On 15 April, Ofgem published a consultation document on how to improve competition in the energy supply market. Although specifically aimed at domestic consumers, this package of remedies aims to provide additional help to small businesses by providing both with greater competition, choice and consumer engagement.

One of the key recommendations of the paper was the introduction of a set of overarching standards of conduct for suppliers. Although these standards were not considered suitable to be implemented via directly-enforceable licence conditions, they are hoped to have significant impact on suppliers' behaviour. Ofgem does note, however, that it will review this situation at a future date when their impact can be assessed.

Suppliers will be expected to take all reasonable steps to adhere in their dealings with domestic and small business consumers, to the following standards:

  • they must not sell a customer a product or service that he or she does not fully understand or that is inappropriate for their needs and circumstances;
  • they must not change anything about a customer’s product or service without clearly explaining to him or her why;
  • they must not prevent a customer from switching product or supplier without good reason;
  • they must not offer products that are unnecessarily complex or confusing; and
  • they must make it easy for customers to contact them and act promptly and courteously to 'put things right' when errors are made.

These standards are designed to be backed up by more specific measures which Ofgem hope will strengthen consumer choice.

Measures promoting more effective consumer engagement

Ofgem research found that just over half of domestic consumers who switch energy supplier do so only in response to a salesperson. In addition to this, only about a third of those who switch actually achieve a price reduction (and this is reduced by half again when considering those who have switched in response to direct sales). Not only were people unwilling to switch providers, they were even less willing (only 8%) to switch tariff within a provider even though this could save them money. A recent moneysupermarket.com report has found that this consumer loyalty is meaning that consumers across the UK are missing out on up to £2.5bn by not switching their energy tariff to the most preferable one in their region.

Consequently, Ofgem is proposing that more information should be provided to consumers in a clear and easily comparable manner. Switching should be encouraged (whether it be to a different tariff or supplier) where it is clearly in the interests of the consumer. The 'Big 6' electricity suppliers are also being encouraged to introduce switching guarantees whereby they promise to support consumers through a switch.

Further proposals from Ofgem include:

  • increasing confidence in price comparison and switching websites; and
  • making it easier for people to switch even when they owe money to previous suppliers by making it easier to identify where this is due to supplier mistake and also by increasing the debt threshold to £200.

Measures to help consumers make well-informed choices

Ofgem proposes to strengthen the licence requirements in relation to suppliers' sales marketing by obliging suppliers to:

  • provide the consumer with a written, clear and easy to understand quotation prior to any direct sale, with a record left for the customer.
  • provide consumers, prior to a sale, with a written comparison between their offer and the consumer's current deal.
  • provide consumers with certain key information at the point of sale. This should include: an explanation of the switching process; a reminder to check the appropriateness of the product; a reminder of the cooling-off period; and details of what a consumer should do if they have any concerns.

The need for this has been underlined by a recent Which? report which noted that 7 out of 10 people found the number of gas and electricity tariffs available confusing. Consumers were reported to find bills 'baffling' and limited their ability to choose between the vast array of options available.

Measures to help small business consumers

Ofgem intends to introduce increased regulatory protection for non-domestic customers who are currently viewed as unable to engage effectively with the energy markets. Proposals include the following:

  • suppliers should be required to provide customers with clear and understandable information regarding the terms and conditions of their contracts at the appropriate time. Suppliers should also: provide advance notice of the expiry of a fixed term contract; state what rights and responsibilities consumers have at expiry; notify customers of any objections to transfer and communicate the new terms following expiry of a fixed term.
  • consumers should be free to switch at the end of any fixed term contract and suppliers should not be able to automatically roll over the contracts.
  • third party intermediaries should work with the Office of Fair Trading to develop a new code of practice for this area. Ofgem should have no regulatory control over this.

Measures to promote market transparency

Ofgem propose to make it easier for current and potential market participants to assess the profitability of different areas of the market. Consequently, they have considered a number of options for enabling information on the 'Big 6' to be separated into distinct financial details of their gas supply, electricity supply and electricity generation businesses. Ofgem is seeking views on exactly how this should be implemented.

In addition, Ofgem is also proposing measures to enhance market monitoring.

Where next?

Ofgem has invited comments on this consultation by 29 May 2009 with a view to agreeing reforms with suppliers in June 2009. If agreement can be reached, then Ofgem will issue statutory consultations on a range of licence modifications by the end of July 2009 with a view to implementation in Autumn 2009. If agreement cannot be reached, Ofgem has stated it will consider making a market information reference to the Competition Commission.