19 Oct 2012

(by Catherine Waddams) This week the Prime Minister of making each energy supply company put all its consumers on the cheapest tariff. Sounds like a great idea until you think how the companies will react. If everyone is on the cheapest tariff, there is only one tariff – but it is unlikely to be the lowest price they offer now. In common with many other products and services (think of telecoms) many of the cheaper tariffs are to tempt householders to change supplier – which is at the heart of a competitive market. Since any offer which a company made to try and encourage switching would oblige them to lower all the charges they make to their established customers, we would not expect to see very many offers. The government and the regulator are keen to encourage new entrants into this industry. A small new competitor, with perhaps 100,000 consumers (less than half a percent of the market), would face a cost of £2million from lost revenue with existing accounts if it offered a twenty pound discount to attract new customers. Ongoing CCP research shows that much higher savings are needed to tempt people to change supplier, and so the company is unlikely to attract enough new customers to justify such substantial losses in revenue. For companies with more customers, the penalty is greater and the incentive to offer better deals is correspondingly less. Such intervention would not strengthen competition amongst the big six energy companies, but weaken it.

The direct intervention of the government in a market which is both supposedly competitive and has an independent regulator is particularly ironic at a time when the regulator is undertaking a careful evidence based review of exactly these issues as part of its Retail Market Review. Ofgem has just decided not to renew the non discrimination clauses, a much less aggressive intervention which they made three years ago, because there is evidence that even this well meaning and relatively mild move has stifled competition. The government’s own figures show that switching rates have fallen by more than half since the clauses were introduced, at least partly because the bargains which households can get by switching have dwindled. the damaging effects of the non discrimination clauses. At a time when Ofgem is acknowledging the difficulty of encouraging consumer activism in this market, recognising that its past interventions may sometimes have had unintended consequences, and is gathering evidence to assess the best way forward, the government’s intervention is reminiscent of a bull in a china shop – unfortunately it is consumers who are likely to pick up the bill for the broken china, as competition withers still further.