Consumer Engagement with Energy Markets
Memorandum submitted by Ofgem (CE 28)
1.1 Ofgem is the regulator of Britain’s gas and electricity markets. Our principal objective is to protect the interests of current and future consumers, by promoting c ompetition wherever appropriate and regulating the monopoly companies which run the gas and electricity networks. As such, we have a direct interest in understanding how consumers engage with the gas and electricity markets at present, and how engagement can be supported further to ensure these markets work more effectively in the interests of consumers.
1.2 Our identification of issues and development of solutions is underpinned by an ongoing programme of consumer engagement and insight, alongside market analysis. This includes:
· our own qualitative, quantitative and deliberative consumer research – for example, we commission large scale surveys and have a regular consumer panel comprising over 100 people from six locations across the country chosen to be broadly representative of GB consumers; and
· examination of a range of external data sources such as data provided by suppliers, the Energy Ombudsman, Consumer Focus, Citizens Advice and Consumer Direct, plus consumer research undertaken by other organisations.
Although this paper primarily concentrates on the experiences of domestic customers we also engage with representatives of business and other non-domestic consumers, for example via our Small and Medium Users Group and our Large Users Group  .
1.3 This consumer insight prompted the establishment of our Retail Market Review (RMR)  , underpinned its conclusion that further action is needed to enhance consumer engagement in the energy markets, to help promote greater and more effective competition, and has informed (and continues to inform) the development of our proposed actions.
1.4 Our aim is to make it easier for consumers to choose the tariff that is right for them and for new suppliers to enter the market. Our RMR proposals include steps to improve tariff comparability and enhance the quality of information suppliers provide to consumers, as well as the establishment of enforceable, high-level principles setting out what consumers can expect in terms of how suppliers engage with them. We consider that these represent the most effective and fastest way of enhancing effective engagement and competition in the retail energy markets.
1.5 We are still in the process of reviewing consultation responses to our RMR proposals, but recognise that since we launched the RMR the industry has taken a number of actions that support our objective of simplifying the market for consumers. These moves are welcome, but we feel that looking across the industry as a whole they do not go far enough. Therefore we believe there is still a need for a cross sector reform package which we consider the RMR will deliver.
1.6 Rather than simply re-stating our detailed actions and proposals in the retail market, this paper focuses on some of the key consumer insights on which our interventions are built. It draws on the evidence base developed in support of the work of the RMR, as well as ongoing consumer research carried out through Ofgem’s Consumer First initiative  . In light of the inquiry’s scope, the following submission presents evidence relating to:
· Consumer engagement in the energy market: what we mean by engagement in this context, and how levels of engagement vary across GB consumers;
· Identified barriers to engagement, including factors which contribute to consumers’ reluctance to actively participate in the market; and barriers impacting on consumers’ ability and capacity to engage; this also includes issues faced by vulnerable customers;
· Consumer attitudes towards broader energy related issues and awareness and understanding of future challenges and developments;
1.7 Wherever possible we have provided references to the evidence which supports our analysis.
2. Consumer engagement in the energy market
2.1 Our evidence suggests levels of engagement with the energy market are low among the majority of domestic consumers. For the RMR investigation in 2011 we developed a simple consumer segmentation model based upon both qualitative and quantitative research conducted to date, including a survey with domestic customers  and our regular deliberative forum, the Consumer First Panel  . This model identified, and broadly quantified, five different types of consumers  based upon their experiences and attitudes towards switching.
2.2 This suggests proactive consumers – i.e. those who are motivated by a belief that worthwhile savings can be made; who actively research offers and go on to switch supplier or tariff – make up a small minority of GB consumers. A similar proportion are identified as reactive consumers: they are also likely to have switched supplier or tariff within the last year, but may switch as a result of an encounter with a sales agent. Typically these consumers are vulnerable groups and families on low incomes. A greater proportion can be considered passive consumers who report having switched at some time in the past, most often to a dual fuel tariff with an incumbent supplier. Our qualitative research suggests they do not feel strongly about the energy market, and despite being aware of their right to switch, and in some cases having high levels of energy literacy, they do not do so. Disengaged consumers report never having switched but don’t rule out switching in the future. They share many of the same attitudinal characteristics as Passive consumers, and may only decide to switch in reaction to poor service from their supplier or following an encounter with a sales agent. The final segment are permanently disengaged consumers who say they have never switched and do not plan to do so in the future. They are the ‘stickiest’ consumers and many – but not all – are likely to be vulnerable consumers. These consumers may feel that they are unable or unwilling to engage with the market.
