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The CMA energy reforms: What will it mean for you?

By Energy Company Numbers on July 10, 2016 in Government and Schemes, Help and advice
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Back in 2012, consumer group Which? called for an investigation into energy bills, and why so many households were overpaying for their gas and electricity in the UK (1). After some initial probing by OFGEM, the project was eventually handed over to the Competitions and Markets Authority (CMA), who launched a full inquiry in early 2014 (2). Last week, that inquiry was finally over.

The outcomes of the inquiry are nothing particularly surprising. CMA have found that we pay too much for our energy, and that largely that is because we fail to switch provider regularly enough. But some of the remedial action implemented by the CMA is somewhat more concerning.

What did the CMA discover?

According to their findings, UK consumers have been paying around £1.4bn a year more than they should be for the energy they use. In 2015, they said, we collectively paid the highest overcharge to date, racking up £2bn in excess payments. The CMA blamed these statistics on a combination of inefficiencies by major energy suppliers and their excess profits.

The CMA pointed the finger at the Big Six energy suppliers, who include British Gas, EDF, SSE, Scottish Power, npower and Eon, and said they had exploited consumers lack of engagement. They accused these suppliers of charging higher prices to those who didn’t bother to switch, with around 70 per cent of the customers of these firms already on their highest charge ‘standard tariffs’ (3). IF these customers had switched last year, they would have saved on average £330 (4).

It said customers who were stuck using pre-payment meters were often worse off. A lack of competition in this sector meant many were paying far higher prices than those on direct debit. Unfortunately, the pre-payment market also includes some of the most vulnerable consumers in our society, meaning those who can least afford it are those who are hurt the most. On average these customers are paying £250 more than those not using pre-payment meters (4).

What are the CMA recommending?

There have been a number of proposed measures from the CMA designed to improve the gas and electricity market for the UK (6). These include:

  • Publishing a customer database, controlled by OFGEM, which will allow suppliers to contact consumers who have not switched for an extended period
  • Putting a cap on tariffs for the four million households currently on pre-payment meters
  • Boosting incentives and information available to price comparison websites to help them find better deals for customers
  • Removing the four tariff limit, so suppliers can devise more affordable tariffs to suit different types of people
  • Requiring suppliers to help around 700,000 people who have economy 7 meters to switch to a single rate tariff, without having to pay for a meter change

There were also a number of proposals concerning how OFGEM operate their systems and policies, as well as regarding pricing of transmission losses to make things more affordable for the customer. More than 30 measures will be brought in as a result of this investigation, which you can read in detail here.

What does this mean for you?

For the majority of these recommendations, it’s nothing but good news. Customers who are on prepayment meters in particular should be delighted that they will no longer be overcharged because of the lack of competitiveness in the market. Similarly, customers with Economy 7 meters will be pleased they can now switch to a single rate tariff, without forking out for the high cost of a meter switch.

However, the one area where people are showing a little more concern is the proposed customer database. This will be an OFGEM held list of names and addresses of those people who have not switched supplier for three years or more, the idea being comparison companies and other supplier can get in touch and offer them deals. Here are some of the questions being asked about this, and what you need to know:

Will I start getting lots of marketing phone calls?

No you won’t. The list will include your name and tariff, as well as your address details, but not your telephone number.

Will I get a lot of junk mail?

You could well end up receiving a lot of mail, because all registered energy providers will be able to access the database. In the UK today, there are 37 energy providers, so in theory there could be 36 who want to talk to you about switching. The CMA are proposing some fairly stringent safeguards to ensure your data is used appropriately, but there is still a concern that the message may be diluted if too many companies try to contact you.

Can I choose not to be on the list?

You can. All consumers who have been on a standard tariff for three years or more will receive a letter advising them that they will be put on the database. At this stage they are able to respond and say they do not wish to be included. If they are added and later decide they want to be taken off, they can contact OFGEM to be removed at any time.

Should I switch?

Definitely. If you have been with your same provider on the same deal for a couple of years or more, you could save hundreds of pounds a year by moving to a different tariff. Other elements are being put in place by the CMA to make it easier for price comparison sites to find amazing deals, and to make switching faster and more efficient.

What if I don’t want to switch?

Nobody has to switch, but if you don’t, you could be missing out. Energy companies are being encouraged to make more deals available, so while you could be paying around £300 too much today, that gap could grow greatly over the next couple of years. Of course, it’s down to you to make the change, but if you choose not to act, you could end up paying significantly over the odds.

All the changes proposed by the CMA will be actioned by a combination of CMA Orders and also recommendations to OFGEM and the government. Following discussions, we expect the CMA to publish a timetable of implementation, which will set out when all these changes will take effect.

References

  1. [Online] http://www.standard.co.uk/business/business-news/which-call-for-independent-inquiry-into-energy-prices-8214332.html.
  2. [Online] https://www.gov.uk/cma-cases/energy-market-investigation.
  3. [Online] https://www.gov.uk/government/news/cma-sets-out-energy-market-changes.
  4. [Online] http://www.telegraph.co.uk/business/2016/06/23/will-the-cma-inquiry-solve-problems-in-the-uk-energy-market/.
  5. [Online] https://www.theguardian.com/money/2015/dec/16/prepayment-meters-pay-more-energy-bills-competition-watchdog.
  6. [Online] https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/506949/Energy_PDR_Summary_March_2016.pdf.

About the Author

Energy Company NumbersView all posts by Energy Company Numbers
Energy Company Numbers is a telephone number directory service dedicated to helping UK consumers keep in touch with their energy suppliers.

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