Complex and uncompetitive, the energy market needs a shakeup

So domestic energy prices are in the news again. They’re too high, it seems, and the government is promising to work “harder and faster” to cut bills.

The main problem is the global price of oil and gas, which is set by supply and demand. Both oil and gas are nearing peak production, but demand for energy continues to rise. So prices will too. See Peak Oil and Peak Gas.

But, in the UK, another major problem is the behaviour of energy retailers, especially the Big Six: British Gas, Eon, npower, EdF, Scottish Power and Scottish & Southern Energy. A 2008 investigation by OFGEM found no evidence of price collusion, but raised several concerns about temporary tariffs and price information.

The complexity of domestic tariffs is mindboggling. Don’t even bother trying to compare them without the latest version of Excel and a chartered accountant watching over your shoulder. This, I believe, is an example of market failure, and a key explanation for uncompetitive prices. A partial, if imperfect, solution to this is uSwitch, which has enabled many customers to identify better deals more easily.

In some cases, mis-selling is an issue. I was misled into accepting a contract from one of the Big Six in July. When I realised it wasn’t what was promised, I queried it. My tariff was explained but the original promise remained unfulfilled, so I switched to another provider and made a formal complaint. It’s not easy to do this; I had to assert my case vehemently to reach the complaints department. The good news is I received £100 compensation, and a promise that appropriate action would be taken, after the original sales call was reviewed.

The pressure for companies to compete effectively in a failed marketplace is enormous. Mis-selling is to be expected, but must be condemned.

Last week, OFGEM announced measures to simplify the market. While ‘innovative’ tariffs will still be available, simple no-frills tariff options will be compulsory, and easily comparable. A standing charge will be set by OFGEM, and companies will compete on a simple unit price. The complexity of today’s market could give way to price leadership in future, but I believe it is an essential intervention.

The average dual fuel bill now stands at £1,345pa (£112 per month). For most of us, that is a big dent in our budget. Many consumers are already in fuel poverty with lesser bills. We all deserve to understand the price of our fuel; at the moment that is all but impossible.

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