2.3 In carrying out our duties, Ofgem must have regard to vulnerable customers including, but not limited to, those who are disabled, chronically sick, of pensionable age, on low incomes, and/or living in rural areas. The nature and extent of vulnerability experienced by energy consumers is wide-ranging and more dynamic than traditional models might suggest. A person may be vulnerable because they find it difficult to deal with complex markets, for example because of age, sickness, mental health issues, low literacy or numeracy, not having English as a first language or isolation resulting from where they live. They may also be vulnerable in certain situations, for example where they fear opening the door to strangers or they have reduced mobility because of a disability. They may also be vulnerable as a result of being on a low income which means they struggle to pay their energy bills. It is likely the degree of vulnerability will be more serious where someone has more than one of the examples given above.
2.4 We are currently considering what more can be done to help vulnerable consumers engage in and benefit from the gas and electricity markets and we will be consulting on our new Vulnerable Consumer Strategy later this year. We continue to undertake research with vulnerable consumers, for example we are currently examining the switching process for customers in debt.
2.5 Our aim in the RMR is to benefit vulnerable consumers, both by enabling more of these people to engage in the market as a result of simpler and more comparable tariffs and clearer information and by ensuring that those who cannot or will not engage are protected. We are currently reviewing responses to the RMR consultation documents, with a view to finalising our detailed proposals later this year.
3. Identified barriers to consumer engagement in the energy markets
3.1 Ofgem has developed an in-depth and up-to-date understanding of the key barriers to consumer engagement in the energy markets through a number of qualitative and quantitative research studies and other analyses. Our summary below is informed by current thinking on behaviour change and categorises barriers according to:
· those which affect consumers’ willingness to engage in the market; and
· those which affect their ability or capacity to engage.
Barriers affecting consumers’ willingness to engage in the market
3.2 Status quo bias refers to the tendency of consumers not to change from what they are currently doing unless they face strong reasons for doing so. Our RMR investigation showed two thirds of consumers’ energy accounts are with one of their ex-monopoly suppliers (either British Gas or the ex-monopoly electricity supplier for that region), and most consumers in the GB energy retail markets are on ‘evergreen’ contracts, within which there are no regular contract renewals to act as ‘trigger points’ to force them to reconsider their current energy deal. 
3.3 Even though our analysis has shown that consumers can make substantial savings by switching  , in our 2011 survey with a representative sample of the GB population 15% of gas customers and 17% of electricity customers said they switched their supplier during 2010 (representing marginally smaller proportions than in 2008 and 2007). In the same survey, 59% reported never having switched gas supplier and 60% say they have never switched electricity supplier  .
3.4 Our qualitative research shows that there are a number of attitudinal drivers which compound this apparent status quo bias. Since the Consumer First Panel started in 2008, many Panellists have said they do not feel strongly about the energy market and report not having the time or the inclination to find out more about the possible benefits of engaging with it. Our quantitative research  suggests this may be driven by positive reasons and apparent satisfaction with the status quo, with three-quarters (77%) of non-switchers giving ‘happy with current supplier’ as the reason for not switching. However, in-depth qualitative research casts a more negative light on this. Members of our Consumer Panel articulate a sense of powerlessness in the face of regular price increases and concern that energy accounts for an increasing proportion of their household budget. They believe that there is little price differentiation in the market (i.e. that prices are similarly high across tariffs and suppliers) and report being increasingly dissatisfied with suppliers across the market, who in their opinion are guilty of excess profit making. 
3.5 In the context of GB energy retail markets, loss aversion means that consumers focus too much on potential losses (e.g. higher prices, problems during the switching process) than potential gains. Our Panel research also suggests this is a barrier for many consumers, especially for those on lower incomes who are most fearful of switching in case prices are higher and cannot be accommodated within existing household budgets.  Our analysis suggests loss aversion, especially when combined with complex information is likely to make consumers disengage from the market.
3.6 Our body of evidence suggests many consumers’ believe there is no or little incentive to act to change the status quo and take what is often perceived as a risk, unless:
· it is clear the benefits of switching tariff or supplier (i.e. cost savings) will significantly outweigh the costs or potential costs of switching (e.g. time, ‘hassle’, risk of inadvertently choosing a worse deal);
· consumers can see an obvious differentiation in price, and/or variation in the product on offer (e.g. as they might with a mobile phone package); and/or
· they experience problems sufficient to motivate them to switch, and have confidence an alternative supplier will offer an improved service.
Barriers affecting consumers’ ability or capacity to engage in the market
3.7 The number of tariffs available to domestic consumers grew substantially in the period 2007-2011.  Our qualitative research suggests the abundance of tariffs, the different pricing structures and wide range of features within them is off-putting for most consumers and hinders comparison.  The growth in the number and range of tariffs may therefore give the appearance of increased choice but reduce consumers’ ability to choose.
3.8 This complexity means that even some energy literate consumers are unsure if they are on the right tariff. In our 2011 survey, of those who switched in 2010, around one in three either did not know whether or not they were saving money as a result or believed they were not saving money as a result.  There was a widespread view among our most recent cohort of Consumer First Panellists that suppliers have deliberately created a complex market that works to their advantage by discouraging consumers from finding the best deal.  This is further reinforced by another qualitative research study looking specifically at improving tariff comparability in which ‘all respondents were of the view that something needs to be done to reduce the number of tariffs and to make it easier for consumers to compare tariffs in order to identify the most suitable tariff for their circumstances.’ 
3.9 Consumers believe the language of the energy market is confusing, and presents a barrier to all but the most engaged of energy customers. Many energy market terms are not well understood by consumers. Semiotics and language experts  commissioned by Ofgem concluded that a lack of standardised energy language across the industry further compounds confusion. Their report states that communications from suppliers are not consumer-friendly, and consumers cannot be relied upon to know the meaning of kWh, unit rate, standing charge, or any other energy-related terminology that is not part of their day-to-day vocabulary.
3.10 Our qualitative research with vulnerable customers  shows that vulnerable consumers are likely to encounter many of the barriers to engagement mentioned above, as well as additional barriers such as: limited capacity to engage because of more pressing concerns in their lives; difficulty trusting anyone they do not know; low levels of literacy and numeracy; not having English as a first language; and lack of internet access. Our quantitative research into tariff comparability models  showed that when ‘vulnerable’ respondents  were asked to look at different tariff presentation options, in general fewer were able to identify the lowest tariff, comparisons took longer and fewer rated the options as easy to understand and use; however within this there was variation as "some sub-groups diverged in their views from the composite figures, either in the direction of "all consumers" or in the opposite direction"  .
4. Consumer engagement with broader energy-related issues and future challenges
4.1 Our research  suggests that although some consumers have concerns about security of energy supply, sustainability issues and their impact on future energy prices, most tend not to be well engaged with wider energy market issues. When prompted to consider these issues, Consumer First Panellists have demonstrated relatively high awareness of some factors (e.g. diminishing North Sea gas) and limited awareness of others (e.g. nuclear power stations being decommissioned) .  Generally they believe domestic sources of energy are important for security of supply and to avoid reliance on other countries . As regards attitudes towa rds sustainable energy sources, consumers’ l ocation appears to be one driver of views: Panellists from urban or semi-urban areas are generally more support ive , and t hose from rural areas express concern about the perceived damaging effects of some renewables (especially wind) on the landscape, and call for improved local community engagement. Nevertheless, both groups express some concerns about the potential costs and impact on energy prices, especially in the context of current price rises. This is also reflected in our quantitative research into energy issues in which the price of domestic energy is the most frequently mentioned concern overall. 
4.2 The government is mandating the roll-out of smart meters in GB for both gas and electricity consumers in the domestic and smaller non-domestic sectors  . Suppliers will be required to procure and install meters for their customers, and to complete the roll-out by a specified date in 2019. Domestic customers will also receive an In-Home Display (IHD) which provides information on their energy consumption  . The Department for Energy and Climate Change (DECC) is directly responsible for managing the Smart Metering Implementation Programme. As part of this, it is developing a consumer engagement strategy which will consider the case for elements of consumer engagement in relation to the roll-out to be carried out centrally or on a co-ordinated basis. This strategy will be consulted on in spring 2012.
