18 October 2012 Last updated at 11:20 ET

Article written by Robert Peston Business editor

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Energy companies vs Cameron

 

I asked the boss of one of the UK's biggest energy companies what would happen if they were forced by the government to give all their customers the lowest tariff they offer.

"It is very simple" he said. "If we could not adjust charges depending on how people pay, we would have to raise our basic price".

Which probably explains why the energy minister did not conspicuously endorse David Cameron's statement of yesterday that energy companies would be forced by law to put all their customers on their cheapest deals.

However the prime minister has highlighted an issue which many would say needs addressing - which is why customers can pay such wildly different amounts for their power.

Why doesn't competition lead to the vast majority of customers demanding and achieving the best deals?

There seem to be three connected flaws in the market.

First, that customers - even sophisticated business people - find their bills very hard to understand. The combination of fixed and variable payments for power is confusing for many.

Second, there is no standardised structure for a basic energy bill, so it is hard - without the aid of price comparison websites - to compare the charges of different companies, especially when there are hundreds of different power packages extant.

And finally, many households are frightened that if they move energy suppliers, there will be mistakes and glitches, and they also don't believe that lower prices offered by a rival will last very long. So they stay put. Some 40% to 60% of customers never switch.

The "Big Six"

A bit like banking, six big companies dominate the industry. And none of them is a young challenger offering a completely different kind of approach to pricing and service.

A prominent entrepreneur told me that energy companies' pricing practices make it impossible for someone like him to create a venture that might gain a foothold. He had worked on entering the market and had given up.

Why?

Well the big power companies do offer very competitive terms to new customers, prices that are impossible for a new entrant to match. And they can offer such cheap deals, he said, safe in the knowledge that most of their customers are too scared or lazy to shop around for the cheapest deal.

So, in his view, the most useful reform the government could offer would be to force all the companies to offer a single basic, easy-to-understand and easy-to-compare tariff, so that more of their customers had the confidence and ability to change providers.