RMR: The growing complexity of “simple tariffs”

Four tariffs per supplier: it sounded so easy. This year’s long-awaited overhaul of energy retail was supposed to simplify the market, encourage switching and ensure customers were on the best tariff for them. In fact, RMR has had a messy and painful birth, against the backdrop of a competition inquiry which may supersede it altogether, with key elements already being eroded.

It began badly. In October 2012 David Cameron shocked the energy industry, and his own civil servants, with the announcement in prime minister’s questions that the government would be forcing energy suppliers to give customers their lowest tariff. Cue media confusion, dubbed the “energy shambles”, as then energy secretary John Hayes engaged in some furious back pedalling, ‘clarifying’ that the prime minister meant the coming reforms would in fact force suppliers to offer, rather than automatically provide, customers with their best tariffs.

Fast forward two years, and things haven’t much improved for the Retail Market Reform (RMR). Critics from all sides have lined up to condemn the heavy-handed market policy – notably former Ofgem director-general Professor Stephen Littlechild, whose most recent intervention came in a letter to the Competition and Markets Inquiry, itself a tacit acknowledgement that RMR did not fix the market for consumers. Meanwhile, Ofgem itself seems to be quietly backing away from the so-called four tariff limit that the RMR imposed, with a number of derogations already issued and a permanent exemption for white label arrangements now out to consultation.

The headline of four tariffs promised through RMR is in itself misleading. In fact, suppliers are allowed to offer four tariffs per fuel (for electricity; gas; and dual fuel). These can vary depending on the customer’s meter type and payment option. An Ofgem spokesman said: “Once a customer has decided how they want to pay for energy and they know what sort of meter they have at home (standard, time of use, smart), they will only have to choose from four tariffs per fuel from each supplier. So while a supplier may offer more than four tariffs across the whole of its customer base, from the consumer’s perspective, the reforms reduce the number of tariffs on offer simplify the choices available and, in conjunction with the requirement to make bills and alternative tariffs clearer, help promote more active shopping around and switching for better deals.”

The criticisms of RMR are manifold. The most fundamental is that an attempt to increase competition in a market by limiting the range of products is logically flawed. In evidence submitted to the Energy and Climate Change Committee in July 2013, ahead of the reform’s implementation, Professor Littlechild argued: “These proposals are well-meaning, but they fail to look at the implications for energy prices. They would lead to the withdrawal of the best prices and other offers and discounts. They would squeeze out tariffs with no standing charges. They would effectively prevent innovation.”

His warnings proved true, with a host of niche tariffs withdrawn from the market when the reforms came into force this year. British Gas managing director, residential, Ian Peters told Utility Week it was difficult to find room within the allowed range of for products such as a “fix and fall” market tariff product, which had previously been popular with customers. There was an outcry when targeted products such as Eon’s Staywarm tariff for elderly customers were withdrawn from the market, prompting Age UK to say it was “very worried” about the impact of RMR on vulnerable customers. 

In response, Ofgem seems to be quietly watering down the reforms.  A number of derogations have already been granted. Good Energy has won two derogations for local tariffs; EDF won an exemption for customers in Tower Hamlets on a CHP scheme; Ovo Energy is in the process seeking a derogation for a tariff that sees interest on over-payments handed back to customers; and a number of cashback offers are currently being allowed pending consultation.

The situation is rather more complicated with regard to Eon’s Staywarm tariff. Its withdrawal was initially linked by the national media to RMR, but Eon now says it was a commercial decision to withdraw Staywarm that was unrelated to the market reform. A spokesman told Utility Week: “It was our decision and ours alone. We did not ask for a derogation.” Eon did ask for, and was granted, a temporary derogation for a separate tariff for the over-65s, Warm Assist. This two year extension will allow Eon to transition customers off the tariff, it said. It is not seeking a permanent derogation.

British Gas’s Peters told Utility Week the suppliers are in a “learning phase with Ofgem as to how far that will go – it’s four and bits now rather than a hard four.”

In addition, Ofgem last week published a consultation that could see white label arrangements granted a permanent exemption for the four tariff limit of their parent company. That means that each energy supplier could in theory have limitless white label arrangements outside its own range of allowed tariffs, each with their own range of tariffs. This is a significant loophole; one which Ofgem initially seemed set against. The consultation closes in November with the new arrangements to be in place by early next year. In the meantime, white label arrangements are operating under a temporary exemption.

So has Ofgem abandoned its initial hardline approach? Not entirely. Market sources say that while derogations are available, they are extremely laborious to achieve, with applicants having to “jump through hoops” to prove the tariffs will benefit vulnerable customers, and the derogations taking an “inordinately long time” to process.  An Ofgem spokesman said: “Considering a derogation can take anything from six weeks to six months. Derogations with the potential for wide impact could require consultation prior to decision, for example. And applicants have to provide information to support their case, and not all of them do that from the off.”

Moreover, the consultation on the white label exemption contains what one source called “restrictive obligations”. Under the new arrangements, unlike the temporary arrangements now in place, white label suppliers must inform their customers if their parent supplier’s tariffs are cheaper, and vice versa.

Taking it as a whole, the tariffs suppliers are allowed to charge are a complex and evolving picture – the very thing RMR was meant to avoid. Will the policy have to be reviewed? According to British Gas’s Ian Peters, it’s “inevitable.”