Can the energy market better serve vulnerable consumers?
Can’t switch, won’t switch
Next April the Competition and Markets Authority (CMA) will publish long-awaited findings from its comprehensive energy market review. After over a year of evidence gathering and hearings, it recently put forward preliminary recommendations that included regulating prices paid by disengaged consumers. Large suppliers rallied against the approach on the grounds it was anti-competitive and too all encompassing, threatening as it does to fix prices charged for up to 70 per cent of consumers.
Who Should We Safeguard?
Beyond the claim and counterclaim one thing is clear: policymakers are being forced to re-think what groups are winning and losing in our energy market. Since the introduction of retail competition, policies have assumed that giving people better information, and nudging them to shop around, would be enough to get people to switch. The failure of this approach to improve market participation (particularly among vulnerable groups), and the CMA’s proposed “safeguard tariff” signifies recognition that more radical approaches may be required to tackle detriment caused by the higher prices paid by “sticky” customers. Under the policy, consumers on their energy suppliers’ evergreen or standard variable tariff would be placed on a regulated tariff with headroom. This means that the cost would be mostly regulated but with some room to allow suppliers small differences in costs. The idea is to effectively cap the amount that inactive consumers can be charged for their energy, with restrictions to be lifted once the market has been cured of its current ills. With Citizens Advice analysis from July revealing that the average difference between suppliers’ cheapest fixed deal and their standard tariffs now stands at £176, and that the gap between the two has risen by a staggering 47 per cent in just the last three years, non-engagement evidently hits consumers where it hurts most—their pockets.
However, the CMA’s proposal only scratches the surface of this problem. We believe a more targeted, forensic approach is required to rebalance the market and ensure the most vulnerable non-switchers are able to afford the essential energy they need to live their lives. Whereas the CMA’s approach places all non-switchers into the same basket, making no judgement about whether prices paid have a material detriment on consumers’ health or wellbeing, our approach takes such factors into account. In instances where inactivity pushes consumers into fuel poverty, or where consumers in vulnerable situations are significantly disadvantaged by the market, we have suggested a more ambitious solution. A backstop tariff, mandatory for some consumers and offering them a supplier-best deal could, our research shows, offer an average discount of between £100-150 for the poorest households.
A somewhat less disruptive option would be to take the good work already done by the Warm Home Discount (House of Commons Library statistics highlight that it took 98,000 households out of fuel poverty in 2014/15) and further burnish that scheme by widening data matching to ensure more vulnerable disengaged households receive the price relief it offers. Ensuring the whole Cold Weather Payments group (c 3.2m households) receive the benefit would help more than a million extra low income families, older people and people with disabilities, and could be delivered at a relatively low additional cost—around £5—to the average consumer bill.
Re-shaping Our Energy Market
Given recent and significant reforms to green energy subsidies, the abolition of the Green Deal and imminent renewal of policy to tackle fuel poverty, change is in the air for GB energy policy and questions over what competition does and should deliver for consumers is a key aspect of ongoing debate. Whilst the Government is, in principle, hesitant to promote any measures that directly regulate prices, recent comments suggest that doing so on a temporary basis whilst the market resets may be acceptable.
17 years on from the introduction of competition to the household energy supply market, it is time we finally tackled the problem of energy suppliers overcharging vulnerable, sticky consumers. The CMA has been bold in its courting of a safeguard tariff but the industry and Government also need to come together and decide where the limits of the free market lie, particularly in relation to our most vulnerable households.
Prospect’s Jonathan Derbyshire chaired a roundtable discussion supported by Citizens Advice on how the most vulnerable can access the energy they need on Thursday 22nd October. He was joined by Alan Whitehead MP, Shadow Minister for Energy, Audrey Gallacher from Citizens Advice, Glyn Davies MP, a member of the Energy and Climate Change Select Committee as well as representatives from the third sector and major energy providers.
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