On Tuesday, DECC finally provided clarity on what the prime minister actually meant when he said at PMQs last month:
“I can announce that we will be legislating so that energy companies have to give the lowest tariff to their customers.”
The wording of the consultation DECC has rushed out still leaves some room for manoeuvre, but it is the coalition’s ‘ambition’ that by 2014 all energy customers will have been placed on the “cheapest price available from their supplier for the tariff type of their choice”.
The government is absolutely right to believe the energy market is not working for everyone. In fact it is only really working for the 15 per cent or so that search out the best deals and switch. Fair play to them you might say, except that this small group does not tend to include those hardest hit by volatile and rising energy prices.
Those on low incomes and the most vulnerable, including the elderly, often fear switching could increase their costs or simply don’t have access to the cheapest online deals.
It is possible the ‘switchers’ may end up paying more under the government’s proposals, but given the cheapest tariffs are only possible as a result of loss-leading offers subsidised by overcharging loyal customers, the overall result is likely to be fairer. Energy companies should not be able to offer these loss-leading deals in any case, as they restrict competition by making it hard for new entrants to compete but Ofgem has so far been unable to fully enforce this.
The proposal to move to an absolute limit on the number of tariffs, as previously proposed by IPPR, is also good news and will bring about much-needed simplification of the market. But as some have pointed out, these proposals don’t go far enough to tackle the underlying lack of competition in the market.
An IPPR investigation earlier this year found systemic problems with competition in the energy market. For example, there is little evidence to suggest energy companies are achieving annual efficiency savings as we would expect in most competitive markets.
Ofgem’s own quarterly analyses of suppliers’ costs show no sign of operational efficiency savings over time, as the chart below shows:
Our investigation found a more efficient market and reasonable profit margins of around 4 per cent could lower energy bills by as much as £70 annually, which would cover the costs of investments in new energy infrastructure and climate change policies.
Doing more to make sure consumers are getting a good deal is good news, if the proposals can be made to work in practice. But the government and Ofgem must also demand more from the energy companies themselves; only with greater transparency around energy companies’ finances will we be able to improve the functioning of the energy market.
If that doesn’t work, we really will have to ask whether the market in its current form can be sustained, or whether far more radical reform is needed.