The birth of the euro, President George Bush’s “Axis of Evil” speech, England’s agonising defeat to Brazil in the World Cup, 2002 was a notable year for many reasons. Nestled in among these events is something far less significant for most but which represented an important landmark for the energy industry—it was the year that Ofgem lifted price controls for gas and electricity purchased via prepayment meters. Concern was expressed at the time, with one consumer champion labelling it "a wholly unjustifiable leap of faith" and the Government of the day chipping in with doubting remarks about what effects the move could have.
The Competition and Markets Authority (CMA) announced earlier this month that it would be recommending a new “safeguard tariff” to limit the amount customers who prepay for their energy are charged. Secretary of State for Energy Amber Rudd described the findings of the CMA’s report on the matter as a “wake up call” for the industry. If a week is a long time in politics then 14 years is an ice age, but ministerial views remain similar and consumers have suffered since their energy costs were left to the market. This is a damning verdict on energy suppliers and prompts one very important question—what went wrong?
Some allowance should be made for the increased costs energy providers bear in operating prepayment meters (PPM) as opposed to credit meters (where the consumer pays for energy used over the previous month or quarter). These costs are incurred by the need to have additional infrastructure in place, maintain relationships with retailers so that people can top up, and produce a steady supply of key cards for customers to use.
In the course of its two year energy market investigation, the CMA found that the additional cost to serve a prepayment meter (PPM) customer amounts to about £54 a year. However, research from Citizens Advice found that the same consumers paid on average £200-300 more per year for their energy, with some paying up to £400 more than those in the credit market. Compounding the problem, tariff competition for PPM consumers has been very poor. Gains from switching energy supplier are less than half those available to credit customers, and even if consumers did want to make the change to another payment method, many cannot afford the charges energy suppliers levy to replace their meter, or find out that they are in too much debt to switch.
This lack of effective competition and the associated costs look even worse when you consider that households with PPMs are often the poorest in our society—over 30 per cent of them are in fuel poverty as opposed to 18 per cent of the general population. This situation is why Citizens Advice last year campaigned for PPM users to get a better deal in our “Fair Play For Prepay” campaign, which laid the foundations for this more radical response and return to price control policies.
Citizens Advice broadly welcomes CMA’s safeguard tariff, which will help countless thousands of vulnerable households and provide them with a discount that is both meaningful and justified. We called last year for poorer, inactive energy consumers to be given a better deal and in many ways the tariff answers that call. However, as it will not be introduced until 2017, suppliers looking to enhance their credentials as responsible businesses could engender a lot of good will by going early, and there is no regulatory barrier stopping them from doing so; we would certainly encourage it.
Despite this positive step we remain concerned by the lack of support for those particularly unlikely or unable to switch energy supplier. This vulnerable group makes up a significant part of the energy market. Households of this kind will have to make do with yet more information-based “nudges,” and the CMA’s headline measure to get them switching—creating a database so suppliers can market to them by mail—will need to be carefully controlled. If handled correctly this measure has the potential to reach many disengaged consumers. However, risks such as scammers getting hold of and misusing customers’ data will need to be managed. If such a problem were to occur the initiative could backfire, meaning non-switchers continue to shun a market they already distrust.
Daniel Walker-Nolan is Policy Manager at Citizens Advice
You can read an article drawn from a roundtable discussion on how vulnerable customers can access energy held at Prospect’s offices here
You can read an article setting out some recommendations for reforming the energy market here
The Competition and Markets Authority (CMA) announced earlier this month that it would be recommending a new “safeguard tariff” to limit the amount customers who prepay for their energy are charged. Secretary of State for Energy Amber Rudd described the findings of the CMA’s report on the matter as a “wake up call” for the industry. If a week is a long time in politics then 14 years is an ice age, but ministerial views remain similar and consumers have suffered since their energy costs were left to the market. This is a damning verdict on energy suppliers and prompts one very important question—what went wrong?
Some allowance should be made for the increased costs energy providers bear in operating prepayment meters (PPM) as opposed to credit meters (where the consumer pays for energy used over the previous month or quarter). These costs are incurred by the need to have additional infrastructure in place, maintain relationships with retailers so that people can top up, and produce a steady supply of key cards for customers to use.
In the course of its two year energy market investigation, the CMA found that the additional cost to serve a prepayment meter (PPM) customer amounts to about £54 a year. However, research from Citizens Advice found that the same consumers paid on average £200-300 more per year for their energy, with some paying up to £400 more than those in the credit market. Compounding the problem, tariff competition for PPM consumers has been very poor. Gains from switching energy supplier are less than half those available to credit customers, and even if consumers did want to make the change to another payment method, many cannot afford the charges energy suppliers levy to replace their meter, or find out that they are in too much debt to switch.
This lack of effective competition and the associated costs look even worse when you consider that households with PPMs are often the poorest in our society—over 30 per cent of them are in fuel poverty as opposed to 18 per cent of the general population. This situation is why Citizens Advice last year campaigned for PPM users to get a better deal in our “Fair Play For Prepay” campaign, which laid the foundations for this more radical response and return to price control policies.
The Solution
The CMA will set a maximum price for PPM tariffs with reference to deals (including non prepay) already in the market. This cap will change over time to allow for changing costs such as inflation and network charges. The CMA estimates this intervention will deliver an £80 saving per year for consumers on the most expensive PPM tariffs, and it will be removed once the market has become more competitive. Overall it marks a radical departure from business as usual.Citizens Advice broadly welcomes CMA’s safeguard tariff, which will help countless thousands of vulnerable households and provide them with a discount that is both meaningful and justified. We called last year for poorer, inactive energy consumers to be given a better deal and in many ways the tariff answers that call. However, as it will not be introduced until 2017, suppliers looking to enhance their credentials as responsible businesses could engender a lot of good will by going early, and there is no regulatory barrier stopping them from doing so; we would certainly encourage it.
Despite this positive step we remain concerned by the lack of support for those particularly unlikely or unable to switch energy supplier. This vulnerable group makes up a significant part of the energy market. Households of this kind will have to make do with yet more information-based “nudges,” and the CMA’s headline measure to get them switching—creating a database so suppliers can market to them by mail—will need to be carefully controlled. If handled correctly this measure has the potential to reach many disengaged consumers. However, risks such as scammers getting hold of and misusing customers’ data will need to be managed. If such a problem were to occur the initiative could backfire, meaning non-switchers continue to shun a market they already distrust.
Daniel Walker-Nolan is Policy Manager at Citizens Advice
You can read an article drawn from a roundtable discussion on how vulnerable customers can access energy held at Prospect’s offices here
You can read an article setting out some recommendations for reforming the energy market here
