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How British Politics Abandoned Faith In Energy Switching

06/06/2017 12:07

If the policies of the two main political parties are anything to go by, the idea of a competitive energy market where consumers readily switch their supplier has been abandoned by the mainstream of British politics.

The Conservatives fired the first shot earlier this year when they floated the idea of an energy price cap. Greg Clark, the UK's energy secretary, even admitted that he himself had never switched his energy using a price comparison website. It was, he said while on the BBC Breakfast show, "quite a hassle." He said he didn't believe consumers should have to go through such a "fuss, simply to avoid being ripped off".

Labour has also launched an all-out assault on the idea that switching energy is a good way to ensure low energy prices for Britain's households. According to the party's manifesto, switching is too much effort for most people. The document claims "many people don't have time to shop around." Instead of the hassle of a competitive market, "they just want reliable and affordable energy."

Instead, Labour wants an emergency energy price cap of £1,000 for a family dual fuel tariff, and the creation of local publicly owned energy companies to compete with private suppliers. Presumably they believe people will switch to the publicly owned suppliers and never switch again.

Such scepticism of switching in the working of our energy market is, in part, justified. Despite a multitude of price comparison sites and the constant advertising about how much switching your provider can save, most people do not switch. Recent figures show that only around 27% of energy customers have switched in the past few years. Further, those who do switch are part of a small group of "engaged consumers", while many customers have never switched and seemingly never will. This undermines the whole reasoning behind energy switching.

When the concept of switching your energy supplier to stimulate competition in the energy market first came about, having a low number of switchers was never meant to be a problem. Initial reasoning had it that even if only a fraction of consumers switched, that would be enough to create a market of affordable and efficient suppliers.The threat of existing customers becoming "switchers" would, it was hoped, keep energy firms on their toes. Not knowing who exactly will switch, suppliers would feel compelled to offer customers competitive prices and good customer service.

Unfortunately, that hasn't quite turned out to be the case. As we, and energy companies, now know: the vast majority of people who switch their energy have done so in the past. And the vast majority who have never switched appear unlikely to start. Energy companies can guess fairly well that those who have been on an expensive single variable tariff for years will not, in all likelihood, start switching after a price rise. And so, there is little fear they will lose these customers when they up jack up their prices.

This reluctance to switch is costing British consumers. The Competition and Markets Authority found that customers could have saved up to £330 per year by switching to a cheaper tariff in 2015. While switching was supposed to keep energy companies competitive for all customers, suppliers have grown confident that they can continue to charge loyal customers hundreds of pounds more than customers that switch to fixed tariff deals.

How to rectify this, though, is not so clear. The simple answer is to ensure more people are aware of the existence of cheaper energy deals and where to go to compare prices. But popular price comparison websites have spent huge sums of money on advertising in recent years. Consumers should be more aware than ever of the ease and possibility of switching. Yet still, people are resistant. And despite the countless studies carried out exploring the problem, no one has yet to put in practice any real, working solution to get more people to start switching.

However, this does not mean we should curtail competition in the energy market further, as the two major parties now seem intent on doing. Having the state set prices is a bad solution to an already bad situation. The problem with the energy market is a lack of real competition. Having the state wade in and fix prices would further reduce that competition and, unfortunately for consumers, push up prices in the long run. In particular, it would punish consumers who are active energy switchers. As Dr. Xeni Dassiou, of the Department of Economics at City University noted when the Tory price cap was first floated: "Economists and the energy industry are concerned a price cap like that being proposed by the Conservative Party would undermine competition and result in higher prices for consumers in the long run." That's not good for anyone.

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