BEIS sets out plans for auto-switching trial and price cap extension

Plans have been unveiled by the government detailing how it intends to test automatic switching arrangements for disengaged customers, as well as for extending the price cap.

The Department for Business, Energy and Industrial Strategy (BEIS) published its energy retail strategy this morning (23 July) alongside a consultation on new switching arrangements first mentioned in last year’s white paper.

With a heavy focus on tackling the so-called loyalty penalty, the paper includes plans to automatically switch disengaged customers to a competitive new contract, known as opt-out switching.

Before such proposals are implemented, BEIS will perform a controlled test with a small group of suppliers and customers before deciding whether to roll the arrangements out on a wider scale.

BEIS plans to undertake qualitative research to understand how consumers might respond to such an intervention. However, it added, only actual testing will enable it to learn how consumers experience the process.

The tests, unlikely to take place before 2024, aim to understand the extent to which consumers who have remained on more expensive default tariffs have done so because they prefer these arrangements, helping to assess the case for wider intervention.

It is proposed that the framework should allow testing to be targeted at all default tariff consumers, including those who initially actively chose to be on a standard variable tariff (SVT), as they are “all at risk of a loyalty penalty”.

A competitive process to determine the tariff to switch customers to is likely to be used for any future full-scale scheme.

Once the decision to switch has been made, suppliers must contact and inform their customers that they will be switched to the cheaper tariff by a certain date unless they opt out. To this end the communication will need to be as “simple and clear as possible”.

Before any testing begins, BEIS intends to develop some qualitative research to consider how best to design this communication. Additionally, the testing should allow customers to easily switch back if they wish to do so.

Opt-in switching

Additionally, there are plans to introduce opt-in switching, where disengaged customers are prompted to switch supplier with targeted communications, as in Ofgem’s recent collective switch trial.

BEIS said in its consultation that it believes the evidence shows that an opt-in switching scheme on a wider scale would help remove barriers to market information and engagement for consumers.

The consultation proposes to introduce opt-in switching incrementally, scaling up carefully as it develops understanding of consumer outcomes and market impacts.

With both schemes likely to be running at a similar or the same time, BEIS recognises that the same groups of customers may be targeted. Therefore the design and testing of the policies should be made with consideration for each other meaning those who did not switch after being targeted in the opt-in trial could be targeted with the opt-out testing.

BEIS added that both opt-in and opt-out switching could help support the uptake of decarbonising products, therefore helping the UK reach net zero.

Price cap

Elsewhere the paper focuses on the next steps of the default tariff cap which was introduced in January 2019. The cap is reviewed each year and currently has a sunset clause which will see it end in 2023.

To protect consumers in the interim period before the switching plans are implemented, the government will introduce legislation to allow for future extensions of the cap beyond 2023.

Green energy tariffs

A key area of concern in recent years has been the lack of transparency of green electricity tariffs – which can lead to the environmental impact of a particular tariff or supplier being overstated.

BEIS said this created a risk that the tariffs may not wholly offer consumers the service claimed, which could lead to a breakdown of trust or assumption that a consumers’ energy is already fully green and they do not need to take further action.

To this end BEIS will launch a call for evidence into designing a framework for transparency of carbon content in energy products. This will seek to gather information from market participants about the need to reform the green tariff framework.

Consumer protections

Additionally, BEIS will issue a call for evidence which will consider whether to regulate third party intermediaries such as price comparison websites and energy brokers. It is further considering whether and how to regulate parties that control load, such as aggregators.

Business secretary Kwasi Kwarteng said: “We want to unleash a wave of competition within the energy market and keep energy bills low so households across the UK can keep more money in their back pockets.

“Although more of us are now shopping around for the cheapest tariffs, the existence of better deals on the market is not sufficient in itself to drive consumer behaviour. That’s why we will make the switching process even easier so we can tackle the ‘loyalty penalty’ and ensure everyone pays a fair price for powering their homes.

“An automatic switching system would ensure households get a fair deal, while new price cap legislation will enable continued protection until we’re confident the market is sufficiently competitive.”

Jonathan Brearley, chief executive of Ofgem, said: “To hit our climate change targets consumers must feel confident to embrace change in how they buy and use their energy. This is why BEIS’ vision is an important milestone in the development of a greener energy market.

“It is vital the future energy market works for all customers. As we work towards this goal, we will continue to ensure the retail price cap offers fair prices for those consumers who are less likely to shop around in the energy market.”