How energy price comparison websites exaggerate savings - Part 3
3. The Background
From 31 March 2014, the final phase of Ofgem's reforms under the Retail Market Review (RMR) came into effect. From that date energy suppliers were required to provide their customers with clearer information on bills and annual statements. This included key information about the tariff, including discounts, tariff end dates, and termination fees, and details about the customers energy usage.
So far, so good.
Ofgem however then made the fatal mistake of deciding to introduce a number of new tools designed to help consumers compare tariffs. These tools, which must be shown on bills and Annual Statements include;
1. The dreaded Tariff Comparison Rate (TCR) (more on that in a separate note)
2. Personal Projections which give the consumer details of their costs for the next 12 months.
The Personal Projection itself was not a problem. In effect it was just a fancy name for the 12 month annualised cost of a tariff that all price comparison sites had in any case been calculating for years.
The problem was the introduction of a definition called the "Estimated Annual Costs" when calculating the customer's existing tariff. The exact calculation is shown in Appendix B, but we will try and summarise it as simply as possible here.
The annual cost of a tariff comprises 4 components;
|1.||Daily standing charge||X||365 days|
|2.||Price per unit of gas / electricity||X||Number of units (kWh) used|
|3.||Discounts (if applicable)|
|4.||VAT (at 5% for domestic customers)|
All very straightforward.
But what happens if your tariff ends in say 3, 6 or 9 months? In that case Ofgem decided, in its infinite wisdom, that the calculation should be split between the customer's current tariff and the tariff they would likely be moved onto at the end of the contract period.
The problem with that approach is this. The tariff that the customer is assumed to move onto is the supplier's Standard tariff (Ofgem calls it the cheapest evergreen tariff but in practise it means the same thing). Standard tariffs are usually the most expensive tariff a supplier offers. So what this methodology does is it "inflates" the cost of the customer's current tariff for comparison purposes.
For example, using this method a customer paying £1,000 for their energy could easily see their current spend calculated to be £1,200. Of course if you inflate the customer's current bill by £200, then by definition you automatically "inflate" the potential saving that the customer is quoted by £200. This saving is fictitious because, whatever the customer does, they will never see.
This requirement was a License condition imposed upon the energy suppliers rather than the price comparison sites. Indeed it applied only to energy suppliers in specific circumstances such as renewal notices, bills, annual statements and such like. The majority of energy price comparison websites, including all of the Big 6, however wasted little time in jumping onto this new "inflated" methodology. We wonder why?
It has long been proven within the price comparison sector that the greater the saving a customer sees, the greater the propensity to switch. So bigger savings = more commissions for price comparison websites.
So, with the new "inflated" methodology, savings shown on price comparison websites in many cases jumped by £100 or more over-night. So too, presumably, did the level of switching on comparison sites and consequently their commissions.
Ofgem is now planning to enshrine this flawed "inflated" methodology into all accredited price comparison websites through its changes to the Confidence Code. If that happens, energy consumers in the UK may never again receive a true like for like and honest comparison of energy tariffs.
Campaign to stop dodgy and mis-leading comparisons
Support our campaign to stop this dodgy and mis-leading practise.
If you feel you've been given an "inflated" saving by a price comparison website or energy supplier we'd like to know about it.
Please drop us a note.
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