Personal Projections and why they are so dangerous
So what is a Personal Projection?
A Personal Projection is an estimate of your Estimated Annual Energy Costs for the next 12 months based on your current energy usage. It takes into account the standing charges, unit rates and any discounts associated with an energy tariff and multiples them up by your energy usage to calculate what you will pay for your energy in the next 12 months.
And what is wrong with that?
Well if you are not changing tariff in the next 12 months, either because you are on an expensive Standard Variable Tariff, or because you are on a long term fixed rate plan, then the Personal Projection is nothing more than the Annual Cost of your current tariff or future tariff projected forwards for 12 months.
However, if your tariff ends in less than 12 months, perhaps because you are on the remaining few months of a fixed rate deal, then Ofgem requires energy comparison websites to assume that you do nothing at the end of your tariff and that you allow yourself to get moved onto your current energy supplier's Standard Variable Tariff. Energy comparison sites are then required to calculate your current tariff costs for the remaining months on your current tariff with the balance of the 12 months calculated using the cost of the Standard Variable Tariff. Got that?
Now I'm confused. Can you show me an example?
Of course. We will use a really simple example.
Let's assume that you have switched to a cheap fixed price tariff that is costing you £900 a year for your energy, and which ends in exactly 6 months from today.
At the end of those 6 months we have to assume, rightly or wrongly, that you do nothing and that you will be moved by your energy supplier to their Standard Variable Tariff. Let's assume your energy supplier's Standard Variable Tariff is going to cost you £1,200 a year based on the same usage.
So while you are only paying £900 a year currently, the Personal Projection for your current tariff is calculated to be (£900 * 182.5 days) + (£1,200 * 182.5 days) = £1,050; £150 more than you are actually paying.
OK got it now. Why is that a problem?
Well there are a number of flaws with this approach which are listed below.
The main one however is this.
If you switch from a tariff costing you £900 a year to one costing you £800 a year you save, in cash terms, exactly £100 a year.
However, if a price comparison website inflates the cost of your current tariff from £900 to £1050, and then uses the inflated Personal Projection figure to calculate your savings, switching to that same £800 tariff suddenly shows a saving not of £100, but an exaggerated and purely fictitious £250. £150 more than you will actually save.
Whoa. That is a problem. Surely price comparison websites would never be able to get away with quoting inflated savings to consumers? Is that even legal?
Well the bad news is that most comparisons websites have done this for 2 years now and still do it. Our research on this showed that savings quoted can be inflated by £100, £200 and even more. You can read our research here.
The legal question is an interesting one that we are looking into.
What about TheEnergyShop.com? Have you ever inflated savings?
No we never have and never plan to. We do calculate Personal Projections as mandated by Ofgem and show the impact these might have on when you switch. However, the savings we quote are an honest like for like comparison between your actual current tariff cost and the new energy tariff(s) you are considering.
We believe that exaggerating savings is not just misleading but fundamentally dishonest.
So what else is wrong with Ofgem's Personal Projection?
OK to be clear this only applies when your current tariff has less than 12 months to run. When that happens, the following problems arise (as briefly as possible).
- Assumptions used (that the user will not switch) are flawed particularly for price comparison websites.
- The calculation is incomprehensible to the vast majority of consumers. We used the most basic example here. It can get a lot more complicated. Confusing customers is not the way forward.
- The calculation is, in any case, inaccurate as it does not take into account seasonality.
But the real damage happens when the Personal Projection is used in a savings calculation. In this case it;
- Systematically overstates the potential savings from switching, often by significant amounts.
- Creates savings calculations which are purely fictional and are never realised as cash savings for consumers(except in very rare exceptional cases).
- Leads to inconsistent results between price comparison websites and between price comparison websites and energy suppliers.
- Creates a different calculated result on a daily basis.
- Is mis-leading, creates real consumer harm and damage, and could give rise to mis-selling claims.
- Affects significant numbers of consumers.
Wow. I'm totally shocked that this is going on. What should I do about it?
If you think you have been mis-sold an energy plan based on an inflated savings quote, in the first instance, please Contact Us. We will look into your situation to see what action can be taken.