It’s been a while since I posted, I’ve had quite a bit on my plate, what with my MSc, and a start-up business project, and life in general.
With Jonathan’s recent news, I’m going to try and help out a bit more, with occasional posts, not quite as regularly as before, but certainly more often than has been the case for the last eight or so months.
Jonathan has very kindly said it would be OK for me to kick off with a quick spot of shameless self-promotion.
The start-up I’ve been working on is called Social Consumer. There’s a lot of backstory as to how it got to where it is today, how it got that name, and what ideas have been moved to the “later versions” pile, but allow me to give a quick rundown as to what we’re doing now.
Once I’ve done that, I’ll ask UK-based readers to help out with a short survey. If you’re not based in the UK, but have friends and family who are, please send the survey-link to them, especially if they’re opinionated about this sort of thing – I’m trying to get to 250 completed responses by next Wednesday.
The “broken” energy market
For those that are in the UK, you will be aware of the price comparison sites, uSwitch, GoCompareTheMoneySuperMeerkat, and so on, and you will be aware of the Big Six energy suppliers (soon to be the Big Five, thanks to the merger between SSE and NPower). You will also be aware that there are many other suppliers in the market. You may not know that there are now around 90! These energy suppliers and the comparison sites make up the domestic energy market.
In one of those rare instances where the left and the right agree, the domestic energy market is seen as “broken”. Only 15-20% of households switch suppliers per year, and almost 60% of the market have never switched.
If the suppliers were all offering good value, the lack of switching wouldn’t be problematic. However, suppliers with lack-lustre customer service, and that exhibit average-to-poor Corporate Social Responsibility, often offer the costliest deals on the market. Nevertheless these suppliers boast hundreds of thousands (and even millions) of accounts.
At the other end of the market there are numerous very small, very cheap, but drastically under-capitalized suppliers, that fall over without much warning.
Recently Ofgem demanded that SSE send a letter to some of their “disengaged” customers, recommending that they move to a cheaper deal with newcomer Electraphase… who promptly went bust. They simply couldn’t afford to pay for their new customers’ usage ahead of the first billing cycle with their newly expanded customer base. Oh, dear.
It’s (not) all about the money (money, money)
Research by several regulatory bodies in the UK finds that price does not encourage people to switch – a sizeable percentage of consumers say they will not switch for savings of £200+, per year.
There seem to be three main types of reason as to why people don’t switch:
- Fear of a failed switch
- Valuing other things
- The apparent complexity of the process
Fear of a failed switch
Switches fail for a number of reasons, but most of them boil down to bureaucratic ineptitude. Sometimes the bureaucracy at fault isn’t even either of the energy suppliers involved. Sometimes it’s because the central databases of gas and electricity meters – run by two separate agencies – are not kept properly up-to-date. Sometimes that is the fault of the consumer’s current energy supplier – or one of their contractors – sometimes it’s the fault of a prior supplier to that same meter. Either way, this only occurs in around 0.7% of switches
What is ironic, here, is that the problem most often lies with the energy supplier that the switcher was leaving anyway.
The failure to report the correct meter is simple to fix, once noted. However, the old and new suppliers may bill the consumer, until this is fixed, and sometimes this can occur for a number of months, especially if the consumer doesn’t notice the double billing. There have been occasions where problems have gone on for a long time, and cost the consumer hundreds of pounds (though they do generally get reimbursed).
Anyone that has read Mullainathan and Shafir’s ‘Scarcity’ will immediately understand why some people don’t switch, in light of this. If you are on a low income, a predictably high bill is better than the unpredictable, stress-inducing possibility of being double-billed. The fact that significant (albeit temporary) financial repercussions happen infrequently is irrelevant, even the minutest of possibilities of being utterly broke, or further stressed about money, is unacceptable, and so some people don’t switch.
Valuing other things
After price, most research about the domestic energy market suggests that customer service is the most important consideration. In the UK, Citizen’s Advice offer a customer service comparison tool separately from their price comparison tool. Aside form annual reports, by the likes of Which?, ranking suppliers on various aspects of their customer service, no-one else is doing this.
Research about purchasing decisions more generally suggest that an increasing number of people, and particularly millennials, want to be able to include measures of a given company’s Corporate Social Responsibility (CSR) in their decision-making about purchases, and this desire has been growing significantly in recent years. One study found that in the UK, however, whilst people wanted to include such measures in their decision-making, when compared with people from other countries, they were more likely to find messages around CSR confusing, or to be skeptical about those messages.
