Homes overspending on energy by £2.2 billion

FIRST Utility have released research showing that UK households are spending £2.2 billion more than they need to on their energy bills during the coldest winter months, with each home overpaying as much as £300 annually.

The independent energy provider reported that this overspend comes predominantly from the failure of customers on standard variable tariffs (SVTs) to switch to a new supplier (i.e. First Utility).

By switching now, First Utility note that the average customer could avoid being on an SVT during the most expensive four months of the year (November to February), which is when more than half of an average household's fuel is consumed.

However, while switching could indeed provide a considerable one-off saving, customers have to be wary of bait-and-switch pricing, which sees them being moved to more expensive tariffs after their discounted first year has finished.

Knowledge is Power

In fact, in a separate study from September conducted by solar provider Octopus Energy, it was found that "six of the top 10 providers increased their customers' bills by over 35% once the first year deal has ended".

And of all the providers in this top 10, none other than First Utility were at the top, charging pre-existing customers 53% more than they were charged during their first year with the provider.

This additional 53% works out at £394 for a single year, meaning that those who are automatically rolled on to First Utility's standard tariff are likely to be in for a surprise.

Indeed, this increase will not only cancel out the £293 saving that First Utility state will come from moving from a "Big Six" SVT to their cheapest tariff, but it will cost customers an extra £101 each.

And if you were to multiply this by the number of households in Britain (26.4 million), then the country as a whole would end up spending £2.6 billion more than it needed to for energy over a single year.

In other words, the country would have lost rather than saved money.

Competition

Still, there are undoubted merits to switching, even if customers always have to be aware of the contracts and companies they're switching to.

For one, switching helps to put pressure on the dominance of the Big Six, who now control 85% of the UK domestic energy market after having controlled some 99% only four years ago.

Because of this decrease in their market share, the big providers have been goaded into competing with their smaller rivals and lowering their tariffs.

At the beginning of the year - and with a record six million switches in 2015 - every member of the Big Six cut their gas prices by around 5% each.

While this modest cut didn't do an awful much to narrow the pronounced gap between their prices and the cheapest deals offered by the independents, it still underlined how the Big Six have ceased taking their customers for granted.

This means they feel threatened, and if they feel threatened, then they're more likely to introduce reductions whenever their older and newer rivals introduce reductions.

Then again, wholesale prices have been increasing recently, with the result being that bigger providers have been able to claw back some of the customers they lost in 2015 and early 2016.

This is because they can afford to buy their wholesale gas and electricity in advance in greater quantities, allowing them to hedge themselves against rises in wholesale costs.

By contrast, smaller suppliers such as Co-operative Energy and Ovo Energy buy smaller supplies of wholesale fuel. While this enables them to offer cheaper tariffs when wholesale costs are low, it means they can't maintain low prices for very long when these costs begin to rise again.

As such, the likes of Co-operative Energy and Ovo Energy have increased their fixed tariffs by as much as £103, with the result being that the number of switchers from big to independent suppliers fell in June 2016 to its lowest level since March 2015.

This is bad insofar as it threatens to create a vicious circle: the more customers switch back to the Big Six, the more this six will be able to exploit greater economies of scale and buy masses of wholesale energy in advance.

This is why it's important that people switch, so as to contribute towards creating a more level playing field on which energy providers - both big and small - can truly compete.

Savings

Yet it's also important because it can save customers money beyond that initial first year on an introductory tariff.

With, for instance, the three cheapest suppliers on a three-year timescale (Octopus Energy, GB Energy Supply, and Flow Energy), customers could save more than £440 on average over those three years by comparison to the three cheapest Big Six providers (SSE, Scottish Power and npower).

This goes to show that there are savings to be had if customers do a little research and shopping around.

It also goes to show that a saving in the first year of a contract doesn't necessarily mean an overall loss in later years, as it does with some suppliers.

But to be fair to First Utility, their report does provide some useful tips to customers on how to be more energy efficient. These include:

And if people follow such guidelines, then they'll always save money, no matter which supplier provides them with their energy.

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