Utility Week

UTILITY WEEK | 23RD FEBRUARY - 1ST MARCH 2018 | 11 Policy & Regulation Stop penalising energy customers for loyalty Pricing in the energy market is not transparent, and that inhibits competition and penalises customers. Chief executive's view Greg Jackson, founder and chief executive, Octopus Energy W hen we think about how we can make the retail energy market more competitive, we oen fall into the trap of thinking we are "unique" and so forget to learn lessons from other markets. It's why I oen point to supermarkets. While different in obvious ways, the outcomes for customers of transparent pricing leading to absolutely cut-throat price wars are exactly what we should expect of any consumer market. On the flip-side, we can learn from bad markets too. For exam- ple, printer ink is one of the most expensive liquids in the world – almost twice as expensive per millilitre as human blood. That's because printer manufacturers compete like crazy on the price of the printer, knowing that they can tie in customers to higher prices on the ink by making that information really hard to see up front. Energy pricing is remarkably similar. Consumers shopping on a comparison site or responding to an advert see Year 1 prices, with no indication of what will happen in Year 2. In the post- standard variable tariff world, it's even harder to work out what a consumer will end up paying, and obfuscation, prod- uct proliferation, complex nam- ing and intractable pricing – like you see with printer cartridges – abounds. At Octopus we oen describe this dynamic as "tease and squeeze"– and the outcome is a "loyalty penalty". Classical economics oen struggles with these scenarios. The traditional assumption is that some companies, seeing consumers being gouged, will spot the opportunity to under- cut the gougers and offer more transparent pricing. However, work by Harvard economists Xavier Gabaix and David Laibson shows that in these scenarios, there is no incentive for companies to fix the issue. New entrants will do better by aping incumbents than trying to correct the broken mar- ket. Not only that, but informa- tion remedies will usually fail because companies are so incen- tivised to maintain this model, they'll innovate new ways to carry it out. Happily, energy supply differs from printers in a very important way: in energy the Year 1 prod- uct is essentially the same as the ongoing product. This means that transparency could easily be delivered by tying the Year 1 price companies advertise to the ongoing prices they charge. I'd like to see the govern- ment's proposed price cap bill strengthened to address this loy- alty penalty. This would ensure that as well as a "social safety net", we'd see a dramatically more transparent energy mar- ket – leading to those price wars that supermarkets deliver for their customers so well. Of course, this would also allow us to address some of the other inequalities in energy. For example, currently customers who receive benefits like the Warm Home Discount don't feel they can switch to sustainable, good value energy providers because they can only get these benefits from the large incumbent suppliers. A market that had been transformed to deliver real competition would necessarily have to make sure that all suppliers were competing on a level playing field – and so the small supplier exemption from those benefits that companies like Octopus currently receive would have to go. The fundamental require- ment for good outcomes for cus- tomers in any consumer market is price transparency – and in energy, that means we have to end the loyalty penalty. Greg Jackson will speak at the Utility Week Energy Summit in London on 21 June. For more information visit: event.utilityweek.co.uk/summit

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