4.3 Smart metering has the potential to be an important catalyst for change in the energy sector. These changes have the potential to support our key objectives of contributing to the achievement of a low-carbon energy sector, helping to maintain security of energy supplies and promoting quality and value for all consumers. The available evidence both from our research, and more widely, suggests positive consumer engagement will be vital to delivering the benefits of smart metering; although it will be important to ensure that those who are not able to engage do not lose out.
4.4 Trials of smart metering undertaken as part of the Energy Demand Research Project (EDRP) reported some customers having difficulties in understanding the new equipment provided. The EDRP also showed that technology alone may not be enough to influence behaviour. Consumers need to know how to access and use the data that their IHD provides, know what to do with that data and have an interest in doing so.  Consumer First Panellists have shown some awareness of smart meters, however only a few have a detailed understanding of what they are, and there is no understanding of the difference between a smart meter and an IHD. Reactions to smart meters were neither overwhelmingly positive nor negative when they were discussed at some length.  Panellists welcomed certain benefits that would help them reduce and regulate energy usage and save money on energy bills. However, the cost of the roll-out was mentioned as being potentially very high and some were concerned about data privacy and security. Some elderly Panellists expressed anxiety about feedback about expenditure, to the extent that they thought some might stop using their heating. More broadly, Panellists thought that some consumers would be disadvantaged because they may find the smart meters and IHD difficult to understand or use. 
4.5 We are working with DECC to help ensure that the interests of consumers remain protected both during the transition to smart meters and once the smart meter roll-out is complete.  This runs in parallel to our work with government in considering the opportunities and issues associated with the development of a smart grid. We will continue to introduce new consumer protection measures in response to early smart meter deployments and we continue to explore the safeguards that may be necessary in the light of market developments. 
4.6 We are aware that substantial consumer engagement is planned in connection with the smart meter rollout and we have had some discussion with DECC about how this might happen and its interaction with the communication of RMR-related changes.
4.7 We would not expect consumers to have much if any awareness yet of the Green Deal, given that it is still at a policy development and legislative stage. Clearly the profile of the Green Deal is likely to grow. While much of it falls outside our remit, we clearly have an interest in how it affects retail market competition and levels of consumer trust, and we continue to engage with DECC on this.
Appendix 1 – References and end notes
 See link for membership of Ofgem’s Small and Medium Users Group (SMUG) and Large Users Group (LUG) http://www.ofgem.gov.uk/Consumers/Documents1/Membership.pdf
 Building on the findings of our 2008 Energy Supply Markets Probe, in November 2010 Ofgem launched the Retail Market Review to investigate whether the gas and electricity markets in Great Britain (GB) are working effectively for consumers.
 In 2007 Ofgem launched Consumer First, a programme designed to ensure that consumers remain at the heart of everything we do and help us improve our understanding of the things that really matter to consumers. Part of Consumer First involves consumer research to inform our key policy decisions and the dissemination of consumer insight across the organisation.
 http://www.ofgem.gov.uk/MARKETS/RETMKTS/RMR/Documents1/IpsosMori_switching_omnibus_2011.pdf Ipsos MORI 2011, ―Customer Engagement With The Energy Market – Tracking Survey: http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Behavioural_Economics_GBenergy.pdf
 Ofgem commissioned Ipsos MORI to conduct a face-to-face survey representative of the population of Great Britain aged 15+ to enable greater understanding of switching rates among the population, and vulnerable customers specifically. This is a tracking survey conducted annually.
 The Consumer First Panel is a deliberative forum comprising over 100 consumers from around Great Britain who are chosen to be broadly representative of the population. Since January 2009 Panellists have met regularly to discuss key issues impacting on their participation in the energy market. Panellists change each year.
 Although the evidence available to us suggests that some non-domestic customers (e.g. micro businesses and SMEs) may face similar challenges in engaging with the market the evidence presented here relates to domestic customers only.
