After holding prices steady for 4 years, last week British Gas raised electricity prices by 12.5%. The average dual fuel bill will go up by £76 a year, a 7.3% rise. Consumers are unhappy. Politicians are outraged. Predictable calls of profiteering are heard from all corners and the media is asking what can be done about it. The Secretary of State for Business, energy and Industrial strategy, Greg Clark, has referred the matter to Ofgem, the regulator, asking what they intend to do to protect consumers.
Energy prices are a sensitive subject. Since 2001 prices in the England and Wales have risen by 50% in real terms, as wholesale prices and delivery costs have risen, and government environmental policies such as the Climate Change Levy, the Energy Company Obligation, the Warm Homes Discount and the Carbon Price Floor have increased costs. This contrasts with the preceding decade, where liberalisation and privatization saw prices drop by 26%. Government imposed environmental costs account for 15-20% of energy prices today, versus only 4% just 7 years ago. British Gas says the latest price increase is necessary to cover costs.
To an outsider, the uproar seems bizarre. If Adidas raises the price of trainers, no politician cries foul play and no regulator steps in to examine the underlying justification. People either suck it up or buy a different brand. Not so in energy.
Is energy a monopoly, then? Or at least an oligopoly? Is competition stifled? On the face of it, no. Though the market is dominated by the ‘Big Six’ energy companies, there is a plethora of other suppliers in the UK. Despite claims to the contrary, the market is not particularly un-transparent. Services like uSwitch makes switching energy supplier simple. ‘It’s hassle free and takes five minutes on a comparison site”, says MoneySuperMarket energy expert Stephen Murray. According to Ofgem, savings could amount to up to £300 a year – but the Big Six still deliver energy to more than 90% of customers.
The reason is surprisingly straightforward: laziness on behalf of the consumer, plain and simple. Despite the large savings on offer, most customers are ‘inactive’ and never change supplier, staying on a ‘standard variable tariff’ despite fierce competition for the smaller ‘active’ customer segment driving down available prices and increasing the gap to the standard variable deals.
Source: OVO Energy
It seems energy customers are just too lazy to switch suppliers – and the current crop of consumers are concentrated on the books of the Big Six. But how did these giants attain their privileged position? Through excellent customer service? A superior product? Clever marketing? Competitive pricing? No, through inherited privilege from their state owned predecessor. After privatization in 1990, 14 regional electricity boards were created. These were then merged into the Big Six in 2001. These companies effectively inherited customers from the state, and without having to compete to attract business, have been happily overcharging their lazy customers ever since. The current situation is a legacy of a nationalized industry.
The question is what to do about it? One option, the one favoured in Westminster, is more regulation. Labour see an opportunity for calling out big business and argue for more regulation or even nationalization – and as usual, the Tories run scared and try to align themselves with the left to avoid having to make difficult arguments. Discussions of price controls have reared their ugly head again. The other option is to recognise that the market is competitive, that government intervention to protect ourselves from our own laziness is unjustified, and that the alternative of price controls and nationalizations are a step backwards – and finally, to encourage consumers to look for the best deal in larger numbers than they do today. Luckily, that is slowly happening. Since 2014 so-called independent suppliers have increased their market share from 0.2% to 7.6%. Time will eventually erode the inherited privilege of the Big Six and provide Britain with a truly competitive energy market. Until then, lazy customers reap what they sow.