How energy price comparison websites exaggerate savings - Part 8
8. Quantifying the problem. Who is affected and by how much?
At the Tariff Level
First the good news. Ofgem's "inflated" savings methodology does not affect customers on Standard tariffs. It is currently estimated that some 60% of households are supplied on Standard variable tariffs. For these customers the "true" and "inflated" methodologies will (or should) return the same result.
Secondly, it does not affect customers on tariffs where the tariff end date is greater than 12 months at the time of comparison. For example, if you signed up to EDF Energy Blue +Price Promise April 2016 tariff in December of 2014, you would not be affected - yet. However, from 1 May 2015, the inflation kicks in and increases on a daily basis thereafter up until the tariff expires.
While there are a number of tariffs of greater than 12 months duration in the market at any time, there are relatively few customers signed up to them, as they tend to be more expensive than short dated fixed tariffs. Currently 70% of fixed tariffs in the market have a product life of 15 months or less. Indeed, the vast majority of the switching over the past 1-2 years has been to short dated fixed deals.
So of the 40% of the total population that might be affected by this methodology, we would estimate that 80-90% of this group probably are. That suggests that 32%-36% of all customers would be affected at the population level.
At Price Comparison Site Level
At the level of price comparison websites, the proportion affected is likely to be materially higher than at the population level. Of the 60% of the population that are on standard tariffs, a significant minority are permanently dis-engaged and never switch. Another significant minority do not engage with price comparison websites. Price comparison websites, and particularly those that incentivise churn (repeat switching) through incentives such as cashback, such as moneysavingexpert, will therefore see a high proportion of returning switchers, a significant proportion of whom will be affected by the "inflated" methodology. Indeed it is normal behaviour for a repeat switcher to check deals on a price comparison website as they come close to their renewal date. This is an activity which Ofgem is now encouraging by requiring energy suppliers to remind consumers about switching on annual statements and renewal notices.
At the level of the price comparison website therefore, we can easily envisage that 50% of switchers get an "inflated" saving quote and are therefore mis-led about the potential saving from switching.
At Customer Level
The extent to which an individual customer is affected will depend upon their tariff and the following 3 factors.
1. The price of the customer's current tariff compared to the Standard tariff of their supplier (the bigger the difference the bigger the error).
2. How close the current tariff is to its end date (the closer you are to the end date the bigger the "inflation" effect).
3. How much energy you use (the greater your usage the more the error is multiplied).
On the scenarios tested, our research shows that the "inflated" methodology leads to savings quoted that are exaggerated by between £133 and £158 for a user with average energy consumption, and £196 for on user with high energy consumption. Clearly there will be scenarios where the "inflation" is much lower and other cases where the "inflation" is much higher.
At Market Level
In order to estimate how consumers as a group are affected we have put forward 3 scenarios in Table 5 - low, medium and high. Here we focus solely on our estimate of switches done through price comparison websites using the "inflated" savings methodology. Please note that collective switching schemes undertaken through a price comparison website using the "inflated" methodology will also be affected so these are included in the estimate. Collective switching schemes where the comparison and transaction and is done on the website of an energy supplier that uses the "inflated" methodology for calculating savings will also be affected. The latter group is not included here and will add to the overall level of potential consumer detriment.
On our estimates, we believe that over 500,000 switchers will have been affected and influenced by "inflated" saving quotes on price comparison websites. The combined effect of this exaggerated quoting could easily be in the region of £50m - £100m annually - savings that consumers will never see reflected on their bills or on their bank statements.
We appreciate that these are estimates and, even if well reasoned, may not be accurate. Fortunately, for consumers, this situation differs from other mis-selling scandals, such as doorstep selling, where sales records were poorly documented. In this case there should be a full audit trail held in the databases off each affected price comparison website, each collective switching scheme and each energy supplier which can identify which customer received an inflated quote, the extent of the inflation at the level of the individual and fir consumers in aggregate. The level of consumer harm can therefore be easily quantified.
Click here to view the Results Tables and Appendices
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