Consumer Engagement with Energy Markets
Memorandum submitted by Make it Cheaper (CE 12)
(Business) Consumer Engagement with Energy Markets
Make It Cheaper has been campaigning for a fairer deal for the UK’s 1.8 million non-domestic energy consumers (micro/small businesses & charities) since the company was founded in 2007. This was the year we organised a round-table in Portcullis House for Mark Prisk MP (then Shadow Enterprise Minister) to grill the Big 6 & Ofgem - primarily - about the unfairness of the rules governing rollover contracts. Ofgem subsequently launched its two year Energy Supply Probe that - arguably - did more harm than good to business customer engagement by setting out new rules surrounding contract notice periods and allowing each energy supplier to ‘interpret’ them in different and unnecessarily complicated ways (see Termination Window Calculator below). Now Ofgem’s current Retail Market Reform seems to have sidestepped the thorny rollover issue - which is still by far the greatest source of grievance among SMEs buying energy - by saying that it will be looked at again only once this consultation is complete (p.16).
Whilst we do not support a ban on rollover contracts (as this would put upward pressure on business energy tariffs), we would like to take this opportunity to recommend simple-to-implement measures that would at least help non-domestic energy consumers avoid the ‘Rollover Trap’ and other key barriers to switching between suppliers.
Q. What are the barriers to consumers switching energy provider? Will Ofgem’s proposed Retail Market Reform measures encourage behaviour change amongst consumers or are further actions necessary?
2. The Problem
SMEs typically pay fixed price tariffs for one, two or three years and it is not unusual to see prices going up by 50% as they come up for renewal at the end of their contract (see our tariff table overleaf). However renewal windows - the only period that a business can apply to switch or look to negotiate a better deal - open and close at different times mid-contract, depending on the supplier. Here, for example, are the renewal window date ranges among different suppliers (including the Big 6) for a notional contract coming to an end on 1st July 2012.
If a business fails to act before the end of the renewal window, its contract will automatically 'rollover' on to renewal rates for at least another 12 months. In other words… cheaper prices are only available to those who know about their renewal window, are proactive about shopping around well ahead of their contract end date and then manage to avoid being rolled - by sending a correct termination letter to their supplier (which requires information such as the Meter Point Administration Number).
Av Current Price Av Rollover Price Av Switching Price
Business Electricity 9.3p/kWh 14.25p /kWh 10.15p/kWh
Business Gas 2.5p/kWh 4.5p /kWh 2.9p/kWh
Source: Make It Cheaper, January 2012
In 2010 and again in 2011, Make It Cheaper commissioned independent research that showed half of businesses were unaware that, in order to terminate an energy contract, they needed to do so within a certain time period. Alarmingly 79% of businesses also said they had never received - or couldn’t remember receiving - a renewal letter from their energy supplier. This being the only warning the supplier is obliged to give its customer that their contract is about to be rolled on to higher rates.
3. The Solution
A few simple changes to customer correspondence would make it easier to switch supplier and result in more businesses doing so. This would encourage the suppliers to sharpen their pencils and offer more competitive rates to retain their business customers in the first place. EG:
a. Each bill sent by a supplier should clearly highlight the contract end date and any notice period required to terminate.
b. Each renewal letter should be sent from the supplier by Recorded Delivery and show the difference between the current rates charged and the proposed renewal rates in £s and %. It could also explain how and when to serve notice if the customer is to prevent its business from being automatically rolled into a new contract on the proposed renewal rates.
Research conducted among Make It Cheaper customers in 2012 (ie those that have actually managed to switch supplier this year) shows overwhelming support of this:
We have, of course, expressed these views in meetings with energy suppliers, Ofgem and Consumer Focus - as well as in written responses to their consultations - providing plenty of evidence (see below for recent examples of Make It Cheaper Customer Feedback). In fact so strongly do we feel about this, that we have taken the unusual step of galvanising other Third Party Introducers (TPIs) and, together, encouraged businesses (through our own customer engagement and via the national press) to write directly to Ofgem in support of our proposals. Following last month’s deadline to respond to Ofgem’s RMR consultation, we created an epetition: "Spell Out To Ofgem What Businesses Want From Energy Customer Engagement".
4. Supplier Objections
A further major barrier to business consumers switching energy provider, as detailed in our RMR response, is the disproportionate number of switching attempts that are derailed by outgoing suppliers raising ‘Objections’. In 2011 Make It Cheaper resolved over 13,000 meter objections with some suppliers objecting to as many as 35% of all customers switching away. Most of the objections we investigate are termination procedure related and, when they do occur, we see an average of 3-5 objections per customer. In addition, the information provided to customers explaining the reason for their objection is poor. In most cases the objections are lifted after our investigations, but it leaves the customer facing delays and could ultimately put them off the switching process itself.
a. Make It Cheaper supports Ofgem’s proposal to publish data relating to objections on a regular basis and we suggest that this should be explained in the context of the percentage of leaving customers this represents.
b. Another key metric of customer engagement that Ofgem &/or Consumer Focus should publish on a regular basis is accurate switching volumes among SMEs - to identify market fluidity and to track trends. As our own independently-commissioned research shows, SME switching volumes are significantly lower than in the domestic market - eg just 7% compared to 18% annually, this despite 45% of businesses expressing a desire to switch when asked.
5. Smart Meter Interoperability
Finally, we have seen a sharp rise in the number of SME switching attempts that fail because of non-compatibility issues with meters using smart technology. In some cases energy suppliers are applying additional standing charges to support smart meter technology. These charges range from 20 pence to 60 pence per day (£73 to £219 per year). Even if a supplier accepts a new type of meter from a customer wishing to switch, it is often subsequently read in the traditional ‘dumb’ way and so removing any smart technology benefits. Any non-domestic site that has had a new meter installed in the past two years is at risk from the compatibility (or ‘interoperability’) problem. As with all of the above issues, these sites include small businesses, charities and smaller sites of larger businesses or public sector bodies.
a. There needs to be better coordination with the rollout of smart meters and, crucially, open standards that guarantee any future switching will be hassle-free / cost-free.
b. SMEs also need convincing that smart meters are not the ‘Emperor’s New Clothes’ with advice on how they can lead to actual cost savings – ie evidence that the ‘pros’ extend beyond meter reading efficiencies and debt management for the sole benefit of supplier billing departments.
I hope that these suggestions are useful and, where necessary, can be quickly incorporated into the supplier licence conditions. We would be happy to provide more evidence from business energy consumers - both anecdotal and statistical - in support of our arguments. Indeed we would welcome DECC to follow Ofgem and Consumer Focus in visiting Make It Cheaper’s contact centre in Waterloo to better understand the issues faced by business energy consumers. Likewise we would also consider exploring ways in which Make It Cheaper’s customerbase - the largest captive audience of businesses switching supplier in the UK - could be used to reach a consensus of where consumer engagement with the energy market can be improved.