9th September 2016
Exposing the real price of energy
Chris Roper, Writer
Big energy companies are catching customers out with their latest tactics.
Beneath the glittering facade of cheap fixed deals lies a snarling beast called the Standard Variable Tariff (SVT), which pounces the moment you forget to run (or switch).
Costing up to 53% more than the first year fixed deals, SVTs are a sign of just how broken the energy market still is. It forces customers to switch every year to get a fair deal, despite very few people buying energy this way. Most people don’t have the time or inclination to switch regularly, and who can blame them?
The worst part is that customers are completely unaware of this practice. According to this Ofgem report, 66% of UK households are still on SVTs. Even regular switchers probably don’t realise that if they forget to do it, they could lose their first year savings in as little as one month of SVT pricing.
Let’s be clear: competition is a good thing. But competition requires clear information, and customers are not getting that.
Customers deserve choice and value for money. When visiting comparison sites, for example, customers believe they’re getting a great price for their energy, shown as “per year” savings in the listings – but these prices are not “per year”, they are usually for one year only, followed by big hikes.
We believe it would be more helpful to consumers to show this over three or five years – combining the great first year price with the effect of those high SVTs.
Alternatively, sites should show the “real” price (SVT) alongside the teaser price.
Energy is fundamentally simple. There are usually just two products, yet shopping for it is more confusing, with far more gotchas, than visiting Amazon – which has 330 million products!
To understand why energy is so confusing, we looked at the best prices offered by companies over the last 6 months compared to their current SVT (including exclusive and collective deals).
At these prices, 6 out of the top 10 suppliers stand to raise their customers' bills by over 35% once the deal ends.
To understand why this is such bad practice, consider a customer who uses a comparison site to get the cheapest deal on their energy. Like most people, this customer isn’t a regular switcher, but believes they’re paying too much for their energy so it’s time for change.
6 of the top 10 cheapest deals on the market have SVTs over £280 higher than their fixed deals. With so many in the top 10, there’s a strong chance customers will opt for these. The cheapest year 1 deal is £27 cheaper than 10th on the list. Since they’re the cheapest, and a brand our customer is familiar with, the customer picks this supplier.
The customer enjoys their year of cheap energy then forgets to switch. Their tariff reverts to SVT, so now they’re paying an extra £311 for the year, or an extra £26 per month. After just two months of paying the higher SVT, the customer would have been better off picking the 9th cheapest; in less than 7 months, they would’ve been better off with the 21st cheapest – which would have been on the third page of results on the comparison site!
This proves that the usual rankings are meaningless if customers stay with a supplier for anything longer than 12 months – which history shows most people do.
If we take the cost of SVTs and rank them from cheapest to most expensive, the results are far more revealing.
Octopus Energy, like a few others bucking the trend with a similar fixed and SVT, is the cheapest (with the 3rd cheapest fixed).
The Big Six all show much higher SVTs than the cheap fixed deals they promote (all are outside the top 10) and these gaps widen with time. The longer that customer doesn’t switch – and many, perhaps the majority, don’t for a long time – the wider the chasm.
So the effect of this is clear: customers don’t have enough information to make an informed decision on where to buy their energy.
Of course, SVTs can change, but that requires companies to tell customers that their price is changing. This is usually bigger news than “your fixed term is coming to an end”. So showing SVTs alongside fixed prices isn’t perfect but it’s a good indication and infinitely better than not showing any indication of companies’ “real” prices.
This pricing model isn’t unusual, and in a way it’s an understandable response to the public’s hunger for lower prices. Businesses losing market share drop prices, effectively “buying in” customers, then try and make up their returns the following year.
A similar pattern emerged in the insurance industry. New customers reaped the rewards of shopping around, while existing customers saw their loyalty penalised with increased renewal premiums. Now, thanks to regulatory scrutiny and a customer backlash, the insurance market is in a post dual-pricing era – not perfect, but getting better.
Regular switchers are less immediately affected, but wouldn’t it be better to not have to switch every year? To get a good deal you know will last, that removes that need to bounce endlessly from supplier to supplier?
After all, switching has its own risks – people forget to do it, suppliers object or make mistakes, and the quality of customer service is anything but consistent.
Buying energy should be simple, clear, and designed around the customer. Single year pricing should be clearly marked as such, with savings shown over several years (3 or 5, for example), to truly give the customer enough information to make a decision. Better yet, energy suppliers should do away with the dual model completely and improve their customer service and green credentials to differentiate themselves from the competition.
Here's what a table with more transparent pricing might look like.
Based on medium consumption in the Eastern region, pricing as of September 9th 2016, and suppliers with a published SVT.
Energy is changing. Suppliers must change with it or face a customer exodus to those companies who know better. Companies whose model is exploiting their customers, confusing them, playing hide and seek and bait and switch, will make money in the short term, but it’s our mission to kill these outdated models which we think are dishonest and bad for customers.
The question to suppliers is simple: “Is your real price the SVT? In which case you should show it up front. Or is it the 12 month fixed prices you advertise? In which case why do you charge your loyal customers hundreds of pounds more?”
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