TTFN to SVTs?

As Centrica becomes the latest company to announce it is scrapping SVTs, is the industry trying to prove it doesn’t need a price cap? And will its efforts make a difference?

In September, Eon became the first of the big six providers to scrap its standard variable tariff (SVT), when it announced it would no longer roll over all discounted fixed-price customers onto the expensive default rate, which incidentally 66 per cent of the market are still on. Speculation was then rife that they wouldn’t be the last, and Utility Week suggested that side-lining SVTs could be an emerging trend.

And so, it has now come to pass, as it turns out Eon’s realignment on the matter did mark the beginning of a shift in the market – Scottish Power followed suit last month and now British Gas has announced it will abolish SVTs for new customers by 31 March next year.

SVTs have been controversial since the Competition and Markets Authority’s (CMA’s) 2016 investigation into the energy retail market, which reported back after two years of surveying and listening to evidence. It highlighted SVTs as a particular problem, with “disengaged” customers being charged significantly more on the tariffs than they needed to be.

Suppliers did react to those conclusions, but not until a year later. Eon wasn’t the first to move towards abandoning SVTs – it actually followed in the lighter footsteps of Engie, which announced it wouldn’t offer any SVTs when it entered the market earlier this year. And while Eon’s is an arguably bolder move as it’s a much larger company, it isn’t abandoning SVTs altogether. Just like Scottish Power and British Gas, it’s more of a ‘move towards…’ exercise – when it comes into effect next year, Eon’s no-SVT offering (whereby SVTs will be replaced with a one-year fixed-price deal) will be limited to smart meter customers and those planning to have one installed – a tempting carrot to dangle as those smart meter installation targets edge ever closer.

Likewise, Scottish Power’s concession is to stop rolling customers onto SVTs when their fixed price deals come to an end – instead, from next year, customers will be offered new fixed rate products. Meanwhile British Gas says it’s scrapping SVTs for new customers only, but does say it will encourage those already on them to choose more competitive deals. In place of SVTs, British Gas will use a new 12-month fixed rate default tariff for customers who do not select one of a range of other competitive tariffs to move on to.

As to whether this is all in response to Theresa May’s vow to put a price cap on “rip-off” energy bills at this autumn’s Conservative party conference remains a matter of opinion. But after she clarified that the cap would apply to the 17 million customers on SVTs, draft legislation swiftly followed, and so the games began…

But are all three companies now entertaining the possibility that these new SVT measures will head off the proposed price cap legislation at the pass? And if they are, how realistic is that dream?

If the cap fits

Scottish Power’s chief executive Neil Clitheroe wasn’t shy in coming forward on the matter of a price cap when he announced the company’s new approach to SVTs in October. He said: “A price cap will not help engagement in the energy market; only removing standard tariffs can do this. If every customer was on a fixed priced product, millions more customers would be prompted to look for the best deal every year, competition would flourish, and the market would work for all.”

And Eon UK chief executive Michael Lewis echoed those sentiments when speaking at a Utility Week Congress in Birmingham, also in October. There, he suggested that intervention in the retail market will reduce competition, deter engagement and put the brakes on innovation.

He said a stable, long-term regulatory framework with the right incentives in place would enable the retail market to invest and innovate, bringing benefits for consumers, but a blanket cap on the whole market “will have the opposite effect.”

He said: “It [a price cap] will reduce customer engagement in the market; it will reduce choice and it will reduce the opportunity for new innovative competitors to come into the market.”

Now the latest development, this week’s SVT culling announcement from Centrica, British Gas’s parent company, has come alongside a raft of measures the company believes could remedy failures in the domestic energy retail market, and which it claims are preferable to the introduction of the price cap.

These include a range of commitments and calls for action from the government and Ofcom, which it says will increase engagement and market transparency, and promote “fairness”.

Notably however, Centrica’s change agenda for the energy market also includes a call for policy and environmental costs, currently wrapped into domestic energy bills to be split out and handled via general taxation. In the process, Centrica chief executive Iain Conn described the current arrangement for passing on environmental and social policy costs as “regressive”.

He also reiterated a call for social and environmental policy costs to be spread evenly across the energy supply market, saying that current rules which see this burden handled only by larger suppliers has created a “non-level playing field”.

The national smart meter rollout was also tackled in Centrica’s alternative market reform package. The company said the programme needs to become more efficient and flexible, allowing for rapid advances in technology, and suggested that one way of increasing the efficiency of a supplier-led rollout might be to alter the existing “opt-in” nature of the programme.

Conn insisted at the time that these measures weren’t published in response to the publication of draft legislation for a cap, saying that Centrica has long been vocal in expressing its opposition to the concept price regulation as a remedy for market failures.

Yet in the same briefing he did go on to sing from a very similar hymn sheet to Scottish Power and Eon, when he said: “Even the Competitions and Markets Authority [CMA] has concluded that they [price caps] will probably result in “disbenefits” for customers. So, I think there’s got to be the possibility that if they’re presented with some industry-led alternative, that they might actually think that might be worth considering.”

As to whether this is the way the wider industry is thinking, Ryan Thomson, Partner at Baringa Partners, says: “This [scrapping SVTs] could well be a sign that the industry is attempting to self-correct before any price cap can be implemented, as the move recognises the desire to treat customers fairly and proactively engage with them instead of reverting to the ‘default’ tariff.”

The kicker is that in all three cases the alternative to a SVT is a newly-packaged default tariff. And the proverbial spanner in the works of the grand plan to reform to the point where the price cap is deemed unnecessary would seem to be that the government has made it clear it remains sceptical of such moves by energy suppliers. Greg Clark, the business secretary, told MPs this month it was unlikely that proposals to end standard variable rates and replace them with something “remarkably similar” would derail the government’s plans. Watching this space has never been such an interesting prospect.