Energy retail: the path ahead

From the government’s retail strategy to the news the price cap is to significantly increase this winter, the last few weeks have been busy for the energy retail sector. As well as concern over what’s largely seen an unavoidable price cap hike and its impact on vulnerable customers, industry figures have also expressed frustration over the heavy focus on switching in the retail strategy. Adam John takes a closer look.

Energy bills have been back at the top of the agenda during the last month as the government unveiled its long-awaited retail strategy and Ofgem announced the biggest yet increase to the price cap.

In the weeks since the announcements many industry commentators have had their say, with top officials from trade body Energy UK slamming what they view as outdated plans to focus heavily on initiatives to get people switching.

The Department for Business, Energy and Industrial Strategy (BEIS) kicked off the flurry of news by releasing its plans for the market over the next decade. Among these include a call for evidence to gather information about the need to reform the green tariff framework, as well as potentially boosting consumer protections.

Central to the strategy, however, are plans around switching which include a radical proposal to trial automatically switching consumers in danger of rolling onto a default tariff. These plans were also part of a consultation released alongside the strategy.

For automatic, or opt-out, switching BEIS intends to begin a controlled test with a small group of suppliers and customers in 2024 at the earliest, with an aim of understanding 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 testing should 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.

Furthermore, there are plans for opt-in switching which would see disengaged customers prompted to switch supplier with targeted communications as in Ofgem’s recent collective switch trial.

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

Such a heavy focus on switching was met with dismay by Energy UK chief executive Emma Pinchbeck who labelled the plans “disappointing” and “stuck in the past”.

She says: “The energy retail sector has changed beyond all recognition in recent years – and will continue to do so at even greater speed for the benefit of customers – and yet this strategy, which should be looking to the future, is stuck in the past.”

Pinchbeck says there will be a different, two-way relationship between suppliers and their customers in the net zero energy system, but the proposals around switching risk “undermining” that future.

She adds: “It’s disappointing and concerning that the government’s approach to the retail sector threatens to cut across their own decarbonisation strategy.”

Similarly, the trade body’s deputy director Daniel Alchin tells Utility Week: “It feels like there is a continued focus on the narrative that engagement in energy means switching supplier every year. That has certainly been true in the past but with every passing year it gets less and less true.”

However, Tom Lyon, director of energy at Energy Helpline, a company heavily involved in the first opt-in switching trials, says opt-in switching is a “proven initiative” that will drive positive outcomes for the most disengaged consumers.

He adds: “We welcome these proposals and believe they could generate levels of long-term competition into the energy market like we’ve never seen before.

“Previous opt-in switching trials helped significant numbers of consumers switch energy suppliers than otherwise would have; a widespread rollout will empower customers to drive down the cost of their bills.”

Whatever the view of observers, the move to automatically switch consumers is a radical one. One industry expert says he believes it represents an almost “ideological shift” in the government’s attitude.

Adam Bell, head of policy at management consultancy Stonehaven and former head of energy strategy at BEIS, says: “Both the government and the retail strategy are effectively saying that they don’t really believe that competition is ever going to be adequate to support people who are disengaged from the market. That’s a big step change in the government’s attitude. It’s almost an ideological shift and it’s really significant for the sector.”

Price cap

Also included in the strategy were proposals to introduce legislation to enable the price cap to be extended beyond 2023 to protect consumers in the interim period before the switching plans are implemented.

Not long after the strategy was published did Ofgem chief executive Jonathan Brearley issue a blog warning of a potentially major increase to the cap in October. The blog explained soaring wholesale costs could result in an increase of £150 per household.

“Regrettably, the increase in wholesale costs will feed through to this price cap and, although final analysis is not complete and other costs will also determine the overall level, it could add around £150 per household to the next level of the price cap,” he said.

The following week came the news that the price caps will see their highest increases yet – £139 for the default cap and a £153 rise in the pre-payment meter cap.

Speaking to Utility Week following the announcement Brearley said he believed the government has “got it about right” with its plans to extend the cap beyond 2023.

“We want to continue the cap, we understand that despite the fact we are increasing the price cap today we do know that it is taking away some of the profits that we saw in the market previously, but we should keep checking that,” he said.

The increases were met with major concerns from some in the sector.

Peter Smith, director of policy and advocacy at fuel poverty charity National Energy Action (NEA), says: “This is a devastating increase. Millions of household budgets are already stretched to the limit and this massive increase could not be coming at a worse time.

“As well as a significant rise in general inflation – driving up spending on other essentials such as food – the new cap level takes effect in October when millions of people will see a reduction in their incomes, as furlough winds down and the uplifts to Universal Credit are likely to be withdrawn.

“This toxic combination of higher prices, reduced incomes and leaky, inefficient housing, will lead to a further surge in utility debt and badly damage physical and mental health this winter.”

Some sympathy was shown to Ofgem, however.

Karin Sode, joint-chief executive of People’s Energy, recognises the timing of the increase will be troubling for many, but adds: “Ofgem really has had little choice but to increase the level of the energy price cap.”

Meanwhile Greg Jackson, founder and chief executive of Octopus Energy, says: “Global gas prices have tripled in the last year, so without the price cap, energy prices would be hundreds of pounds higher than they are now. Never has the cap been more vital and it should be made permanent.”