For 30 suppliers, those losses were so catastrophic that they went bankrupt. But their customers have not lost their offer. It must remain that way, otherwise no one will change supplier and there will not even be competition.
Customers of bankrupt companies are picked up by a major supplier who then repays the customers the surpluses created by excessive monthly debits and buys energy on the market to supply them.
The National Audit Office said the cost to consumers of those failed businesses had already reached £2.7 billion.
Ofgem itself has admitted the mess added £94 a year to every household’s bills – even the half that never changed supplier. Add the estimated £1.9 billion to save Lamp – which at 1.6 million customers was too big to be absorbed by this mechanism – and the price of Ofgem’s failed competitive regime is approaching £5 billion.
It will, it said in December, “make sure we learn the lessons … and adapt our approach”.
There is another problem with the energy system: it is a false market. The suppliers – billing agencies – can only compete on price. But if they simply charged a unit of electricity or gas, as a supermarket does for a can of beans, it would be too easy to see who was the cheapest and only a few large companies would survive. So Ofgem makes comparing prices difficult.
First, in 2013, it forced all suppliers to have a flat fee – an accounting mechanism inherited from the industry’s nationalized past.
A typical household – itself a fictitious Ofgem construct – pays £821 a year for the units of electricity and £157.60 for the standing charge, just to be connected. One sixth of the bill is independent of what a household consumes, even if it is zero. That makes the cheapest deal different for high, medium or low users, depending on the standing charge and unit price, both of which can vary with the supplier.
Vendors fueled the confusion by coming up with tens of thousands of rates with different unit prices and fixed rates over different set periods. A dozen parasitic websites sprang up to do the complex calculations to find the best deal. Each customer who switched from both fuels made £60.
But they hid the truth in two ways. In 2018 Ofgem ruled them didn’t have to list every rate so the comparison sites could make deals with a supplier to get its rate at the top of the tables.
Second, Ofgem allowed them to charm customers with fictitious savings† The actual saving is the cost of the old rate minus the new rate, which is often small. Instead, suppliers quoted the difference between the new rate and the rate they would return to if they didn’t change. Those relapse rates were kept artificially high and people who switched found that the promised savings did not materialize. Ofgem responded by limiting the relapse rate.
But since wholesale prices have risen above the cap, that’s the rate we almost all pay now. No competition and no market.
Ofgem should read its own mission statement and better protect consumers “whether it would promote competition or not”.