To switch or not to switch?

I recently read this blog from David Dean, Communications Manager at NEF. David was writing with a personal hat on about his experiences considering switching energy supplier.

Switching is one of the market levers that Government is really pushing at the moment, keen for us to become smart consumers who shop around for the best deal to reduce our energy bills. At this point, I was going to say that the switching market had grown significantly in the last couple of years, but I checked out the stats: it hasn't. Here's DECC's chart (you can find the original via http://bit.ly/1SjCNGZ):

(That chart surprised me: I had thought that switching went crazy over the past couple of years, but it turns out the boom time was actually the point at which energy prices were tumbling. Traditional economic theory would say that was competition driving down prices, but switching has (irrationally) gone down as prices have gone back up...)

Anyway, back to the blog...

Strategically, a vibrant switching market is a great move. It prepares us for a future energy system where smart meters enable us to switch suppliers within 24 hours and for more dynamic time-of-use tariffs where we consciously engage with when we use energy as well as how much of it we consume.

But in the short term?

David’s experience highlights one of the challenges that householders face: information is asymmetric in the switching world. Even providing the fullest of data to a switching supplier doesn’t guarantee that you’re going to get something useful back. This is perhaps the legacy of some long-standing tariffs which the switching providers don’t know about, or maybe it’s the outcome of a lazy algorithm.

The data side is key. During our fuel poverty outreach work in West London, I have spoken with households who have seen their energy bills double or even triple after switching. Why does this happen?

Data.

Households are switching based on partial data, lack of knowledge about their current tariffs, incomplete or estimated energy bills – a whole raft of bad data goes into the system and, surprise surprise, a bad result pops out.

People are also switching based on their current direct debit level. If they see that their monthly payment might come down, then it must be a good thing, right? But your direct debit is an average estimate of consumption which – in many cases – bears only a passing resemblance to reality. That’s why so many of us end up owing money to – or owed money by – our energy suppliers. Again: bad data.

All the caveats in the world on a switching website can’t overcome this problem. People are drawn in by the lure of saving money on bills (and the endorsement of Government for the process). And which of us really checks the small print each time we sign up for something which looks good for us? Which of us really appreciates that the value of investments can go down as well as up?

So, if we can’t absolutely quality control the data that goes in, can we encourage switching providers and energy companies to improve their end of the bargain? Some of these issues are addressed in theory in Ofgem's Confidence Code. But in practice:

• Is there a genuine duty of care on the switching provider to check that people are providing sufficient and quality information to enable a good consumer choice?
• Are the switching providers doing enough to make sure that people can find the information they need? Data on kWh of consumption should be on an annual statement – are people being signposted to find this? Can a householder ring their energy company and get this information or a duplicate statement easily?
• Is there a “switch-back” facility if the householder doesn’t get a better deal (based on the same kWh consumption, to avoid any increase caused by behaviour change), at no cost to the customer? (This raises the same difficulties about data – bring on smart meters! Perhaps timing the installation of a smart meter alongside a switch could be a way to ensure that customers get an additional benefit from switching: the knowledge that future billing will be based on accurate consumption, not estimates…)

The cynic in me would suggest that a flawed switching market simply ensures more switches – you change supplier, your energy costs you more, you change again. Repeat switching means repeat fees for switching providers, and it also locks energy companies into spending their marketing budget continually trying to persuade new customers to switch to them, rather than on engaging with their existing customers on a more meaningful, long-term basis. Does this sound like an efficient system which drives down prices? What are the transaction costs?

And what of the smart switching future? Does a bad customer experience of switching now mean that we will have a cohort of households who are less likely to engage with switching in the future, when it could pay real dividends? Will there be brokers in future and what will their incentives and interests be? Or will we all be managing our day-to-day and hour-to-hour switches ourselves?

Big questions which may not yet have answers. I’d love to hear what you think, your experiences of switching and how we can make the most of the competitive market to create a better system for competition, security, affordability and carbon reduction in future. Email me: liz.warren@se-2.co.uk or tweet to @se2limited!