Outside the marginals

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

Energy Pricing

The Consumers Association (Which) has noted:

Energy companies are failing to properly explain the regulator’s new price-comparison tool to consumers. When we called 13 suppliers six times each – a total of 78 times – we were provided with accurate information in only four (5%) of our calls.

When we called the energy companies in July 2014, we asked them to explain the Tariff Comparison Rate (TCR) – introduced in April by regulator Ofgem, this is a single rate that tells you how much a tariff costs per kilowatt hour, based on medium usage.

It’s important that energy firms can explain TCR accurately, because simply choosing the lowest TCR doesn’t necessarily mean you will pick the cheapest deal for you – as your energy use may differ from a medium user.

We are calling for energy suppliers to adopt simple pricing, presented in the style of a petrol forecourt display, so people can more easily compare tariffs and find the best deal for them.
Which Website 19 November 2014 : Energy suppliers fail to explain ‘simple’ tariff rate

The Tariff Comparison Rate (TCR) is a fudge – any attempt to explain something complex by grossly simplifying usually is.

The question is do we need such a complex pricing structure?

If we want competition based on “petrol forecourt” type displays, pricing has to be as simple as the consumer pricing of petrol.

When I buy petrol, I do not pay a “standing charge” for the use of the pump, I do not get a discount because I also buy charcoal for the barbecue off the same forecourt, nor do I get a discount for allowing the petrol station to automatically remove the cost from my bank account.

We generally accept that one brand of petrol is much like any other and will shop on the basis of price and convenience (where the petrol station is and possibly how salubrious it is).

With gas and electricity there is no difference in brand and there should be no difference in convenience – it is there when we switch on no matter who we buy from.

Different Energy companies should compete on the basis of the margin between what it costs them to buy energy and the price for which they sell it to us. Any other basis is obfuscation.

There should be no “standing cost” for the energy companies to sell energy. The “infrastructure cost” to deliver to me or to my neighbour is identical irrespective of who our suppliers are. Therefore it is pointless to charge us different standing charges – there is no competitive difference. (The infrastructure cost for an energy company to deliver into the distribution system is their problem and is reflected in the “regionality” of their unit pricing.)

So to get a proper “petrol forecourt” type price comparison, you need a single price per unit and then either:

  1. Ban standing charges. Then just make the energy companies absorb the “infrastructure cost” into the unit tariff, or
  2. Get Ofgem to set standing charges (if necessary by region) and remove them from the scope of direct price competition.

In both the above cases you can then compare on a “price per unit basis”. Allowing energy companies to offer different standing charges makes comparisons more difficult and highly dependent on projected energy use.

In respect of standing charges there is an issue for very low users or people in extreme poverty and for the latter 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). Fuel Poverty standing charge relief should be funded by some form of levy on the energy companies agreed with Ofgem.

Currently Ofgem are promising simplification that still permits varying standing charges.

By January 2014:

  • Complex tiered tariffs will be banned. Suppliers will now only be allowed to have one structure for tariffs – a unit rate (or unit rates for time of use tariffs) and standing charge, which can be zero. This will make tariffs more consistent and easier to compare.

Ofgem Website [20 November 2014] : Simpler choices

Unless you know your energy usage in advance a price offer that includes a standing charge is too complex:

  • Offer A: 24.77p per day plus 4.46p pence per unit, or
  • Offer B: 26.34p per day plus 4.25p pence per unit.

Which is cheaper? Well it depends on how many units you will be using. How many units will you be using? Well it depends on how cold it will be and how much I use my heating. How cold will it be? I don’t know!

  • Offer C: 4.7 pence per unit, or
  • Offer D: 4.8 pence per unit.

Which is cheaper? Do I need to know how much I will be using? Do I need to know how cold it will be? No, I can see “petrol forecourt” style that 4.7p is cheaper than 4.8p. Simples!

By January 2014:

  • Cash discounts will be simplified. Suppliers will only be able to offer two cash discounts, one for dual fuel (where a consumer takes gas and electricity from the same supplier) and one for managing your account online. These will be displayed in a simple pounds-per-year format. We are also banning restrictive discounts which made it difficult to compare the costs of tariffs.

Ofgem Website [20 November 2014] : Simpler choices

I would also ban dual fuel discounts as they do not represent a “consumer reward” for making the energy companies significantly more efficient. They are a discount only available to people who live in areas with both mains electricity and mains gas and by offering the discount you obfuscate and make it less likely that a consumer will switch.

The online discount does represent a genuine “consumer reward” for making the energy companies significantly more efficient – online billing is cheaper than paper billing. However an online discount represents an opportunity for obfuscation as different companies can offer different online discounts – thereby making comparisons more difficult. Let Ofgem fix a single online discounts across all companies. If an energy company can make savings greater than the “paper-less billing” discount, let them keep the extra; on the other hand if a company is so inefficient that it cannot achieve those savings, let them absorb and suffer those costs. Choosing whether to pay online is then a separate consumer choice independent of choice of fuel supplier.

I am glad that Ofgem seem committed to removing the 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 and then take too much money from your bank account. The banks “direct debit guarantee” does not apply because the energy companies “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?”)!

Reform pricing so that companies are forced to compete on the basis of a single unit price – like “petrol forecourts”. Let’s force the energy companies to compete on how effectively they buy energy (gas and electricity companies) and convert it (electricity companies).

That way we don’t need misleading Tariff Comparison Rates (“because simply choosing the lowest TCR doesn’t necessarily mean you will pick the cheapest deal for you”). We can just look at the “forecourt price”.

(This post is an update and development on my original post Switching Off from October 2013)

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