Energy market reform needs to be much more radical than just introducing a price cap

The energy market is broken. Most people pay more than they should for their energy – in some cases, up to £300 or more per year. In an era of stagnant wage growth, high inflation and rising energy prices, this has become a major issue. And it’s getting worse. The Big Six energy providers have all significantly increased the price of their standard variable tariffs (SVTs) over the last year, hitting the pockets of millions in the process.

Political parties of every colour have been under pressure to do something about it. And so, after a degree of toing and froing, the Government will mandate Ofgem to impose a price cap on the cost of the controversial SVTs, in theory saving households on these un-competitively priced tariffs up to £100 per year.

So, is the price cap a silver bullet solution? To be frank, not in the slightest.

It will take more than a three to five-year absolute price cap to fix the broken energy market. At best, the cap is a short-term solution which will see some households on the worst value default tariffs pay a little bit less for their energy. At worst, it will simply turn people off ever looking at an energy bill again, ultimately damaging consumer engagement with the energy market, which has been slowly but steadily getting better.

To give the Government its due, it implicitly acknowledges the short-term nature of this fix. The cap is only intended to be in place until 2020, with the possibility of an extension to 2023 at the latest. So, whilst the cap might sound radical, it is only tinkering around the edges and there are many other possible reforms that could make the energy market more competitive.

Increasing customer engagement with the energy market is key. Ofgem’s recently published “State of the Market Report” referred to energy as being a “two-tier market”, split between the engaged and disengaged consumer, with the balance heavily weighted towards the latter. It found that only 17 per cent of consumers switched supplier between July 2016 and June 2017. Given the price cap will likely switch people off, we need a comprehensive set of long-term solutions to get people more engaged in their energy usage and the tariffs they are on. Why? Because switching tariffs remains, by a distance, the best way to save money.

Long-term solutions to the energy market should comprise a combination of practical steps which households can easily take, alongside a commitment from energy companies to adhere to a set of core principles. The solutions that we have devised, outlined in no particular order, are as follows.

While we believe that the broader price cap on SVTs is unhelpful and short term, not all price caps are created equal. We believe that maintaining a dynamic pre-payment meter price cap, to protect the most vulnerable customers, is a really important Ofgem initiative that should remain firmly in place for the foreseeable future.

We need an energy bill revolution – a radical “simplification overhaul” of energy bills to make them consistent, easy to read and understand. If you can’t understand what you’re paying for then you probably won’t be able to work out whether you can get a better deal elsewhere, or cannot spare the time and effort required to work it out. We need to change this, and have proposed a standardised simple bill template for energy companies to be encouraged, or coerced by regulation, to adopt.

The smart meter rollout programme needs to get back on track. Smart meters could play a big part in combatting the current problems around providing usage estimates and erroneous meter readings. However, the smart meter programme has, to date, been something of a disaster.

The first generation of smart meters – still being installed today – are often rendered “dumb” as soon as you switch. There are no firm timelines regarding the rollout of the second generation of smart meters, which are supplier agnostic, other than vague talk about early 2018 from some of the big energy suppliers.

To get the smart meter rollout on the right track we need to ensure that only the new technology, which allows the meters to talk to the central database, is installed in homes and that stronger reassurances are provided by both Smart GB, the voice of the rollout, and by energy suppliers around the safety of the installation and the security and usage of the data being collected.

Another important step to encourage better engagement is to introduce mandatory annual alerts, however the customer chooses to receive them: for example, via text message or WhatsApp, reminding people that their tariff is coming to an end and that they should review their options. This nudge should act as a catalyst for many who previously might have stuck their head in the sand.

According to our data, an estimated 274,000 customers will be automatically moved onto standard variable tariffs in the last three months of 2017, with affected households facing an average increase of £331 on their annual energy bill.

Whilst all these solutions are undeniably on the regulator’s radar, there needs to be a renewed focus on improving customer service, so that consumers are encouraged, rather than de-incentivised as many are today, to interact with their energy company. There are so many complaints around billing, and of the customer service handling these complaints, which make people want to avoid their energy supplier at all costs. This is not a healthy situation.

Finally, it is vital that the price cap rhetoric does not drown out the message that people should compare a wide range of tariffs on the market to get the best deal. The government and regulator have made great strides in this area in recent years; its switch and save campaign got people changing their tariffs and saving money. It’s really important that they don’t throw the switching baby out with the SVT bathwater, or we’ll end up with a market that’s as broken in 2023 as it is today.

Peter Earl is head of energy at price comparison website comparethemarket.com