The prospect of tighter regulation of third party intermediaries in the business energy market has been broadly welcomed by experts, amid criticism that self-regulation has failed. Critics claim the experience of small, medium-sized and microbusinesses has been very hit and miss.
A year-long Competition and Markets Authority investigation in 2015 revealed considerable variation in the prices paid by SMEs (including microbusinesses), a significant minority of which are on more expensive default contracts and pay much more on average than other businesses. It estimated that fairer competition could save UK SME customers £500 million a year.
Perhaps not surprisingly, the past few years has seen growing recognition of the business opportunities presented by the business energy switching market, leading to an influx in the number of third party intermediaries , all promising to slash money off business customers’ energy bills and vying for a slice of this lucrative pie.
Important market players
More recent analysis in Ofgem’s State of the Energy Market Report 2018 finds that brokers offer an important avenue for small and microbusinesses to shop around and switch.
In 2017, 67 per cent of those who switched tariff or supplier used a broker and 42 per cent of those who switched tariff or supplier said the broker was their main influence. However, growth of this market has also witnessed ongoing complaints from business users about some practices employed by some TPIs, prompting calls for tighter regulation of the business switching market.
The experience of microbusiness customers has been patchy, with just 63 per cent of users saying they are satisfied with the service they received from TPIs. Although this is a big improvement on Ofgem’s 2015 findings, where only one in five microbusinesses and SMEs described their overall view of energy brokers as positive, there is a clear need for improvement.
A lack of trust is partly driven by longstanding concerns about the behaviour of some TPIs, flagged up in complaints to various official bodies – including some TPIs making misleading claims, using pressure sales techniques, or even intermediaries claiming to act for official purposes.
Back in 2015, Ofgem outlined its timetable for a mandatory code of practice for the non-domestic TPI sector. It promised by the end of that year that key governance issues would be decided, and that it would transfer the reins to a governance board to implement and monitor the code. More than three years on, regulation governing non-domestic TPIs is still waiting.
In January this year, Ofgem announced that a microbusiness review would be conducted to include a proposal to extend protections aimed at non-domestic market consumers. It has promised to publish an opening statement over the coming months. “As part of our consideration of more fundamental reforms to the retail market, we will carefully consider how the scope and form of our regulation may need to change,” Ofgem said in a statement at the time.
Lord Redesdale, chief executive of the Energy Managers Association and a former energy spokesman for the Liberal Democrats, is not overly optimistic that Ofgem’s words will result in concrete changes.
“My worry is that there are a large number of cases of bad practice and Ofgem has failed in its duty to protect customers,” he says. “The whole issue of TPIs charging fees and giving the impression that they’re not will end up in front of the law courts before too long. Self-regulation is a joke. I’m just surprised that Ofgem hasn’t done anything about it before now – this issue has been around for a long time.”
Steve Kirkwood, policy manager at Energy UK, says his organisation has long raised concerns about the role some TPIs, such as brokers, play in the small and microbusiness energy market.
“Over two-thirds of these customers use brokers to help them secure their energy deal, yet TPIs remain an unregulated player in the energy market.” TPIs are not subject to direct sectoral regulation in the same way as energy suppliers by Ofgem. They are subject to regulation under general consumer protection rules, and in some cases have signed up to voluntary agreements governing their business practices and interactions with consumers.
“We are concerned over the potential negative impact the lack of regulation might have on consumers – one bad experience with an unregulated broker could permanently dissuade them from engaging with their energy use and securing the best deal for their business in the future.
“Ofgem’s review of microbusiness protections, launching soon, will look at what can be done in the short and medium-term to protect the smallest non-domestic customers. Energy UK will be pushing for action to be taken to ensure customers are protected no matter how they engage,” Kirkwood says.
To boost engagement, customers should be confident that there are regulatory protections when using a third party, just as they currently are when going to a supplier directly, he adds. “Depending on the findings of the review, things could start to change next year but we are conscious that these reforms will likely need government action, which has proved a stumbling block before.”
Energy UK’s Future of Energy report, which looks at the future energy system from a consumer perspective, is due to be published at the end of July and will explore how the regulatory regime could be reshaped to ensure appropriate protections are in place for consumers, both domestic and non-domestic, no matter how their methods of engagement with their energy evolve in the future.
Seeking consensus
“The industry is also keen to work with the recently launched Future Energy Retail Market Review, being led by BEIS and Ofgem, to ensure these issues can be collaboratively addressed,” Kirkwood adds.
Wasim Musa, a business energy analyst at Yorkshire Energy, says the unregulated nature of the business switching market leaves customers, and especially microbusinesses, vulnerable to being locked into poor-value contracts.
“Some brokers charge significant uplift on the supplier rates for little more than agreeing on a contract with the supplier. Yorkshire Energy for Business feels that Ofgem should consider bringing brokers/ TPIs under its remit to ensure they are held to the same high standards as everyone else in the industry.”
