Outside the marginals

a commentary on the politics that followed the UK 2010 & 2015 elections

Switching – off.

In response to today’s announcement by SSE of an 8.2% “average increase” to energy prices:

Business and Energy Minister Michael Fallon said he was “disappointed” by SSE’s decision to increase energy prices.

He told BBC Radio 5 live: “I would encourage all customers to look again at their tariffs and see whether they can switch to a cheaper tariff.”

He added the long-term answer to high energy bills was “more competition and encouraging consumers to shop around”.
BBC News Website 10 October 2013 SSE to raise gas and electricity prices by 8.2%

He seems to think that this is a “simple” operation, but what he does not realise is that competition is not working and “shopping around” is next to impossible.

It should be simple – one electron is identical to any other and they all come down the same wire – and the energy companies are not actually responsible for the final distribution – that is done by a utility that supplies identical electrons “from” a few energy companies to multiple customers on numerous different tariffs. Even the meter reading (when it happens) is done by a company different from the energy companies.

Domestic energy is in some respects the ultimate commodity. The only way an energy company can differentiate itself is to make a mess of billing. Price should therefore be the key decision-making factor.

But can you obtain actual prices?

To make a good decision you need to know the Standing Charges and cost(s) per unit. Really Ofgem or someone similar should tabulate these, as the energy companies either don’t seem to want to tell you or want to make the information near impossible to find on their websites.

Without this key information any switch is really a stab in the dark. The energy companies and switching companies (which are essentially parasitic, feeding off the energy companies’ obfuscation) suggest that you either select “low/high/medium energy user” or you enter “your energy consumption” from past bills.  This is difficult if your past consumption is not an indicator of future consumption. If you are trying to keep your consumption down – mine varies dramatically with the weather, my health and whether I have visitors – past consumption is pretty much irrelevant. Then the claims made by companies that by switching (to them – of course) you will save “£xxxx on a “typical bill” are not just meaningless but potentially actively misleading.

The problem of course is that pricing is not linear. So “price per unit” varies depending on how much you use – the graph has a series of kinks – but few know where these kinks occur. They are caused either by standing charges or by “dual rates” (higher for the first x units, then slightly lower for subsequent units).  In the old days of the regional utilities this was justified by them saying that they had to provide the distribution infrastructure – irrespective of how much a consumer used – and then they supplied the energy.

Two improvements seem apparent:

  1. Ban standing charges and dual rates (as described above – based on usage). Then just make the energy companies absorb the “infrastructure cost”. However, I suspect that if the energy companies had to have a “single rate” for each tariff (i.e. no kinks based on usage), they will pump the rate such that high energy users will pay over the odds – which some may see as no bad thing as long as it is the low energy users benefiting and not the energy companies’ directors and shareholders.
  2. Get Ofgem to set standing charges (if necessary by region) and remove them from the scope of competition – and then ban dual rate tariffs (as above based on usage). For very low users or people in extreme poverty it may well be necessary to provide some form of relief for those standing charges (otherwise their “effective average cost” will vastly exceed the “effective average cost” paid by more typical users).

The energy companies however can still obfuscate!

  • Dual fuel discounts – why have these? Do they really represent cost-savings made by energy companies being passed on to consumers?
  • Discounts for allowing the energy companies to dip into your bank account “at will” (the so-called “direct debit discount”). Energy companies always seem to over-estimate bills – my mother who was on “direct debit” built up large credit balances – but these have never been repaid. The “direct debit guarantee” does not apply because they “correctly” remove from the account the amount billed. But if the amount billed is wrong – just try getting it corrected – submit a reading over the internet and (in my experience) the next you hear from the company is not a revised bill but a warning that they are about to take legal action for recovery of the original amount (and “why don’t you move to monthly direct debit to avoid this trouble?”)!
  • Discounts for “paper-less billing”. This discount may actually represent a genuine cost-saving being passed on to consumers.

Part of me would say ban these discounts – and make sure that the savings come back in lower prices. Let’s force the energy companies to compete on how effectively they buy energy (gas and electricity companies) and convert it (electricity companies). Alternatively let Ofgem fix the discounts (such as the three listed above) and remove them from the scope of competition. If an energy company can make savings greater than the “paper-less billing” discount, let them keep them; on the other hand if a company is so inefficient that it cannot achieve those savings, let them absorb and suffer those costs.

If changes were to be adopted as suggested above, competition would then be purely based on the “price per unit” and supplier x would then be seen to be “0.1p a unit cheaper” (or whatever) than supplier y. This would make comparison so much easier – we could “shop around” It would also probably create competitive pressure on the energy companies to reduce those rates.

Advertisements

Single Post Navigation

One thought on “Switching – off.

  1. Pingback: Energy Pricing | Outside the marginals

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: