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The law of unintended consequences has hit the energy market once again. As the bar to entry for new retailers has been lowered to encourage competition, customers now have the choice of about 70 suppliers, and switching is at a record high.
The unintended consequence? There are serious concerns around the long-term sustainability of some new entrants, and the service that customers are receiving from newer and less established companies. To which end, Ofgem has this week threatened to extend its ban on Iresa Energy taking on new customers, and announced an investigation into alleged breaches of competition law by Economy Energy and E (Gas and Electricity). It has also launched a probe into how Utility Warehouse – one of the larger and more established new entrants – manages customers who are in debt.
So what’s gone wrong? There are several factors at play – but much of the price-driven switching to the smallest suppliers is built on a dangerous and unfair anomaly that must now be corrected.
As it stands, the smallest suppliers – those with fewer than 250,000 customers – are not subject to the Energy Company Obligation (Eco) or the Warm Home Discount (WHD). Because they are not paying these taxes, and so not having to pass them on to their customers, these companies are able to charge lower prices and tempt switchers. But how many of these switching customers realise they are benefiting from what is effectively a tax loophole, rather than from greater efficiency or a willingness to take lower profits on the part of their new energy supplier?
Moreover – that law of unintended consequences again – the exemption actually puts vulnerable customers at risk of losing benefits to which they are entitled, and of subsidising their wealthier neighbours.
It’s a mess – and the market is now unanimous in its view that smaller suppliers should be subject to the same obligations as their larger peers. Energy is a vital public service and the suppliers of it must be financially sound, operationally resilient and capable of looking after their customers. Supplier obligations should be the price to pay to play in the market – it is a higher bar to entry that would go a long way to ensuring customers are properly served and protected.
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