An alternative history of energy deregulation and energy price comparison in the UK

So how come you can compare energy prices and switch supplier on the Internet?

We used to be cool

Well, almost. That was back in 2001, when we were the first to launch a price comparison calculator for energy which was accredited by the regulator Ofgem for its accuracy.

Since then energy price comparison has become quite a normal and regular thing to do. Roll back the years though and our customers were genuinely (and positively) surprised to find a place where they could compare prices for gas and compare electricity prices from different suppliers side by side - and then switch to the best deal. That idea was wholly new then.

This positive reaction was not a surprise, at least not to us. Because the only way people switched energy supplier before we came onto the scene was via direct doorstep-selling. And boy! What a terrible way to get a saving!

In fact, it was a sure way to not get a saving. But more about that later.

So how did it all come about?

Here is our highly subjective timeline of the events that ultimately led you to this page:

It all started with Margaret Thatcher and her government’s decision in 1986 to sell off The British Gas Corporation in what was then the biggest privatisation of a state-company in British history. The advertising slogan “If you see Sid...Tell him” that was used to promote the flotation is probably still stuck in the head of those who were of thinking age at the time.

British Gas plc remained a fully integrated monopoly provider of gas to Britain’s 40 million households for some time after the privatisation. But British Gas was not free to charge what they liked for their product: the company was subject to supervision by the newly created Office of Gas and Electricity Markets (Ofgem) to protect against abuse.

Following this first step the country’s Electricity Boards (nationalised Electricity companies) were privatised in 1990. Similar to British Gas these companies retained their monopoly status for a while to come, and were subject to controls by Ofgem. For those who can remember, this phase of the deregulation process was coined “comparative competition”. Even though customers could not switch supplier yet, they would theoretically benefit as the newly privatised Electricity Boards would improve their systems and processes by copying each other’s best practices (the country’s water utilities remain stuck in this ‘theoretical’ stage of deregulation).

The next milestone date came in 1996. By the end of that year, the gas markets were opened which meant that consumers were given a choice of gas provider for the first time. The privatised Electricity companies, now called ‘Regional Electricity Company’, or ‘RECs’, became most active in competing with British Gas for customers from the start.

By 1998, the electricity markets were opened in turn. The RECs could now acquire customers from each other, while British Gas was free to take on electricity customers.

Ofgem had been mindful that the old monopolists were fully integrated business, meaning that both British Gas and the RECs also produce gas or respectively electricity. This gave them a degree of control over the wholesale cost of energy and in turn, power to shut new entrants out of the market. In the run-up to the 1996 and 1998 big-bang openings, the regulator had therefore demanded comprehensive corporate restructurings aimed at decoupling suppliers' generation businesses from their energy sales operations.

After an initial wait-and-see period which saw few new entrants in the market and tepid price competition, Ofgem in 2001 launched a set of wholesale energy trading reforms dubbed the ‘New Electricity Trading Arrangement’, or NETA. These reforms were aimed at weakening suppliers' continued grip on the wholesale market. With NETA, Ofgem declared the deregulation process over and announced the end of price controls in the domestic energy sector. Since 2001, the cost of energy in the UK has been set by the market.

Merger Frenzy

Few new players came to the market post-deregulation, and nearly none of those that did make the attempt are still around. The energy supplier landscape actually shrunk after 2001, and most of the names associated with the regional Electricity Boards are history by now. The table below illustrates how concentrated the supplier field has become in just a decade.

From this
Eastern ElectricityE.ON
East Midlands ElectricityE.ON
London ElectricityEDF Energy
Midlands Electricity Boardnpower
Northern Electricnpower
Scottish Hydro-ElectricSSE
Seeboard ElectricityEDF Energy
Southern ElectricSSE
Yorkshire Electricitynpower

Most start-up brands were either acquired or went belly-up. The so-called ‘Big 6’ energy suppliers today supply about 99% of UK households, with just a handful of small businesses sharing the rest.

Enter the Internet

Before online price comparison energy switching was done entirely on the doorstep. Suppliers hired busloads of doorstep salespeople and sent them out to raid their rivals’ territories, knocking on doors and talking residents into switching.

