Ed Davey’s energy proposal will accomplish nothing

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November 20, 2012 by Nash Riggins

Energy Secretary Ed Davey is expected to outline a proposal today that will ensure all UK households are inherently placed on the cheapest possible energy tariffs by their suppliers; however, said legislation will undeniably hurt consumers more than it will help them.

In line with PM David Cameron’s off-the-cuff promise last month to reform the UK’s domestic energy market, Mr Davey will call on all domestic energy suppliers to reduce the maximum number of tariffs they are allowed to offer to just four. In addition, energy suppliers will now be required to automatically transfer all customers onto their cheapest available tariff.

Consumer groups are already hailing the proposal as a ‘victory’ on the behalf of energy customers nationwide, claiming that the difference between the cheapest and most expensive tariffs on offer from many suppliers runs in excess of £300 a year. That being said, customers should expect to save only around 12% of that supposed difference.

Preliminary figures indicate that Mr Davey’s proposals – if enacted – would save the average UK homeowner £36.65 per year, based upon the current standard rates offered by the UK’s predominant Big Six energy suppliers. Assuming that all customers were inherently deferred to their supplier’s cheapest tariff on offer, said suppliers would be then forced to charge UK customers a minimum of £1,210.79 per year in order to match their current average turnarounds. In truth, many energy customers are already paying less than that.

Short-term savings aside, Mr Davey’s proposed legislature is undeniably bad for competition in an otherwise thriving energy market. There are currently 63 domestic tariffs on offer in the UK – although it should be duly noted that a relatively large number of said tariffs are merely permutations of one-another, and boast identical rates. What’s more, the majority of the UK’s 17 energy suppliers already have less than 4 tariff options on offer. As a result, if Mr Davey’s legislature went ahead, rules of uniformity could bring the number of tariffs up to 68 – rendering an embarrassing textbook definition of the word ‘backfire’.

In fact, this entire notion of tariff reduction is merely a public rehash of a long-term initiative that industry-regulator OFGEM put into place earlier this year. In all likelihood, it will hardly affect the majority of large suppliers – but simultaneously offer smaller suppliers an excuse to further inundate the market with even more confusing tariffs. Moreover, if consumer advocates truly believe that Davey’s plan will convince energy suppliers to abandon their most expensive plans on offer, they should think again.

Above all else, Number 10’s impending legislature has wholeheartedly failed to account for basic economic doctrines. Wholesale energy prices will slowly continue to rise, and energy conglomerates will continue to raise domestic rates in line with these increases – the government will never be able to hinder this ill-fated fact of life. Accordingly, by deterring energy suppliers from convincing customers to invest in their ‘platinum’ packages – assuming suppliers don’t choose to use those higher rates as a new ‘standard’ price – said suppliers will look elsewhere in order to turn a profit. Subsequently, the ‘cheap’ standard rate tariffs with which Ed Davey is effectively keen to dump the majority of UK customers onto will dramatically rise over the next several years – because so long as those plans are the cheapest tariffs on offer, government legislature will dictate that customers are forced to pay whatever ridiculous price the energy market is able to muster.

In addition, customers stand to lose substantially in the long-term if energy suppliers inherently dump them onto standard rate tariffs. At many points, a supplier’s cheapest rate tariff will be its standard, variable rate plan, rather than fixed rates – why? A supplier’s fixed rate tariffs intrinsically emerge onto the market at a more expensive rate than that of standard variable rates, so as to cope for the supplier’s presupposed future loss in profits when fixed-rate customers are paying substantially less than standard rate customers several months down the line. That being said, at what point will legislature call for customers to be moved from variable to fixed rates, as they will be cheaper in the long-term? Mr Davey’s proposal is to make no such caveats regarding this dilemma – suggesting that energy suppliers will have little motivation to encourage customers to switch to these seemingly more expensive plans that will actually save them money in the long-term.

Legislative solutions to regulate a fiercely competitive market are inevitably bound to fail, because the competitiveness of that market ultimately stands to be destroyed. Energy is relatively cheap in the UK – in fact, UK customers pay up to 66% less than their European neighbours in order to heat their homes during the winter. As wary customers brace themselves for impending domestic price increases, it’s no wonder that they’re looking to point the finger at energy companies; however, rising costs cannot be countered by pesky government mandates, but rather societal advancements that fall into line with said increases – first and foremost, via a substantial rise in living wages for UK workers. Instead, the Coalition Government has hastily put together a competition-killing piece of legislature in an effort to publicly display its assumed understanding of an issue that threatens its grip on power.

Mr Davey’s proposal will save customers a small amount of money over the short-term; however, in the long-term it will erode industry competition and potentially cost customers substantially more for their energy than they’re paying now. Westminster must work closely with OFGEM in order to manage affordability in the domestic energy market; however, the underlying issue here cannot be solved by near-sighted legislative restrictions. With any luck, MPs will realise this and act accordingly.

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