I was at a dinner party recently and as per usual the subject of energy prices came up (it’s hard to avoid as “the energy guy” at the table). I did a quick straw poll of my ten friends around the table to see how many had changed tariff in the last 12 months. The results, even for a straw poll, were enlightening:
Three couldn’t even remember the last time they changed tariff (or even the name of their supplier!)
Five confessed to being with the same provider for definitely longer than 12 months
Only two had actually changed their provider recently
There is a fair chance that 80% of my friends could save a couple of hundred pounds on their energy bills. The Electric Vehicle (EV) car owners among them potentially more.
The straw poll is actually closely representative of the general UK population.
OFGEM figures show that only 4.8 million customers switched in the last year - while that’s up on previous years, that’s only 17% of the 27.5 million homes in the UK. Furthermore, recent research claims that 15% of energy customers had never switched providers!
Why switch providers?
Understanding a little about the business model of energy suppliers helps to reveal why you should regularly switch. Having worked with several retailers I’ve seen the same model applied time and time again.
In short, energy providers bank on your apathy towards switching. Take Henry, a lawyer, at my dinner party - he classically represents the story of most energy customers:
A few years ago, Henry saw an energy deal that looked like a bargain so he signed up
Henry “set and forget”, paying on time via monthly direct debit like the dutiful customer that he is.
Henry recalled that after 12 - 18 months, his energy bills jumped up 20-30%. He thought that was a normal market movement because everyone was complaining about high energy costs.
He continued to be a dutiful customer until the day of our dinner party where I showed him the results of a comparison website.
Finally, his typical response: “I can save how much??”
Obviously, Henry’s costly mistake here was at step 3. While market prices can indeed move 30%, more likely was that Henry’s energy provider was simply fleecing him.
And Henry is not alone, Ofgem believes many energy users could save around £200 by switching suppliers, and thinks those who haven’t switched for a while, or never switched, could save at least £300.
How are energy providers making money?
Most energy providers have two types of plan, a fixed rate plan and variable rate plan. When you go to a provider’s website you’ll typically see a few plans presented to you. Most likely, the most expensive plan is the variable tariff, and obviously very few customers sign up to that.
The fixed rate plan will be cheaper but will have an end date - usually 12 months but sometimes longer. At the end of the fixed price period, the contract will “end” and you’ll be “rolled over” to a standard variable tariff contract. Sounds dodgy, but if you check the fine print of your energy contract (and who reads those?!) it’s all there in plain sight and you agreed to it.
Ofgem believes around 45% of customers are still on standard variable tariffs, which are “significantly more expensive than the cheapest deals”.
Frankly, fixed price deals are a sanctioned form of bait and switch.
But why is this allowed to occur? Well for good reasons.
What does my energy provider even do?
Energy providers just send you bills, charge you money, and occasionally take your service call, right? Yes - but only half right.
The other main function an energy retailer does is the thing you never see or hear about: purchasing energy on your behalf from the wholesale energy market. This makes up about 45% of the average domestic consumer’s bill.
This sounds benign enough, until you realise that like the oil markets the price of electricity and gas floats up and down. Actually the price of electricity is reset every 30 minutes. Normally electricity prices are about 4.5p/kWh. But depending on the time of day, week or year, electricity prices can actually go negative (i.e. too much supply and not enough demand) to up to 600 p/kWh (no, that’s not a typo!)
What makes it even trickier for energy providers is that they have to guess how much to buy. That’s right, for each 30 minute block, an energy provider has no idea how much energy their customers used. For the vast majority of customers who don’t have a smart meter, they never will. So instead they make an educated guess using average energy profile data, weather information and customer historical usage. A reconciliation process that happens 14 months after the day you used energy corrects that guess, and your energy supplier has to pay or get refunded the difference.
What does this have to do with fixed versus variable contracts? Well to take out some of the guess work and to try and hold onto you as a customer for at least 12 months, energy providers create fixed price contracts.
All of this is eye-wateringly complex, requires sophisticated computer models and experts to manage and retailers take on huge amounts of energy market risk on your behalf so you never have to pay a ridiculous price (like 600p/kWh) for any of your energy. So you can complain about energy providers a bit, but not too much!
That said, the other reason they do it is to attract new customers. Retailers make very little profit (or even make a loss) on their fixed price plans to attract new customers. They also spend around £100 per customer in marketing to attract you to their business. This cost has to be paid somehow and this usually comes from you staying on as a customer.
How do you beat energy providers at their own game?
This game is a big part of why we created the Evenergi products for EV drivers. We believe that we can help EV drivers know when to switch, but also help suppliers better plan so that they don't have to play bait and switch games.