Energy customers ‘paying £1.7bn a year too much’

Millions of customers are paying too much for their energy bills, an investigation has found. The Competition and Markets Authority (CMA) revealed the Big Six suppliers overcharged householders by around […]

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By Priyanka Shrestha

Millions of customers are paying too much for their energy bills, an investigation has found.

The Competition and Markets Authority (CMA) revealed the Big Six suppliers overcharged householders by around 5% – or £1.2 billion – and small and medium (SME) customers by around 14% – or £0.5 billion – a year between 2009 and 2013.

Householders currently spend around £1,200 on energy every year but dual fuel customers could save an average of £160 annually by switching to a cheaper deal.

For the poorest of households, energy bills now account for around 10% of total expenditure, the CMA said.

Around 70% of customers are currently on the “default” standard variable tariff (SVT) despite there being cheaper fixed-rate deals. The CMA added that’s due to a lack of awareness of what deals are available, confusing and inaccurate bills and the real and perceived difficulties of changing suppliers.

A survey of 7,000 people found more than 34% of respondents had never considered switching provider.

Roger Witcomb, Chairman of the energy market investigation, said: “There are millions of customers paying too much for their energy bills – but they don’t have to.”

Prices, profits and costs

Image: Thinkstock
Image: Thinkstock

Electricity prices have risen by around 75% and gas prices by around 125% in the last 10 years, with much of the recent increases down to environmental and related network investment costs.

The average revenue per kWh earned by the large companies – British Gas, E.ON, EDF Energy, npower, SSSE and ScottishPower – from customers on SVT from 2009 to 2013 was around 10% higher for electricity and 13% higher for gas than average revenue earned from customers on other tariffs.

The CMA also found “considerable variation” in the prices paid by SMEs, including microbusinesses. It revealed rollover tariffs were 29% to 36% higher than retention tariffs for electricity – depending on the size of the customer – and 25% to 28% higher for gas.

“Overall, our provisional view is there is a range of evidence that suggests average prices paid by domestic customers have been above the levels we would expect to see in a well-functioning competitive market. For SMEs, the evidence suggests that average prices have been substantially above the levels we would expect to see in a well-functioning competitive market,” the CMA stated.

Margins on sales of gas (10%) to SMEs were higher than those on sales of electricity (8%).

Reforms

Image: Thinkstock
Image: Thinkstock

The CMA suggests the need for a “coherent and transparent approach to responsibilities and policy implementation”.

It said there is a “lack of shared understanding” of the factors that have led to price increases and “lack of transparency” is hampering trust in the sector, which are undermining regulatory stability.

The CMA stated: “Trusted and transparent information on the costs incurred and the profits earned by energy companies may help to inform the public debate and reduce the risk of errors in policymaking, by providing clearer information about whether and where intervention is required.

“It may also help to improve confidence in the regulatory system on the part of policymakers and the general public, which itself may improve the stability of the regulatory regime.”

The CMA is considering is a transitional price cap while reforms are made to the energy market.

Responses

Trade body Energy UK said it will “fully consider” the report.

Chief Executive Lawrence Slade added: “Our members have improved openness and continue to work to make things clearer for customers who, as acknowledged by DECC among others, say, increasingly, they trust suppliers.

“These are not the final results and our members will continue to work closely with the Competitions and Markets Authority, government and the regulator to ensure the best outcome for all customers.”

Energy Secretary Amber Rudd said the government’s “priority” is to keep bills down, adding: “We’ll consider the report and respond soon and we won’t hesitate to take further action where the market is not delivering a fair deal for consumers – including doing more to support switching, ensure the swift roll-out of smart meters and increase competition in energy markets.”

Ofgem added it will work with suppliers to deliver “a more competitive market” for consumers.

A previous CMA report found 95% of householders that buy their gas and electricity from the Big Six energy companies have paid hundreds of pounds more by failing to switch.