CMA Retail Energy Reforms

The CMA findings, which have been delayed, have been long awaited and anticipated by the market, in particular the Price Comparison Websites (PCWs) and Independent Suppliers. There was a marked increase in 2015 in the number of Customers that switched to an Independent Supplier, and these changes are set to stimulate that switching even further.

The removal of the four tariff rule, and the restrictions on PCWs will change the market considerably on their own, however in conjunction with the creation of a Disengaged Customer Database, and the proactive promotion of tariffs to customers who have not switched in the past three years, will increase the activity in the switching market dramatically. Leading to a rise in acquisition activity across the board, and stronger retention activity by the Big 6 energy suppliers.

The rise in importance and value of the Price Comparison Websites is shown throughout the reforms, and increases their status and power with Suppliers. They now only have to show tariffs that they get paid commission on, which will force some of the new entrants to have to start paying commission, and their tariffs to become less competitive. They also have access to Industry data, and are able to negotiate bespoke tariffs with suppliers.

In summary the CMA changes to the domestic energy market, will dramatically increase the amount of Customer contact, and switching activity by Suppliers and PCWs, and whilst greater numbers of tariffs brings greater choice for customers, it also gives Suppliers and in particular Independent suppliers the ability to compete harder against the Big 6 suppliers and create greater points of difference.

 

Price Comparison Websites restrictions lifted

The CMA will be lifting the restrictions on the price comparison sites under the Ofgem confidence code, where they are mandated to show the whole market, even if they are no receiving a commission. The wording needs more explanation, but the CMA have said that the PCWs now only have to make clear who they represent

 

Removal of the Four Tariff Rule & Ofgem Principles

The CMA are removing the four tariff rule, allowing suppliers to create more complex and incentivised tariffs for customers to encourage switching. They are also instructing Ofgem that they are not to use ’rules’ to enforce Supplier Licence Condition 25, and should instead use ‘Principles’. Both these things are really significant, as they allow a Supplier to create bespoke tariffs for different customer groups, change the use of incentives in acquisition, and as long as they are in line with the Principles of the licence condition, they cannot be reprimanded.

 

PCWs allowed to negotiate ‘exclusive’ tariffs with Suppliers

This will allow a PCW like uSwitch to negotiate a bespoke tariff for uSwitch customers only with an energy supplier. This will mean that a PCW effectively have their own tariff, and can use it to approach existing and new customers online and via telesales to promote the new tariff.

 

PCWs allowed to access Industry Data

The CMA is granting access to PCWs to be able to access Electricity Industry data(ECOES) & Gas Industry data(SCOGES), which really underlines the fact that PCWs are now seen as a key part of the industry and have great importance to enabling competition. Access to this data will allow PCWs (and their agents) to access data on a customers current supplier and supply details, which will mean that they can compete more and also increase the chances of successful switching.

 

Disengaged Customer database

Currently around 80% of the domestic market is disengaged, and a large proportion have not switched at all. The Big 6 energy suppliers actively do not engage with these customers, so that they retain them, and they do not lose them as a customer.

The CMA have found that there are an average of £300 per year savings for a domestic customer, and so is now actively gong to try and engage these customers. It is doing so with a controversial move, and creating a Disengaged Customers database, that will hold details of all domestic customers that have not switched within the last three years. Suppliers will be obligated to contribute customer data to the database, and it will then be made available to suppliers(not clear whether it will be made available to PCWs yet). Customers can opt out of this, but will automatically be opted in for postal contact. Presumably if an opt in for customers can be overlayed, then telephone contact will also be allowed.

 

Measuring Positive Customer Outcomes

At a recent meeting I had with Ofgem, they were discussing their need to start measuring ‘Positive Customer Outcomes’, which is to demonstrate that Customers are becoming engaged through the switching process. However even though all customers may choose not to switch through the new changes to the market, they also need to measure and demonstrate that Customer engagement is increasing, and so I believe there will be changes on the horizon, where Suppliers and PCWs have to demonstrate positive customer engagement outside the sales process, which should give rise to new positive Customer contact to build engagement and measure satisfaction.

 

Smart Meter Rollout

No changes proposed here, but there is a note in the CMA paper to say that the Smart Meter rollout must complete by the end of 2020, and that Ofgem should impose financial penalties for Suppliers failing to do so. This is because the CMA recognise that the SMIP is a key enabler to a Smarter more engaged domestic energy market in the UK.

 

Prepayment Price Caps

The CMA are introducing a price cap on Supplier prepayment tariffs, so that Suppliers cannot now increase the premium charged for pp tariffs greater than the cap. This is designed to protect the Prepayment customer, which includes a large proportion of Vulnerable Customers. However as this will materially affect the revenue of a Big 6 energy supplier, I would expect them to start to actively promote and incentivise the move from PPM to a credit meter, and the increase in number of tariffs available will allow them to create a bespoke tariff for this. It will also materially affect businesses like Utilita that have focused on the prepayment market as a niche, and may force them to diversify into Credit tariffs.