Perception and fact in the energy retail market

The treatment of customers on standard variable tariffs in the energy market continues to be a source of fiery debate. David Blackman surveys the battleground.

Perception, rather than fact, seems to be what counts these days.

Donald Trump’s first few uproarious days in the White House show the power that cleverly spun alternative realities can gave on international politics. Meanwhile, closer to home, populist perceptions of the UK domestic retail energy market bear little relation to the actualities – at least according to former regulator Stephen Littlechild who recently launched another broadside against the Competition and Market Authority’s (CMA) critique of the UK domestic energy market. 

The CMA’s two-year energy probe concluded last summer that many customers stay on relatively costly standard variable tariffs (SVTs) because they lack sufficient prompts to look elsewhere. This customer lethargy, or loyalty in sticking with the same supplier, is claimed by the CMA to be costing consumers £1.4 billion a year more than they would pay “in a fully competitive market”.

Its suggested remedy is that suppliers should have access to an Ofgem-administered database of other companies’ consumers, who have been on a SVT for more than three years, so that they can send them postal marketing.

But just because many consumers don’t take advantage of cheaper tariffs doesn’t mean that the market isn’t working, Littlechild concludes, adding that existing efforts to promote competition has already squeezed out excessive profits.

Littlechild would have been fuming if he had sat in on the one-off public inquiry into the CMA’s energy review, which was carried out by the BEIS (business, energy and industrial strategy) select committee last week.

Consumer groups, challenger energy companies and the CMA itself lined up to criticise the big six energy suppliers.

Which? head of campaigns Pete Moorey led the charge, branding the suppliers’ response to the CMA inquiry as “dismal”. He said the consumer champion had been “very disappointed” that the industry had done “very little” to better engage the estimated 10 million who have been on SVTs for a long time.

“We would have expected a much bigger response from energy suppliers given that there has been this huge inquiry into the energy market.”

“Energy suppliers should have been doing much more to demonstrate that they have learnt the lessons of the flaws in the market.”

The watchdog has conducted its own survey of how companies plan to engage with long-term SVT customers. As of the day of the inquiry, which had been the suppliers’ deadline to respond, he said only a handful had come forward with their engagement plans on how engage with SVT customers.

First Utility UK managing director Ed Kamm backed up Moorey’s complaint.

In a nod to some of the proposed remedies mooted by the CMA, he said: “We would have liked to see energy suppliers doing some of these things over the last six months.”

“Something is clearly broken. In any other market, you would see a lot more consumers going to market,” said Kamm, arguing that the industry didn’t have to accept that consumers wouldn’t budge from SVTs.

Figures showing that only around 19 per cent of his own company’s customers are on such tariffs were proof that lack of switching isn’t down to consumers being dozy.

First Utility’s customers are generally only on SVTs for a few months because their fixed tariff has expired, Kamm claimed, urging other suppliers to follow its lead in using frequent communication to actively push customer off the priciest market rates.

Another of the CMA’ ideas for nudging customers to take cheaper deals is to rename the SVT, an idea which First Utility has also backed and which suppliers will be required to trial this summer in newly mandated engagement experiments.

CMA project director Simeon Thornton said: “SVT sounds very reasonable. If you called it an emergency or out of contract tariff, people might feel less inclined to remain on it.”

EDF Energy residential sales director Dan Hopcroft welcomed the opportunity to see the impact of changing the SVT name. He added however, that his company is also conducting research with behavioural psychologists into what makes people properly read communications from their supplier.

Hopcorft also raised the thorny issue of loyalty and revealed EDF’s plans to test the impact of loyalty bonuses for long term customers. Npower, now embattled following its announcement of an SVT price hike said it too was keen to introduce loyalty rewards.

In a market focused avidly on inter-supplier switching rates, supplier efforts to encourage loyalty lie in tricky territory.

Clearly the continued competitiveness of suppliers relies on their ability to find ways of retaining customers for the long term, rather than encouraging them to churn from one provider to another. However, with observers like BEIS committee chair Ian Wright warning that suppliers are locking long-standing customers into “abusive relationships” measures to encourage loyalty need to be developed with care.

Keeping track of the efficacy and fairness of supplier actions to promote loyalty would be helped by making data on intra-supplier switching more readily available.

Currently, this crucial piece in the customer engagement puzzle is missing, or very difficult to collate, leaving big question marks over the true levels of customer engagement with energy and making it hard to quantify what impact loyalty offers might have on broader market switching data.

Kamm is strongly of the opinion that there are currently two energy markets. “One market is engaged: they know they can switch and another that doesn’t want to engage because don’t they have the confidence to engage or don’t know how to.”

Greater visibility of intra-supplier tariff changes would help to clarify the truth of this belief, support better understanding of the impact of loyalty measures and add a helpful base of fact to an environment rife with negative perception.