Can Ofgem crack the tariff complexity nut?

As recently described on this blog by my colleague Rose Grogan, in late 2012 David Cameron made a surprise announcement (a surprise even to his colleagues) that he would use the Energy Bill 2012-13 to force all energy companies to put their customers on the lowest tariff.  Frankly, no one thinks this is a good idea or indeed that it will happen.

The problem

Nonetheless, there is an obvious, longstanding and widely recognised problem in the electricity and gas markets, particularly for domestic consumers: virtually no-one understands their tariff, nor can they properly assess whether an alternative is better.  The historically prevalent use of pricing in pence ‘per therm’ or ‘per Kwh’ are meaningless to most – and complicated still further when such prices often vary vastly depending on usage (e.g. the first ‘tranche’ being expensive, the second, relatively cheaper).

This was confirmed by information gathered by Ofgem in its supply probe in late 2008: about one third of those who go to the effort to switch tariff or supplier actually ended up worse off.  Even switching sites can only attempt estimates in many cases, relying on your description of usage, and telling them (correctly) which of the thousands of available tariffs you are currently on.

Certainly some of the tariff complexity arises from the actions of the suppliers, but there are a number of inevitable variables that affect tariffs, including:

  1. Energy types (3: electricity only, gas only, dual fuel);
  2. Payment types: direct debit or credit;
  3. Meter types: PPM or credit;
  4. Billing: online or paper;
  5. Regional cost differences arising from network charges.

So, a dual fuel, direct debit, credit meter with online billing will – for reasons of cost – generally be lower than a single fuel, pre-payment meter or if payment is by cheque rather than direct debit and bills are sent out by post.  In practice there are some 36 combinations for every supplier arising out of these fundamental differences (often the choice of the consumer).

The proposed solutions under the Retail Market Reform (RMR)

Both Ofgem and the Government have sought tariff simplification by ‘agreement’, but this has had limited success, and now changes to the licence conditions are under consideration by Ofgem (report to consultation due in Spring 2013) under the RMR.

The proposals aim to tackle the problem from several angles, while avoiding the simplistic (and unworkable) ‘automatic switch’ proposed by David Cameron.

First, suppliers will be limited to 4 ‘core’ tariffs per fuel. So, the total number of tariffs will reduce significantly from the c1500 in place in 2008.

Secondly, and perhaps this is finally the key to unlock the problem fully, Ofgem propose something akin to the “APR” in use for credit products so that, for example, credit cards, mortgages and loans can be compared on a like-for-like basis.  This is referred to as the ‘TCR’ or ‘tariff comparison rate’.  It would be a significant achievement if this works, as for the first time consumers will be able to easily compare offers in the marketplace.

Finally, as subsidiary measures, consumers are to be informed if their own supplier could switch them onto a (financially) better tariff.

In short, these proposals, which could be implemented far sooner than David Cameron’s proposals, may for the first time since liberalisation in 1990, enable consumers to truly participate in the energy markets.