7th July 2015
Energy customers are paying £160 per year more than necessary because of lack of competition and transparency in the market, the watchdog has found.
Following a year-long investigation, the Competition and Markets Authority has concluded that, British Gas, E-On, Npower, EDF Energy, Scottish Power and SSE have collectively been charging households £1.2bn a year more than they would have done had the market functioned in a more competitive manner.
The research reveals that the average household currently spends about £1,200 on energy each year. For the poorest 10% of households, energy bills now account for about 10% of total expenditure. However, widespread consumer disengagement is impeding the proper functioning of the market. An extensive survey of 7,000 people in the UK found that over 34% of respondents had never considering switching provider.
As a result, the report has found that dual fuel customers could save an average of £160 a year by switching to a cheaper deal. About 70% of customers are currently on the ‘default’ standard variable tariff (SVT) despite the presence of generally cheaper fixed-rate deals. Lack of awareness of what deals are available, confusing and inaccurate bills and the real and perceived difficulties of changing suppliers all deter switching – and the higher price levels reflect that suppliers can charge higher prices to these disengaged customers, the CMA said.
In a separate report, Citizens Advice recently revealed that customers on pre-paid energy meters, who are often financially vulnerable or trying to pay down debts, are paying an average of £80 more per year than direct debit households and receiving poor customer service.
In its own report, however, the CMA found that regulatory changes intended to simplify prices, such as the ‘four-tariff rule’, have actually reduced the range of discounted deals and stifled competition.
The CMA proposes a new approach based on clear principles that allow the benefits of competition to be gained and promote measures, such as smart meters, while specifically targeting disengaged consumers to prompt them to shop around.
Alongside this, the CMA will also be considering whether safeguards such as a transitional price cap on the most expensive tariffs are needed to protect customers until other measures have led to a more competitive market.
Electricity prices have risen by around 75% and gas prices by around 125% in the last 10 years. The regulator says that much of the recent increases are down to increased environmental and network investment costs. It says that future energy prices will be heavily influenced by decisions being made about investment in generation capacity and renewables.
The CMA report also points to a lack of transparency that is hampering trust in the sector. It has called for wider availability of financial information and better communication of the impact of decisions on bills.
It has also argued for a clear demarcation of responsibilities between the Department of Energy & Climate Change (DECC) and Ofgem – and a clearer, independent role for Ofgem.
Roger Witcomb, chairman of the energy market investigation, says: “There are millions of customers paying too much for their energy bills – but they don’t have to.
“Whilst competition is delivering benefits to increasing numbers of customers, mainly through the growth of smaller suppliers with cheaper fixed-price deals, the majority of us are still on more expensive default tariffs. Many customers do not shop around to see if there’s a better deal out there – let alone switch. The confusing way energy is measured and billed can make comparing deals understandably daunting.
“The result is that some energy suppliers know they don’t have to work hard to keep these customers. It’s notable that there are such high levels of complaints about customer service.”
Witcomb also raises concerns about the high cost of low-carbon electricity.
He says: “While absolutely not disputing the need to move towards cleaner forms of energy, the move will have a significant impact on bills, and we need to ensure that the process of bringing clean electricity into the market is carried out efficiently and transparently and at the lowest possible cost.”