Some suppliers were better than others at managing their salesforce, but that won't stop us from saying it the way it is: doorstep selling was an unmitigated disaster which gave energy switching a bad name. Full stop. Doorstep selling was poorly regulated, supervision shockingly lax, and the disgusting behaviour of a significant number of sales agents turned people off the market for good. Abuse was rampant and no supplier can claim to be innocent: switching people by entering their details from the phone book or the electoral register, forging the signatures of deceased people, pressure selling to confused pensioners, making wildly misleading and exaggerated sales pitches - it all happened, it went on for way too long, and it wasn't an innocent mistake.

If you don’t believe how bad it is, just look at how much the energy suppliers have clocked up in fines over the years

DateSupplierFine For
May 2012SSE(Scottish Hydro, Southern Electric and Swalec brands)£1.25m Misselling energy contracts
Mar 2012EDF Energy£4.5m Misselling energy contracts
Oct 2011npower£2mMishandling customer complaints
Jul 2011British Gas£2.5mMishandling customer complaints
Dec 2008npower£1.8mMisselling energy contracts
Nov 2002EDF (then London Electricity)£2mMisselling energy contracts
Currently under investigation:ScottishPowerMisselling energy contracts
Currently under investigation:E.ON Misselling energy contracts
Currently under investigation:npowerMisselling energy contracts

The Future

After another lengthy review, Ofgem is now poised to force through further major change in the way energy is sold and explained to customers. The key change is a requirement for suppliers to simplify their tariff offering. Going forward, all suppliers must offer at least one ‘Standard’ Rate tariff, which will have a Standing Charge, a single unit rate, no lock-in period and no penalty for switching. The idea is that consumers will find it easier to compare these rates side-by-side, as it is these tariffs that are predominantly sold over the doorstep. Alongside the Standard Rate, suppliers will still be free to market as many other Discounted or Fixed Price offerings as they like.

Market failures

The UK energy market is one of the most advanced deregulated markets, but its pioneer status does not mean that everything has gone well. We have touched on the doorstep market already - it proved itself incapable of reform and in our view the practice should be banned. Another shortcoming is found in the market for the so-called ‘fuel-poor’ (customers who need to spend 10% or more of their income on energy for their home, and who tend to be supplied via prepayment meters). Despite repeated attempts to make life fairer for this segment of the market, the fact remains that those who can afford to pay least for their energy still pay the most - usually because they find themselves on expensive prepayment meter tariffs or because they do not have a bank account to pay by direct debit. We can go on - customers with storage heaters (a small but significant minority) are typically unable to switch to a cheaper deal because the metering arrangements at their home can only be supported by the supplier they inherited when they moved in. Nothing has been done for these so-called RHT (Restricted Hours Tariff) customers since the beginning of deregulation!

Deregulation simply has not spurred energy suppliers into innovating our way out of some very old problems. Some examples of what bothers us:

1) Yes, most billing is STILL based on usage estimates! And please don’t ask us how suppliers come up with these estimates. We don’t know. What we do know is that unless one pays close attention it is easy to be billed the wrong amount. And just a few months of that can land you in more debt than you can handle. In many other countries meters have been read by radio signal for decades and bills are always based on an actual reading. The UK situation was inacceptable 10 years ago - it is simply scandalous today.

2) It takes too long to switch. Despite passing the so-called ‘EU Third Package’ into UK law in 2011 (stipulating that suppliers cannot take more than 3 weeks to take a new customer on-board) it still takes longer than that. In all other comparable industries (take mobile phones, for example), the technology exists for a customer to switch account in about one week. Not here.

3) Penalties. Suppliers can charge customers for leaving. This is typical for fixed rate tariffs, when the customer is on a deal that freezes their rates for a period. Fair enough - customers are getting a price guarantee in return. Yet the application of these penalty rules is not uniform or transparent. Is it ok to apply to leave for a different deal four weeks before the expiry of that deal (knowing that it will take 4 weeks to process the switch), or do consumers need to wait until their current deal has expired, which means that they are likely to be spending 4 weeks, sometimes even more, on a higher rate that they did not sign up for? Consumers are rarely sure - and often they delay switching to the best offer for fear of a penalty.

It is clear that even after 25 years of deregulation Ofgem still needs to remain very active in keeping supliers on the straight and narrow.

Perhaps the biggest favour Ofgem could do for this market is to finally succeed in making it easier for new companies to come into the market. One just needs to take a look at other deregulated markets - think telephony again - to get a glimpse of what should be possible.

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