It could be the first step towards fairer energy pricing, a step the sector can be taking while new policy takes shape around it, hopefully with everyone playing their part.
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