Electricity customers not seeing price benefits of competition

Electricity customers are not seeing expected price benefits of increased competition and internet price searches in the sector, according to research by economists at the University of Warwick, Aston Business School and the Universidad del Rosario Columbia.

The new research is in a paper entitled “Pricing behaviour under competition in the UK electricity supply industry” to be delivered at the Royal Economic Society Annual Conference at the University of Warwick on Thursday 12th April. The researchers looked at prices offered by each of the 6-18 firms active in the domestic electricity market from February 1999 to December 2006. The data was obtained from the Consumer’s Association, OFGEM and Energywatch.

The researchers noted that there were a number of factors in that period that would lead one to expect that customers would benefit from low prices and that there would be low differentials in prices between companies:

Increased use of the internet by customers to provide price comparisons

Increased competition between suppliers. In particular new suppliers entering the market place and attempting to take market share by offering prices well below the incumbent suppliers

Easy mechanisms allowing switching between suppliers.

Surprisingly the researchers found that incumbent suppliers’ electricity prices were much more resistant to change and remained at higher levels than expected. These high incumbent prices also appeared to make it worthwhile for new suppliers entering the market to quote, and do business at, prices that were significantly noncompetitive.

The researchers also found that over the period of study retail electricity prices overall did not fall to the extent of price falls in wholesale prices over the period since a market has developed (OFGEM, 2003).

The researchers further found that if anything the variation in prices being offered between one supplier and another increased over the period of study. High energy users paying by direct debit saw the range of price offerings by non-incumbent suppliers increasing to 30% of the bill, for example. Low energy users paying by direct debit saw an even larger range, up to 35%.

In examining what factors could have produced these surprising results Professor Waterson from the University of Warwick said: “This confirms past studies which have shown that some consumers remain reluctant to switch, even in the face of substantial financial benefits. Incumbent electricity suppliers can therefore charge a premium over new suppliers without losing all of their custom. Moreover, it is important to be careful in choosing an alternative supplier, because it is perfectly possible to switch and yet be worse off, if you choose at random.”

The research team also noted that while fast and increased internet access brings with it the possibility that a large proportion of consumers might avail themselves of the opportunity to compare prices on line and switch to another company there is little evidence that this is a sufficiently widespread practice to have a large effect. Past studies show that although the proportion of searchers using the internet specifically for this purpose has increased, it is still a minority method of gaining information on electricity price offers compared, for example, with information gathered from a representative who calls at the consumer’s home (according to an OFGEM report from 2004).

Geoff Slaughter, Energy Product Manager at uSwitch.com, commented: "The University of Warwick has hit the nail on the head - despite apparent competition in the market, consumers are still getting a raw deal, paying over the odds to their incumbent suppliers who continue to 'charge a premium'. This is currently costing the average consumer just under £117.

“The report is indicative of the energy market as a whole. It finds that regardless of the financial rewards and the customer service benefits of switching, consumers still remain 'reluctant' to switch. Although last year around 4 million consumers helped themselves to a better deal by switching, 10 million more are still languishing on the uncompetitive deals offered by their incumbent supplier. They could be saving themselves £2.25 billion collectively. More worryingly, 4.5 million (41%) of the elderly are living in the shadow of fuel poverty and yet over two thirds (69%) of the over 60s haven't switched.

“At the moment consumers appear to be relying on their supplier's salespeople to point them in the direction of a good deal, however the University clearly identifies that there is much better information to be had through using independent online switching services. Take up is still low so it is vital for consumers to wake up to the benefits of these services as there are substantial savings to be made - last year people saved up to £325 by switching gas and electricity suppliers.”