IMG’s thoughts on the CMA Energy Market Reforms

March 10, 2016 1:44 pm Back to News & Offers

gas-hobThe CMA findings which have been delayed have arrived at last, and are long awaited and anticipated by the market, in particular the Price Comparison Websites 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 even further switching.
  • The removal of the four tariff rule, and the restrictions on PCWs will change the market considerably on there 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 the tariffs that they get paid commission for, 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(PCWs) under the Ofgem confidence code, where they are mandated to show the whole market, even if they are not receiving a commission.

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 are unlikely to  be reprimanded.

PCWs allowed to negotiate ‘exclusive’ tariffs with Suppliers

This will allow a price Comparison Website to negotiate a bespoke tariff for their own 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 has granted PCWs access to the 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 customer’s 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 having never switched at all and remaining on Standard Variable Tariffs. The Big 6 energy suppliers actively do not engage with these customers, so that they retain them, and the higher margins that they bring.

The CMA have found that the average savings per year for a domestic customer is around £300, and so is now actively going 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.  Customers can opt out of this, but will automatically be opted in for postal contact.

Smart Meter Rollout

There were no changes proposed here, however there is a note in the CMA paper to say that the Smart Meter rollout must be completed by the end of 2020 and that Ofgem should impose financial penalties for suppliers failing to do so.  This is due the CMA recognising 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 no longer 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 incentivize 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 energy suppliers that have focused on the prepayment market as a niche, and may force them to diversify into Credit tariffs.

 

For more information, you can read the full summary HERE

 

By Liam Smith
Key Account Director

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Image copyright of CubePM