 What can behavioural economics say about GB energy consumers? Ofgem, March 2011 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Behavioural_Economics_GBenergy.pdf
 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Behavioural_Economics_GBenergy.pdf ; Ipsos MORI 2011, ―Customer Engagement With The Energy Market – Tracking Survey
 Ofgem 2011,The Retail Market Review – Findings and initial proposals, p37 Figure 2.10 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/RMR_FINAL.pdf
 Ipsos MORI 2011 ― Customer Engagement with the Energy market – Tracking Survey http://www.ofgem.gov.uk/MARKETS/RETMKTS/RMR/Documents1/IpsosMori_switching_omnibus_2011.pdf
 Ipsos MORI 2011 – Customer engagement with the Energy Market – see hyperlink above
 Ofgem Consumer First Panel Year 4: Findings from first workshops (held in October and November 2011) January 2012
 Ofgem Consumer First Panel Year 4: Findings from first workshops (held in October and November 2011) January 2012 – see hyperlink above
 Ofgem 2011,The Retail Market Review – Findings and initial proposals p22 Figure 2.1 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/RMR_FINAL.pdf
 Tariff Comparability Models Volume 1 - Consumer qualitative research findings; A report by Creative Research on behalf of Ofgem; October 2011 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Tariff_Comparability_Qualitative_Research.pdf ; also based on an analysis of Consumer First Panel reports since 2009
 Ipsos MORI 2011 – Customer engagement with the Energy Market – see hyperlink above
 Ofgem Consumer First Panel Year 4: Findings from first workshops (held in October and November 2011) January 2012 – see hyperlink above
 Tariff Comparability Models Volume 1 - Consumer qualitative research findings; A report by Creative Research on behalf of Ofgem; October 2011 – see hyperlink above
 Lawes Consulting & Lawes Gadsby Semiotics; Retail Market Review – energy bills, annual statements and price rise notification advice on layout and the use of language; A research report for Ofgem; November 2011 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Lawes_Language_Report.pdf
 2011 Vulnerable customer research, FDS Ofgem Research Report on Vulnerable Consumers’ Engagement with the Energy Market
 Consumer reactions to varying tariff comparability models; Quantitative Research conducted for
 Ofgem, Ipsos MORI, 18 October 2011
 For the purpose of this study respondents considered to be vulnerable customers included those on low household incomes (up to £11,499 pa), those aged 65+ and state supported (the “frail” elderly), those who conceded they had problems with literacy or numeracy (or who had no formal educational qualifications) and those who considered themselves to be disabled.
 Consumer reactions to varying tariff comparability models Quantitative Research conducted for
 Ofgem, Ipsos MORI, 18 October 2011
 With the exception of our 2009 research ‘Energy Issues 2009, Survey of British public opinion’ by Ipsos MORI
 http://www.ofgem.gov.uk/Sustainability/Cp/CF/Documents1/MORI%20energyissuesreport%20Final.pdf .
 Please note that awareness of wider energy-related issues among consumers has rarely been the core focus of our consumer research. However it is possible to come to some conclusions based on the source above and a broad analysis of qualitative data in which these broader issues are discussed.
 Ofgem Consumer First Panel – 2009/2010; Findings from second workshops - Project Discovery (January 2010) http://www.ofgem.gov.uk/Sustainability/Cp/CF/Documents1/Ofgem%20Panel%20Discovery%20report%20FINAL.pdf
 Energy Issues 2009, Survey of British public opinion’ by Ipsos MORI – see hyperlink above
 By ‘smaller non-domestic’ we mean electricity customers with meters on profile classes 3 and 4 and non-domestic gas customers with consumption of less than 732 MWh per year. Further information on the policy design for th e roll-out can be found in the g overnment’s March 2011 Response to the Smart Metering Prospectus Consultation. Smart Metering Implementation Programme: Response to Prospectus Consultation , Ofgem/DECC, March 2011 .
 Energy Demand Research Project: Final Analysis, Aecom 2011 http://www.ofgem.gov.uk/Sustainability/EDRP/Documents1/Energy%20Demand%20Research%20Project%20Final%20Analysis.pdf
 Ofgem Consumer First Panel Year 3; Report from third set of workshops; Smart Metering Data Privacy Issues; June 2011
 Ofgem Consumer First Panel; Year 3 2010/2011 Findings from first workshop held in November 2010 (January 2011)
 As above.
 Promoting smarter energy markets, Ofgem, December 2011:
 Supporting effective switching for domestic customers with smart meters, Ofgem, December 2011: