Energy bills: Are standard variable tariffs a rip off?

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Are we being ripped off by energy companies?

It’s the question at the heart of Theresa May’s policy announcement – the idea that these energy giants are charging us a lot more than they need to for life’s essential services.

Politically, it obviously has a certain allure. Nobody likes paying big bills for gas and electricity, and it allows the Tory party to maintain its stance of sticking up for the ordinary families who are “just about managing”.

But think about the other side of this.

For one thing, there are generations of Conservative voters who have been attracted to the party by its laissez-faire view of corporate Britain. Now, though, we have a policy that advocates Government interference in what is, by pretty much any definition, a competitive market.

That might chime with some JAMs (just about managing), but it might worry some others.

And is it the right solution anyway? There are lots of different tariffs available to most energy consumers, but at the heart of this argument is just one – the standard variable tariff (SVT). It’s the one that about 70% of us pay, and it’s almost always the most expensive.

So what is it? Well, you may well have joined an energy provider attracted by a good deal, one that ran out after a fixed period of time.

After that, you’re free to find another deal, maybe to switch to another supplier, but many of us forget, don’t bother or worry about the fiddle of switching supplier. And then we revert back to the company’s standard tariff.

They are, categorically, not good value. Every serious study of energy prices has found that, without any great difficulty, you can find a better deal than the SVT. Most of us should switch or at least pester our company into giving us a better deal, but whether it’s through inertia, ignorance, complacency or a fear of change we stick to the SVT.

When the Competition and Markets Authority (CMA) investigated the energy market last year, it concluded that of British Gas’s 6.6m customers, very nearly three in four were paying the standard rate.

It also found that that they could save an average of £129 by switching to the company’s cheapest tariff. Among SSE customers, 91% were on the standard rate, paying £98 per year more than they could be doing.

The CMA’s conclusion was that all these customers should be helped as much as possible to switch supplier. It proposed a database of people who had been on the SVT rate for three years or more, who could be directly marketed with better offers.It wanted greater involvement from the Government in understanding the rationale of price rises, and it also brought in a price cap on prepayment meters, typically used by some of the most vulnerable customers.

Switching, it said, was the most important way to get people to find better prices, and there are signs that switching is growing. Certainly there are more suppliers in the market, offering more deals.

Both the CMA and the energy regulator, OFGEM, said that mobility was the key to making the market work better.

What they categorically didn’t suggest was a price cap. In its report, the CMA was explicit: “Regulating prices over such a wide part of the market would give customers even less incentive to seek better deals,” it concluded.

“All suppliers would be under less pressure to drive prices down and improve customer service. And by creating that situation, it would prove difficult to remove in future.”

Energy companies concur, of course. No company wants more Government interference in its business and the likes of Centrica, which owns British Gas, are no exception, warning that price caps could lead to less competition, not more.

Iain Conn, Centrica’s chief executive, said a couple of weeks ago that he thought “there are some at the heart of Government who don’t believe in free markets”.

It’s worth noting that this has parallels in other parts of our life. Savers are routinely given teaser rates, car insurance seems always to get more expensive after you’ve been lured in by a good price for the first year of cover and credit card companies offer an array of offers to new customers.

All of them are everyday services – if not essential to everyone – and all rely on the same sort of inertia that has helped energy companies.

But the price of energy has a special resonance in our household spending, in the media and in politics.

That’s why Ed Miliband was drawn to it in the last election, and why Theresa May has picked up the idea now.

How that idea could be translated into managed, sustained policy is


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