BBC BLOGS - Douglas Fraser's Ledger
« Previous | Main | Next »

Electric shock treatment

Douglas Fraser | 13:35 UK time, Monday, 21 March 2011

It costs your energy supplier an average of £37 to send out bills, wait for you to send a cheque, chase up the bill, carry the debt and eventually process the payment.

So it's justified in charging that much more to those who get their bills on a quarterly basis rather than paying by direct debit - or so says the industry regulator, Ofgem.

But is there any explanation for charging £114 more, on average, and in some cases as much as £180 more?

That's the question Ofgem is putting to Scottish Power, in an investigation it's launched into the Spanish-owned, Glasgow-based energy supplier.

Across the Big Six players in the energy supply market, the average saving for customers switching during last year from conventional billing to direct debit was £66.

The answer I've been given by Scottish Power is that there's a big discount for prompt payment, averaging £65 per year. That brings the gap down to £12. But is that enough to satisfy Ofgem? Find out later this year.

Radical shake-up

It's part of a terrible start to the week for the energy companies - and potentially quite a good one for their customers.

Having been cheered by the new pricing regime for electricity distribution networks announced on Friday (see my previous entry in The Ledger), the energy companies have been walloped by the regulator this morning with news of a radical shake-up of the way they operate.

The root of the problem is that around half of customers don't look for the best price, but stick with the historic monopoly supplier of energy in their region or nation.

Those who have the same power company supplying gas and electricity, who pay by direct debit, manage their accounts online, and who have a track record of shifting supplier, get the best deals. The price of not doing so is high, and those most likely to pay it are the better-off.

Sticky customers

Take, for instance, the management of accounts online. Between September 2009 and March 2010, energy costs fell. Those with online accounts (one in eight of those with dual fuel bills) saw their annualised bills fall by an average of £100, according to Ofgem. Those with conventional, offline accounts saw them fall £50.

The lack of customer switching is demonstrated by the market power of those with the legacy of customers from pre-privatisation days.

Around Britain, of those who don't source gas from the same firm that supplies electricity, 75% of customers look to British Gas or Scottish Gas (the same company, owned by Centrica).

Of those who don't source electricity from the same firm that supplies their gas (let's call them electricity-only accounts), 73% stick with the company that supplied them by nationalised monopoly until being privatised in 1990 and 1991.

In Scotland, the loyalty to the legacy supplier is significantly higher. Scottish Hydro-Electric (part of Scottish and Southern Energy) has 85% of electricity-only customers in the north of Scotland. Much of that area is off the gas grid, so it has no option but to be electricity-only.

Scottish Power inherited customers from the South of Scotland Electricity Board, and still has 82% of electricity-only accounts.

Ofgem is now saying that it's too expensive for those who don't switch, or can't be bothered.

The estimated sales margin on those who are pre-privatisation legacy customers is reckoned to be nearly 6%. Those on dual fuel (gas and electricity) accounts are paying a margin of 3.7%. Those who switch deliver a margin under 2%.

That's because companies attract switchers with introductory offers, which of course hit their margins, but can be cross-subsidised by those sticky customers.

Simpler pricing

But Ofgem also reports that the Big Six energy suppliers have told it that they intend to keep roughly the same number of customers in future.

That's partly because they have to balance demand with their supply of power. It could also be because they have a tacit agreement not to drive down margins by competing for customers.

Ofgem interprets it as a lack of competition. In other words, if companies are complacent about the number of customers they've got, then the market isn't working.

That's supported by a rise in margin on the average customer, reaching a record early last year, and getting close to it in December.

A telling graph in the Ofgem report shows how that margin has widened, and that a typical £1,180 dual fuel bill is for energy that costs less than £500 in the wholesale market.

This range of evidence is the basis for the regulator's proposal that companies should have to auction up to 20% of their supply, allowing entrants into the market to shake things up.

That's a significant blow, particularly for Centrica, which has invested heavily to secure its upstream supply of gas, and is reported this weekend to be interested in a new acquisition in Dutch waters.

Ofgem wants much simpler pricing structures, and an end to the rolling over of fixed-term contracts.

There's a balance to be struck here, as Ofgem acknowledges. Prices are going to have to rise to pay for investment in renewed generating capacity, a shift to renewable energy and the cost of the reconfigured distribution grids.

But if they are to rise, customers have to know the increases are fair and the industry remains competitive in order to keep downward pressure on prices. At the moment, customers don't and can't.


  • Comment number 1.

    It would of course be much simpler and almost certainly cheaper if these companies were nationalised and there was just one national supplier.

    Competition worked up to a point whilst there was a plentiful supply of gas in particular but nowadays we need companies that are working in our interest not those of fund managers in London, Barcelona, Paris or Berlin!!

  • Comment number 2.

    Yes, guilty as charged. I always waited untuil the red letter arrived, why? Because like very many others I'd already overdrawn at the bank and I had to wait for next month's salary or I got my annual bonus....Certainly I got really annoyed with the debt chasing phone calls at some very inconvienent times. They became so annoying that I eneded up requesting pre-payment meters to be installed. I heard they are more expensive and I've had an army at my door suggesting they are cheaper but when looking at the tarrifs, I was completely bamboozled! So much so I really could not trust what any representative claimed! So perhaps this latest Ofgem initiative will make it fairer for consumers? time will tell!

  • Comment number 3.

    as a family we have done everything we are supposed to . we have switched at least 4 times we pay by direct debit and we get both our gas and electric from the same supplier but find it quite hard to actually find any true competition. the only winners are of course the gas and electric firms.

  • Comment number 4.

    Scrap the standing charge. Set domestic for price gas/electric at one set rate for all users.The more you use the more you pay.Only one tarrif should be available from each supplier Transparent pricing and billing should be key.

  • Comment number 5.

    this should be simple
    - direct debit, but only take what you use not what they decide you should lend them over the summer
    - restrict them to only one of each type of account, for example if they advertise an online energy saver deal, then that should be their price. There should not be online energy saver 1 through 40. If I signed up to the online energy saver deal I want them to automatically put me on the latest competitive rate for the online energy saver, not leave me on an every increasing "we get you for not checking" rate.

    If my rate is uncompetitive I want that to be because my energy company is not being competitive, not because my energy company is charging me more than new customers

  • Comment number 6.

    forgot to say when you look into switching your supplier on line you find that different "regions " of the UK pay a different price for the same tariff that's nice of them is it not?

  • Comment number 7.

    I have a problem with this “change your supplier” malarkey, nobody wants to know!
    The problem appears to be that the electricity suppliers want everything in their favour, when I mention that I am on “comfort plus” tariff they can’t runaway fast enough, I wonder why?
    Could it be that as a sole electricity consumer using planning and controlled consumption, they the suppliers have to work at the planning and that does not come easy to them. Purchasing their energy in small blocks from the generators at competitive pricing should produce a “free market” but it does not, but shows that a cartel is operating in that market.


BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.