Hi everyone,
Below is a button to a survey that has simply one question on it, should Ofgem extend the ban on acquisition-only tariffs? Here’s everything you need to know.
Background
When the crisis happened, Ofgem put in place a couple of rules. One of them said that suppliers can no longer offer cheap deals exclusively to new customers (this is the ban on acquisition-only tariffs), instead the cheap deals had to be offered to both new customers and existing customers. This helped stabilise the market, because it meant suppliers weren’t trying to steal each others customers.
Alongside this ban, Ofgem decided to make a small exception: suppliers can offer super cheap deals to their existing customers, but not make them available to new customers. These are called retention-only tariffs.
These rules were meant to be in place for one year, from April 2022 to March 2023. Every year since then, Ofgem has decided to extend it for one more year, while they “work on a long-term, permanent rule”. Currently, the ban on acquisition-only tariffs is due to expire on 31 March 2026, but they are consulting on extending it until 2027.
Why are Ofgem extending the ban?
Ofgem have been working for a while on some wider market reforms, and as part of one of those, they are hoping to create a more permanent set of rules on the offerings suppliers can give to customers, which will include a deeper review of the ban on acquisition-only tariffs and the imapcts it has on a more steady market.
Ofgem received overwhelming responses from both suppliers and charities that said the ban is a good thing, especially for customers in debt as they would be unable to utilise the cheaper tariffs from other suppliers (people with excessive debt cannot leave their supplier until the debt falls below a certain threshold).
Because of the support from the energy industry at large, Ofgem believes the ban is a good thing and therefore is minded to keep it in place for the foreseeable future.
What are my thoughts of the ban?
I don’t agree with the ban. I think it was useful for stabilising the market during the energy crisis, but I see a variety of problems with it now, there are four particular categories for me that need considering.
Price Competition
Firstly, whilst I think re-nationalising the energy industry would be best, we have to live in reality. The reality is that we have a private energy system, and the purpose of having a private energy system is that competition should drive prices down and improve efficiencies. This ban is literally designed to limit competition, which leaves us in the worst of both worlds: profit-seeking entities are being forced not to offer competitive prices.
To be fair, this system kind of works for suppliers, it means they do not need to worry so much about their customers being stolen by other suppliers, so they get the benefit of more expensive tariffs (more revenue for the supplier, woo) without having to offer super-cheap tariffs to other customers.
Worked Example
MATH WARNING: This section is mathsy, feel free to skip if you’re not interested
For those that say “well they can offer cheap tariffs to get new csutomers, it just needs to be offered to their own customers too”, here’s why that doesn’t result in the cheapest deals possible. (Please note, everything below is illustrative and not a real life example, just explaining why acquisition-only tariffs are beneficial).
Say you’re Octopus Energy and you want 100,000 new energy customers. You know from the 100,000 new customers that you can convince some of them buy heat pumps at a nice profit margin, so you can afford to make a small loss on the energy these 100,000 customers are buying from you. So you create a super cheap tariff that leaves you with an average of £50 loss per customer, knowing you’ll make that up in heat pump sales so its fine. You predict to make a £5million loss on the energy, but you also predict to make £10million profit from new heat pump sales, all sounds perfect, definitely worth making this new super cheap tariff.
Important Note: This is called a loss-leading tariff and was common prior to the crisis. As many suppliers offer other products such as insurance, broadband, EVs, heat pumps, new boilers etc. they would often run loss-leading energy tariffs, just so they could have more customers to promote these more profitable services to. It makes sense, lose £5 a year on a customers energy but make £150 a year profit on insurance or broadband, it’s a no-brainer.
But wait, you can’t offer this cheap tariff just to new customers, you have to offer it to all of your own customers as well. Your current customers are making you profit on energy, say just £50 per customer. Now all of your 8 million customers (thats roughly how many Octopus have) see you’re offering a super cheap tariff out to the market that is £100 cheaper than what they are currently paying! So, obviously, a bunch of your exisiting customers now want to move to this super cheap tariff, but that loses you £100 of profit per customer. You’ve already marketed heat pumps to these existing customers, so there is no extra gain. Now that £5million profit you were going to make is being chewed away £100 at a time, only 50,000 of your exisiting customers need to move to this new tariff before it becomes completely worthless. That’s 50,000 out of 8,000,000, only 0.625% of your customer base!
All of a sudden, it becomes very risky to run this loss-leading strategy, so you simply don’t do it. Now no one benefits from the super cheap price you were previously considering, instead everyone’s energy bills remain high. The market is more “stable” because no one is moving to take advantage of super cheap deals, because the deals don’t exist because they are too dangerous for suppliers.
Assisting Customers in Debt
The ban does stop unfairness to people who cannot switch providers because of their debt. This is true, but is it fair? Essentially, Ofgem are saying “99% of customers cannot be offered super cheap tariffs because it wouldn’t fair for that 1% of people who wouldn’t be able to move to those super cheap tariffs”. I do not think we should penalise the majority to stop a perceived slight by a minority.
Since the beginning of the energy crisis, Ofgem have introduced three new allowances (costs to consumers) to the price cap to help tackle the debt problem. So, not only is Ofgem stopping suppliers from offering the majority of consumers decent tariffs because it’s “unfair to those in debt”, they have also added more costs to our bills to help suppliers manager the cost of selling debt to debt collectors! And there is a fourth consultation out at the moment where we are going to be paying to finally just write off the debt from customer accounts!
Retention-Only Tariffs Reduce Competition Further
The allowance of retention-only tariffs (tariffs that only existing customers can access) has a bunch of issues. Firstly, it again limits competition, because a supplier doesn’t need to offer really cheap tariffs to their customers, they simply need to be just £1 cheaper than the competition and then they can close off their customer base to the market. Additionally, it causes huge problems with price comparison services because suppliers aren’t required to share details of retention-only tariffs with price comparison sites. So if a customer is on a retention-only tariff but then wants to do a price comparison, the price comparison website has no information about their current tariff so cannot tell them whether they are likely to save money by switching.
Stabilising the Market
Finally, Ofgem likes this anti-competitive ban because it “stabilises the market”. Again, I agreed with this at the time of the energy crisis when we needed stability, but Ofgem have over-corrected. Since the beginning of the crisis, Ofgem have put into place dozens of new rules around ring-fencing money to ensure suppliers can weather market fluctuations in the future, increasing profit allowances, debt allowances, wholesale costs allowances and so many more costs to our bills.
These rules are far more than enough to ensure stability in the energy market. The ban on acquisition-only tariffs (and the allowance of retention-only tariffs) is overkill at this point, it’s regulator control to the benefit of suppliers and to the detriment of the majority of consumers.
Why Complete the One-Question Survey?
My opinion is this: suppliers like the ban because it keeps prices and profits high. Charities like the ban because it protects the minority of consumers, which is the job of the charities. Who is looking out for everyone else? The average person just trying to reduce their energy bills and manage their household budgets during this ridiculous cost of living crisis also needs a voice!
I guess that’s what I’m trying to do here, look at the majority, and I don’t think this ban works best for the country, that’s my opinion.
However, Ofgem doesn’t like taking one person’s opinion, they require evidence for making a change. So, I’ve created this one-question survey and I’m asking you to complete it. Whatever the outcome is, I’ll supply that to Ofgem next week as evidence for whether consumers want the ban (and the retention-only allowance) to stay or go.
Please click the link below and take 30 seconds to read and answer the question.
Thank you,
Richard Winstone
The Regulator Guy.
