Could the government force energy suppliers to offer customers their cheapest tariff?
Our CEO, James Constant, reflects on the PM’s leftfield announcement on energy prices that he made earlier today.
“I can announce that we will be legislating so that energy companies have to give the lowest tariff to their customers.”
Those were the words of David Cameron in Prime Minster’s Questions today.
A law forcing energy suppliers to give customers their cheapest tariff has the potential to totally change the energy market. It’s bound to be popular too, coming in the wake of price rise announcements from SSE, British Gas, nPower and Scottish Power.
Details about how such a law would work haven’t been released, and it’s left us (and no doubt a lot of other people) with a lot of questions:
- Will it apply to businesses? – Many pieces of energy legislation only apply to domestic customers, and occasionally micro businesses too, so it’s not hard to imagine that this won’t be extended to business energy customers.
- What do they mean be cheapest? – There’s no one-size-fits-all cheapest deal and what’s cheapest for one person won’t be cheapest for the next. Will the cheapest tariff be personalised for each customer? Will it take into account things like discounts for paying by Direct Debit? All of this is currently unanswered.
- What about choice? – By limiting the number and range of deals offered naturally choice will be diminished, this may be no bad thing if it keeps costs low but retains a spread of options however the likely response from suppliers is to provide only the lower common denominator products meaning the potential end of green energy, fixed or capped price energy tariffs.
- What about the market? – The cheapest tariff for a customer might be with a different supplier from the one who currently supplies them; this legislation won’t help customers to work that out and could mean that they become complacent about searching for the best deal and simply take the cheapest deal with their current supplier and not the cheapest deal in the market. This could spell the end for price comparison websites such as uSwitch.com who have done so much over the past 10 years to initiate and sustain competition in the energy industry. Some may well argue that if there is no role for a ‘uSwitch’ then it proves the market works without it, however that is a huge gamble to take given the majority of energy customers, business or domestic, do not switch even in the current climate.
- Will it mean prices will go down? – The clear hope is that it would however a lesson in plain, simple economics would suggest otherwise. The market would undoubtedly be simplified by reducing choice but by no means would it be guaranteed to make it cheaper. If suppliers have to offer everyone the cheapest deal, including those passive non-switchers who are currently paying high rates then they will no longer have the subsidy they are used to across their portfolio. As a result prices for all customers will need to rise to keep the supplier in a net no worse off position. It is difficult to foresee an outcome where suppliers will voluntarily reduce their margins, profitability and long terms attractiveness to investors to achieve a ‘fair’ market for consumers who can leave at any point.
- Will it be automatic? – If customers are just told about their current supplier’s cheapest tariff, they will not have a full market view, as a result they will not know they can get the same product cheaper elsewhere and as such will not necessarily switch to take such a deal. If they’re then moved over to their existing supplier’s ‘cheapest’ tariff automatically, it could mean that they end up in the same position as business energy customers do when they have been rolled over – stuck on a tariff that they didn’t choose, when there may be a better deal available with another supplier.
Overall this doesn’t feel like a thought through piece of policy from the government, it probably felt good to say, but the reality suggests a significantly different outcome than those words originally suggested.