Switching: competition by numbers

A focus on customer switching levels in energy retail is not helping create a clear picture of the market, says Jane Gray.

For those deeply involved in the throes of energy retail, the subject of consumer switching is one which can inspire something akin to religious fervour.

For many, the volume of domestic customer switching is the key indicator of a healthy and competitive market with strong engagement.

But not for all. In an environment of ongoing and intense market scrutiny, and in the wake of a wave of energy switching reports, a few frustrated voices are calling for a change of focus.

Switching, they say, is not the be all and end all – nor necessarily a very helpful indicator of customer engagement or fair play when taken in isolation.

More needs to be done, argue critics of switch-counters, to understand the broad church of reasons behind why customers chose to switch – or not to switch. There also needs to be acknowledgement that a decline in switching may not be an inherently bad thing if it can be attributed to increased customer loyalty and better service from energy suppliers.

“The regulator must acknowledge that a reduction in switching, if done for the right reasons, is actually a positive sign of a successful, sustainable and competitive market, not a sign of failure,” Ryan Thomson, partner, Baringa 

So, what is switching data telling us, or failing to tell us about the energy retail market today?

The latest official data on switching was released by Ofgem on 2 March.

According to the regulator, 2016 saw switching levels increase to their highest level in six years. There were 7.7m switching events recorded across the 12 months and 47 per cent of these were to small or medium sized suppliers – which tend to offer the cheapest deals.

Lawrence Slade. chief executive of trade body Energy UK, slapped a seal of approval on these figures, saying they are proof that “competition is working”. Energy UK itself had already issued its annual review of switching levels in January, and Ofgem’s results broadly endorsed its conclusions that: suppliers must be doing more to engage customers, switching must be getting easier and that there must be enough diversity across the supplier spectrum to keep people interested in what a new contract might offer them that is different to their previous energy experience,

Not all onlookers were so convinced however, including Ofgem’s own chief executive Dermot Nolan.

He welcomed the fact that customers appear to be shopping around more and observed that this should remind suppliers that, “If they fail to keep prices under control or do not provide a good service, they risk being punished as customers vote with their feet.”

However, he tempered his enthusiasm with an observation that, despite increased switching, the market “is not as competitive as we would like”, and is still particularly problematic for vulnerable customers – hence the introduction of a price cap for customer with prepay meters.

Clearly this measure will do nothing to encourage competition and switching in the prepay market, but it has been deemed necessary to protect low income households and other kinds of vulnerable customers.

In the eyes of Citizens Advice – the statutory consumer champion on energy issues – Ofgem could go a lot further to make such interventions in the market and worry less about driving up switching.

In part, this logic is based on the fact that many of those customers who have never switched are also the UK’s most vulnerable energy users – including the elderly and those with low incomes.

Rather than trying to prod these customers into engaging with a marketplace they may find threatening and stressful, government, the regulator and suppliers should simply join forces to protect them, says Citizens Advice.

Other commentators argue for a reduced focus on switching for different reasons. Ryan Thomson, a partner at consultancy Baringa says it is “concerning” that switching has become the “’go-to’ measure to judge the competitiveness of the market”.

He argues that “a secure, successful energy market requires more than lots of customers switching between lots of suppliers. In fact, if the only way customers feel they can get a good deal is to change supplier every year then perhaps we should conclude the market is not working.”

In short, Thomson says Ofgem and government need to expand their criteria for energy market competitiveness, placing more emphasis on the actions suppliers are taking to reduce customer bills.

The authorities who are so quick to condemn suppliers for trapping customers in “abusive” relationships (a comment from Iain Wright MP) must acknowledge that “a reduction in switching, if done for the right reasons, is actually a positive sign of a successful, sustainable and competitive market, not a sign of failure,” insists Baringa.

Discussion at a recent smart metering conference in London suggests that a recalibrated outlook on switching may be needed sooner rather than later. Speakers and delegates pointed out that, for reasons good and bad, the national smart meter rollout may supress switching levels.

On the side of the optimists, Oliver Sinclair, head of consumer advocacy for smart metering at the department for business, energy and industrial strategy, said that all suppliers who have deployed smart meters have seen net promoter scores from those customers increase – a sure sign of improved satisfaction and loyalty which will logically lead to less switching.

Meanwhile, a more pessimistic delegate raised concerns over the stunting effect that early iteration smart meters might have on switching rates to smaller suppliers. He warned that customers with SMETS 1 meters may be discouraged from switching to the market’s cheapest deals – often offered by smaller suppliers who cannot yet support smart meters – when they discover that their new technology has interoperability limitations.

It’s always tough to draw robust conclusions about the many facets of human behaviour based on impersonal statistical evidence – so it’s no surprise that there is an array of opinion and interpretation around what switching can tell us about energy retail.

This doesn’t mean that switching levels are an irrelevance. But the influence they have assumed in discussions around market competitiveness is often unhelpful and counterintuitive.  

Fundamentally, a growing school of thought argues that it reflects an overwhelming lack of vision at a policy level around what a good energy supply market really ought to look like.