UK Energy Policy in Tatters

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October 19, 2012 by Nash Riggins

As the domestic energy market attempts to reclaim its footing following the tremors caused by three new impending price hikes, government organisations and consumer watchdogs alike are struggling to protect the interests of UK energy customers; however, these initial responses are heading in the completely wrong direction.

In the course of less than one week, British Gas, nPower and ScottishPower have all announced the implementation of universal price increases for all domestic customers – as much as 11.25% in some regions – to come into effect by year’s end. Meanwhile, the 8.72% increase announced by Scottish and Southern Energy (SSE) earlier this year came into effect on Monday.

Why the sudden price hikes? In essence, all four suppliers have blamed these ‘necessary’ increases upon rising wholesale energy prices, as well as the government policies and environmental schemes that affect tariff rates. Despite this line of reasoning, however, this news undeniably does not bode well for energy consumers – in fact, the average UK energy bill has risen by almost 13% in the last year alone. As winter begins to rear its ugly head, action must indeed be taken on behalf of the UK’s fuel poor and average householder alike – yet the first responses from the consumer groups and the UK’s government have been utterly unfeasible and nonsensical.

In an open letter to Prime Minister David Cameron, consumer group Which? called yesterday for the government “to launch an urgent, expert, independent review into the rising cost of domestic energy bills and whether competition among energy suppliers can be made to work more effectively in the consumer interest.” The letter elaborated by requesting that energy industry-regulator OFGEM should introduce a fair cap on ‘standard’ prices in an effort to protect customers from un apparently uncompetitive domestic energy market. The Prime Minister responded to these demands swiftly.

During yesterday’s session of Prime Minister’s questions, Mr Cameron announced that his government will immediately be pursuing legislation that will force domestic energy companies to place all costumers on their lowest-priced tariffs by default. Yet only one day after Mr Cameron’s announcement – hailed by many as a “victory” for the UK’s fuel poor – the prospective legislature has already begun to segment members of his Coalition government.

Today, Energy Secretary Ed Davey appeared to distance himself from the stance by side-stepping enquiries on the matter – and the chances are, he doesn’t wish to elaborate for one simple reason: Mr Cameron’s announcement will not benefit customers in the slightest.

The Prime Minister’s heart is clearly in the right place; however, his knowledge of the UK’s energy market is blatantly limited. Indeed, if legislation is put into place that effectively limits domestic energy suppliers to one, go-to tariff, logic dictates that the majority of suppliers will drastically raise the prices of said tariffs in order to compensate for any subsequent loss in profits. Mr Cameron’s suggestion is more or less achievable, in that UK energy customers can be deferred to the lowest possible tariff rates; however, these rates will undoubtedly be substantially higher than the rates at which the nation’s lowest tariffs currently stand.

Indeed, any legislative attempts to stifle competition as it currently stands within the energy market are predictably bound to backfire for one simple reason: the domestic energy market already is competitive. What’s more, energy prices are not expensive in the UK in relation to the rest of the developed world – in fact, figures from the International Energy Agency suggest that retail fuel prices in the UK are up to 17% cheaper than in neighbouring, oil-rich Baltic countries. That being said, it’s plain to see that relative retail expense is not the issue afflicting the domestic energy market, but instead a matter of affordability.

If Mr Cameron truly wishes to positively impact the UK’s domestic energy on behalf of its customers, he must look substantially further than following near-sighted suggestions surrounding standard price caps, and look instead at how to resolve this issue of domestic affordability. Said issue is rarely addressed head-on, as it is not necessarily a line that will win votes; however, there are several feasible ways in which the government can strive to increase affordability without stifling industry competition.

First and foremost, Mr Cameron should abandon nonsensical ideas surrounding standard price caps, and instead pursue legislation that forces domestic energy suppliers to abandon early termination fees. These fees – sometimes running in excess of £60 for dual fuel customers – effectively trap homeowners into expensive, long-term tariffs, when they could have otherwise pursued switching energy suppliers and enjoyed immediate savings.

Second, Mr Cameron would do well to push for OFGEM to amend legislation such as Standard License Condition 25 (SLC 25), which limits face-to-face and telephone marketing within the energy industry and its semiotic comparison industry. It’s no wonder that the majority of consumers – as well as consumer groups such as Which? – perceive the domestic energy market to be confusing and uncompetitive, because OFGEM has stifled competitive marketing tactics and enlightening face-to-face interaction by depleting transparency within the industry. If anything, the price hikes that have been announced within the last week have wholly proven that such legislative acts have failed to protect customers.

Finally – and perhaps most vitally – the government must abandon half-baked ideas such as collective purchasing once and for all. Ed Davey and the DECC continue to endorse the ideology surrounding reverse auctions and collectively switching energy suppliers; however, the movement’s flagship project, the Big Switch, undeniably turned out to be a major flop.

The reverse auction, sponsored in May by consumer group Which?, was the UK’s largest reverse energy auction ever. Indeed, interest peaked at 287,365 registrants; however, Co-Operative Energy’s subsequent auction-winning tariff was capped at 30,000 customers, and provided an average savings of around £223 per year.

Yet Industry leaders such as British Gas – now backed into a corner of their own – consequently argued that such campaigns only serve to confuse consumers and cloud the market via the launch of single-serving, incomparable rates that effectively leave consumers to fend for themselves should they ever wish to switch to a cheaper deal. In addition, critics argued that the Big Switch campaign actually cost customers money – as it prevented customers from switching suppliers for almost four months, whilst they could have enjoyed an immediate savings had they opted to switch individually. Above all else, however, Which? was blasted for its inability to provide Big Switch participants with the nation’s best deal.

In fact, the Big Switch campaign’s winning single-serve tariff as offered by Co-Operative Energy – coming in at a yearly average of £1,048 for most households – was unable to match the savings of First Utility’s iSave v10 tariff, which could have collectively saved those customers an additional £340,000 annually. Several subsequent campaigns have run into similar snags throughout the year, proving that such activity hinders customers more than it actually helps them – yet for whatever reason, the UK government continues to encourage these ineffective auctions.

Rising domestic energy prices are an issue – yet given the UK’s relatively low tariff rates, the true issue is ensuring the affordability of energy for those most in need. To achieve this, Mr Cameron should seek to cut corners elsewhere – for example, issue has yet to be taken with the European Union’s proposed liquidation of the UK’s reduced VAT rates on energy bills, which could stand to increase domestic energy bills by 15% overnight. If Mr Cameron truly wishes to protect the interests of the UK’s fuel poor individuals, he would do well to start here – rather than be tricked into allowing domestic energy suppliers to charge customers even more for fuel than they already are. With any luck, the UK government will pursue some of these points, and quickly abandon these foolish attempts to cap something in which they cannot even regulate in the first place; however, the bumbling legislative outlines that are currently emerging from Whitehall suggest otherwise.

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