Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/386110
UtILItY WeeK | 26th september - 2nd october 2014 | 17 Policy & Regulation Analysis F our tariffs per supplier: it sounded so easy. This year's long-awaited overhaul of energy retail was supposed to sim- plify the market, encourage switching and ensure customers were on the best tariff for them. In fact, Retial Market Reform (RMR) has had a messy and painful birth, against the backdrop of a competition inquiry which may supersede it altogether. Key elements are already being eroded. It began badly. In October 2012, David Cameron shocked the energy industry, and his own civil servants, with the announce- ment during prime minister's questions that the government would force energy suppli- ers to give customers their lowest tariff. Cue media confusion, dubbed the "energy sham- bles", as then-energy secretary John Hayes engaged in some furious backpedalling. He "clarified" that the prime minister meant the government would force suppliers to offer, rather than automatically provide, custom- ers with their best tariffs. Fast forward two years, and things have not improved much for RMR. Critics from all sides have lined up to condemn the heavy- handed policy – notably former Ofgem direc- tor general professor Stephen Littlechild, whose most recent intervention came in a letter to the Competition and Markets Authority inquiry, itself a tacit acknowledge- ment that RMR has not fixed the market for consumers. Meanwhile, Ofgem seems to be quietly backing away from the so-called four- tariff limit imposed by RMR, with a number of derogations already issued and a perma- nent exemption for white label arrangements now out to consultation. The headline of four tariffs is anyway misleading. In fact, suppliers are allowed to offer four tariffs per fuel (for electricity; gas; and dual fuel). These can vary depending on the customer's meter type and payment option. An Ofgem spokesman said: "Once a customer has decided how they want to pay for energy and they know what sort of meter they have at home (standard, time of use, smart), they will only have to choose from four tariffs per fuel from each supplier. So while a supplier may offer more than four tariffs across the whole of its customer base, from the consumer's perspective, the reforms reduce the number of tariffs on offer." The criticisms of RMR are manifold. The most fundamental is that an attempt to increase competition in a market by limiting the range of products available is logically flawed. In evidence to the Energy and Cli- mate Change Committee in July 2013, ahead of the reform's implementation, Littlechild argued: "These proposals are well-meaning, but they fail to look at the implications for energy prices. They would lead to the with- drawal of the best prices and other offers and discounts. They would squeeze out tariffs with no standing charges. They would effec- tively prevent innovation." His warnings proved accurate, with a host of niche tariffs withdrawn from the market once the reforms came into force this year. British Gas managing director, residential, Ian Peters told Utility Week it was difficult to find room for products such as a "fix and fall" market tariff product. There was an out- cry when targeted products such as Eon's Staywarm tariff for elderly customers were withdrawn, prompting Age UK to say it was "very worried" about the impact of RMR on vulnerable customers. In response, Ofgem seems to be quietly watering down the reforms. A number of derogations have been granted. Good Energy has won two derogations for local tariffs; EDF Energy won an exemption for custom- ers in Tower Hamlets on a CHP scheme; Ovo Energy is seeking a derogation for a tariff that sees interest on overpayments handed back to customers; and a number of cash- back offers are currently being allowed pend- ing consultation. The situation is rather more complicated with regard to Eon's Staywarm. Its with- drawal was initially linked by the national media to RMR, but Eon now says it was a commercial decision unrelated to the market reform. A spokesman told Utility Week: "It was our decision and ours alone. We did not ask for a derogation." Eon did ask for, and was granted, a temporary derogation for a separate tariff for the over-65s, Warm Assist. This two-year extension will allow Eon to manage the transition off the tariff, it said. It is not seeking a permanent derogation. British Gas's Peters told Utility Week sup- pliers are in a "learning phase with Ofgem as to how far [derogations] will go – it's four and bits now rather than a hard four". In addition, Ofgem last week published a consultation that could see white label arrangements granted a permanent exemp- tion from the four-tariff limit of their parent company. That means that each energy sup- plier could in theory have limitless white label arrangements outside its own range of allowed tariffs, each with their own range of tariffs. This is a significant loophole, and one that Ofgem initially seemed set against. The consultation closes in November with the new arrangements to be in place by early next year. In the meantime, white label arrangements are operating under a tempo- rary exemption. So has Ofgem abandoned its initial hard- line approach? Not entirely. Market sources say that while derogations are available, they are laborious to get, with applicants having to "jump through hoops" to prove the tariffs will benefit vulnerable customers, and the derogations taking an "inordinately long time" to process. An Ofgem spokesman said: "Considering a derogation can take anything from six weeks to six months. Derogations with the potential for wide impact could require consultation prior to decision, for example. And applicants have to provide information to support their case, and not all of them do that from the off." Moreover, the consultation on the white label exemption contains what one source called "restrictive obligations". Under the new arrangements, unlike the temporary arrangements now in place, white label sup- pliers must inform customers if their parent supplier's tariffs are cheaper, and vice versa. Taking it as a whole, the tariffs suppli- ers are allowed to charge are a complex and evolving picture – the very thing RMR was meant to avoid. Will the policy have to be reviewed? According to British Gas's Ian Peters, it's "inevitable". A simple plan… RMR limits each supplier to four tariffs, greatly simplifying the market – or at least that was the idea. The reality is that a profusion of tariffs and white labels still abounds. Ellen Bennett reports.