Energy bills ‘£1.2bn a year more than they should be’

The UK’s competition watchdog has found that millions of homes are paying too much in energy costs. The industry was referred to the CMA by Ofgem over concerns about the supply businesses and generation arms of the six largest suppliers.

In the UK, the “big six” – Centrica, EDF Energy, E.ON, RWE npower, Scottish and Southern Energy plc (SSE), and Scottish Power – supply energy to around 90 per cent of the domestic customers and generate over 70 per cent of total electricty.

The average household currently spends about £1,200 on energy each year. In the poorest 10 per cent of households in the UK, energy costs account for 10 per cent of family bills. The CMA found that “widespread consumer disengagment” was impeding the proper function of the market; consumers were confused by tarriffs and rates and did not know that it was possible to be on a cheaper rate.

Decade price hikes

Over the past 10 years, electricity prices have risen by around 75 per cent and gas prices by around 125 per cent, the CMA said, citing environmental and related network investment costs as the primary reason.

The CMA’s survey of 7,000 people in the UK found that the vast majority – 70 per cent – are currently on the default standard variable tariff (SVT), despite cheaper deals existing. They found that the average customer could save £160 a year by switching – but those who need to most are not.

“35% of those whose household incomes were above £36,000 had switched supplier in the last three years, compared with 20% of those whose household incomes were below £18,000, and 32% of those with degree level qualifications had switched in the last three years compared with 185 of those with no qualifications.”

On average, people living on under £18,000 a year and in rented accomodation were paying a “somewhat higher price” than the rate paid by wealthier people who own their home, the investigators found.

Lack of transparency

The report said a lack of transparency is hampering trust in the sector, and has a number of recommendations to improve understanding of how energy tariffs work by increasing the use of ‘smart meters’ – particularly pre-paid customers.

Both domestic customers and businesses were paying too much – their analysis of of the average prices offered by the “big six” from 2009 to 2013 found that they were around 5 per cent higher than they should be for homes, and 14 per cent higher than they should be for businesses.

“This equates to domestic customers paying around £1.2 billion and SME customers paying around £0.5 billion more on an annual basis than would have been the case had competition functioned more effectively.”

The investigation found high levels of complaints about customer service against the “big six”, but low levels of customers actually switching. Roger Witcomb, who chaired the investigation, said it was time for customers to shop around more.

“There are millions of customers paying too much for their energy bills, but they don’t have to. Whilst competition is delivering benefits to increasing numbers of customers, mainly through the growth of smaller suppliers with cheaper fixed-price deals, the majority of us are still on more expensive default tariffs. Many customers do not shop around to see if there’s a better deal out there – let alone switch.”