LONDON (Reuters) - The recently completed retail market review is the last chance to deal with concerns about the poor functioning of gas and electricity markets without fundamental institutional or structural reform, Britain’s regulator, Ofgem, has warned.
There is a “very short window of opportunity to make the market work well”, Ofgem’s interim chief executive told a conference in London on Tuesday.
The bewildering range of tariffs on offer and the difficulty customers encounter when they try to switch to another supplier, coupled with the seemingly relentless rise in prices and squeeze on household budgets, have left customers frustrated and angry, according to Ofgem.
The result is a vicious cycle: customer anger prompts politicians to respond, intervening in the market in ways that increase uncertainty and deter much-needed investment, raising costs and the risks of supply interruptions further.
Ofgem wants to replace the vicious cycle with a virtuous one in which customer trust and satisfaction are rebuilt. If they are not, the regulator has warned that politicians may abandon the current market-based approach, which relies on competition, in favor of direct price regulation.
Changes being introduced by Ofgem will require suppliers to offer fewer, simpler tariffs and other information to improve price transparency, restrict discounting and other forms of price discrimination, and aim to make switching easier. Some suppliers have begun to modify tariffs and customer communications.
From August, suppliers’ licenses have been altered to oblige them to treat each customer in a “fair, honest, transparent, appropriate and professional manner” and provide information that is “complete, accurate and not misleading”.
“The standards of conduct are designed to improve the interactions and experiences customers have with energy suppliers in order to increase levels of customer trust in the industry and the energy market,” Ofgem wrote in a letter to suppliers in June.
“This, in turn, is intended to improve customer engagement and increase competitive pressures within the market.”
The retail review is backed by a threat: if at any stage Ofgem concludes the changes are unlikely to realize the intended benefits, the regulator could refer the sector to the Competition Commission for a full investigation.
Ofgem and the suppliers agree on a need to “re-engage customers in the energy market” and prove that it can be made to work in their interests. The extent of the challenge is clear from some statistics presented by consumer organizations to the conference.
Trust in suppliers is in “accelerated decline”, according to Adam Scorer, director of Consumer Futures, a quasi-official organization meant to advocate on behalf of utility customers.
Just 38 percent of UK consumers trust energy firms to do the right thing, compared with a global average score for the energy sector of 57 percent.
Nearly 60 percent of customers don’t trust energy firms at all. The sector is even more distrusted than other businesses unpopular in Britain such as banks (33 percent), car salesmen (55 percent) and train companies (27 percent).
In an opinion poll, nearly two-thirds of respondents said they would be more energy efficient if someone told them how to do so. But 60 percent said they did not want efficiency advice from energy utilities, and 68 percent said this was because they thought the suppliers were interested only in making money, not helping them.
Customers are increasingly dissatisfied with their current energy supplier, but switching rates have been declining. In the second quarter of 2013, only 9 percent of customers “seriously considered” switching suppliers. Annual switching rates are running at just 2 million out of more than 20 million domestic customers.
Customers blame a difficult and confusing process as the reason for not switching, though inertia is probably a bigger, unstated reason. Many also doubt switching will result in durable gains, with one supplier likely to be much like another in the long term.
Ofgem, suppliers and consumer groups are pinning a great deal on re-engaging customers in the energy market, the theme of Tuesday’s conference, to spur competition and more satisfaction.
The hope seems to be that if customers can be re-engaged, the clamor for politicians to do something about rising energy bills will abate. But the challenge is enormous and the policy’s prospects for success are modest.
For nearly two decades, Britain’s regulators have been trying to encourage switching in the market for current (checking) accounts to stimulate more competition and improve abysmally low satisfaction ratings towards banks, so far with little success.
In the current-account market, switching rates remain low and customer satisfaction is still poor, despite efforts to make the switching process much simpler and faster. Inertia ensures customers are more likely to get divorced than change a lifetime attachment to their bank.
It is not clear that customers want to be “engaged” in their energy supply. Most just want an affordable service without having to think too much about it.
Ofgem may also be focusing on the wrong target. Customer anger is driven more by rising bills than lack of trust in the suppliers.
Bill increases are being driven by factors common to all suppliers, including the rising cost of imported gas and policies designed to reduce greenhouse emissions by increasing energy efficiency and the share of electricity generated from renewables and nuclear.
Switching is unlikely to have much impact on the costs that customers pay in aggregate.
“Supply competition is a sideshow,” according to Oxford University’s Dieter Helm. “Switching is fun for a small number of people who have the evenings free to surf the complexity of company websites.” For the rest, it is unlikely to result in a significant reduction in the amount they pay for energy.
The real problem is that Britain’s politicians have three objectives for energy policy - decarburization, supply security and affordability - which are increasingly in conflict.
British Gas (CNA.L), one of the largest energy suppliers, calls them a “trilemma”: you can have any two of them but not the third. A reliable and low-carbon energy system is likely to be expensive. Bills can be kept lower but only by relaxing some of the more ambitious decarburization and supply security targets.
“It is fashionable to say that the objectives of energy policy are security of supply, decarburization and affordability (sometimes stated as competitiveness),” Helm wrote in a recent paper. “The easy assumption ... is that these are natural bedfellows ... This is a fantasy.”
“The difficult political and institutional challenge is how to reconcile objectives which sometimes conflict,” he concluded (“Labour’s energy policies”, October 2013).
Until 2008 or even 2011, rising oil prices and fears about future fossil fuel shortages concealed the conflict. Green energy could also be cheap energy, at least when compared with the escalating cost of fossil fuels. The shale revolution has changed all that. Green energy now looks expensive and customers are balking at the cost.
There is not much that Ofgem can do about rising bills. The regulator is charged with making the retail market competitive; the objectives of energy policy are set by politicians.
Britain’s political leaders set the country on the path of rising bills when they passed the Climate Change Act in 2008, which set ambitious and legally binding targets for reducing emissions, and was backed by all three major political parties.
In theory, all three remain committed to the decarburization process laid out in the act, though with varying degrees of enthusiasm.
The ruling Conservative Party is still officially committed to decarburization, though its enthusiasm for renewables is not strong, and the party is clearly queasy about defending rising energy prices.
The opposition Labour Party wants bills to stop rising, and blames profiteering by the energy suppliers and generators, though it too is still committed to decarburization.
Only the Liberal Democrats, the junior party in the governing coalition and the smallest of Britain’s main parties, are enthusiastically committed to the 2008 consensus position.
But something has to give. Customers are voters. Anger at rising bills is pushing the awkward policy trade-offs into the open and forcing politicians to respond. Britain is starting to have the discussion about the costs and benefits of various policy choices which it should have had in 2008.
Editing by Dale Hudson