Energy plans: indefinite no more?

Getting chilly, isn’t it? And along with that comes wearing two pairs of socks and rushing out to buy a hot water bottle. Oh, and consuming  a rather alarming amount of tea. Until about March. Good thing you don’t need to worry about your energy tariff changing any time soon. Oh, wait – you do.

Why?

It turns out the CMA (that’s the Competition and Markets Authority – the competition watchdog) has been considering temporarily capping the indefinite energy tariffs that are the default when we move, or when our fixed-term energy plan ends. They’re also called ‘standard variable’ tariffs, and most of us are currently on one of them – about 70 percent of UK households, in fact.

A little background

We’ve already said that most of us are currently on indefinite energy deals, and that it’s usually the case that we end up on these by default – either when our fixed-term energy plan ends or when we move home. But it turns out that quite a few of us remain on these indefinite energy plans for a while (we’re talking years), even though it’s often not the most economic tariff out there. In fact, the CMA’s year-long investigation into the energy sector (and doesn’t it seem like there’s always some sort of investigation into the energy sector?) showed that not shopping around costs most of us savings of up to £234 a year. Quite a bit, isn’t it?

And it’s (partly, at least) because consumers aren’t shopping around that their energy suppliers – the focus here being on the Big Six – raise their prices. After all, if they know their customers are unlikely to look elsewhere, why wouldn’t they raise their prices?

So the CMA has been considering what could be done about this. And what did it conclude? Well, in July of this year it suggested that temporarily capping the price of these indefinite tariffs might be one way to deal with this. These caps, which would be imposed by either the CMA itself or Ofgem, could result  in many of us being charged less for our energy, and would protect against the suppliers raising their prices.

What did people think?

This attracted considerable criticism, both from industry bigwigs (not very surprising) and consumer groups (somewhat more so). More specifically, the CBI (the Confederation of British Industry – a business lobby group representing 190,000 businesses) warned against price capping, claiming that neither consumers nor competition would benefit from it.

You’re probably wondering how it would harm consumers – surely limiting how costly energy tariffs can be is a good thing? Not according to the CBI, who claimed that a price cap would give them less of a reason to shop around (because if prices are capped, why bother?). And this, in turn, would supress competition.

And how did the CMA react?

It’s now proposing to phase out these indefinite tariffs, leaving only fixed-term tariffs. As you approach the end of your fixed-term energy deal, you’d be notified (by letter) of this. The letter would also suggest that it might be time to start looking for a new deal.

But what if you don’t? Maybe you don’t have the time; perhaps you simply forgot. Once your tariff ends, you’d be put on a default tariff. This would be a fixed-term, year-long deal, possibly with a cap on the price (in contrast with the current default, which is indefinite and has no such ‘safeguard’). You’d also be sent reminders to actively select a deal. And who decides what this default tariff should be? Wait for it… The energy suppliers. After all, this proposal is based on suggestions from ScottishPower and British Gas. Nice little twist, that.

So what happens now?

It’s a bit of a waiting game. The CMA has said that this might be a more effective way to increase consumer engagement with the market. But it still has its concerns, including the possibility that some people still won’t shop around for a new energy deal despite being prompted to do so, and whether this new proposal (once implemented) would really protect this group of consumers from high energy prices.

At the moment, it looks like the CMA might give us a better idea of which reforms it’ll back sometime in January.

In the meantime, we recommend curling up on the sofa with a cup of perfectly brewed tea.  Not that you needed us to tell you that.

Simplify the Law

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