Centrica’s proposals for a fairer energy market for all

Posted On: 
20th November 2017

Iain Conn, Group Chief Executive, Centrica plc sets out plans to reform the energy market.

Credit: 
Centrica

We seem to have been arguing about the UK energy market and whether customers get a raw deal ever since British Gas was privatised over 30 years ago. It’s an argument characterised by misinformation, bad temper and restatements of entrenched positions.

It’s a bit like the weather. It’s always with us, but there seems to be very little we can do about it.

Well, I’ve been in this business for nearly three years, and I don’t accept this fatalistic position. We are the market leader and we have a responsibility to do something about it.

So today, we are setting out bold proposals to reform the UK energy market. There are actions which we will take, unilaterally, as a business. There are also things we want the Government and the regulator to do.

But before I tell you what they are - and they are all summarised at the end of this piece - let me set out the principles on which our actions are based.

We believe in real competition, encouraging customer engagement and giving them choice. Customers deserve an informed, clear and easy choice of energy suppliers and tariffs.

We believe in helping those who struggle to afford their energy bills, and we believe all suppliers, big and small, have a moral and social obligation to do so too.

We believe the cost of changing the energy system and driving to a lower carbon future should be borne by those who can most afford it. These policies should be paid for in a fair and transparent way.

Finally, we believe that there needs to be real transparency about what makes up energy bills and what is causing bills to rise.

Our main headline action is that we are unilaterally withdrawing the Standard Variable Tariff (SVT). I apologise for the technical term. But this disguises a radical move. The SVT is the type of energy bill that most people pay. The supplier can vary the price, up or down. And it doesn’t have an end date.

That lack of an expiry date is a real killer when it comes to encouraging consumers to engage with the market. Many other household bills, such as car insurance, are annual contracts. The renewal notice is a real stimulus to shop around, especially if your premium has gone up.

That doesn’t happen with the SVT. If we agree that lack of consumer engagement is the single biggest problem facing the UK domestic energy market, then we are not going to change anything unless we get rid of open-ended contracts.

We think everybody should be offered a fixed term energy deal by their supplier. And at the end of that term, say a year or two, they should be offered new deals to choose from. That’s what we are going to do. And we also need the regulator to follow by banning all contracts without an end date and phasing out SVT for all suppliers.

The energy market has other long-standing issues to sort out. Bills are too complex. Customer service is still not good enough. Today, we’re making commitments in these areas too.

But our actions alone are not going to give consumers the sort of fairer, clearer energy deals they deserve. The Government and the regulator also have a vital part to play.

So, we have some suggestions to make, and in addition to phasing out SVT altogether, one of them is particularly important. We’re calling for energy policy costs (which pay for or encourage large, national infrastructure projects among other things) to be moved off the bill and paid for another way such as through taxation.

This would cut the average household energy bill by c.£200 a year and ensure a fairer system of funding government energy schemes.

No one likes paying more tax. But under the present system, the costs of changing the energy mix in the UK – over £5 billion a year - is equally borne by those who find it hardest to pay their energy bills. We don’t think that’s fair on them. If the cost were paid for out of taxation, it would be linked to ability to pay.

Helping vulnerable customers is a priority, and we do more than most. But some energy suppliers do little or nothing and are exempt from helping out. We think all suppliers should do their bit. This is a mature energy market, with more than 60 suppliers, and every player needs to take responsibility for those who struggle to pay their energy bills.

We believe that our proposals, and the measures we are requesting, will deliver the change the Government wants but without the risks of further price controls. All the evidence from around the world shows that price caps don’t work. They tend to result in lower competition, reduced choice and prices cluster around the cap. Just look at what is happening with maximum university tuition fees.

In Spain, to give just one example, energy price caps led to €29 billion of energy costs – equivalent to 3% of GDP – ending up as a taxpayer liability. Do we want that here? Even the Competition & Markets Authority thinks that price caps are likely to backfire.

There is a better way and we have set it out today. We call on the Government to work with us, the rest of the industry, and Ofgem to enact these important changes that will deliver a fairer and brighter future for the UK energy market.

Our proposals in full:

Centrica will:

1) Unilaterally withdraw the Standard Variable Tariff (SVT) for new customers

2) Introduce new products and services offering more value, convenience and choice

3) Proactively offer customers a choice of fixed-term tariffs at the end of their contract

4) Introduce a new fixed-term default tariff

5) Engage and continue to treat fairly customers on legacy SVT, but encourage them off it

6) Introduce simple no-nonsense bills

7) Drive further improvements in customer service and in our own efficiency, and continue to invest in innovation to satisfy the changing needs of our customers

We are asking Ofgem and the Government to:

1) Phase out the SVT and prohibit all tariffs without end dates

2) Move funding of government-mandated energy policy costs from bills to general taxation

3) Level the playing field so that all domestic energy suppliers are obliged to contribute to the social and environmental policy costs on the bill

4) Ensure any price cap doesn’t slow down the smart meter rollout and ensure the programme is as efficient as possible

5) Better identify vulnerable customers and ensure this is consistent across all suppliers

6) Accelerate plans to remove the prescriptive nature of customer bill designs

7) Review pre-payment cap methodology so it is more representative of the costs energy suppliers face

Read our views on the UK energy market here: http://www.centrica.com/energymarket