With the advent of Brexit, it is also likely that many people would want to be sure that their money is not going off shore. However, of the Big Six, only British Gas and SSE are British owned and operated – three of the other four are owned by French or German interests, and Scottish Power is owned by Spanish company, Iberdrola. Even some of the mid-sized suppliers are starting to be bought out by foreign interests, for example, First Utility is now owned by Royal Dutch Shell, and new entrants Engie and Enstroga are Europe-based.Another thing that some consumers believe is that loyalty to their supplier is a good thing. This is mostly the older customers, and most obvious in the case of customers that haven’t switched since their Government-owned Energy Board became company-owned, and changed its name. These, of course, are the same people who are also on the Standard Variable Tariff, having not even switched tariffs with their existing supplier.
Any or all of these factors may impact on a person’s decision-making process, assuming they were to engage at all. Deciding between 90 suppliers based on as many as four factors, and taking price into account as well, makes for a confusing time for most people.
The apparent complexity of the process
Research by various regulatory bodies suggests that many people think that switching is complex. What’s less clear from that research is what aspect of the process they think is complex.
The target provider undertakes the energy-switching process, and that includes contacting the former provider to arrange a final bill. As such it’s less complex than switching phone providers. In the case of a mobile phone account, in the UK, at least, you need to approach your current provider for a PAC code, before ever contacting your new provider (though many do, because they are unaware of this). To be honest, there would be some benefit to that process, as that might reduce the number of failed switches; but that’s for Ofgem to figure out.
It seems likely, therefore, that complexity is either an invented barrier cited by those who have never switched, or it’s not the switching itself that is complex, but the decision-making that precedes it. Which makes this more like the ‘fear of making a mistake.’
As noted above, with a handful of important elements to take into account, it’s very difficult to maintain all of the moving parts in the decision.
Only a small percentage of people are driven by price, and many are too risk averse to attempt to benefit from switching. Despite this, the government, the energy regulator (Ofgem), and the domestic energy market as a whole, has relied on price comparison as the primary means to encourage people to switch suppliers, since 1999. So, not surprisingly, only 20% of householders switched energy supplier in 2017, and this was the busiest year on record.
The latest move by Ofgem is to instigate a price cap, such that people at risk of dropping into fuel poverty (spending more than 10% of their income on energy) will not be charged above a certain amount (£1136 per year). That capped price is, on average, £75 cheaper than the current Standard Variable Tariffs from the Big Six, but still more than £200 above the lowest tariffs in the market. This will help those who are risk averse, or just “loyal”, who also tend to be the people who are least able to afford high bills.
I am collecting publicly accessible data for complaints handling (a proxy for customer service) and fuel-mix (a proxy for eco-friendliness). I have a semi-exclusive arrangement with Ethical Consumer magazine to use their ratings data (a proxy for ethicality, obviously) for the suppliers they currently rate, and I can use their researchers to rate more suppliers, as needed.
Having compiled these three data sources, and normalized the data, it’s usable as the basis for a relatively simple but effective comparison across a sizeable chunk of the market, and I will be able to expand this over time.
For now I am going to use these data to enable users to easily compare multiple suppliers, quickly, on their Corporate Social Responsibility (eco-friendliness and ethicality), and their customer service. Users will be able to state which of these is more important, or select them as all equally important. They will also be able to see where the data has come from, and engage with an audit of the data we use to the degree they wish to do so – in other words, complete transparency.
At the moment, this is running as a mailing list, with a monthly newsletter, advising who the top suppliers are. This assumes that all three measures (customer service, ethics, and eco-friendliness) are considered of equal importance. In August, on that basis, and ignoring price, only three suppliers were worth considering, Good Energy, Ecotricity and Ovo Energy. And you can switch to one of them, here, if you like. However, I am expecting more data from some of the newer suppliers, soon, which may change this.
I will be looking at providing other data, such as ownership structure, Citizen’s Advice customer service rating, TrustPilot ratings, and even Glassdoor employee data further down the track.
I have an offer of partial funding for this project, and I am close to securing another, which will enable me to launch the first iteration of the website by the end of the year.
To help secure that funding, I am doing a final piece of my own research, to confirm (or indeed deny), that there is a market for what I am doing. The secondary sources provide a resounding ‘yes’ to that question, but there’s nothing like primary research!
So, if you are in the UK, and are disposed to doing so, please complete this short survey.
It will take no more than 10 minutes, and you can go in the draw for hampers of ethical chocolates or soaps/cleansers, or vouchers from The Internationalist’s Ethical Shop.
Thanks for your time.
PS For those in the UK, I’ll be on Countdown on November 6th… I might have done fairly well :D