Musa says the energy needs of the business market, compared with domestic customers, and in particular the variety of meter types, makes pricing more complex. “A blanket price cap could lead to mis-selling and extra pass-through costs for consumers. One alternative could be an uplift/commission cap that brokers are allowed to charge, and suppliers are allowed to pay.”
According to a spokesman from Energylinx for Business: “Right now the TPI market is failing businesses. For the market to evolve there needs to be more transparency.
“Brokers are not transparent with commissions or who they are working with. If they only work with one suppler then it is unlikely that one supplier is always the best deal for the end user.
“Better regulation is needed. In the domestic market Ofgem runs the Confidence Code and regularly ensures that its members meets its requirements. There is no-one regulating the broker market in the same way.
“Ultimately better regulation forcing brokers to be more transparent will be better for businesses looking at their energy options.”
Michael Rossman, a co-founder of business energy switching and comparison service EnergyBillKill, says he does not believe the non-domestic energy switching market is working for customers, but that innovation and market forces could solve many challenges in the sector. “We should have 90 per cent-plus of businesses switching regularly and painlessly. The problem is the way business energy is sold – mainly through cold calling brokers with hidden and often outrageous broker commissions. The switching process is often manual, the cold calling is annoying and the pricing is not transparent.
“What has been lacking in the market is excellent switching technology combined with user experiences, speed, transparency, and low/minimal broker costs. Why should it be more difficult to switch business energy than booking a flight?” says Rossman.
Many businesses have no idea they pay more for their energy because broker commissions are included in their gas and electricity charges and can make up to 20 per cent of the bill. Technology is often used as a lead generator, meaning some websites have what look like price comparison engines but in reality often divert customers to brokers after collecting the data, Rossman warns.
Robust regulation is always a good idea, he adds. “I would strongly urge that there is more public policy outreach to encourage businesses to switch energy and to bring transparency to the broker fees so that businesses always know how much they are paying for the switching service. I would also urge more regulation around cold calling.”
Business group the Federation of Small Businesses says its members continue to have very mixed experiences with energy brokers – ranging from the unscrupulous to the excellent. It is calling for a transparent, regulated TPI industry that builds trust by promoting the good – and excluding the bad – but warns that improvements to the way the TPI industry operates must come in the wider context of other improvements that are urgently required in the energy market.
Mike Cherry, national chairman at the FSB, tells Utility Week: “TPIs can play an important role in helping businesses secure the best energy deals. With energy bills starting to include costs associated with additional products and services, like energy efficiency advice, renewable sourced energy and smart technology, the role of a TPI will become even more important.
“Data is key. The national rollout of smart meters across the UK, and the associated move to a smarter and more dynamic market, provides the greatest opportunity for customers to take control of their energy and reduce their consumption.”
However, in the case of smart meters, simply installing the new technology won’t automatically provide any benefits, Cherry warns. “Cost savings will come with the behaviour change that this technology empowers and the energy savings that come with this.
“Business customers must be empowered to understand and choose what services they pay for, where they can find the best deal, where they can save energy, and where and how their energy is generated. It’s absolutely critical that businesses and consumers – and those operating on their behalf – have timely and secure access to consumption and usage data,” says Cherry.
Q&A with Ofgem
We asked the regulator to update us on its activities policing TPIs.
Is the microbusiness review the first thing to have happened in this area since 2014?We have introduced principles around backbilling microbusiness customers, where suppliers are unable to bill microbusinesses for energy used more than 12 months prior. This took effect in November 2018.
Do you have any statistics about complaints to Ofgem about mis-selling or other issues in the business energy switching market?
We collect complaints data under the category of “sales and marketing – sales directly between supplier and customer” and “sales and marketing – sales including via a third party”, for which suppliers have to make different submissions: for domestic customers, and for microbusinesses (if they supply them).
Our guide document explains exactly what these categories include and lists examples.
The first mentioned category includes any issues related with selling and marketing activities carried out by the supplier or directly outsourced via a supplier’s subcontractor.
The second covers issues related with selling and marketing activities carried out through third party intermediaries.
What recourse do business customers currently have if they feel they haven’t been treated appropriately by a TPI?
Businesses could potentially complain to an energy supplier if it is a TPI that is acting as a representative of one, given there are supply licence conditions that require suppliers as well as their representatives to adhere to certain things. We can and we will hold suppliers accountable and responsible for their representatives’ actions.
There may be other actions businesses can take considering they are protected in relation to TPIs under general consumer protection law.
For example, a TPI is prohibited by the Business Protection from Misleading Marketing Regulations (BPMMRs) from carrying out misleading advertising activities and should therefore always identify itself and be clear about the purpose of its call. In November 2013, Ofgem acquired powers to apply to courts for an injunction to prevent breaches of the BPMMRs.