Energy providers using 'bait and switch' to squeeze customers

energy lightbulb with flame©iStock.com/shulz

ENERGY providers are abusing their customers by signing them up to attractively cheap deals and then moving them onto more expensive standard variable tariffs (SVT) after the first year of contract.

This was the main finding of a report produced by solar energy supplier Octopus Energy, who discovered that six of the top 10 providers increased their customers' bills by over 35% once the first year deal has ended.

This means that customers are often paying more than £280 extra for their second year of energy in contrast to the first.

Once again, the report blamed this overcharging on the lack of transparency in how energy suppliers present their tariffs, and on the seeming unwillingness of customers to switch providers.

While this switching issue will be partially helped once the recent proposals made by the Competition and Markets Authority (CMA) are implemented by Ofgem, these proposals won't in fact do much to combat energy providers' "bait and switch" tactics.

This is because, even though the database of "disengaged customers" the CMA call for will allow people to be offered better tariffs by rival providers, no customer who has been on a SVT for less than three years will be included in it.

As a result, these "recent switchers" will be susceptible to having their rates bumped up after the first year.

Cynical

And these rates do really exhibit a very marked increase after the honeymoon period. With First Utility, for example, customers are being charged an extra £394 (53%) a year on average, once their fixed tariff expires, putting the independent supplier at the top of the leader board when it comes to increasing users' bills.

While First Utility is an independent energy provider, the top 10 also includes every single member of the Big Six.

All of these six have much higher SVTs than the cheap fixed deals they offer customers. However, the worst offender was Npower, whose SVT was £368 more costly than the fixed rate they were offering in July.

It was also noted that these discrepancies between initial and later rates only increased with each passing year, so that the most loyal customers are ironically being "rewarded" for their loyalty with higher bills.

Octopus Energy called this constant raising of rates "cynical", although the fact that they too are an energy provider should indicate that their research isn't wholly disinterested.

Still, to their credit, their current SVT is only £30 more than their fixed price, which means that they offer the lowest cumulative bills after two and three years.

However, given that 90% of customers are with the Big Six and that 66% of these customers are on SVTs, their report indicates that a large proportion of people are being significantly affected by hefty increases in their bills once they've been automatically moved onto an SVT by their supplier.

'Blended' prices

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And it seems that once they've been moved onto one, many people stay with them, even though they aren't anywhere close to being value for money.

One of the major reasons for this is that energy providers don't tell their customers about how much the automatic switch to an SVT after the first year will cost, leaving many customers unaware that they'll end up facing a steep climb in their bills.

Octopus Energy's response to this is to propose that energy providers and price comparison sites present a "three year blended" price to potential new customers.

Even though SVTs obviously vary from year to year, estimating a three-year energy bill based on the current SVT would give people a much clearer idea of what they'll end up paying with each provider.

Just as importantly, it will also force suppliers to be competitive on their SVTs, as they seek to undercut their rivals in attracting new customers.

However, despite being sympathetic to such an idea insofar as they called for greater pricing transparency, the CMA don't seem to have much intention of forcing providers to display longer-term or "blended" bills.

Instead, their report (PDF) on the energy industry from June simply offered the vague proposal of "enhancing price transparency" by "removing regulatory burdens that inhibit" price comparison websites (PCWs) from listing available energy deals.

In a similarly non-committal vein, they also fell short of recommending any particular laws that would enable PCWs to do this more effectively. Instead, they affirmed the importance of having a "greater emphasis on the use of principles rather than detailed rules".

They even suggested that PCWs shouldn't be obliged to list every tariff available to customers, since according to the CMA comparison sites are in fact "brokers offering their customers good deals and facilitating switches rather than repositories of all available tariffs".

Their light touch in this regard would suggest they're unwilling to go ahead and specifically propose the kind of combined bill advocated by Octopus Energy.

What's more, their aim to allow PCWs "to negotiate exclusive tariffs with domestic energy suppliers and to offer discounts funded by the commissions they receive from suppliers," would worryingly imply that PCWs may begin acting more in the interests of providers.

Becoming more dependent on British Gas or SSE for commissions, they may shy away from highlighting the longer term costs a customer might face when signing contracts with these providers.

That's because to do so would be to risk the profit that essentially funds their own profit.

Disengaged Customers

The CMA's proposals will also fall short of addressing "bait and switch" policies in another way.

They call for the creation of a database of "Disengaged Domestic Customers," which in theory will allow energy providers to retrieve the details of everyone who has been on a default tariff with a rival provider for more than three years.

In some respects this is a good idea, not least because 55% of customers with the Big Six (some 10 million people) fall into this category.

With their details on an open database, they can be contacted by suppliers who may have a better deal to offer them. Also, that their customers might be contacted by rival suppliers could potentially force providers to keep their tariffs low so as to prevent them from switching.

However, this applies only to people who've been on the same SVT for three years or more.

As such, the database won't put any pressure on suppliers to stop transferring new customers to higher SVTs once their one-year fixed tariff has ended. That's because it still allows these suppliers to charge a higher SVT for up to three years before having to bring the tariff down in order to retain customers.

In other words, it still provides room for providers to "game" the system.

This wouldn't be so bad if the CMA's proposals demanded that the likes of First Utility, Npower and EDF advertised "blended" prices.

Unfortunately, these proposals seem to be moving in a very different direction, potentially allowing providers to offer a greatly expanded array of tariffs while allowing PCWs not to list them all.

Since it doesn't look as though much will be done by the CMA or Ofgem to end bait and switch, it's vital that customers remain aware of the particular tariff they're on, and switch suppliers or change tariff if they're about to be put on an SVT.

Normally, they'll receive a letter from their provider 42 to 49 days before their fixed-rate tariff comes to an end. It's here that they can act to avoid ending up with a much steeper energy bill, and to avoid giving their current supplier an income boost they don't necessarily deserve.

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