With domestic energy prices in the news again and likely to be a major player in the forthcoming general election, why is it that much of the focus is on short term gimmicks when there are structural and fiscal options that would significantly reduce energy costs across the board?

There is much the retail sector can do to offer lower prices independently of the supply price through changes to fiscal policy and the removal, by regulation, of anti-competition marketing strategies.

Competition between the energy retailers is virtually non-existent. There are two simple observations to support this assertion both of which are critical to the existence, or not, of a competitive environment:

  1. Each of the major players experience very little movement in overall customer numbers and the smaller providers aren’t large enough to make much of a difference overall. This static arrangement suits the industry very well but is a clear indication that there is little scope for one supplier to be significantly better than another. The product itself, whether gas or electricity remains the same, the infrastructure and distribution network are external entities so don’t feature and the customer service efforts of all the main suppliers rank between poor and appalling so any personal experience of this is likely to leave a bad taste whichever company you happen to deal with. No competition means everything remains the same.

  2. Nobody knows how much they pay for energy. Try this simple experiment and ask 10 people what they pay (in pence per Kwh) for their gas and electricity. If you find anyone who can get even close you will have done well as most won’t have a clue. This is a critical factor in a market which only has price as the sole measure of competition. If that’s all you have to compare, not knowing it means that competition is completely absent. Typically energy providers try to tempt with a range of peripheral benefits and a bewildering display of tariffs, which in themselves, represent a highly anti-competitive approach. The built-in complexity is so successful that a plethora of comparison companies have blossomed in the last ten years or so adding a significant amount to the end bill. All that advertising has to be paid for by someone and that’s you and me.

The main reasons why people do not switch more frequently are term contracts (and rolling contracts) and a multiplicity of tariffs for exactly the same thing. At the time one is thinking of switching the existence of an unexpired contract may well prevent it. If you remember to do it when your contract is due to expire (which almost nobody does) it can still take a month to change. The whole process is designed to deliberately discourage switching suppliers yet it can easily be simplified.

Each supplier should have one national price for gas and one for electricity. That price to be prominently displayed on every bill and every promotional tool. The standing charge should also be a single figure and also prominently displayed (there has also been much obfuscation surrounding phantom standing charges). Historically we have had national tariffs for gas and regional tariffs for electricity, with the concomitant multiplication factor, yet there is no good reason why the differences remain. Of course there are regional transmission cost differences but that applies to both fuels. Equally there are differing locality delivery costs for post, yet a principle of the service is that a stamp costs the same wherever you send the letter. The permanent benefit of a single price is that people will know at a glance which company is the cheapest. This one price must be the lowest that can be offered to anyone so rather than giving a commission to comparison sites the basic price can be lowered. Such a policy would also help those who pay for their energy in advance yet suffer the highest of prices.

Term contracts for domestic energy should be disallowed. Changing energy supplier should be as simple as making a phone call or an internet request. With a meter reading supplied there is no real reason why the new supplier could not assume responsibility the following day.

These two changes would lessen considerably the need for comparison site ‘middle men’ and remove the added costs they create.

Significantly simplify the switching process and create an environment for real competition between suppliers. If it is easy and unobstructed, clear and immediate it will be used much more effectively. For anyone in doubt that this can be done just look back a few years when one transferred money from one bank to another and it disappeared for a week. Today it’s done in seconds.

Then abolish VAT and green levies on energy.

For residential customers the VAT rate is 5%, but is still an unwanted and unnecessary cost to the consumer. There will be an apparent direct loss to the exchequer but together with the abolition of the 20% rate on industrial and commercial energy we could well see taxation revenues rise in other areas through additional economic activity. After all it isn’t taxation that creates wealth it’s enterprise.

This isn’t as daft or as expensive as it may initially sound. For all VAT registered businesses VAT activity must rate as one of the most pointless exercises in all creation. Enormous effort and cost for nothing as all the VAT is simply reclaimed so its abolition costs nothing. For companies not VAT registered you may well imagine the boost this might give them to aid growth. VAT on business energy is at best a complete waste of time and at worst a drag on economic activity.

Increased competition, no VAT, together with prudent and collective exploitation of new gas and oil could see energy prices halve. Can you imagine the competitive advantage that would create for our export capability whilst at the same time having a direct and significant beneficial effect on the cost of living for us all.

Sometimes we need to be bold, imaginative and courageous to get the right result and to attract the attention of the public to real solutions. The political competition is pitiful with the Miliband price freeze the only memorable platitude they can come up with.

Photo by mbgrigby

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