Death of "tease and squeeze"?

"Tease and squeeze" pricing could finally come to an end under proposals made by John Penrose MP and Caroline Flint MP, saving energy customers millions. 

Today will see MPs debate a suggested 6% relative price cap between a supplier's Standard Variable Tariff and their cheapest advertised rate, which would eliminate the exploitative pricing used by the Big Six (and others) to overcharge loyal customers whilst appearing to offer good value in comparison tables.

We've fought long and hard to highlight the overcharging suffered by customers on expensive SVTs, so we're delighted the government is standing up to the suppliers prioritising profit over fairness, and new customers over existing ones.

Here's what I told John and Caroline:

If the proposal is approved, customers will have a much clearer idea of how much their energy will cost them in the long term. Rather than being schmoozed by cheap introductory prices, they'll be equipped to choose a supplier that gives value that lasts – and those who prefer staying with one supplier can do so without punishment. 

This solves the problem of convincing two thirds of the UK to switch energy providers every year – which we never believed was the right answer – and allows suppliers to compete on what truly makes them different (efficiency or customer service, for example).

We believe that the way the energy market works currently is to incentivise and reward price obfuscation by suppliers, but if these measures are adopted, the most efficient companies will gain customers. And any company that wants to win new customers with sensible prices will have to offer good prices to its loyal customers too.

There are some who'll oppose the relative price cap, so we've put together a list of "myth-busters" to address the concerns some might have.

Price cap "myth-busters"

MYTH: The gap between SVTs and fixed rates is necessary to create enough price difference to encourage switching

Under the proposals, even if the expensive suppliers do not cut their SVTs, there are many other suppliers to choose from.  Many of these suppliers have much cheaper SVTs and would be able offer the same savings to switchers as those available today:

Currently, the biggest saving in the market for a typical customer switching from Npower’s SVT (the highest of the Big 6) to the cheapest supplier is £403. The same gap would exist if this proposal was accepted. Similarly, the biggest cap from Npower SVT to, for example, Octopus is £317 and the same gap would still be £317. Switching to Flow would save £323 now and £311 under these proposals. The attached chart shows the full picture, but it’s clear that this proposal would not materially reduce benefit from switching.

If the expensive suppliers were to cut their SVTs down to a level just 6% above their best acquisition rates, then millions of households will be better off.

MYTH: If we introduce a ‘relative price cap’ energy companies will just raise the price of their fixed tariffs, so consumers will lose out overall

Actually, expensive suppliers would need to cut SVTs, or see their business dwindle:

If suppliers with high SVT rates want to preserve those, they will need to raise their “year 1” prices, meaning they can no longer compete effectively for new customers.  If they want to compete for new customers, they’ll need to give existing customers a better deal.

MYTH: We just need to encourage people to switch

For 20 years, governments, the media and consumer organisations have been exhorting people to switch. In spite of this, only about 10%-15% of households actually switch in any given year according to Energy UK – and a large proportion of these are repeat switchers.  One third of households have never switched. 

MYTH: Cheap “one year” deals benefit some consumers without hurting others

The Big Six energy companies are able to offer artificially low prices for new customers, paid for by a cross-subsidy from their ‘legacy’ SVT customers (as admitted at the BEIS Select Committee on January 31st 2017).

This means that most switchers find that the cheap deal they got disappears unexpectedly, leaving them back on high SVTs and disillusioned with energy companies.

These loss-leading prices make it hard to tell the difference between suppliers that offer good prices because they are efficient from ones that are offering teaser deals that will be dwarfed by the SVT

Our data (attached) shows that there would still be plenty of cheap deals available from more efficient suppliers and that those who want to switch frequently will still get the best prices, and similar prices to the ones they get now.

MYTH: Consumers make informed choices when they switch

Price comparison websites and energy company sites do not show the SVT in any part of the purchase journey when consumers are switching. Instead they use the misleading language of “save £X per year”, when the saving is usually for one year only.

MYTH: Customers know their ‘teaser’ energy deal won’t last beyond the fixed term

Despite the fact that around half of customers switch to large supplier tariffs (Energy UK Switching stats), which are typically Tease & Squeeze deals, a recent Octopus survey showed that only 7% of energy switchers in the market spotted that the price increased sharply after the fixed term.

MYTH: SVTs are well communicated to consumers at end of fixed term and in bills

Most people find it hard enough to decipher their bills. To receive 12 cluttered, undecipherable statements and then engage with the critical 13th that communicates what happens at the end of a fixed term is not fair to customers.

For many, customers, even when they do try to engage, they are faced with complex information and difficult choices.

MYTH: Big Six SVTs reflect the real cost of energy

Octopus Energy believes that an efficient supplier obligated to pay WHD and ECO costs should be able to build a sustainable business by offering 12 month fixed products at a price that is at least £150 cheaper than a typical Big 6 SVT.

MYTH: Big Six SVTs are higher because of social obligations that small companies do not pay, like the Energy Company Obligation and the Warm Homes Discount

The obligations levied on suppliers with more than 250,000 customers account for £40-£50 per dual fuel customer per year. This is dwarfed by the typical £150-200 difference between the Big Six SVTs and economically sustainable prices offered in the market by other players.

MYTH: Other industries, like telecoms, seem to function without this level of intervention and energy shouldn’t be treated any differently

Energy is a universal service – every household has to be supplied with energy except in extreme cases. Unlike broadband and telephony, energy will be “on” when you move in, and stay on regardless of whether or not you have a contract. For this reason, energy supply is probably unique in needing the ‘deemed contract’ construct, which is priced using the Standard Variable Tariff.

Energy bills vary enormously with seasonality, so it’s much harder for consumers to really understand what they’re paying, and therefore easier for companies to put prices up without being noticed.

Energy bills are often paid by a fixed amount monthly direct debit, and when prices go up the direct debit often doesn’t follow for quite some time, again masking price rises from consumers.

We'll be keeping our fingers crossed that MPs vote for this measure and that it makes it to the next stage. If it does, the winners won't be the MPs, but Britain's energy consumers.