In my view, this clearly affirms that the innovation smaller suppliers are bringing to the energy market is working for customers. A clear emphasis on listening to what customers want is delivering the goods. But despite its rhetoric around encouraging more independent suppliers, Ofgem’s retail market reforms are struggling to keep up with developments in this area.
There needs to be a greater shift towards transparency in our market by focusing on greater simplicity, and there’s no doubt that customer care in the wider industry is a problem that needs addressing. But the regulator’s one-size-fits-all approach will increase the burden on all suppliers, regardless of the way they conduct their business.
My greatest concern is with the proposals to restrict evergreen tariffs, while allowing an unfettered proliferation in the fixed tariff market. The problems with wholesale liquidity and credit mean that smaller suppliers tend to buy short, and need the flexibility to adjust prices to match market conditions. As a result, Ofgem is inadvertently giving a competitive advantage to the larger suppliers which, through vertical integration, can easily access the power required for competitive fixed-term tariffs. Of course, the irony is that it is those same suppliers that create the problem with their confusing plethora of fixed tariff deals.
The reforms pose a threat in other ways. They would jeopardise the future of the Green Energy Supply Certification Scheme which, based on Ofgem’s own guidelines, is the only way consumers can assess green tariffs. The future of tariffs linked to smart metering would be far from certain. Innovation around local electricity tariffs linked to new renewable energy projects would be stifled.
Ofgem also proposes to set the same standing charge for the evergreen tariff for all suppliers. You don’t need to be an economist to understand that fixed costs are higher for smaller players than larger ones. So either Ofgem sets them too low to cover smaller suppliers’ fixed costs, so their variable costs will have to be uncompetitive, or too high so the larger suppliers make a healthy return on the fixed charges and can afford to charge less for their variable costs. This is far from a level playing field.
Perhaps the best example of regulation stifling innovation is the proposal by Ofgem to prescribe the wording in price change letters. Good Energy takes great care with all its communications, explaining things clearly and simply to its customers without dumbing down. We could now find ourselves just topping and tailing an “Ofgemspiel” letter aimed at the mass market rather than our own customers.
These changes will also cost money at a time when suppliers also need to finance the Green Deal, Electricity Market Reform and smart metering. Why should small suppliers have to cough up for changes to deliver improvements in the customer care of the big six, which they have passed by anyway?
Ofgem’s justification for this approach is that competition isn’t working because there are far too many sticking customers who haven’t changed supplier or even tariff. Perhaps the test of whether this reform will actually stifle competition will be to see if the larger suppliers fight it, or accept the proposals knowing it will entrench their existing customers rather than encourage them to switch.
For those customers who have switched to a smaller supplier, competition is working. But they will not be pleased to find that the industry regulator is dragging smaller suppliers back towards being “acceptable” rather than “outstanding”. Retail market reform, yes, but not like this please.
Juliet Davenport, chief executive, Good Energy
This article first appeared in Utility Week’s print edition of 16 March 2012.
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