“Unjustified” energy bill pricing is to be banned, under a new set of rules designed to give households more power.
Ofgem, the energy supplier regulator, has unveiled a host of new rules to clean-up the retail energy market, including the prohibition of unjustified price differences. This means that energy companies will have to justify why people with pre-payment meters pay more for their gas and electricity compared to those on standard direct debit tariffs.
Energy suppliers will have to justify price differences and ensure retail prices are a true reflection of cost.
The new rules also aim to clean-up doorstep sales of energy tariffs, with salesmen now having to offer customers written quotations and, for pre-payment deals, proof that the new deal is better than their existing one.
Other measures announced by Ofgem include:
• Customers given annual statements detailing the amount of energy they use and their current tariff information
• New at-a-glance pricing score cards to help people compare tariffs when switching
• Energy suppliers will not be able to prevent customers from switching to a different deal without good reason
Alistair Buchanan, chief executive of Ofgem, says: “This is an emphatic move by Ofgem to clear the decks of obstacles that prevent consumers from getting access to the best offers.”
Impact of new rules
Ofgem’s new rules emphasise the work that energy suppliers must do to ensure energy bills and prices are more transparent, making it easier for people to switch to a new deal if they want to.
For example, the only way most people know exactly how much they pay each year on energy is by working it out from their quarterly bills – hopefully, seeing the figure in an annual statement should shock people into taking action and checking if they could reduce their bills by switching.
But the main purpose of the new rules is to reduce the price gap between suppliers' cheapest deals (which tend to be online tariffs) and their most expensive (usually pre-payment meters). Suppliers will have to justify these gaps and, when they cannot, reduce the cost for consumers.
However, there are concerns that the new rules couldmean the cost of paying for energy with a pre-payment meter actually increases.
Generally considered the most expensive way to buy energy, pre-payment meters are popular among low-income houses as they allow people to budget for their energy rather than face paying a quarterly bill in one go. Transact, a consortium of debt agencies, recently warned that pre-payment customers pay £215 more a year than someone on a direct debit tariff.
John Pierce, campaigns officers at the National Housing Federation, which is currently campaigning to stop energy companies imposing “unfair charges” on pre-payment customers, says Ofgem’s new rules will make things worse not better.
The rules state that energy companies must justify price differences – the problem is, the premium associated with pre-payment meters can be justified as this is a more expensive charging structure of energy supplier.
Recently, all of the big six energy suppliers agreed to bring the cost of pre-payment electricity inline with direct debit prices. However, British Gas, EDF Energy and Southern & Scottish Energy continue to charge more for gas customers.
“The new rules could undo all the good work that has been done to reduce the pre-payment meter costs,” says Pierce. “It is not the fault of pre-payment customers that this method is more expensive for suppliers and they shouldn’t have to pay more as a result.”
Bob Wilson, assistant director at the Federation, adds: “This could be another kick in teeth for millions of prepay customers, who have finally seen prices coming down after years of being ripped off by the energy giants. These proposals will give the big six the perfect excuse to increase their prepay charges again and could result in dramatically higher prices."
Ofgem says that if energy suppliers do not adopt its new rules, then it will refer the issue to the Competition Commission, which could then investigate how fair current pricing is.
Energy companies are, therefore, largely expected to adhere to the rules. But, as Gareth Kloet, head of utilities at Confused.com, points out, there is no incentive for energy companies to wholeheartedly embrace them.
“There is no advantage for an energy supplier to move someone onto a cheaper tariff, unless there is a wholesale cost savings for it,” he explains. “In addition, there will be a marketing cost of the new rules for energy companies.”
Meanwhile, Consumer Focus, the consumer rights organisation, wants Ofgem to set a deadline for when the new rules come into place.
Robert Hammond, energy expert at Consumer Focus, says: “We are happy to work with Ofgem to ensure these deliver clear practical benefits for consumers, however, a firm date is needed for these proposals to come into effect.”
Kloet also believes the new rules need to be more prescriptive in order to ensure consumers really benefit – particularly in relation to annual statements.
Ofgem’s new rules propose that all customers be sent an annual statement as standard. This will include the tariff’s name, the customer’s energy consumption and the total amount they spend each year on heating and lighting their home.
But energy bills are already cluttered, and adding additional information could confuse matters further. It will be up to each individual energy supplier to decide how to design the new-look bills, which could see customers presented with a “mishmash” of information, Kloet warns.
It will be up to consumers to use the information they are given as best they can, as they are unlikely to be aided to any great extent by their supplier.
Meanwhile, a new law to tackle fuel poverty among vulnerable households was last week thrown out by MPs. David Heath, the Liberal Democrat MP for Somerton and Frome, told MPs that 20,000 people die from the cold each year. The Fuel Poverty Bill would help low-income people - including pensioners - heat their homes.
Fuel poverty is defined as when more than 10% of a household's income is spent on heating their home to an adequate standard. The government’s target is to end fuel poverty for vulnerable people by 2010, and for everyone by 2016.
Charities have expressed dismay that the Fuel Poverty Bill has been rejected. It received 89 votes for and two against, but needed 100 positive votes to be adopted.
Gordon Lishman, director general of Age Concern, says: "This is a huge let-down for 2.75 million older people living in fuel poverty and many will question why a government which claims to be concerned about fuel poverty has acted in such a cynical way."
And Jonathan Stearn, an energy expert for Consumer Focus, warns pensioners, low-income families and the disabled will suffer as a result.
"The proposed energy efficiency and social tariff measures would have ‘fuel poverty-proofed' homes and would have stopped the poor paying more for their energy," he adds. "By not supporting the Bill the government has dramatically failed the poorest consumers."